The Capital Letter: Stimulus Politics, Trade Deficits, Big Government & Big Tech

(James Lawler Duggan/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Gridlock, Georgia, a win for pensioners over ESG, San Francisco self immolates (a bit more), Barr’s European co-belligerents, stamping on Ant, and Adam Smith — Ladies’ Man.

Betting on Gridlock, but Georgia Is on my Mind

Over the years, I have been frequently impressed by the way that investors can find reasons to buy stocks. At the beginning of the week, investors were buying on the back of hopes (hopes!) of a blue wave, focused on the prospects of a Biden binge (and, perhaps, for those paying attention, the thought that federal money could be used to avert the coming crunch in some of the more chaotic states).

However, maybe, just maybe, those investors were missing some elephants — or should that be donkeys — either in the room, or just outside it. To take a quote from Engels (partly quoting Heine) and then to rip it out of context: “So just fight bravely on, most gracious masters of capital . . . but do not forget that ‘the hangman stands at the door!’”

Melodramatic? Well, just a bit. Nevertheless, it is still a struggle for me to see how higher income taxes (and don’t forget pass-throughs), higher capital gains tax rates, business-unfriendly regulation and the orgy of value destruction and malinvestment represented by even elements of the Green New Deal are (a few sectors apart) a market positive. Yes, the continuation of ultra-low rates ought to push investors in the direction of stocks, but there are limits as to how far that can be the case.

But I am a glass half-empty sort of person.

On the other hand, as anyone who remembers the ‘90s will know, there’s a lot to be said for gridlock. The Clinton presidency that emerged after 1994 was somewhat more market friendly than the Clinton presidency which preceded it, something that helps explain the much sharper move up in stocks in the years that followed.

So, it’s not that surprising that stock investors (the Treasuries crowd not so much) seem to have appreciated the prospect of the return of gridlock with the Biden agenda reined back (at least partly) by continued control of the Senate. I wouldn’t overlook either the fact that the GOP appears to have increased its presence in the House, still a minority of course, but perhaps a warning to some Democrats who might otherwise be tempted further to the left.

The rebound in tech stocks is telling for now. That may owe something to the way that some of the leaders, at least, are seen as quasi defensives, and it may also owe something to the thought that they will face less of a regulatory onslaught, although given the mood in some sectors of the Republican Party as well as in the Democratic Party, I wouldn’t be so sure about that. There’s also the fact that, with his profoundly misguided assault on Google, Attorney General Barr has opened a Pandora’s box that Democrats as well as Brussels will be only too pleased to empty out.

Meanwhile, Georgia is on my mind . . .

USA Today:

While Democrats’ chances at winning a Senate majority are diminishing, the fight for the Senate may stretch into 2021.

Both of the Georgia Senate seats up for election this year could head to runoff contests in January, based on results in the state as of Thursday.

Republican Sen. David Perdue held 50.0% of the vote Thursday morning. If that number ends up below the 50% mark, he’ll face Democratic challenger Jon Ossoff in a Jan. 5 runoff. The other Georgia Senate seat between GOP Sen. Kelly Loeffler and Raphael Warnock already appears headed to a runoff next year.

The races could play an important role in the makeup of the new Senate, though it appears Republicans are likely to keep their Senate majority. Democrats have flipped two seats this election – in Arizona and Colorado – and lost one seat in Alabama, resulting in a net gain of one seat. Going into Election Day, Democrats had to win four seats to gain a majority or three if Democrats win the White House.

The remaining chances for Democrats are the two Georgia seats as well as seats in Alaska and North Carolina. The Associated Press has yet to call these races.

Here are the remaining races yet to be decided:


Perdue was leading Ossoff 50.0% to 47.7% as of Thursday morning.

Perdue needs to secure at least 50% of the vote to avoid a runoff, and Ossoff and Libertarian candidate Shane Hazel have chipped away at Perdue’s vote share over the past several days. Gabriel Sterling, Georgia’s voting system implementation manager, said mid-morning Thursday there were about 60,000 votes left to be counted in the state. The state would likely finish counting the remaining ballots by the end of the day, he said, though they were prepared to continue counting in the evening.

As Perdue’s vote share declined, Ossoff’s campaign predicted a runoff election in January. Ossoff campaign manager Ellen Foster said Thursday though the votes were still being counted, they were “confident” a runoff election would be called and that Ossoff would win.

Perdue’s campaign manager Ben Fry countered, “if overtime is required when all of the votes have been counted, we’re ready and we will win.”

Georgia’s other Senate election is set for a January runoff between incumbent Republican Sen. Kelly Loeffler and Democrat Raphael Warnock, the senior pastor of Ebenezer Baptist Church in Atlanta.

North Carolina

Incumbent Republican Sen. Thom Tillis was leading in North Carolina by close to 97,000 votes, with 93% of the vote counted. He thanked supporters in an Election Night speech for a “stunning victory.” His Democratic opponent, former state Sen. Cal Cunningham, however, has declined to concede the race and is instead waiting for more ballots to be counted.

North Carolina’s Senate race was the most expensive Senate race in U.S. history, according to the Center for Responsive Politics. It was upended in its final weeks by the disclosure of Cunningham having an affair and Tillis testing positive for COVID-19.

President Donald Trump currently leads Democratic presidential nominee Joe Biden by roughly 77,000 votes in North Carolina with about 94% of the vote counted.


Alaska’s Senate race was a longshot for Democrats, but it became a potential pickup opportunity as the campaign cycle progressed, with Democratic-backed independent candidate Al Gross raking in campaign donations and polling competitively with incumbent Republican Sen. Dan Sullivan.

Trump won Alaska by about 15 points in 2016, though Sullivan won election to his first term in 2014 by about two percentage points.

With about half of the vote counted, Sullivan led Gross by close to 58,000 votes, or about thirty percentage points.

Fat lady and all that.

A Win for Pensioners over ESG

The Wall Street Journal:

The Department of Labor adopted a final rule that could curb investing in 401(k)s based on environmental and social issues.

First proposed in June, the rule published Friday requires that funds in retirement plans only consider risk-and-return for stocks and bonds—and not environmental or social issues.

“This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives,” said Labor Secretary Eugene Scalia.

Still, a senior department official said funds that consider environmental and social issues could be allowed if managers document how the strategy benefits the core risk-and-return objective.

This does not mean that fiduciaries are prohibited from considering such issues as environmental impact and workplace practices,” the official said.

There could be also “rare circumstances” that an investment with environmental or social goals is indistinguishable economically from a competing option. In those cases, a fund manager could weigh those factors but must show how the financial interests of savers aren’t sacrificed.

The Department of Labor regulates retirement plans through the Employee Retirement Income Security Act of 1974.

I wrote about this proposed change in July.

Spoiler: It’s a good thing.

A related rule on proxy voting (another increasing source of investor abuse) is also in the works, which will come on top of SEC rule changes in this area.

Spoiler: It’s a good thing.

Back to The Wall Street Journal:

The measure was opposed by money managers who are building out environmental, social and governance funds to meet rising demand. Only one of the 86 asset managers who sent letters over the 30-day comment period supported the rule, according to an analysis by US SIF: The Forum for Sustainable and Responsible Investment and other organizations.

The fact that ESG funds often carry higher fees (justified by the box-checking “research” that goes into them) has, of course, nothing to do with this. Nor has the fact that ESG allows an unholy alliance of Wall Street, NGOs and activists to play politics with other people’s money.

Sadly, these rule changes are unlikely to survive the switch to a Biden administration.

Here’s the Manhattan Institute’s Allison Schrager from July:

Joe Biden unveiled his economic plan last week. It’s mostly unremarkable, containing Donald Trump-like nods to economic nationalism, but one thing that stood out was Biden’s vow to “put an end to the era of shareholder capitalism.” The former vice president and presumptive Democratic presidential nominee rejects “The idea the only responsibility a corporation has is with shareholders. That’s simply not true. It’s an absolute farce. They have a responsibility to their workers, their community, to their country. That isn’t a new or radical notion.”

Biden is correct that running a company in a way that reflects the interests of “stakeholders” and not just shareholders is not a new or radical concept. That doesn’t, however, make it right.

As a reminder, shareholder capitalism rests on the (apparently) farcical notion that the managers of a company are responsible to those who own it. However, arguing that shareholders are just one constituency among others — something that is the essence of what has to come to be known as stakeholder capitalism — is not only an attack on property rights, but is also a device that bypasses the basic democratic process.

And, as Biden correctly states, in one shape or another, stakeholder capitalism has been around for a while. That is because it’s essentially an expression of corporatism, an idea that stretches back (at least) into the 19th century. Sometimes it’s reasonably benign. It was an essential element in the establishment of post-war West Germany’s social market. On other occasions, however, it has been distinctly malign: It formed an important part in pre-war fascist theory.

So the fact that Biden will be in a position to push through a stakeholder agenda is not entirely reassuring.

And yet, as I write (1: 50 p.m.) the S&P is up 2 percent on the day.

Around the Web

The self-immolation of San Francisco continues . . .

The Independent:

Addressing economic disparity laid bare by the coronavirus pandemic, San Francisco voters overwhelmingly approved several tax measures targeting landlords and big businesses whose CEOs earn far higher than their average workers.

Under the new law, any company that pays its top executive 100 times more than their average worker will pay an extra 0.1% surcharge on its annual business tax payment. If a CEO makes 200 times more than the average employee, the surcharge increases to 0.2%; 300 times gets a 0.3% surcharge and so on.

Voters also agreed to sweeping business tax changes that will lead to a higher tax rate for many tech companies, and a higher transfer tax on property sales valued between $10 million and $25 million.

Standing with Barr . . .


Amazon, Facebook, Google, Apple and Twitter have now acquired a power that is equal only to that of states and have thus become their adversaries, French Economy Minister Bruno Le Maire said on Wednesday.

“One of the greatest challenges of the 21st century […] is the emergence of digital giants that are as powerful as states, as financially powerful, as technologically powerful, as powerful in commercial terms,” France’s economy minister told radio station Radio Classique.

Le Maire reiterated that he would ensure “that these digital giants are taxed at the same level as French companies”, welcoming the fact that this objective is now being taken up by the European Commission.

In the case of France and the EU, these complaints are lightly disguised mercantilism, accompanied, all too often, by undisguised anti-Americanism. That the Department of Justice is acting as, in effect, their co-belligerent is . . . disappointing.

Stamping on Ant.

An interesting read, via Bloomberg:

The mid-level bureaucrats left China’s richest man waiting as they prepared for a meeting that would send shockwaves across the financial world.

It was Monday morning in Beijing, and Jack Ma had been summoned to a conference room at the China Securities Regulatory Commission just days before he was set to take Ant Group Co. public in the biggest stock-market debut of all time.

When the bureaucrats finally turned up, they skipped over pleasantries and delivered an ominous message: Ant’s days of relaxed government oversight and minimal capital requirements were over. The meeting ended without a discussion of Ant’s IPO, but it was a sign that things might not go as planned.

The writer of the article raises various regulatory-type issues, but them comes to the nub:

Still, some China watchers have an alternative theory for why Xi’s government acted the way it did: it wanted to send a message.

Ma, a former teacher who’s widely revered in China, faced an unusual amount of criticism in state media after he slammed the country’s financial rules for stifling innovation at a conference in Shanghai on Oct. 24.

His remarks came after Vice President Wang Qishan — a Xi confidante — called for a balance between innovation and strong regulations to prevent financial risks. “It appeared that, intentionally or not, Ma was openly defying and criticizing the Chinese government’s approach to financial regulation,” Andrew Batson, China research director at Gavekal Research, wrote in a report.

Some investors are bracing for tougher times at both Ant and the rest of Ma’s business empire. Shares of Alibaba Group Holding Ltd., which owns about a third of Ant, tumbled more than 8% on Tuesday in New York for the steepest drop in five years. The slump cut Ma’s wealth by almost $3 billion to $58 billion, dragging him down to No. 2 on China’s rich list behind Tencent Holdings Ltd.’s Pony Ma.

The IPO debacle has also raised broader concerns about China’s commitment to transparency as it tries to lure international investors.

On Tuesday, confusion over the suspension triggered a flood of calls to Ant’s bankers from baffled money managers. The sense of whiplash in some cases was stark: Just an hour or two before the suspension was announced, Ant’s investor relations team was still trying to confirm attendance at a post-IPO gala in Hong Kong. One of the company’s biggest foreign investors predicted the episode could do lasting damage to confidence in China’s capital markets.

Really? If such investors are only now are waking up to the nature of the relationship between the Chinese state and China’s companies, their sleep must have been very deep indeed.

Meanwhile, it would be awkward if any ESG investors have stakes in Chinese companies. Satisfying the “E” (environmental) was always on the tricky side, and now we have another reminder that, so far as the “G” is concerned, it has much more to do with the government in Peking than good corporate governance.

Random Walk

Adam Smith, lifelong bachelor, but ladies’ man?

F.E. Guerra-Pujol:

More recently, however, many Adam Smith scholars have been willing to entertain and explore [the] amorous Smithian enigma head on. Gavin Kennedy, for example, addresses the possibility of numerous “love interests” in the opening pages of his intellectual biography of Adam Smith, only to dismiss this tantalizing possibility out of hand as unfounded “speculation”. Dennis Rasmussen deems reports of Smith’s numerous dalliances as mere “rumors,” while Nicholas Phillipson relegates these persistent and various reports to mere “gossip”.

Mere? As a member of #TeamGossip, I’m outraged.

But back to the tea.

There was, it seems, a lady in Fife, an Englishwoman in France (possibly a Mrs. Nicol), a Miss Campbell. There is also wild conjecture:

[A]lthough I am not accusing Adam Smith of keeping a mistress during his sojourn in France, I am asserting that he was in elite aristocratic circles during his travels, that some of the great men he met and interacted with during his travels were the kind of men who would have kept mistresses or who would have had a more “liberal” (in the classical sense of that term) attitude toward love and sex.

Guerra-Pujol’s conclusion:

Although Ian Smith Ross famously concluded that “[i]t is to be feared that the biographer can do little more with the topic of Adam Smith’s sex life than contribute a footnote to the history of sublimation,” we should reject this hasty, resigned, and melancholic conclusion, for plenty of primary evidence exists supporting the thesis that the great Adam Smith was all too human, that he fell in love at least twice and perhaps as many as three times during his remarkable life. Whether Doctor Smith was right in wanting to suppress this evidence should be the subject of another paper, but it bears repeating that Adam Smith lived in a radically different world than us, a world between the High Middle Ages and today’s modernity.

More specifically to this paper, Adam Smith’s world was one in which intellectual life and sexual activity were strictly monitored by Church elders, and nowhere was the regulation of sexual morality more oppressive than in Adam Smith’s native Scotland, where he lived for most of his life. I thus conclude this paper with the following conjectures: Adam Smith must have resented these religious and intellectual restrictions; perhaps these restrictions were the genesis of Adam Smith’s life-long love and defense of personal liberty.

H/T: Marginal Revolution

— A.S.

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