Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the Chamber of Commerce’s hedge, pruned, Coinbase, crytoptimists, combining the essence of two old crises to make a new one, and inflation. To sign up for the Capital Note, follow this link. Feeding the Crocodile Winston Churchill: Each one hopes that if he feeds the crocodile enough, the crocodile will eat him last. All of them hope that the storm will pass before their turn comes to be devoured. But I fear greatly that the storm will not pass. It will rage and it will roar ever more loudly, ever more widely. That was Churchill talking about neutral countries in 1940. And so to the Chamber of Commerce. Josh Kraushaar, writing in the National Journal: For a lesson in the perils of trying to play both sides of the aisle in a polarized Washington, look no further than the U.S. Chamber of Commerce’s unenviable position in the early months of the Biden administration. The business lobby, which has traditionally and disproportionately supported and financed Republicans, decided to hedge its political bets in the last couple of elections by endorsing many Democratic candidates it viewed favorably. The Chamber now finds itself in political purgatory—alienated from many Republican lawmakers it once considered close allies, while not winning much of a hearing from the new Democratic administration and Congress on its pet priorities . . . The last few weeks have been particularly turbulent for the once-imposing business lobby. It tried to navigate an administration looking to expand the role of government with its stimulus and infrastructure proposals, while at the same time placating a Republican opposition growing increasingly outraged by the corporate community’s capitulation to progressive activism. On a host of hot-button cultural issues, from state election laws to equity-training programs in the workplace, big business seems to be in lockstep with Democratic dogma. This week, the Chamber slammed the emerging $4 trillion infrastructure spending program from the Biden administration as “dangerously misguided,” criticizing the corporate tax hikes while warning that the legislation would hurt American competitiveness. But only a small number of Democrats have spoken out against the proposal, and none of the 15 Democrats the Chamber endorsed last cycle have aligned themselves with the business lobby’s position . . . The relationship between McConnell and the Chamber has grown chillier since the group started endorsing more Democrats in anticipation of divided government during the Trump administration. Chamber of Commerce chief policy officer Neil Bradley told National Journal that the group’s policy is to endorse every lawmaker who earns at least a 70 percent rating on its voting scorecard, a benchmark that included numerous Democratic lawmakers last year. (The Chamber, it should be noted, changed the criteria for the scorecard in 2019 to include subjective factors like bipartisanship and leadership skills.) That said, together those two changes only account for 20 percent of how the Chamber rates lawmakers, and the leadership rating is less subjective than it sounds: Leadership makes up 10% of a Member’s total “How They Voted” score. Throughout the 116th Congress, the Chamber has urged members to either cosponsor — or refrain from cosponsoring — specific bills. The Leadership component measures the number of times a Member has acted in accordance with the Chamber’s requests. Members are ranked relative to the performance of all other members of their party. The top ranked of both parties earn 100. Quite why “bipartisanship,” however, should be considered, in the abstract, as a positive has always escaped me. This looks to me a little like a small step designed to help the Chamber in its political realignment. Bradley notes that while the Chamber supported Trump’s tax overhaul, its views on free trade and immigration were at odds with those of the Trump administration. Fair enough, but somehow I doubt whether the Biden administration will prove over-friendly to free trade. The New York Times (from last month): For decades, the principle of “free trade” inspired a kind of religious reverence among most American politicians. Lawmakers, diplomats and presidents justified their policies through the pursuit of freer trade, which, like the spread of democracy and market capitalism, was presumed to be a universal and worthy goal. But as the Biden administration establishes itself in Washington, that longstanding gospel is no longer the prevailing view. Political parties on both the right and left have shifted away from the conventional view that the primary goal of trade policy should be speeding flows of goods and services to lift economic growth. Instead, more politicians have zeroed in on the downsides of past trade deals, which greatly benefited some American workers but stripped others of their jobs. President Donald J. Trump embraced this rethinking on trade by threatening to scrap old deals that he said had sent jobs overseas and renegotiate new ones. His signature pacts, including with Canada, Mexico and China, ended up raising some barriers to trade rather than lowering them, including leaving hefty tariffs in place on Chinese products and more restrictions on auto imports into North America. The Biden administration appears poised to adopt a similar approach, with top officials like Katherine Tai, President Biden’s nominee to run the Office of the United States Trade Representative, promising to focus more on ensuring that trade deals protect the rights and interests of American workers, rather than exporters or consumers. Oh. As for tax, the direction a Biden administration would take has long been clear, even if it now seems that it will move even further away from a corporate-friendly fiscal regime than the Chamber might have feared (the Chamber has opposed the proposed tax increases). The Chamber may well get some of what it had hoped for on the immigration side, but if the proposed federal minimum wage increases to the level that is now being proposed, the main benefit, acknowledged or otherwise, that the Chamber might have hoped to see from higher immigration — suppressed wages — may not be quite so extensive as it had once anticipated. Thus its lack of enthusiasm for $15/hour. Back in in 2019, the Chamber was advocating $10. So much for that. Under the circumstances, its strategy of endorsing some Democrats in 2020 who had previously backed $15 looks . . . unwise. So, if the Chamber had hoped that, by throwing some dollars the Democrats’ way, it would be able to shape the course that a Biden administration might take, that bet has been a bust, as any business organization with any claim to be taken seriously ought to have recognized was always fairly likely to be the case. But perhaps something else was going on. Kraushaar notes how on “a host of hot-button cultural issues, from state election laws to equity-training programs in the workplace, big business seems to be in lockstep with Democratic dogma.” Is there any reason to think that the Chamber of Commerce, to the extent that it is aligned with big business, would be any different? Thus, from January: Marty Durbin, president of the U.S. Chamber’s Global Energy Institute, issued the following statement today welcoming the Biden Administration’s decision to immediately rejoin the Paris Climate Agreement: “The Chamber welcomes President Biden’s action to rejoin the Paris Climate Agreement. It is critical that the United States restore its leadership role in international efforts to address the climate challenge. The Chamber and the business community look forward to engaging with the Administration as it considers a revised nationally determined contribution (NDC) for the United States.” The Chamber’s position on climate change, which includes support for market-based approaches to accelerate greenhouse gas emissions reductions across the economy, also calls for global cooperation to address the climate challenge. The Chamber has official observer status at the United Nations Framework Convention on Climate Change. Given the regulatory and financial burden that Biden’s climate agenda is likely to impose on American businesses, big and small, it was an interesting position to take. And the idea (or excuse?) that the Chamber could “engage” with the White House on its climate policies was laughable even then. Now, it is simply pathetic. There are many reasons why major companies (or, more accurately, the managements that run them) have been turning, to use the shorthand, woke, but one flows from their embrace of stakeholder capitalism. As I have mentioned (many times) before, stakeholder capitalism is an expression of corporatism. Stakeholder capitalism rests on the belief that a company should be run for its “stakeholders,” various interest groups amongst which the shareholders are only one class. As such it is an application of corporatist principles down to the level of an individual enterprise, a notion of considerable appeal, for various reasons, to the managements of those larger companies subject, for now, to the tougher, financially based, discipline traditionally insisted upon by shareholders. Looking beyond the boardroom, corporatism is characterized by the notion that society is also best run through its leading interest groups, a proposition attractive to captains of industry and, for that matter, the organizations that purport to represent them. Why such a system might win the support of the Chamber of Commerce ought therefore to be obvious. Given its lack of foresight, that is almost certainly not the reason that it is behaving in the way that it is now, but, in time . . . Around the Web Coinbase: could have chosen a better date. Patrick Young for CapX: Wednesday April 14 is a date when the world of finance changed. In 1720, it was the day when the South Sea company first sold stock to the public. £2 million worth of stock was offered at £300 per share, and the issue sold out within an hour. Sales were especially brisk thanks to investors only needing to pay a 20% deposit, with the remainder due in installments over 16 months. The only problem was that the bubble burst before the stock was fully paid up, great fortunes were lost and the British economy suffered a colossal tumble. Wednesday April 14, 2021 may also have marked a turning point in the financial world – the only question is precisely what that turning point was? For the financial media, though the real focus yesterday was the Nasdaq listing of a remarkable company. On its arrival in public trading Coinbase immediately became the largest exchange group in the world. Despite lacking the same regulatory status as the legacy bourses its $100bn valuation it was more than $25bn higher than the previous leader, Hong Kong Exchanges . . . For an exchange to be listed and simultaneously launch into the top tier of the publicly traded exchanges is rare. For a de facto exchange – and one which is really more a collection of disparate licenses than a fundamentally regulated entity – to be so richly valued is unprecedented . . . Speaking of which . . . Via Magnify Money: 62% of crypto investors think they’ll get rich off those investments. More than 1 in 10 current crypto investors have invested $10,000 or more. What could go wrong? Oh yes, there’s this too: About a third (32%) of crypto investors don’t have their private key — which is needed to access their digital wallet — written down. Separately, 73% who own crypto are at least somewhat concerned about their cryptocurrency disappearing. Like losing a winning lottery ticket to a gust of wind, you may not be able to access your crypto funds if you lose your private key. You get a certain amount of tries to input your password, but you’re out of luck if you’re wrong. And it happens. In fact, The New York Times reported in January that (according to data from Chainalysis) about $140 billion worth of Bitcoin was apparently lost or in stranded wallets. Just a small survey, but still . . . H/t: Axios. Is it possible to combine both the dot-com bust and the 2007–08 fiasco? Grants Almost Daily: The red sea flows stateside. More than a quarter of U.S. stocks failed to generate positive net income last year, Bernstein analysts led by Toni Sacconaghi reported yesterday, the highest proportion in at least the past 50 years. Technology companies were amply represented within that group, with 37% of sector constituents generating a loss in 2020. No profits, no problems, as that tech subset generated a 65% equal-weighted total return and 92% market-cap weighted return last year, easily topping the 40% figure for the domestic tech sector as a whole. That run-up has helped foment some fancy valuations, as 36% of the money-losing tech universe garnered market caps equivalent to at least 15 times sales, topping the previous 33% peak in 2001 as well as the 24% logged during the depths of the financial crisis. As Sacconaghi and co. relay, that not only stands at nearly double the share of similarly expensive, lossmaking companies within the broader market, but also spells bad news in terms of historical performance. Over the past 50 years, highly-valued and unprofitable equities have lagged the broader market by an average of 1% on a one-year basis, and 10% on a five-year view. The tech stocks within that expensive cohort have seen a 1% average one-year excess return, but that is overshadowed by a meaty 28% relative performance deficit over a five-year horizon. While equity investors who choose wisely in high-risk enterprises can enjoy outsized gains, creditors seeking the return of principal along with a little extra have traditionally given a wide berth to such speculative tech concerns. That appears to be changing, as private lenders increasingly dabble in the sector via private loans which can then be packaged into asset-backed securities . . . Random Walk Feeling cheerful? David Goldman’s thoughts on inflation will put a stop to that. A long read from Law & Liberty, which is well worth your time. Here’s an extract: Modern monetary theorists say, well, look, the Federal Reserve can print money and the US government can borrow all it wants at effectively a negative real interest rate. The interest rate on five-year, carefree, inflation protected securities is -1.7 percentage or so. So, at a privilege, if I buy effective security for five years, for the privilege of letting the US government use my money, I’m losing 1.7% a year in real terms. Or I would expect to be, just based on expected inflation. And that’s a great deal for the US government, but it’s not a great deal for the creditors of the US government. So eventually we’d lose the dollars. And if you read publications close to the state council of the Chinese government, the Chinese Communist Party, I’ve read article after article saying the US, because it has a global reserve currency, can get away with it for a certain period of time but eventually that’s going to wipe out the dollar’s role as a reserve currency, and that’s the end of American power. That’s one way things could happen. Another way things could happen is that inflation really takes off. And that creates so many distortions that eventually the Federal Reserve is forced to raise interest rates, call a halt to this, and then we have a real bind because if we have US debt equal to our gross domestic product, and it’s increasing at 20% of GDP a year, for every percentage point that our debt increases, we pay another $250 billion in interest. Let’s say we go up three or 4%. Suddenly our interest builds us up by another trillion dollars and exactly at the point where we are forced to reduce borrowing, we also have to increase spending to pay the interest. In other words, we look like Italy during its economic crisis of several years ago. We look like a third world country, look like Turkey and at that point, we’re in a world of pain. The good news? The weekend’s coming up. — A.S. To sign up for the Capital Note, follow this link.