Tag Archives: Stocks

Why European Capital Markets remain fragmented

Someone on twitter posted this clearly AI-generated image of burning money. See how many mistakes you can spot in the Euros. I think the one on the left is even an upside-down Bennie Franklin, although these are all supposed to be Euros.

I blogged a while ago about how Mario Draghi wants Europe’s capital markets to be more unified to spur growth. I outlined how this was not just a matter of putting ink to paper, unifying the capital markets means unifying EU investment laws. And since those laws involve things like property rights, worker’s rights, bankruptcy rights etc, some people are going to win or lose out if everyone suddenly has to have the same investment laws. Workers whose jobs were once guaranteed even during a bankruptcy won’t appreciate that protection being removed. Companies in jurisdictions which don’t guarantee workers’ jobs like that won’t appreciate the added costs and may even close up shop, leading to no jobs for those workers at all.

But I wanted to write more on this topic as it’s a subject that interests me. And rather than last time where I went deep into the weeds outlining how one specific regulation (bankruptcy) differed across the EU’s many member states, this time I’d like to take a more broad approach to the many ways the EU’s capital markets are fragmented. And I’d like to point out that overcoming this fragmentation and unifying the markets will involve some nations winning or losing out, which is why the markets haven’t unified yet, no one wants to be the loser.

First, let’s talk Central Securities Depositories. A Central Securities Depository (CSD) is responsible for making sure that when a buyer and seller trade a financial asset, whether that’s a stock or a bond or what have you, the buyer gets the asset and the seller gets the money. Ensuring that an agreed-upon trade actually *happens* is fundamental to a working financial market. You wouldn’t go to the store if there was a chance you’d pay your money and the cashier would keep your groceries, same thing with financial markets.

The USA has a single CSD. It’s a private company but with heavy government oversight. The EU has dozens of CSDs, structured very similarly. But with dozens of CSDs to work with rather than just one, buying and selling of assets becomes a hassle. “Settlement” is the term used in finance for when the buyer and seller actually exchange money for assets, and there is a small cost associated with settlement to make sure everything is legal and on-the-level. The EU having dozens of CSDs instead of just one raises those settlement costs substantially, that in turn increases friction in the financial markets and decreases investment.

The EU wants to unify their capital markets and have just one single CSD. But will it be the French CSD, thus bringing more jobs to France? Or the Italian CSD, bringing jobs to Italy? Everyone wants their CSD to be the European CSD, and no one wants their country to lose all the high-paying jobs and high-status institutions that a CSD brings with it.

Now let’s talk about IPOs. European financial leaders have bemoaned that America has way more high-valued startups than Europe, and that European startups often flee to America rather than staying home. IPOs have at least something to do with this.

When a startup IPOs, they sell ownership of their company in exchange for investors’ money. This is a powerful way for the startup to get needed cash, and for investors to get in on the ground floor. But while Europe may have almost as much money floating around as America does, that money is in dozens of different national silos split up by regulation. You need to just adhere to 1 set of regulations to get access to all of America’s investment money, you need to adhere to dozens of sets of European regulations to get access to European money. Is it any wonder then that companies IPO in America?

But say you purchase stock in an IPO, only to lose everything because the executives were overpromising and hiding the company’s problems. Can you sue the company to recover your lost investment? Well, it heavily depends on which country you bought the stock in. Countries with strict investor protections won’t enjoy losing those protections if the EU unifies its capital markets. Countries with more lax protections generally want to prevent frivolous lawsuits from investors, who may have been well aware of the risks of a stock but still want to blame the company for their investment going south. Those countries won’t appreciate new investor protections that encourage ever more investor lawsuits.

Then thinking about IPOs, there are a lot more rules about how the shares must be structured. If you are the CEO and founder of a company, you want to IPO to get money, but you may want to keep holding all the power and control over your company. How can you sell off ownership of your company without losing any of the power and control that ownership brings?

One way is to only sell a small portion of your company’s value. You can sell off 10% or 15% or 25% of it to raise money but keep the rest for yourself. This makes you a huge majority shareholder who can never be outvoted in matters of corporate governance.

This structure poses risks to the minority shareholders, both in terms of shareholder rights and in terms of stock value. This structure, where one person owns a large part of the companies, is part of why the Adani companies collapsed so spectacularly in value back in 2023. Adani owned 75% of his companies outright. Some shareholders though this protected them “Adani will never sell, so the value cannot drop.” But actually it didn’t protect them at all, Adani would never sell, but he could also never buy.

The value of the companies wasn’t based on what Adani himself would do, his 75% ownership was locked in and unchanging. Rather the value was based on what a small minority of investors thought, the other 25% owners. If some of those investors started selling, and if no other participants in the market were willing to buy, then the price would collapse *fast* because there’s a lot less buyers and sellers available than what it may seems. Adani and his 75% ownership could not be a buyer or seller, so the market for Adani shares was 1/4 as large as it seemed to be based on the listed value of his companies.

So anyway, minority shareholders can get washed by a majority shareholder keeping all the shares to himself and ignoring their rights. Different EU companies have different rules about how much of a company a majority shareholder can retain, and what the rights of minority shareholders are. Someone is going to lose out if those rules are unified across the EU. Some companies will find their ownership structure is no longer legal, and their majority shareholders will be forced to sell. Or if majority shareholders end up being able to have a *larger* stake, some market watchers will decry that this keeps too much power in the hands of rich majority shareholders, rather than in the hands of the small minority shareholders (aka “the people”).

Then there’s taxes. Say you are a German living in Germany, but you own shares in France’s Francis Frances (FFF), incorporated in the Netherlands. Your shares in FFF pay a dividend to you, which you receive as income.

Now, the Netherlands wants you to pay tax on that income, so they tax your dividend as the money leaves their country. Germany also wants you to pay tax on that income, so they tax your dividend as the money comes into Germany. You pay dividend taxes twice, while if you’d just invested in a Germany company and ignored the Netherlands entirely, you’d have only been taxes once.

But OK, there are EU rules that are supposed to prevent this double-taxation, which should encourage cross-border investment and help unify the capital markets. But those rules are often a mess of red-tape and delays. In theory, either Germany or the Netherlands or both should give you a tax credit to pay you back for what they took out of their dividend. In practice, they may hold your money for years, or require you to jump through arbitrary hoops to get it back.

And so in the end many investors *don’t invest outside their own country,* not because they are small-minded or don’t want to, but because they’d pay twice as much tax as if they just invested in their own country. This again fragments capital markets, but governments are loath to unify the tax code like this because they still want to maintain full sovereignty over their taxes and budgets. And besides, if they unified the tax code, what would the rate of dividend tax be? 30-40%, like in Denmark and France? Or 0%, like in Slovakia and Slovenia? Everyone has arguments on what the rate should be, and no one wants to budge because there are good reasons for each argument.

In the end, I think a lot of online commentators undersell the difficulty of unifying Europe. Unification of the capital markets isn’t held back by small-minded nationalists, or sclerotic bureaucrats, it’s held back by the need for trade-offs which no government wants to make. No government wants to come to the people and say “we’re changing the laws on stocks and taxes, and we’re moving all the CSD jobs across the border.”

Leftists in France would revolt at any fall in capital gains tax, rightists and investors would do likewise for any rise in such tax in the EU’s many many low-tax jurisdictions. Emerging economies like Slovakia and Slovenia would cry foul at having to remove their competitive advantage in taxes to appease Denmark and the developed economies, Slovakia might think the only way they can attract investment is by having lower taxes than the more advanced economies of Europe.

So once again, trade-offs *exist*, and they are the reason Europe still hasn’t unified its capital markets.

Are analysts’ opinions anti-correlated with the market?

This time 2 years ago, we were still riding high on the post-pandemic surge, and analysts were expecting the S&P could break 5,000. This time last year, we were still in what felt like the 2022 doldrums and analysts were predicting a recession. This time 3 months ago, people were declaring inflation was whipped. And then a few days ago, CPI and PPI came in hot.

I’ve written before about how the Efficient Market Hypothesis may imply that there is *no* correlation between analyst opinion and the stock market. Analysts are just as likely to be wrong as right, but people only remember the examples which agree with their biases. On the other hand, I read an article recently (I’m sorry I cannot find it to link) arguing that analyst opinion is in fact *anti*-correlated. That is, the Short Cramer ETF is correct, and analysts are so stupid you should do the opposite of what they say.

Speaking of, the Short Cramer ETF “SJIM” is down about 20% from when it began. But no matter, should you do the opposite of what analysts say or is that as irrational as following their advice?

One argument is that analysts are inherently *backward-looking*, they generally assume trends will continue forever. Some are perma-bulls or perma-bears, but on average when the market is down analysts predict a down year, and when it’s up they predict an up year. In this case, if the market is a random walk then it’s very unlikely to simply continue it’s current trend, thus an analyst is more likely to be wrong than right.

On the other hand, shouldn’t wisdom of the crowds have an affect? On the aggregate, many gamblers who bet on real world events (either sports of politics) are betting on what they *want* to happen, and many have no real knowledge whatsoever. Yet Nate Silver and others have argued that betting markets are often more accurate than not, whether it’s politics, sports or what have you. Some how, a million idiots adds up to something better than our smartest mind.

If that’s the case why don’t all the analysts of the market add up to something smart?

It just reminds me to be humble, because all too often I’ve seen people caught out badly by a trend. The late 2023 “inflation is beaten, start thanking Joe Biden” narrative won’t seem as smart if inflation stays persistently hot, any more than the “recession around the corner” narrative of 2023. Overconfidence when you really know nothing is the hallmark of an analyst, and maybe that’s why they’re so often wrong.

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”

Have IPOs become more speculative?

This post is very late because I didn’t feel good about my conclusions, but here it is.

I’ve been wondering if IPOs have become more speculative of late. Rumors abound that OpenAI (makers of ChatGPT) may IPO soon and they’ve been quoted as having a billion dollars in revenue and a valuation of 80 billion. 80 times profit is already a pricey valuation, 80 times revenue is even moreso. And other even more speculative IPOs have happened in recent memory. Companies like CRISPR Therapeutics and Beam Therapeutics IPO’d when they have essentially no revenue, just patents.

It was once said to me that IPOs are “supposed” to be for a company that is profitable. The company shows the world that it is profitable and can thus afford to pay a dividend. The investors of the world will then pay for stock in the company in order to grow their money. So the company gets a big pile of cash by selling shares, and the investors get shares which pay a dividend and may grow in value also.

The above is a very 20th century view of investing, these days dividends aren’t all that popular to begin with. So too does it seem that many companies will IPO long before they can afford a dividend, and long before they are profitable at all, so why are investors investing and buying these stocks?

It isn’t necessarily a bad move for investors to buy stock in OpenAI if it does IPO. The investors are speculating that while it’s not profitable now, it will be in 10 or 20 years. In essence, an IPO like this lets investors play the role that venture capitalist play. Venture capitalists invest in many startups long before they see revenue or profit, and they bank on the fact that while 10 startups may fail, the 1 that succeeds will let them see more than 10x gains. With companies IPOing early, normal investors can now also play this game. Beam Therepeutics, CRIPSR Therapeutics, and OpenAI may all fail, but if you invest in them and 10 other speculative companies, then maybe 1 will succeed which will give you gains that wipe away all your loses.

So I can’t say that companies IPOing earlier and earlier is a bad thing. As long as they don’t lie on any of their forms, then investors know exactly what they’re getting into. Investors know that they’re buying into a very speculative, pre-profit, maybe even pre-revenue company. But if it works out, they can make big gains. And remember that “investors” here isn’t just faceless, deep pocketed billionaires. Investors is also every person with a 401k or IRA. They too can buy into these companies using their own money and play at being venture capitalists. And if its so profitable for venture capitalists to do this, then why shouldn’t the rest of us do the same?

But while I cannot say this is a bad thing, I also cannot say if this trend is even happening. Remember I started this story by asking if IPOs are happening earlier and earlier. Is it true that in the 20th century, most IPOs were of profitable companies, and in the 21st century most IPOs are of unprofitable ones? Or is that simply recency bias at work? I tried and tried but couldn’t find hard numbers on this kind of thing, which is why it took me so long to write this post.

Either way, if OpenAI does IPO I might toss a few dollars their way. Intellectually I know I probably can’t beat the market, but emotionally it’s fun to pretend I can. And where’s the harm in that?

Shadow boxing the NIMBYs again: luxury vs low income apartments

Warning, this post is longer than usual.

NIMBYs will give any excuse to block housing. There’s two examples of this I’d like to discuss, one is the “luxury vs low income” false dichotomy. The other is when NIMBYs try to change the subject and ban corporations or foreigners from owning housing.

Let’s get one thing clear: affordable market-rate housing is just housing that has been on the market for a while. Houses built in the 80s are affordable now, even if they weren’t affordable when they were built in the 80s. Houses built this year generally aren’t affordable, but will be in 40 years. In economics you’d generally assume that products will be built for every level of customer. For rich customers, expensive products with expensive material are built. And for poor customers, cheap products with cheap material. Housing doesn’t follow this because of a few reasons.

The first reason is that for the past 50 years, much of the cost of building a house comes simply from getting permission to do so. There is a huge barrier to making housing whether you’re trying to make cheap or expensive housing. Cheap products can usually make up the different by being mass produced, but these barriers to housing (aka zoning etc) excise most of the benefits of mass production. That means there’s no point trying to mass produce houses anymore and make up in quantity, you can only produce quality houses and make up the difference using high prices.

The other reason that housing doesn’t follow the pattern is because it’s a good that lasts so long. Food is gone very quickly, whether it’s expensive or cheap. But an expensive or cheap house can last a hell of a long time with regular repair. Of course it slowly degrades, but that just means an expensive house slowly becomes a cheap house as its value on the market declines (or this is what you’d expect to happen, but if housing supply is constricted, price remains elevated). So again, a developer isn’t incentivized to mass produce cheap housing because anything built more than a decade ago has already become cheap housing, a developer of cheap housing is thus competing with the entire city’s housing stock.

For those two reasons, developers like to build “luxury” housing, including condos and apartments. Whenever these things are built, certain NIMBYs come out of the woodwork to protest the housing using vaguely left-of-center vocabulary. They’ll say things like “these expensive apartments are only for rich people! That won’t help the housing crisis for poor people!” Then they try to stop development with their economic illiteracy.

Those NIMBY arguments are just plain wrong. ANY increase in housing supply will lower the cost of housing in the market, even if it’s luxury housing being built. If this luxury housing isn’t built, then the rich people are forced to compete with the middle class people for the middle-income housing. The rich can afford to spend more, and so they drive up the cost of middle-income housing. If instead the luxury housing gets built, then the rich are spending their money on that, so there’s less demand for middle-income housing. Now more middle class people can afford middle-income housing, so they don’t have to compete with poor people for cheap housing. All this means lower prices for the middle class and the poor as less people are competing for the same amount of housing, and it happened because the rich were able to move in to those new luxury units.

So stop protesting luxury apartments, they lower the cost of housing just as much as cheap affordable apartments. And in 40 years those luxury apartments will have worn down a bit and will now become affordable so anyone can move into them.

The other thing I’d like to hit out against is people trying to ban foreigners and corporations from owning homes. Canada recently enacted a ban on foreign home buyers, and I have two problems with this. One: it will not do anything for affordability, foreigners make up a tiny percentage of Canadian home buyers. Number 2 ties into the ban on corporations, so let me discuss that.

There’s a knee jerk reaction by some that corporations and investors are at fault for driving up the price of houses. But corporations don’t live in houses, people do. A corporation only buys a house because they think they can make back their money by selling or renting it to another person. This implicitly requires that corporations think the value of houses will continue to go up, and monumentally so, otherwise they’d lose money on this transaction. So are you angry at corporations buying houses? Then the solution is to build more houses so the market is flooded and the corporations lose out on their investment.

The second part of this knee-jerk is an economically illiterate idea that corporations are just vampires sucking value out of the economy. If only we banned corporations, then all the prices would go down due to less competition and there’d be no downsides whatsoever. But if you think about it economically you’d realize that corporations are providing a form of service by being in the housing market: they are providing liquidity to the housing market.

Liquidity is most well-studied in places like the stock market. A lack of liquidity can lead to wild swings in prices, both up and down, and is generally regarded as a bad thing for the market as it hurts both buyers and sellers. When you want to buy shares of stock, you don’t need to match yourself to a single individual who wants to sell the same number of shares you want to buy, at the same price you want to buy them at. Instead, market makers create the liquidity by buying and selling lots of stocks. The market makers don’t want to hold any stocks for long, they just want to buy and sell them.

When I buy a stock, the market maker is immediately able to get it for me, as much as I want, and at the market price. When I sell a stock, the market maker immediately takes it, and again they take as much as I give them, at the market price. I don’t have to find an individual buyer and seller, everything can happen through a single market maker who is interacting with not only me but every other buyer and seller in the market. This is actually much more efficient than if every buyer and seller had to go out and find someone to trade with, we all just go to a single person, the market maker, and get the market price from them.

The market makers are in turn taking on a lot of risk, and using a lot of stats and technology to mitigate that risk. When I sell them some Apple stock, they are willing to buy it immediately on the assumption that somewhere out there someone will buy it from them for more. They take a small cut, usually a cent or so per share, which helps hedge against falling prices in the few milliseconds it takes them to find a new buyer. But there’s a risk that if Apple stock falls fast, they’d be left holding my stock which is now worth less than I sold it to them for. But market makers are large and invest in a lot of technology and statistics to be able to take on that risk.

But now imagine there were no market makers, the stock market would have a lot less liquidity. Any time I wanted to sell Apple stock, I’d need to find an individual who was a willing buyer. But if the price of Apple is falling fast, investors will get skittish, they’ll be worried about getting caught out, and most of them won’t have statistics and technology that the current market makers have. Thus they may not be willing to buy from me, thus I’ll have to lower my price even more to find a buyer, but that makes the price of the stock fall even faster, meaning that investors get even more skittish and even less willing to buy…

This is what’s called a liquidity crisis, it can happen to stocks moving both up and down. Lack of liquidity leads to wild swings in prices which hurt both buyers and sellers and generally mean people lose more money from the market than if it were liquid. But these days liquidity is generally smoothed out by the market makers. For all that conspiracy theorists hate them, the market makers are why buying and selling stock is so seamless, easy, and reliable these days. Large price movements are smoothed out by liquidity, and any buyer can find a seller and vice versa so people can enter and exist the market whenever they wish.

Now let’s say for a moment that corporations are prevented from buying any housing. Let’s even take the more radical proposal I’ve seen that says no one should be allowed to own more than 1 house. And let’s see the results this would have on the housing market. Spoiler alert: a lack of liquidity in the housing market would hurt both buyers and sellers.

So when you want to sell a house, you have to find a buyer. In our theoretical “no corporations, 1 house per person” market, you’d need to find someone who actually wanted to live there. Someone who wants to live exactly in your area and in your house. If your house is a fixer-upper, you need to find someone who is willing to buy and fix a house. The need to find someone willing to immediately live in your house, right now severely limits your potential pool of buyers. Maybe people just don’t want to fix a house these days, so even thought the repairs aren’t that bad, you’d now have to either do them yourself or lower your price by a lot in order to find a buyer.

Now when corporations are allowed to buy homes you can find a buyer immediately. The corporations then takes on the risk of finding people to buy the house, they take the cost of showing buyers around, of fixing up the house if need be, of advertising it, etc. Corporations are providing liquidity to the housing market, which prevents giant movements in price. Someone who needs to sell their house in a hurry might otherwise be forced to cut the price 20%, 30%, 50% if they just can’t find a buyer within a month or two. But a corporation can buy the house at its full price and can then afford to sit on it for a few months waiting for a new buyers to come along. So people selling their house get the best price possible because corporations are providing liquidity.

If you want to buy a house, you also have to find a seller. Most houses aren’t for sale at any one time. But it would be a nightmare without corporations because then you would actually have to find someone who is actively moving out of their current house. Very few houses are being built (thanks again, NIMBYs), so any house you want to buy will be pre-owned. And remember we’ve banned corporations and multiple home owners, so that house isn’t being kept empty, it’s lived in. That then means that you have to move in at precisely the time they want to move out, otherwise either you’ll be caught homeless for a time or they’ll run afoul of the law because they’ll own more than 1 house at a time. It would be difficult, maddening even to line up your schedules.

This maddening scenario is exactly what’s going on in Britain right now. The British housing market is extremely illiquid not because there are corporations but just because there is an extreme shortage of houses period. The UK has the largest housing shortage of any member of the G7 or G20, meaning that there’s basically no houses anywhere sitting empty. In America, about 9% of homes aren’t currently lived in. Some are dilapidated, but some are just being held while buyers and sellers find a price. In the UK, that number is around 3%, and again many of those are dilapidated and unlivable.

The lack of empty homes in the UK means that anyone looking to move in must first wait for the owners to move out. Of course no one wants to be left homeless, and no one wants to own two homes at once and be forced to pay taxes on both, so Britain has an insane system found no where else in the world called “chains.” In a chain, every property sale has to execute at exactly the same time so that multiple people can all move into/out of houses at the same time. These chains can have over a dozen links, and so of course you can imaging getting a dozen families to all agree on a move date is a nightmare. This system is basically completely unique to Britain, I haven’t heard of it anywhere else, and it is all due to a lack of liquidity in the market, although here brought on by comical undersupply and not the banning of liquidity-assisting corporations.

The chain system is an absolute mess, you can search social media for the horror stories of people losing jobs because move-ins were delayed, or losing money because they had to expedite a move-out. Nothing works the way it is supposed to because the market is so illiquid, and everyone in the British housing market is tangibly worse of because of it. And that’s exactly what we’d get if no one were allowed to own a home they didn’t actively live in.

Corporations and home investors, foreign or native supply liquidity to the housing market, they do not make house prices go up. House prices go up because there is a lack of housing supply. If you’re tired of corporations owning homes and want to force them to lose money, then you should demand your city allow anyone and everyone to build a house on any plot of land that they own. Yes even your neighbor. If your neighbor wants to subdivide his house to build a duplex, let them. If they want to sell to a builder who will demolish the house and build an apartment block, let them. If some developer wants to buy the vacant lot across the street to build condos, let them. If a big developer wants to buy the convenience store down the street and build a 5-over-1, let them. Only by having more housing in everyone’s back yard will the cost of housing go down.

Why are conspiracies about the stock market so common?

The obvious answer to the question posed in the title is that the market is complicated, and therefore people who don’t understand it are more likely to fall into conspiracies than to admit their ignorance. But I truly am blown away by how common stock market conspiracies are amongst “retail” investors. I don’t just mean the meme stock traders, many many retail investors I’ve spoken to have conspiracies about how the amorphous Wall Street is driving the market one way or the other in order to “punish” someone. Usually the argument goes that X company is a threat to Wall Street, either because it supports some politics that Wall Street doesn’t or because its technology is highly disruptive to an entrenched industry. Therefore Wall Street “punishes” it by deliberately pushing down its stock price.

Just as an aside, that disruptive tech idea is dumb merely on the face of it. The idea is usually said to me as “Wall Street has too much money invested in Y industry, and X company has a technology that could totally disrupt it. Wall Street is protecting its investment by forcing down X company.” This is dumb on the face of it: Tesla, Amazon, and Apple were all exceptionally disruptive and still grew by leaps and bounds. Just because some investors have their money tied up in Ford doesn’t mean other investors won’t give Tesla a shot. Not every investor on Wall Street is invested in the same things, so the idea that they would act as a collective unit is nonsense.

As another aside, I wrote early about how this was a conspiracy I see a lot when talking about nuclear fusion. The idea is that fusion is such an amazing energy source that all other energy sources can’t compete, so they work together to keep it down. But if they can keep down fusion, why haven’t they kept down every other disruptive tech that upended industries through creative destruction? I never get a good answer.

Anyway I think this widely held believe, that Wall Street “punishes” stocks and causes them to go down, is simply another case of people not understanding that the market is filled with individuals acting in their own selfish interest. The only way Wall Street could act as a collective would be if each and every investor was forced to act the same way no matter what.

Say Company X has stock selling at 20$. Some Wall Street investors think that 20$ is a fair price for that stock. But some Wall Street investors are angry that Company X has technology which will disrupt their investments, so they want to “punish” it and force its price down to 1$. They can try to do this by selling the stock, but if the stock falls to say 15$, then the investors who think 20$ is a fair price will happily snap it up, because if 20$ is a fair price, then 15$ is a deal. Quickly the buying pressure from investors who think it’s undervalued should overwhelm those who want to push it down, and the price would stabilize.

Now there are two reasons this mechanism could fail. One is that all investors are forced to act in concert, which again doesn’t make sense at all. Investors compete fiercely with one another, they do not work together for common benefit. And furthermore working together creates a huge prisoners’ dilemma, if even one investor breaks with the group at large, they can reap enormous rewards by buying up stock with a fair value of 20$ for just 1$. Getting to 20x your money for free is a huge incentive to break with the collective, and no greedy investor would pass such an inventive up.

The second reason this mechanism could fail is that there are very few investors who believe the fair value is 20$, and most agree the value is 1$. But that isn’t a conspiracy in action, that’s price discovery in action. The price is an equilibrium between the expectations of the buyers and the sellers. If more and more people think its fair value is higher than at present, its price will go up. If more and more people think its fair value is lower, price will go down.

Trying to “force down” the price of a stock below its fair value is not a profitable way of doing business. No one investor or group of investors control the market, the market is a huge competition between all investors. And so while selling a stock for a price below its fair value can momentarily drop the price, it’s also a great way to lose your own money. Meanwhile if the market is filled with investors who think the fair value is higher, they’ll buy the stock back up to the original point. All you’d succeed in doing with this trick is burning your own money.

The price of your favorite stock went down because more investors thought it was overvalued than thought it was undervalued, not because of some huge Wall Street conspiracy.

A possible cure for Duchenne Muscular Dystrophy

Sarepta Therapeutics may have a cure out for Duschenne Muscular Dystrophy (DMD). It’s called SRP-9001, and while I hesitate to say it’s a Dragonball Z reference, I’m not sure why else it has that number. Either way it’s an interesting piece of work and I thought I’d write about it and what I know about it.

DMD is caused by a mutation in the protein dystrophin, a protein which is vital for keeping the muscle fibers stiff and sound. Our muscles move because muscle fibers pull themselves together, which shrinks their volume along an axis and therefor pulls together anything they are attached to. The muscle cell pulling on itself creates an incredible amount of force, and dystrophin is necessary to make sure that that force doesn’t damage the muscle cell itself. When dystrophin is mutated in DMD, the muscle cells pulling on themselves will indeed begin to cause deformations and destruction of the muscle cell itself, which leads to the characteristic wasting away of DMD sufferers. The expected lifespan of someone with DMD is only around 20-30 years.

Dystrophin is a massive protein, fully 0.1% of the human genome is made up of just the dystrophin gene. However a number of the mutations which cause DMD are point mutations, mutations in a single DNA nucleotide. If just that one nucleotide could be fixed, in theory the disease could be cured. For a long time genetic engineering and CRISPR/Cas9 has targeted DMD for treatments based on this idea of just fixing that one nucleotide.

However, Sarepta seems to be working on an entirely new theory. Deliver a complete gene to the patient which can replace the functionality of the non-functional dystrophin. This is called micro-dystrophin and it is less than half the length of true dystrophin. However it still contains some of the necessary domains of dystrophin like the actin-binding-domain. This is important because of how genetic engineering in humans actually works (these days). How do you get a new gene into a human? Normally, you must use a virus. But the viruses of choice (like AAV) are actually so small that the complete dystrophin gene simply would not fit in them. Micro-dystrophin, being so much smaller, is needed in order to fit the treatment into a virus.

So the idea would be that DMD patients cannot produce working dystrophin, but when SRP-9001 is given to them it would give them the genes to create micro-dystrophin for themselves. Then once their muscles begin creating this micro-dystrophin, it would spread throughout the muscle cell and take up the job of strengthening and stiffening the muscle cell just like normal dystrophin does. In this way the decay of their muscles would slow and hopefully they’d live much much longer.

SRP-9001’s road to FDA approval is not yet fully formed. They’ve done some nice clinical trials where they’ve shown that their genetic engineering drug does successfully deliver micro-dystrophin genes into the patients, and that the patients then use those genes to produce the micro-dystrophin protein. However as of right now they are still doing Phase 3 clinical trials and still awaiting the FDA to give them expedited approval. That approval won’t come until June 22nd at the earliest, but I believe it would still make it the first FDA-approved treatment for DMD.

So, what exactly was the metaverse?

This may just prove that I’m an out of touch old fogey, but I never cared for the metaverse hype and am not surprised it failed. Yes Meta, the company which renamed itself for the metaverse, hasn’t yet admitted defeat, but at this point I’m willing to say it failed. The metaverse was never explained to me in a way that made it seem both feasible and viable. “Imagine you could train surgeons in the metaverse, they wouldn’t need to train on Cadavers and Patients!” Yes, imagine the quantum leap in technology that would be required to allow for that kind of haptic feedback. Because it isn’t enough to know where everything is and what it looks like, knowing how much resistance the body gives to you as you force your way into it is also very important, and you don’t get that playing VR Surgery. “Imagine you could go to the office in the metaverse!” Why would I want to do work with a VR headset on my head?

I know I’m more than a year late to the party, but I never understood just what the metaverse was supposed to be or accomplish. To some people it was a Sci-Fi future like the matrix (impossible). And to others, it was clearly just a solution in search of a problem. But the most audacious thing is that for a while, it seems every company wanted to be a Metaverse company. I was recently pointed to a hilarious ETF themed for the metaverse. They’ve got Meta in their, that’s fine. They’ve got AMD and nVidia, yeah I guess graphics cards would be needed. Then they have Coinbase. Why the hell is Coinbase a metaverse company? I looked it up and some people were trying to tie “Web3” to the Metaverse, and that crypto would be the currency of the Metaverse. Crypto cannot even reliably operate as a currency of any kind, so it sure isn’t taking over the Metaverse.

Then it seems that every gaming company of any size was a metaverse company. EA, Take Two, Nintendo? Yeah, they made the Virtual Boy, so I guess they know what a shitshow VR headsets can be. But if the best people could think of for the metaverse was VR gaming then that says a lot about how little though was even put into the concept.

Now, Web3 and Crypto in general are already their own solution in search of a problem, but nothing every dies with a bang, it just fades away. And I think we’ll have a long time yet before Crypto and “The Metaverse” finally fade. Even after Facebook realizes how terrible their new name is, some other company will probably take up the banner to scam investors. But I cannot ever see myself replacing my gaming PC or any human interaction with a VR headset.

Quick Post: WTF happened with Silicon Valley Bank

So I’m really only making this post so I can link to it in another post, but while there have been plenty of explainers going around about what happened with Silicon Valley Bank (SVB) I wanted to get all the facts as I know them in one place.

Basically, Silicon Valley Bank had a bank run and needed a bailout. Why?

When you deposit your money into a bank, the bank pays you interest on the money. You are giving what is essentially a loan to the bank, and they in turn use that money to give loans to other people. The assumption is that the interest they get on their loans is more than the interest they pay you for your money, so the bank can always stay profitable.

Banks have their best relationships with the people who deposit money into them, so those tend to be the ones they reach out to and offer loans. Whatever bank you deposit your paycheck into is likely going to be the one that offers you a car or a house loan. But SVB was taking deposits from Tech startups and Silicon Valley hedge funds. Those guys don’t need or want loans. They raise money through equity, not loans. So while lots of deposits flowed into SVB, far fewer loans flowed out.

So how could SVB make money without loans? They bought bonds instead. Government bonds are just a loan you give to the government after all, and SVB thought that using their deposits to buy bonds was a surefire strategy because the government will never default. Remember that banks don’t ever just sit on loads of cash, they have to sell assets if they want “liquidity” (finance speak for cash). But if depositors want their money back, SVB can just sell bonds and give them cash, while if depositors hand them more money, SVB will use that money to buy government bonds.

But then inflation came, and brought with it interest rates. We’ve discussed before about how when interest rates rise, the price of an old bond falls. If you bought a bond paying 0.25% and interest rates have gone up to 5%, no one will buy your bond without a heavy discount. So 3 years ago a tech startup deposited $100 dollars into SVB, and SVB bought 100$ worth of bonds. Now the startup wants its money back but the 100$ bond SVB has bought has given them almost no interest (0.25%!) and has collapsed in price. When SVB sells its bond, it gets back WAY less than 100$.

So when interest rates rose, SVB’s bonds were all worth a lot less, but they were obligated to sell them to pay back their depositors. That would be fine if only a few depositors wanted their money, SVB can take a loss and make back the difference with profit elsewhere. But if ALL their depositors want their money back, SVB cannot cover.

And the depositors did want their money back. Startups backed by hedge funds get piles of money by selling stock, IPO’ing, and selling equity. Then they handed that money to SVB. Stock prices collapsed in part due to rising interest rates, the flow of cheap money stopped. Because of that, startups needed to take their money back out of SVB to keep the lights on. Money was flowing out but nothing was flowing in.

So SVB had a massive interest rates risk on both sides of its balance sheet. Interest rates decreased the amount of money going in (by tanking the stock market and making IPOs and share selling less common) while also decreasing the value of the assets SVB held (by making their government bonds worth less). Add onto that that inflation increased the amount of money flowing out (since startups needed to pay more for everything) and SVB was primed for a bank run. Depositors realized SVB didn’t have enough cash to cover everyone’s deposits, and so they all rushed to take all their money out before it collapsed.

And so collapse it did, and the government handed it a bailout. I’ll write more about that tomorrow.

Was the Crash of 1987 all that important?

America has had a lot of recessions, depressions, and financial crises. Every country has of course, but since America has been the world’s largest economy for well over 100 years, ours get more press and reverberate more strongly throughout the world. But the crash of 1987 is one that I rarely see talked about, and I thought that was with good reason. On October 19th 1987, stock prices worldwide crashed by double digits in a single day. But the effects on the wider economy were not so severe, and the US economy still grew by 3.5% that year.

The Crash of 1987 is a good reminder that the stock market is not identical to the “real” economy. Now, they are not wholly diverged either, and if stock prices crash companies will find it harder to use their stock to finance expansion. But they aren’t tightly coupled and the Crash of 1987 is one of the many events that proves it. However I’m reading a book now called “The Decline and Crash of the American Economy” that appears to posit more from 1987 than was warranted.

The author, Joel Kurtzman, tells you his thesis on the cover of the book, and the inside jacket makes special note of how 1987 heralded deep problems that would not be fixed without his preferred policies being implemented. But Kurtzman is basically a left-protectionist who blames Nixon and Reagan for ending the gold standard/Bretton Woods and liberalizing American trade. Kurtzman’s policies were by no means implemented, but the 90s were hardly a decline and crash by anyone’s definition. It feels to me like Kurtzman had a thesis already in place, and simply used the crash of 1987 as ex post facto proof of what he already believed.

I’ll try to write more about this book in the coming days, but I don’t think 1987 was an important as Kurtzman thinks.