As we've written before (here, here) 2020 was actually a very good a year for Wall Street. And now we know just how much (on average) for the risk-takers in financial firms. The NYS Comptroller's office released bonus numbers for 2020 and it's pretty good: the average bonus paid to employees in NYC rose 10% to $184,000. A boom in underwriting activity, historically low interest rates and surges in trading were behind the windfall revenue for securities firms. The Comptroller estimates the bonus pool for NYC finance industry workers was $31.7 billion in 2020, up from $29.7 billion in 2019. The Comptroller noted that growth of the bonus pool following a recession was unique. Bonuses fell by 33% in 2001 after 9/11 and by 47% in 2008 after the GFC. (Click chart to enlarge)
The good news for everyone else, the "income tax revenue from NYC's securities industry will help shore up state and city budgets that are strained by steep declines in other industries."
One positive of the global pandemic has been a reduction in pollution due to measures taken to slow down the spread of Covid-19. Data from IQAir's platform shows that air quality improved in 84% of countries last year adn that most major cities saw double-digit % improvements in air quality. But also, that still we have a long way to go with only 24 out of 106 monitored countries meeting the WHO guidelines.
And their annual list of the 20 cities with the worst air quality still had dangerous levels of pollution. All 20 cities were located in just four neighboring Asian countries: India (15), China (2), Pakistan (2) and Bangladesh (1). (Click chart to enlarge)
So, what's with India? While the dynamics are probably similar in all the listed cities, the combination of booming industrialization, extreme crowding, poor vehicle regulations, and burning of trash seems most acute in Indian cities.
And just to put meaning to the above numbers, the chart below helpfully puts into context how poor the air quality is in Hotan, China and Ghaziabad, India. Based on PM2.5 levels...pretty Unhealthy-- with increased likelihood of adverse effects to the heart and lungs among general public. And that's after a much improved year!
The WSJ had an interesting story on how tax-avoidance by the wealthy is far larger than previously thought. A study by IRS researchers and academic economists estimates that the top 1% of households fail to report about 21% of their income, and unreported income could be twice that for the top 0.1%. It's good to be a billionaire.
Referencing the study, the IRS Commissioner recently asked Congress for more resources contending that each additional dollar spent on tax enforcement could yield $5-$7 in revenue and result in perhaps as much as $1 trillion of additional collections over a decade, without raising any taxes.
One of the co-authors of the study is Gabriel Zucman, a leading economist on income equality. His research reveals the striking disparity in income distribution in the U.S. starting in the 1980s. Looking at average annual real income growth rates (1.4%) between 1980 and 2018, the median American's income grew by less than 0.5% per annum while the top 0.001% group's income shot up by 6% per annum. Notice prior to the 1980s, results were very different--average income growth (2%) was fairly even across all income percentiles; in fact the income of the richest Americans actually grew at a slower rate (1%) than that most of the population (click chart below to enlarge).
Next, the chart below shows just how tax rates have changed by income groups over the last 70 years. In the '50s, '60s and '70s the highest-earning Americans paid significantly more taxes--shockingly more, like Nordic-countries more. The top 400 richest Americans had a marginal tax rate of 70%. But over the last 20 years, and by 2018, the richest Americans have effectively paid less taxes than working class Americans!!
So, through a variety of laws, tax-shielding strategies and offshore accounts the one percent get to have their cake and eat it too! I wanna be a billionaire so f***ing bad...
The burning question in the 2020-21 NFL season for many football fans was who was more responsible for the Patriots dynasty. Was it due more to Tom Brady's leadership and skills or Bill Belichick's organization and strategizing? Well, the answer seems pretty clear now...Brady won his 7th Super Bowl this winter, while the Patriots went 7-9 and failed to make the playoffs for the first time in a dozen years.
Now Harvard has also weighed in. A HBR analyses of 38 years of football data has determined, indeed, that the quarterback is the most important piece of an NFL franchise. The quarterback is most responsible for the variation in a team's record (~40%), followed by the head coach and GM. Brady it is then!
But wait, Belichick is said to exercise extensive authority over the Patriot's football operations, effectively making him the team's GM as well as head coach. In that case, maybe Bill Belichick has been more important for New England's six titles than Brady? Nah, what do academics know...
Some of the most interesting financial stories of the week:
1. Goldman Sachs analysts want better working conditions: A small of group 1st year IBD analysts who felt overworked and had no time to shower or sleep but, on the other hand, did manage to find the time to put together a professional looking deck (congratulations, you are GS material!) under the guise of a 'survey', bemoaning their lot in life and how GS needs to change or risk losing them. And, of course, posting it on social media to have the desired effect. Hmmm, not sure they will get all that much sympathy from current senior management.
2. Greensill and financial innovation: Greensill Capital was supposedly at the forefront of fintech before it collapsed last week, offering supply chain finance reserved only for blue-chip companies to small (i.e., risky) businesses through great analytics. But Softbank was an investor so, you know, it could always go either way. Turned out it had decidely low tech, but no shortage of risks.
Greensill's business was financing supply chains. Say, company ABC buys $100 worth of widgets from company XYZ. XYZ allows ABC 90 days to make payment, but would rather get paid today and is willing to offer a discount as incentive (you know..."a bird in hand is better than two in the bush" argument). So Greensill would pay XYZ $95 today and collect $100 from ABC 90 days later. And that's supposedly the whole game. Of course, that alone doesn't get you a check from Softbank. Greensill would do many of these transactions and remove the risk by securitizing the cash flows...specifically, sell them to two Credit Suisse funds. Ok, sounds more interesting.
But Greensill also financed "prospective receiveables" from "prospective buyers." Huh? Basically, XYZ says to Greensill that they think company BBB will buy $100 of widgets from them shortly. So asks Greensill to advance them $95 and collect $100 from BBB in 90 days. Of course, BBB isn't a XYZ client yet and has not purchased anything and may never do so...there's just the dream of doing so. But Greensill was undettered, because what is high-finance but dreams? At the end of 90 days, of course, no sale. But XYZ promises very soon...almost there. So they roll over the loan. Greensill lends XYZ $95 so it can pay Greensill back the original advance plus interest. XYZ wires, I dunno, $99 to Greensill. And they keep doing that...but wiring money back-an- forth incurs fees and that's not high finance. So the parties move to a cashless roll, where XYZ just pays the interest--voila, a high-finance solution! Greensill apparently did a lot of this with its biggest client, Bluestone. So, it was probably risky stuff like this with risky counter parties that got Greensill into trouble, but also stuff like this that probably made them attractive to VCs in the first place.
3. Dow gains 1,000 points in record time to reach 33K: The Dow Jones notched its fastest consecutive, 1,000-point milestones on a closing basis, taking just 5 days after passing 32,000 to close at a record 33,015 on March 17th. Lately, the Dow's been on a tear gaining ~4% MTD and benefiting from the rotation out of growth (i.e., Tech) into cyclicals. The tech-heavy NASDAQ is down 4% MTD.
4. Bitcoin hits $60,000: The crypto juggernought continues. Bitcoin passed the $60K milestone last weekend, about 4 weeks after crossing $50K for the first time. YTD the crypto "currency" is up almost 100%. Here's a revealing chart from BAML that puts Bitcoin's popularity in perspective. Seriously, not a bubble? Bitcoin's meteoric rise makes the prior decade's Tech and U.S. Housing gains look almost rational.
The yield on the 10-year Note has risen 89% YTD as of 3/19 (from 92 bps to 173 bps) and 223% since a low of 54 bps back in July. Obviously % changes from such a low base are going to be dramatic. But it's got market analysts and economists somewhat freaked out about the "i" word.
To be sure, the rise in yields has tracked the progress of vaccines approvals and improvements in the economy...but has risen sharply in recent weeks as the Democracts successfully pushed through a massive $1.9 trillion stimulus. While Republicans predicatably blasted the deal, one of its harshest critics has been Larry Summers who believes the recently passed $1.9 trillion stimulus will "set the economy on fire." Err, that's economist speak for 'are you outta your f***ing minds?'
Last month we highlighted a fascinating discussion or "debate" between Paul Krugman and Summers concerning the yet-unpassed stimulus package. Essentially, both agreed that more support for the economy and, in particular, vulnerable groups was needed, but disagreed on the size of the package. Krugman wanted Biden to go big or risk a weak recovery, while Summers thought the size of proposed stimulus was overkill and risked stoking inflation, if passed.
Well, the stimulus did passed (surprisingly? shockingly?), giving the Democracts a huge political win. But what does it mean for inflation? Bloomberg's Wall Street Week invited both Krugman and Summers to make their points again this week:
Krugman dismissed worries of 1970s-style inflation saying the latter did not transpire overnight, but took hold gradually over a decade of poor policies and oil shocks. His big argument continues to be that the bigger risk is not doing enough to support the economy. The fiscal stimulus had to be massive because with short-term interest rates near zero, stimulatory monetary policy options are limited. However, precisely because rates are so low the Fed has a lot more options should the economy heat up. And Krugman believes the Fed is up to the job of managing price stability. Period. So, he sees an asymmteric risk-reward here.
Summers, on the other hand, sounds even more critical than he did a few weeks ago, calling the stimulus package the "least responsible fiscal macroeconomic policy we've had for the last 40 years." Blaming the instransigent Democratic left and all Republicans. He was also pointedly critical of Krugman for bringing political analyses into what should be a rational economic discussion. We've covered all this previously. But what was surprising here was Summers' conviction that it would go all wrong; starkly warning that he thinks there is a 1/3 chance Fed will be behind the curve and we become an inflationary country, 1/3 chance the Fed surprises the markets, reacts hard and puts the economy in recession, and 1/3 chance that by some miracle he's wrong.
So, I can see where Summers is coming from. Goldman Sachs and much of Wall Street is expecting 2021 GDP growth to about 8%, the fastest rate in 56 years! Unemployment at under 4% by end of 2021 and 2022 GDP growth at 4.5%! Whoa! Of course these are sell-side research forecasts which are always bullish ("...economy is growing, buy stocks!!" and Krugman has a wicked burn to just that point in the full version). But this chart from Blackstone does make that point, as does research from Summers and Furman. The BX graph (click to enlarge) shows the $2.2 trillion economic contraction Covid caused last year was largely (but not fully) offset by more than ~$3.5 trillion of federal aid even before the latest $2 trillion of stimulus. So, all this money is going juice growth and cause prices to rise, right?
Yes and no. The chart below shows the difference between nominal GDP and 10-year yields over the last 60 years. When the spread has been 5% or more, you've had a sharp rise in inflation (late '60s, '70s)...and based on analysts' forecasted 2021 GDP growth, the expected spread today is more than 6%!
Ergo, inflation? Summers is right?
...Not so fast. Analyses from the (leftish) Brooking Institution suggests growth will be transient. Their study projects the U.S. economy will experience moderate above trend growth in the short-term, 2H 2021 and 1H 2022, but revert back to pre-Covid trends by end of 2022. However, without the Biden package, Brookings estimates the economy would not fully recover for a long time...just like after the Great Recession. So Krugman "wins"...again!
What's more, the biggest boost to the economy will come from aid to financially vulnerable households. Yeah, this set of analyses defintely favors Krugman. Ding! Ding! Ding!
But what about short-term inflation...how bad can it get? Meh, probably not that bad. The Fed's biggest problem the last three decades has been not enough inflation. Another $2 trillion won't make much of difference against the generational forces of an aging population, shrinking workforce, and deflationary technology as discussed previously. As for bonds...well those same forces will continue to ensure that private savings>private investments across the OECD and keep interest rates low.
I'll say this again. The best rebuttal to Summers comes from Summers, who very persuasively made the exact same argument when he famously revived the "secular stagnation" thesis. So, Treasuries at 1.73% may actually be a buying opportunity! I'm sure European and Japanese pensions will be thinking so.
I don't claim to understand non-fungible tokens (NFTs). At all. Or art. Still, I was quite intrigued (and taken aback) by the headline in the NYT this morning that a JPEG/ JPG file by the artist Mike Winkelmann sold for $69.3 million!!! Yes, sixty...nine...million. Titled "Everyday--The First 5000 Days" the digital piece is a collage of all the pictures the artist (aka Beeple) has been posting online each day since 2007. Here's a shot of the world's most expensive JPEG (click to enlarge):
As per the NYT, bidding for the piece started at $100 and then "with seconds remaining the work was set to sell for less than $30 million, but a last-minute cascade of bids prompted a two-minute extension of the auction and pushed the final price over $60 million." Note, "the realized price," which includes fees, was $69.3 million, according to Christie's (quite the commission).
So, what exactly are NFTs and why is it suddenly exploding? This ZeroHedge post explains that NFT is "an attempt at re-wiring the financial attributes that connect to media and digital objects. I don't know what that means. Thankfully there's an analogy. In simpler terms: the Mona Lisa is original and valuable. A poster of the Mona Lisa, while offering the same visual information is not. Similarly, a repoduction of the Mona Lisa, even if perfect stroke-for-stroke, is not valuable either, because "it is not the original." So what we can say is that "art is valuable not for its collection of particular atoms in some particular order, but for its historical and social context. Recreating the object does nothing...With digital NTFs, the same logic is true...Owning an original token means you own its particular history and community."
So, that's a fair explanation. Having the original recording of the first words spoken by Alexander Graham Bell and Thomas Watson through the world's the first telephone would be a wonderful piece of history with rich layers of emotions. And I can see how if something that monumental were to be tokenized it would surely be worth a lot. But a collage? Yes...art is in the eye of the beholder and has to be contextualized, but paying millions for effectively someone's Instagram collection?
Even Beeple was shocked. His tweet below will naturally be tokenized and sold as well.
On March 6th the Senate passed President Biden's $1.9 trillion pandemic aid package. It was a huge political victory for the Demcrats and the new administration. The financial market reaction was well telegraphed before hand. But moving along...how will all that money get spent? The WSJ has a nice breakdown of all the major spending areas, shown below. As reminder, this was the third Covid-19 stimulus plan. The first two, totaling over $2.6T, were passed in March and December 2020. So, that's $4.5T in all.
Focusing on the latest package, here's how the $1.9T breaks down (click to enlarge):
And to be sure, there has been debate, not just by politicians, whether almost $2T of aid was really needed just as mass vaccinations are taking place and the economy is posied to take-off. But Biden has learned from the lessons of 2009--essentially, go big or risk a weak recovery. And the data shows how crucial the last couple of rounds of stimulus were in keeping the economy from falling into a prolonged recession or even depression.
The chart below from Morningstar shows that household cash levels and net worth were higher in Q3 2020 than the prior year across all economic quintiles as a result of fiscal and monetary policies:
And this analyses from the NYT shows, again, how federal aid has helped states avoid the grim fiscal outcomes many economists were forecasting (yes, yes we all know economists are horrible at economic forecasting). In fact, many states generated the same or even more revenue in 2020 than 2019 (click to enlarge for the % change in y-o-y tax revenue):
And most states' current fiscal health certainly compare favorably to what happened during the Great Recession (click to enlarge):
So, four comma checks can be put to good use. It's also good to know that for the price of the FANGs or two and one-quarter Apples you can save the U.S. economy.
Last year Joe Rogan signed an exclusive $100 million podcast deal with Spotify. Why not, his show, the Joe Rogan Experience, generates 190 million (!) downloads a month and $30 million in revenue per year. Podcasts have come a long way. They've been around for decades but have experienced explosive growth within the last six years or so. Today, according to Brandastic 55% ofAmericans listened to a podcast once a week in 2020; 24% listened to multiple podcasts weekly. Here's a chart of the growth of the medium (click to enlarge):
I started listening to podcasts in 2015 while driving. I became anamored with the stories in This American Life and other NPR podcasts, which were both informative and entertaining. Science says auditory retention is 2x as strong as reading and 4x as group lectures. And the form is very intimate, allowing you to build the images of stories in your mind; again, dramatized audio yields stronger mental imagery. Another critical reason podcasts are so popular: they allow for multitasking. People listen to podcasts while doing chores at home, driving, walking, working out and even at work. In fact, work is where the heaviest engagement (i.e., listening to multiple podcasts per week) seems to be! It's also an easy way to keep up with latest news and events. And there's a niche for just about everyone with 700,000 active podcasts and more than 29 million available episodes.
Podcasting is now a big business as evident by the Rogan-Spotify deal. Ad revenues for podcasts has grown by 1000% from 2015-2021; true, that's off of a very small base and the absolute numbers are just over $1 billion (compared to over $50 billion for TV). But the podcast market is expected to grow at a ~30% CAGR through 2027, making it, by far, the fastest growing media segment.
Spotify is the biggest platform for podcasts controlling 25% of the podcast market, followed by Apple (20%) and Google (16%). The 5 biggest podcasts generated over 60 million in revenue. They include:
And if you are looking for quality podcasts to listen to, well, as mentioned, there are no shortages...here are some of 2020's "best of" from the Guardian, Time, and Rolling Stones. Enjoy!
Jeffery Preston "Jeff" Bezos is the richest, no wealthiest, person in the world worth $190 billion at last count. And that's an insane amount of money...but a natural question is how does his wealth stack up relative to others in history? And of course, everyone loves lists. So the good people at Money Inc. put a lot of thought into it and ranked the 20 richest people in human history, adjusted for inflation...And the winner is (drum roll): Prince T'Challa aka the Black Panther.
Just kidding, well perhaps not. Money ranks Mansa Musa (1280-1337) who ruled and expanded the Mali Empire in the 14th century as the richest person history with an estimated adjusted net worth of $4.6 trillion. In fact, T'Challa and Black Panther are very likely modelled after Musa. In Marvel's universe T'Challa is the wealthiest man in the world. Check. He rules an advanced African nation. Check. While Europe was in the dark ages, Mali was known at the time for its advance knowledge and technology. In fact, Wakanda is, as Vibe notes, just a "magnified, majestic version of Musa's Mali Empire."
Here's a short history from TEDed:
During Musa's reign Mali was the largest producer of gold in the world at a time when the global demand for the rare metal was exceptionally high. It was during his 1324 pilgrimage to Mecca, the Hajj, that the wider world learned of his power and wealth. As he and his 60,000-strong entourage travelled from West Africa to Mecca, he reportedly gave away so much money to the poor that he inadvertently caused massive inflation in the economies of North Africa and the Middle East, the preemiment global trading hubs at the time. Think, in today's terms, not ZIRP or QE, but helicoptor money. As Kelsey Williams notes, "in the cities of Cairo, Medina and Mecca, the sudden influx of gold devalued the metal for the next decade. The prices of goods and wares [were] greatly inflated."
But Musa did see the impact his actions were having. To help rectify the gold market, on his way back from Mecca, "Musa borrowed all gold he could carry from money lenders in Cairo, at high interest rates." He became an inflation hawk. It is the only time in recorded history that one man controlled the price of gold in the world. So, in addition to warrior and ruler, he was also effectively the Fed chairman of his time directing global monetary policy.
Now, I mention Musa because (i) his story and legacy is fascinating and important from both a historical and cultural perspective and (ii) there has been a great deal of bruhaha in the financial markets in recent weeks (once more) about inflation. And since the Aug 4th lows in yield, the price of 10-yrs Treasury note has plunged by ~28%. Now, we've written about a potential inflation head fake and we still believe that we are more likely in a secular stagnation (driven excess private savings over private investments) than an inflationary regime, but Musa's story does show that good intentions can have unexpected consequences. Musa acted quickly and forcefully to help manage the situation. The market right now is signalling that it fears the Fed will not or cannot if, in fact, inflation comes roaring back. Powell and Yellen can look back and learn from Musa.
