March 17, 2019
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1 big thing: Seeing through the greenwash
Now that represents a degree of hypocrisy that I've hitherto suspected in you, but not noticed due to highly evasive skills.— Withnail, in Withnail & I, by Bruce Robinson
In a big week for hypocrisy, the leader of the pack was surely Bill McGlashan, the CEO of the world's largest impact investing fund.
- McGlashan, who was once described by the New York Times as resembling "a Buddhist monk," led a multibillion-dollar investing vehicle designed (among other things) to "expand access to educational attainment." Simultaneously, he was allegedly spending $250,000 of his own money to bribe his son's way into a selective university.
- McGlashan was fired on Thursday, an action he claimed to be "perplexed" by. (It seems that McGlashan just can't avoid lying: There's no way he didn't know why his bosses wanted to fire him rather than allowing him to resign.)
- Where it stands: "A man who embodied the faith that the meek of the earth could be saved by private-equity barons," tweeted Anand Giridharadas, "has been indicted for rigging the opportunity structure against the disadvantaged."
Why it matters: McGlashan exemplifies the way in which financiers claim the moral high ground while refusing to compromise their own privilege. (See also: Al Gore, whose socially responsible investment firm runs more than $18 billion and who lives in a 10,000-square-foot house with a huge carbon footprint.) McGlashan's downfall marks an opportunity to critically re-examine the entire world of impact investment.
"Green bonds" drive a lot of impact investing, even though they're mostly indistinguishable from their non-green siblings.
- A recent World Bank bond was ostensibly designed "to raise awareness for the importance of investing in women and girls." There's no obvious way in which it does that, and it's a minuscule $4 million in size — a drop in the bucket, compared to the Bank's annual $50 billion in bond issuance.
- The World Bank's ebola bond was, it said, “a momentous step” that would "serve the world’s poorest people.” The idea: Were ebola to flare up again in west Africa, investors' money would be used to address it. Investors so far haven't lost a penny, despite the outbreak of the 2nd-largest outbreak of Ebola on record.
- US municipal green bond issuance fell to $4.9 billion in 2018, per S&P Global Ratings, down more than 50% from $10 billion in 2017. Development banks also saw their green bond issuance fall. But for-profit banks, largely in China, took up a lot of the slack. They issued $48 billion of green bonds in 2018, up from $23 billion the previous year.
- The real impact: A lot of people who think that they're making socially responsible investments are really just buying Chinese bank debt.
Equity impact investment can also be highly dubious. See for instance DBL Partners (it stands for "double bottom line"), which has put money into companies ranging from online luxury-consignment store The RealReal to bankrupt Wi-Fi juicing company Juicero.
The bottom line: Impact investing, by its nature, involves making the rich richer when increasing inequality is one of the world's great dangers. Bill McGlashan was at the forefront of attempts to quantify the social impact of investments, but I have yet to see an internal impact accounting that includes the consequences of funneling dynastic wealth to him and his family.
Bonus: JUST no traction
If you want to minimize the social impact of your money, the best thing you can do is invest in public equities. By buying stock on the secondary market from existing shareholders, you guarantee that none of your money actually goes to the company you're investing in.
Driving the news: Social impact ETF "JUST" is designed to invest in "U.S. companies that are driving positive change." (I welcomed the fund when it launched.) This week, the Wall Street Journal reported (and Axios later confirmed) that Goldman Sachs pulled the $100 million it initially invested in the fund. As a result, the fund's assets under management are now at an all-time low.
- Between the lines: It's not uncommon for a market-maker to put in seed money when a new ETF launches and then pull that money at a later date. What's odd is that JUST launched with this much seed money in the first place.
- The largest socially responsible ETFs, SUSA and DSI, launched with just $20 million and $25 million, respectively. Today, they're still small by ETF standards (SUSA is $922 million, DSI is $1.32 billion), but they're much bigger than relative newcomers like JUST and the gimmicky SHE. Both of those funds launched with great fanfare and $250 million under management; both are now significantly smaller than when they started.
The big picture, from Axios' Courtenay Brown: You can try to ensure that the EFT sponsor you choose is itself a good cause. A case in point: The sustainable-development SDGA fund, sponsored in part by the UN, which launched at just $2 million. That's a much more typical seed size for socially responsible ETFs. But an ETF that small will suffer from illiquidity and high fees.
Of note: In a statement to Axios, JUST Capital CEO Martin Whittaker said the JUST ETF's remaining $100 million in assets under management is "strong proof of the demand for this fund."
2. Too much computer
We can't assume that adding more technology to our lives will make us safer. I wrote about the human-computer nexus in the context of aviation this week; Axios' Steve LeVine wrote about it in the context of surgery. In both cases, giving humans less work to do risks making them less competent, with potentially catastrophic consequences.
In finance, the most catastrophic case of "too much computer" was the Basel II international capital adequacy regime.
- Central banks are the pilots of the financial system, tasked with keeping banks within the envelope of safety. The old tools — as laid out in the Basel I regime — were implemented in 1988. They were crude, if broadly effective, and required banks to increase the amount of capital they had according to how risky the loans on their books were.
- When Basel I was replaced by Basel II in 2004, the tools became so complex that human regulators could no longer intuit or understand the computer outputs they were looking at. At that point, they were no longer really in control.
- After the financial crisis, central bankers replaced Basel II with Basel III, which includes a number of simple ratios that banks need to meet and that can't be gamed. Computers are still used, but human regulators have more assurance that they broadly understand and are in control of how much capital banks need.
Flashback: The flash crash of May 2010, when the U.S. stock market plunged by 9% in a matter of minutes for no particular reason, was also caused by computers. It could happen again. The best way to prevent a much more damaging repeat would be to severely limit high-frequency trading, where investors buy and sell stocks at speeds that far exceed the limits of human comprehension.
Cryptocurrencies have been plagued since their inception by the unintended consequences of giving up human oversight and leaving it all to preset digital rules. It turns out that most humans like the safety of knowing that there's a human common-sense component to their currency stack, which is one big reason why cryptocurrencies have seen very little real-world adoption.
The catch: Not all areas of finance can be tackled with low-tech solutions. When it comes to cybersecurity, the only way to effectively fight off black-hat hackers is to hire even more sophisticated white-hat defenders. That particular technology arms race isn't going to end anytime soon.
The bottom line: Finance has been reliant on opaque technology for longer than just about any other sector of the economy. That reliance was in large part a cause of the global financial crisis. Perhaps regulators in aviation, autonomous vehicles and even medicine should talk more to their financial counterparts and learn some of the lessons of 2008.
3. Tech salary inflation
Nowhere is the Federal Reserve more conflicted than when it comes to wages. The Fed's dual mandate calls for full employment, which tends to place upward pressure on salaries. But it also calls for low inflation, which can be hard to achieve when incomes are rising fast.
Axios obtained salary data for tech jobs around the country from ZipRecruiter, an online jobs marketplace. Some of the year-on-year jumps are startlingly huge: 9% in Phoenix, 12% in Indianapolis, 17% in Austin.
Our thought bubble, from Axios' Kia Kokalitcheva: As Big Tech companies like Apple, Google and Amazon open new offices or continue to grow in these cities, expect the competition for tech talent to intensify.
Go deeper: Tech salaries rise in emerging U.S. hubs
4. Coming soon: Celebrity banks?
Imagine you're a social media influencer with 2 million followers and you want to create a loyalty bank account that showcases your personal brand...— Green Dot CEO Steve Streit
Green Dot is a mostly behind-the-scenes company that allows big corporations like Apple and Walmart to provide banking services. Now, according to its CEO, it wants to provide a similar service to "the social media influencer or the mid-sized retailer, or the small store owner with 3 employees. ... It could be the church who wants to do a fundraising card for their 1,000 parishioners."
The bottom line: Remember the dreadful Kardashian Kard? The disastrous RushCard? The only good thing about celebrity debit and credit cards is that there haven't been very many of them. Now imagine a world where every YouTube or TikTok influencer has their own branded bank account with its own associated fee schedule. What could possibly go wrong.
5. Go passive
SPIVA is a national treasure. Run by S&P Dow Jones Indices, it's by far the most rigorous attempt to measure the probability that an active fund manager will outperform the relevant passive index.
- The year-end 2018 SPIVA scorecard is now out. It shows 69% of domestic funds underperforming the S&P 1500 over 1 year, and 88% of them underperforming over 5 years.
- Internationally, 71% of global funds underperformed in 2018, with 85% underperforming over 5 years.
- Among bond funds, 100% of long-dated and intermediate-dated government bond funds have underperformed over the past 3 years.
My thought bubble: People choose fund managers because they don't have the requisite time or skills to pick stocks themselves. But if you're not skilled enough to pick a stock that will outperform, you're not skilled enough to pick a fund manager that will outperform, either. Passive investment is a much smarter bet.
6. Brexit postponed
The UK parliament finally agreed on something! Amid much acrimony, they voted this week to ... kick the can down the road, for an unknown period of time, assuming that all of the other 27 EU states agree.
The catch: European Parliament elections are scheduled for May 23, and no one in the British government has any appetite to participate in them. Conversely, EU leaders don't want to see a member state lacking parliamentary representation. For that reason, it's hard to see this particular can being kicked down the road any further than July 1, when the new European Parliament will be sworn in.
The bottom line: Theresa May is going to try to get her Brexit deal through Parliament for a third time this week, on the basis that if you don't like the result of the vote the first time around, you can just keep on running it until you get the result you do want. Weirdly, she doesn't seem to view the non-binding referendum result the same way.
7. Facebook's terrible, horrible, no good, very bad week
Less than a year ago, Recode's Kurt Wagner could write a story saying that "no one in Facebook’s upper ranks ever seems to leave the company." That's not true anymore.
- Facebook's #3 executive, Chris Cox, left this week, along with Chris Daniels, who ran WhatsApp. Daniels himself was running the messaging subsidiary only because both of the app's co-founders had already departed — as have Instagram's co-founders.
Also this week:
- Facebook suffered a six-hour-long outage on Wednesday, which is a very bad look for an institution that aspires to be "the critical infrastructure for modern-day democracy."
- Facebook is also facing new criminal charges over whether other companies, including Apple, Amazon and Microsoft, were given access to users' confidential social graphs.
- The white supremacist Australian terrorist who killed 50 people in New Zealand livestreamed his massacre on Facebook.
Why it matters: Mark Zuckerberg has total control of Facebook and its board, and he isn't afraid to wield that control at will. Billions of users can do little more than wait to see what Zuck decides he wants to do to them next.
Go deeper, with Axios' Ina Fried.
8. The week ahead: Xi goes to Italy
The Fed's open market committee meets on Wednesday, but no one expects them to hike interest rates (or cut them, either).
- The market is betting that the Fed is done for the year, writes Courtenay.
- The Fed’s been shrinking the bond portfolio it amassed during the crisis for the past few years; there's speculation that chair Jay Powell might announce a plan to end that process.
The Bank of England also has a policy meeting on Thursday. Virtually no one predicts the BoE will announce a policy change, but expect talk about Brexit the day after Theresa May is expected to put her Brexit deal up for a third vote in Parliament.
China's Xi Jinping will visit Italy this week. Italy is hoping to sign onto a preliminary deal that would connect the country to China's Belt and Road Initiative.
- Brazil's President Jair Bolsonaro will be in Washington on Tuesday to meet with President Trump.
9. Building of the week: The Chrysler Building
The Chrysler Building is about as iconic as a building can be. Designed by William Van Alen and completed one day before the Wall Street crash of 1929, it's easy to see why the Abu Dhabi Investment Council spent $800 million to buy a 90% stake in the 1.2 million-square-foot building in 2008.
- Abu Dhabi's investment was not a good one. The building was sold again this week, this time for just $151 million. That's $90 million less than hedge fund manager Ken Griffin spent on a single New York City condominium apartment. Then again, Griffin's annual maintenance costs are surely lower than the $32.5 million per year that the owner of the Chrysler Building needs to pay in ground rent to Cooper Union, which owns the land underneath the building.