Commentary on Political Economy

Monday 2 August 2021


 “Square has brought forward a trading update in light of the [Afterpay] deal, and flagged a net profit of $US173m on revenue up 143 per cent to $US4.68 billion. The net profit excludes gains on equity investments for the quarter to June 30.”

Divide 173 into 4,680… and you get a measure of how buy now pay never is bankrupting wallets just as much as social media turns people antisocial! Note: no cash is changing hands; it’s ALL SCRIP! Yep, up the garden path we go!

“Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles,” Mr Dorsey said in a statement.

“Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.”

"...putting the  power back in their hands"... hahaha... power to take on more debt they can't repay ! ... brilliant ! 

If Western financial markets have lost all sense, why do financial analysts have to follow? What happened to professional rectitude and honesty? Well, at least John Plender at the FT is taking a stand in plain English (also today, its editors have condemned the Nazi German Nord Stream, for which Merkel ought to rot in prison):

Market jitters only underscore China’s importance to global economy

US threats, combined with Beijing’s drive for control, raise the very real risk of tensions escalating

A man checks his phone while walking in Lujiazui financial district during sunset in Pudong

Beijing is bent on cutting tech titans down to size and gaining a tighter hold over data © Aly Song/Reuters


August 1, 2021 12:00 pm by John Plender

A curious feature of the aftermath of the 2008-9 financial crisis is that there has been no backlash against international finance to compare with the retreat from globalised production. Still more curious is that global capital seems so unbothered by the Biden administration following Donald Trump in seeking to decouple economically from China.

This makes the wholesale dumping of Chinese bonds and equities by developed world fund managers earlier last week — in the face of Beijing’s continued assault on Chinese tech giants and its new attack on the Chinese private education industry — a striking about turn. Doubly so, given the sheer momentum of record inflows into China.

The stock of inward foreign direct investment in China has risen from $587bn in 2010 to $1.9tn in 2020. While global foreign direct investment fell last year by 35 per cent to $1tn, inflows into China rose from $141bn to $149bn, no doubt partly reflecting perceptions of a very rapid recovery from Covid-19.

Foreign investors also bought $35bn of Chinese onshore equity stocks and $75bn of government bonds in the first half of this year, in each case a 50 per cent increase over the buoyant pre-Covid levels in 2019. As for Chinese companies quoted in the US, until this month investors largely ignored the administration’s threats to delist those that fail to meet stricter audit compliance requirements. So, too, with prohibitions on investment in Chinese companies with links to the military.

Nicholas Lardy of the Peterson Institute for International Economics points out that global economic decoupling from China is simply not happening. Indeed, “in some critical dimensions China’s integration into the global economy continues to deepen”.

In part, that reflects the Beijing leadership’s commitment to gradual liberalisation of the financial system. Wall Street’s finest, mesmerised by the prospect of a Chinese crock of gold at the end of the global rainbow, have recently been encouraged by Beijing regulators’ relaxation of ownership rules to take controlling stakes in Chinese securities firms and fund management groups.

And by easing restrictions on bond and equity inflows the Chinese authorities have been helping relieve the solvency problems of overstretched American and European pension funds. Against the background of an appreciating renminbi, these investors have been finding more generous yields in China’s bond market than in the US or Europe.

Domestic and US-listed Chinese equities, meanwhile, offer access to a vibrant technology sector. Rhodium Group, a research company, estimates that US investors held $1.1tn in equities issued by Chinese companies at the end of 2020.

Last week’s market turmoil suggests that developed world investors have underestimated the importance the Chinese Communist party attaches to control and social stability. Beijing is bent on cutting tech titans down to size and gaining a tighter hold over data. Its tilt at the tutoring market is designed to make education less elite-friendly.

The leadership is also determined to block the efforts of the US Public Company Accounting Oversight Board to gain access to US-listed Chinese companies’ documents. Former diplomat Roger Garside suggests in his book China Coup that US threats to delist Chinese companies that fail to comply are not empty. He sees a risk that tensions over capital market issues could escalate seriously.

The scope for Chinese retaliation is equally real, notably in relation to so-called variable interest entities (VIEs), through which US investors gain access to Chinese equities. Beijing’s sudden ban on tutoring companies’ use of VIEs has highlighted the risks in an arrangement that confers only tenuous ownership rights and no control rights at all over onshore Chinese companies.

If greater hostility to foreign capital endures, China will pay a price. So far Beijing’s aspiration for the renminbi to be a global reserve currency has been well served by its liberalised financial markets. Yet the essential next step — capital account liberalisation — was always going to be a challenge for the party because it entails a loss of control. It will become even harder if there are reduced foreign inflows to offset capital flight unleashed by rich Chinese who have no trust in the regime.

The US and China have a mutual interest in continuing financial interdependence. But as with wider geopolitical competition, the risk is of friction becoming out of control. The global financial alchemy whereby the relatively poor Chinese help finance rich countries’ pensions is no longer a given.

Interesting : FT on Taiwan

Japan calls for greater attention to ‘survival’ of Taiwan

Defence minister Nobuo Kishi’s remarks follow Tokyo’s decision to link Taipei’s security to its own

Defence minister Nobuo Kishi walks in front of lined-up Japanese soldiers

Nobuo Kishi is known for his close links with politicians in Taipei and regarded as both a conservative and a hawk on China © Kyodo via Reuters Connect


August 1, 2021 11:01 pm by Robin Harding and Leo Lewis in Tokyo

Japan’s defence minister has called on the international community to pay greater attention to the “survival of Taiwan” as he warned that China’s military build-up was enveloping the island.

Nobuo Kishi, the younger brother of former prime minister Shinzo Abe, told the Financial Times in an interview that broad international pressure was crucial to prevent Taiwan’s future being decided by military confrontation.

His comments mark a further step up in rhetoric after Japan broke with years of precedent and directly linked Taiwan’s security to its own in a recent defence white paper, with an explicit reference to the need for a greater “sense of crisis”.

The same report, whose cover illustration of a samurai adorns Kishi’s office, warned that the overall military balance between China and Taiwan was now “tilting to China’s favour” — a warning the minister repeated.

“We’re seeing various moves by China that work to envelop Taiwan,” said Kishi. Chinese military aircraft have regularly entered the air defence identification zone off Taiwan’s south-western coast since last year.

Beijing has also started flying around the southern tip of the island into airspace off its south-eastern coast and Chinese military planes flew parallel to the northern half of Taiwan’s east coast earlier this year. Chinese naval vessels have increasingly been spotted in waters off Taiwan’s eastern coast.

Kishi is known for his close relations with politicians in Taipei and is regarded as both a conservative and a hawk on China. He was recently photographed gazing across the 110km strait that separates Taiwan from Japan’s westernmost island of Yonaguni.

Japan’s strong message, Kishi said, was that peace in the Taiwan Strait would only be assured if the international community demanded it. “Rather than a direct military collision between China and Taiwan, international society needs to pay greater attention to the survival of Taiwan,” he said.

US and Japanese military officials have begun serious planning for a possible conflict between China and Taiwan, including top-secret tabletop war games and joint exercises, six officials told the Financial Times at the end of June.

Taro Aso, Japan’s deputy prime minister, said a crisis in Taiwan could present an existential threat to Japan, in remarks at a private fundraiser that were reported by local media. The comments were significant because that is the constitutional hurdle for use of Japan’s military to support US forces.

But despite its growing concern, Japan does not intend to forge a direct military relationship with Taipei, Kishi said, and would maintain the status quo in which the two nations do not have formal diplomatic relations.

“While maintaining the existing framework, we want to reach a mutual understanding via various initiatives, or through the exchange of views between Japan and the United States,” he said.


US and Japan conduct war games amid rising China-Taiwan tensions

Although the gap in military strength between China and Taiwan is widening every year, Kishi indicated that he believed in Taipei’s ability to defend itself. He said the island was combining “asymmetric military capabilities”, which use cheaper weapons to offset an adversary’s strength, into a “multi-layered defence system”.

As part of Japan’s push for greater international attention, Kishi said Tokyo welcomed a greater role for European countries in the region, including the upcoming visit by the UK’s Queen Elizabeth aircraft carrier strike group.

“A lot of countries have shown their sympathy with our idea of a free and open Indo-Pacific,” he said. By showing their presence in the region, “we can together send a strong message on regional peace and stability”, Kishi said.

The point to Big Tech is that its “technologies” have had only marginal effects on productivity, but they have allowed one of the biggest transfers of social wealth to the few from the many by way of historically unprecedented levels of personal and national debt… Gradually, through populisms and myriad cults springing everywhere, the pain of this indebtedness is spreading and intensifying everywhere… as anyone can see… leading to mounting social conflicts, international and intergenerational, that are simmering and just waiting to explode. 

I think it was the WSJ that just last week named New Zealand as “the safest place to be” in case of what most observers with any clue sense is an oncoming global crisis. According to Joseph Schumpeter, the Austrian economist “prophet of innovation”, capitalism is a process of “creative destruction” (schopferische Zerstorung, in German). Yet, even he could see that just as easily this process can turn into… destructive creation (zerstorische Schopfung!)… which is what is happening now as even formerly rock-solid nation-states like the US are shaken to their foundations. Only the other day, as you know, a leading Pentagon general was suggesting that Trump was planning the equivalent of a coup d’état! Science fiction? Runaway fantasy? Maybe… But this is a top sitting and serving US general!

Two examples:


Confirmation of what I was saying… the Afterpay heroes get a chance to opt out (the stock was down 6 per cent on Friday!)… and the Square turkeys will boast huge increases in turnover, by paying with astronomical scrip!   Wwwoooowww… shades of the Dotcom bust! 

And what about the other Square shareholders… will they witness the “Square root” of their share price now they’ve been diluted to buggery? Time will tell…

“Most major M&A deals, like the recent bid for Sydney Airport, are assessed on an enterprise value to EBITDA multiple basis, but high growth tech companies (or fintech in this case) are rarely viewed under this lens. Afterpay already traded on an EV/EBITDA multiple of more than 600 times and Square’s bid for the business puts it at more than 800 times on a trailing basis.”…. Good Jesus!

Note that the Editorial devotes far too little attention to cryptocurrencies...  AND YET! It argues point blank thar ransomeware hardly existed... BEFORE... cryptos were introduced and... allowed to trade... legally! The absentee State, turning fast into the accomplice of Evil Empires, strikes again... "it wasn't there again today/ I wish, I wish, he'd go away!"

Bartholomewsz says "smart move" for Afterpay founders. In reality, they got an offer they could not refuse, as he himself concedes... Take the money and run... and let Square handle this hot potato!

The absentee State will pay dearly for its absenteeism: this from John Kehoe at the AFR:

"The buy now, pay later giant has access to sensitive personal data of millions of customers and also has plans to shift into banking.

Given the FIRB’s heightened scrutiny of critical infrastructure such as payments systems and data, national security officials in Canberra will carefully run their eyes over the transaction.

The Australian Competition and Consumer Commission and its trust-busting chairman Rod Sims will also be called in.

Afterpay is also the subject of several future regulatory and policy decisions, including whether buy now, pay later should be regulated more strictly as credit and if it’s no-surcharge rule for merchants should be banned.

Frydenberg is considering the findings of a review of the payments system architecture that he commissioned King & Wood Mallesons partner Scott Farrell to undertake.

If Afterpay becomes foreign-owned by a major US payments player, there could be less sympathy in Canberra for the existing “light touch” regulatory approach to buy now, pay later.

Commonwealth Bank of Australia chief executive Matt Comyn, a close business confidant of Frydenberg, has been warning about the risks of Afterpay and pushing hard for buy now pay later to be subject to the comprehensive credit reporting regime.

This would require Afterpay to report into credit bureaus, so the total amount of debt held with different buy now, pay later providers could be seen to allow banks to properly assess customer risk."

"The naysayers will look at the peak Afterpay stock price at $160 a share in February and say the fact the board agreed to sell at $120 tells you the stock story has peaked.

That doesn’t mean BNPL won’t keep growing from a bigger case.

It will also be opened to a bigger company with grander plans for distributed ledger finance -bitcoin and all.

That’s the hope, for there is always the market to sell stock for those who see the writing on the wall."

The writing IS on the wall... Square and Afterpay are like two drunken sailors holding each other up... It's either that and a very slow agonizing death (by a thousand cuts) or kicking the can down the road and hope for the best...

Frank, this from the FT just now is what I was saying earlier : when will the music stop?

Hedge funds enter private equity turf with deals for unlisted companies

Buying into private companies seen as way to bypass overcrowded IPOs

Hedge fund executives such as Mike Platt, Daniel Loeb and Paul Marshall see private firms as a way into rising tech companies © FT montage; Bloomberg; Anna Gordon


August 2, 2021 4:00 am by Laurence Fletcher in London

Hedge funds are looking to buy in to unlisted companies, betting that an area of the markets that has wrongfooted the industry in the past can now provide them with the kind of lucrative gains enjoyed by private equity rivals.

High-profile executives such as Third Point’s Daniel Loeb, Marshall Wace’s Paul Marshall and BlueCrest Capital’s Mike Platt are among those who have spotted the opportunity. They are now seeking to invest directly in fast-growing companies, particularly in the technology sector, that are staying private for longer and can already be richly valued before they float.

Marshall Wace is launching two portfolios to invest in the healthcare and digital assets sectors, the first time it has launched vehicles for outside investors to buy into private companies. Third Point has been looking to raise about $300m for its first dedicated venture capital fund and has completed its first close, said a person familiar with the fund.

Platt, one of the world’s most successful macro traders whose firm is now a private family office, told the Financial Times that US private equity investment was now “a significant focus” for him. Paul Singer’s Elliott Management, already a longtime private equity investor, said in a letter to investors this year seen by the FT that taking stakes in private companies and public-to-private deals represented some of the best investment opportunities at the moment. 

“The best public market investors now have to be participating or at least aware of the action in private markets, or else they have a huge blind spot,” said Cutler Cook, managing partner at investment firm Clay Point Investors. “Some of the savviest investors have realised that, with public markets where they are, the opportunities to outperform are so much better in private markets.”

The interest in private assets comes on the back of huge gains reaped by some so-called Tiger cubs — protégés of Julian Robertson’s famed Tiger Management — such as Tiger Global’s Chase Coleman, Viking’s Andreas Halvorsen and Maverick’s Lee Ainslie. All are long-time backers of unlisted companies and have made tens of billions of dollars from these investments.

Chart of returns from hedge funds and 10-year annualised IRR for global buyouts (median performance), which shows that hedge funds have bounced back. Having underperformed buyouts in the past decade, they have generated higher returns in the past 18 months

Many hedge fund managers, who have traditionally invested in public markets, have also been looking with envy at the returns, fees and investor inflows enjoyed by the private equity and debt industries in recent years. Assets in private capital have risen from just over $2tn in 2010 to more than $7tn at the end of last year, according to Morgan Stanley. The hedge fund industry has grown from $1.9tn to $3.6tn over that period, according to HFR, and performance has often been lacklustre.

This is not the first time that hedge funds have expanded into private equity and unlisted companies. Before the 2008 financial crisis some managers bought into private companies to juice up returns. That move backfired spectacularly when the crisis hit and many such assets became tough to sell, just as investors were demanding their money back.

Some managers put these assets into special vehicles, which often took years to wind down. Last year, the FT reported that a GLG Partners fund created out of assets bought by star manager Greg Coffey before the crisis, including a large stake in a Siberian coal mine, had only recently made the final payments back to investors.

This time, managers argue that funds have done a better job matching the assets they hold to investors’ ability to withdraw their cash. And while some funds have put the investments into their more liquid hedge funds, others such as Coatue and Tiger Global have gone on to develop separate private equity funds with longer investor lock-ups.


Hedge fund stars shy away from the limelight

A key reason for investing in both public and private companies is the additional information hedge funds believe they can glean, which can help inform other investment decisions. Unlike public companies, which are subject to strict reporting rules, private companies can provide them with much more information, not only on their own performance but also on metrics such as sales and margins across the sector.

“If you analyse public and private companies, you see the whole picture,” said Christian Vogel-Claussen, managing partner at London-based hedge fund Alanda Capital. The firm, which takes a similar investing approach to some of the Tiger cubs, has bought into companies such as debit card company Marqeta, TikTok owner ByteDance and digital banking firm Revolut.

Third Point founder Loeb wrote in an investor report seen by the FT that “the feedback loop between private and public markets has never been as pronounced as it is today”.

Managers also argue that by investing in private companies they can get ahead of overcrowded IPOs. Some have found more opportunities to do so during the coronavirus pandemic, when the economic hit from lockdowns put off some private equity firms from committing capital. New York-based hedge fund Kora Management, for instance, said it was able to invest in Indian food delivery company Zomato in the third quarter of last year when “the capital cycle was not as favourable”. The stock soared on its debut in July.

“At an IPO there’s little chance, as a hedge fund, to get an allocation — therefore you must have exposure earlier,” said Alanda’s Vogel-Claussen.

Cédric Fontanille, head of investment mandates at Unigestion, said hedge funds had identified a “sweet spot” in smaller private firms “that are outside the range of the big private equity funds and are maybe a little less looked at by private equity”.

However, some in the industry see more pragmatic reasons for the switch into private investments.

Whereas hedge funds can be undone by one bad trade or quarter of performance, private equity managers lock up investors’ capital for far longer and are judged over much longer periods. According to one industry insider, taking such a long-term approach offers far less “career risk”.

Incidentally, note that the absenteeism of Western states is the nefarious by product of what is known as “regulation competition” whereby national authorities are reluctant to regulate private enterprise… for fear that it will move abroad! This transforms “globalisation” in a “rush to the bottom” that now endangers stability everywhere and In everything!

Joe Aston at AFR:

“Over the past decade, Sydney Airport has paid its shareholders dividends of $5.7 billion. But it has now been eclipsed in “value” by Afterpay, which has never made a profit, has never paid a dividend and has less than $1 billion in net assets.

It is being acquired for an implied $39 billion by Square, which last quarter generated 70 per cent of its revenue from bitcoin. Afterpay shareholders will receive Square shares, currently priced at 120 times forward earnings. Welcome to 2021!”

Square made 70 per cent of its revenue last quarter… from Bitcoin… ah well, Mr. Powell and his cohorts will see to it that the party rolls on… until the punch bowl turns into a… POWDER KEG!


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