Apr 1, 2021

Axios Capital

Situational awareness: Happy April! The S&P 500 has just hit 4,000 for the first time ever.

  • No joke: I got vaccinated yesterday, which means that I, for one, have a lot more of the consumer confidence that's been going around recently.
  • In this week's newsletter: Archegos, Greensill, Miley Cyrus, Morphosis, Alan Turing, Harriet Tubman, infrastructure, secret loans, NFTs, and much more. All in 1,770 words, a 7-minute read.
1 big thing: Markets pass the Archegos test

Illustration: Annelise Capossela/Axios

The bubble didn't burst. That's the main lesson to be drawn from the failures of Greensill and Archegos — headline-grabbing implosions that were certainly bad for Credit Suisse, among others, but that did nothing to slow the broader market's surge to new all-time highs.

The big picture: Speculative financial bubbles tend to be self-fueling. Investors using cheap borrowed money invest in assets that go up in value, generating paper profits that in turn get levered up even further and invested even more aggressively.

  • It's a strategy that works until it doesn't. When one or two big lenders or speculators go bust, that can cause the cycle to get thrown into reverse, with credit suddenly tightening sharply and a rush to the exits as investors realize the greater fool is no longer going to appear.

Driving the news: Archegos, a large and highly-levered fund, imploded last week, sending share prices of its stockholdings plunging and causing multi-billion-dollar losses across various banks.

  • The Archegos blow-up came on the heels of the bankruptcy of Greensill, a finance house based in London.
  • The two collapses were unrelated except for the fact that Credit Suisse seems to have lost billions in both of them, and the fact that neither could have happened without a broader market environment of banks who are happy to lend freely to anybody who seems to be making money.

Background: Greensill stretched the definition of supply-chain finance well past its natural breaking point. Eventually it lost the backing of a key insurer, which meant that it could no longer access markets itself.

  • Archegos, similarly, lost the backing of its prime brokers, who exercised their prerogative to sell the fund's holdings. While some of the banks were reportedly willing to try to sell the stock slowly, so as not to perturb the market, Goldman Sachs and Morgan Stanley announced enormous block sales before the market open, precipitating some massive declines.
  • The episode is reminiscent of the movie "Margin Call" — except this time, the fire sale didn't cause the broader market to crash. Quite the opposite.
2. Biden's investment plan goes big

Illustration: Aïda Amer/Axios

Infrastructure Week has finally arrived — and it's a doozy.

  • By the numbers: The plan doesn't come with an official price tag, but White House economic adviser Jared Bernstein told Axios' Dan Primack on Wednesday that it involves $2.8 trillion of spending, while Standard & Poor's reckons that thanks to multiplier effects it will inject $5.7 trillion into the economy.
  • The number of jobs created could reach 2.3 million by 2024.

Context: The economy seems to be roaring already, with Goldman Sachs projecting that GDP grew at a 9.5% pace last quarter and will hit the 12.5% mark in Q2.

  • In the eurozone, by contrast, GDP almost certainly shrank in Q1.

The big picture: Anybody worried that the Biden stimulus plan might cause inflation should love the infrastructure plan, since it will increase the absorptive capacity of the economy by trillions of dollars.

  • Rather than turning up in the form of higher prices, Americans' dollars will start being funneled into new businesses that build upon the roads, rails, broadband, electric charging stations, and other forms of infrastructure that the government intends to build.

The plan will also help to reverse an infrastructure deficit that S&P pegs at $1.5 trillion. That's the amount of money that state and local governments would have spent on infrastructure but didn't, thanks to the financial devastation caused by the crisis of 2008-09.

The bottom line: This might not be a fully-fledged Green New Deal. But it's certainly a big step in that direction.

3. Revealed: How China uses secret loans

Illustration: Sarah Grillo/Axios

China, like all other rich countries, lends billions of dollars to needy governments. Unlike other rich countries, it does so in a particularly self-serving manner.

Driving the news: A major new study from Georgetown University's Anna Gelpern and others shows that China's debt contracts are more unfriendly to debtor nations than anybody else's.

Why it matters: China is using debt contracts to place it at a geopolitical advantage not only to its debtors, but also to all other rich nations.

How it works: Chinese debt contracts differ from standard boilerplate in three main ways.

  • Confidentiality: Under the terms of most modern Chinese loans, borrowers are not allowed to reveal their terms or even their existence. That means China has much more information about debtor countries' real financial state of affairs than any other creditor nation, bank, or bondholder.
  • Collateral: China often insists on ensuring that countries set up a special bank account — at a bank "acceptable to the lender" — which China can seize more or less at will in the event that the borrower enters any kind of distress. That money is therefore effectively off-limits when it comes to any other form of government spending, even if it's an official part of the country's asset base.
  • Acceleration: China can declare the loan to be in default, with the full amount of the debt due and payable immediately, under an astonishingly broad range of events, including the debtor taking action adverse to almost any Chinese entity.

What they're saying: The collateral requirements mean in practice "that government revenues remain outside the borrowing country and beyond the sovereign borrower's control," write the authors of the paper.

  • The Chinese loans also include clauses that explicitly exclude the debts from being included as part of a broad international debt restructuring.
  • The combination of aggressive acceleration clauses with equally aggressive cross-default clauses means that China has extreme control over actions in debtor countries. For instance: one proposal to cancel a dam project in Argentina was abandoned because it would not only mean an event of default on dam-related loans; it would also mean an event of default on all Chinese loans to the country.

The bottom line: Citizens cannot hold their governments accountable for debts they do not know about. And when those governments do get into trouble, the web of Chinese debt contracts makes any kind of restructuring vastly more difficult.

4. Financial literacy month arrives

An expert on Sharpe Ratios, she is not. Photo: Alberto E. Rodriguez/Getty Images for Dick Clark Productions

April is financial literacy month, which means you should expect a steady stream of celebrities like Miley Cyrus exhorting us to "learn more about stocks."

Why it matters: Financial illiteracy is a real problem, but it's not one that can be fixed with a 90-second video or a jaunty slideshow.

  • When you see a financial education site emblazoned with the logo of a financial-services company or a celebrity, what you're looking at is marketing, not useful instruction.

Driving the news: The SEC recently put out an investor alert warning that "Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you."

The big picture: Arguments in favor of financial literacy generally put the onus on the poor to educate themselves. Financial literacy month effectively turns poverty into a series of individual problems, rather than one big societal problem.

  • It doesn't work very well. Lauren E. Willis of Loyola Law School has examined the research on financial literacy and has found no "causal chain from financial education to higher financial literacy to better financial behavior to improved financial outcomes."
  • If anything, a little financial education can be a bad thing, causing overconfidence rather than sensible caution in the face of complex financial structures.

The bottom line: A carefully-structured school curriculum from the likes of Next Gen Personal Finance can, over time, help kids get up to speed on important financial concepts. A glitzy celebrity-endorsed marketing campaign, on the other hand, will do nothing of the sort.

5. NFTs begin to tarnish

Illustration: Annelise Capossela/Axios

Some of the shine might be coming off NFTs. The platforms selling them, however, fresh off of raising hundreds of millions of dollars in new capital, are likely to relish the challenge.

Driving the news: Daily volume has dropped to about $3 million, down from a peak of $19 million. Still, Dapper Labs managed to raise $305 million in its most recent round, at a valuation of $2.6 billion.

  • Opensea, a more artistic marketplace, raised $23 million. Other companies taking advantage of the funding environment include Zora, Enjin, and SuperRare, which is one of the few sites to build artists' resale royalties into its cryptographic contracts.

How it works: One of the great attractions of NFTs to artists is the promise of being able to get paid a cut of every future transaction, in perpetuity — much like songwriters get paid every time one of their compositions is performed.

  • Reality check: High-profile NFT platforms like MakersPlace (which minted the $69 million Beeple) and Nifty Gateway do not include royalties in their cryptographic contracts.
  • If a collector buys an NFT on one of those platforms and then chooses to resell it on the same platform, the site in question might remit some of the proceeds to the artist. That percentage, however, is generally not divulged to the collector when the item is purchased.

NFTs are also unique among collectibles in that no one selling them is collecting sales tax.

  • Sales tax is collected by states, rather than the federal government, and so long as no states have specifically released guidance on NFTs, the platforms are all just assuming that they don't have to pay it.
  • "Definitely I think it's a little Wild West," says Wendy Walker of tax compliance software firm Sovos.

The bottom line: NFTs have a lot of growing up to do before they become a remotely mature asset class.

6. The real estate boom continues
Data:Realtor.com. Graph: Axios Visuals

The median national home listing price grew to a record $370,000 in March, according to the latest monthly Realtor.com housing report.

  • The fastest annual growth was seen in Austin, where prices rose 40% year-on-year to a median of $520,000.

Even the New York City commercial real-estate market is finally picking up. Midtown Manhattan is beginning to bustle again, and New York led the gainers in the March VTS Office Demand Index, rising 23 points to 77.

  • "Demand for office space in New York City jumped 120 percent since the new year," says the report, although it's still 40% below pre-pandemic levels.
7. Alan Turing is faster than Harriet Tubman

Britain's new polymer £50 note, featuring artificial intelligence pioneer Alan Turing, will be issued for the first time on June 23, Turing's birthday.

  • A public nomination period in 2018 elicited 227,299 nominations and 989 names; within three years, the Turing note — complete with state-of-the-art security features — was a reality.

In the U.S., by contrast, the new Harriet Tubman $20 bill is still years away, despite her name having been finalized in 2015.

  • "It turns out that the complex design and testing process for currency cannot be hurried," writes NYT's Ephrat Livni.
8. Coming up: March payrolls

Illustration: Brendan Lynch/Axios

The March jobs report is out tomorrow at 8:30am, writes Axios' Courtenay Brown.

Why it matters: Economists expect a pickup in hiring on the back of vaccinations and relaxed economic restrictions.

The median forecast calls for 650,000 payrolls added — the biggest gain in five months.

  • On the high end of the range, economists are penciling in as many as 1 million jobs. That would be the best since August.
  • The unemployment rate could fall 0.2 percentage points to 6%.

Worth noting: Don't look for a stock market reaction; it'll be closed for Good Friday. The bond market closes at noon.

9. Building of the week: Cornell Tech

Photo: Roy Rochlin/Getty Images

The Bloomberg Center at Cornell Tech's Roosevelt Island complex in New York City was designed by Morphosis in 2017.

  • The net-zero emissions building was named by former New York Mayor Mike Bloomberg in honor of his daughters, after he donated $100 million towards the cost of construction.
  • The roof is a photovoltaic canopy, while the aluminum facade is designed to register images when viewed at the right angle.