Grocery Deals and Bond Ethics
You can tell a sort of satisfying shareholder-activism story about Amazon.com Inc.'s acquisition of Whole Foods Market Inc. Whole Foods came under pressure from shareholder activists like Jana Partners LLC. Its chief executive officer John Mackey complained bitterly in a Texas Monthly interview about how the activists were "greedy bastards" who "just want to sell us, because they think they can make forty or fifty percent in a short period of time," and he bemoaned the short-term time horizons and myopic shareholder-value focus of public-company shareholders. And then he sold his company to Amazon, a company with a geological time horizon, a company that embraces bold experiments, "a charitable organization being run by elements of the investment community for the benefit of consumers." Given that Mackey talked about his battle with activists as a "morality play between conscious capitalism and greedy, short-term financial capitalism," Amazon seems like an obvious fit, though I suppose there are some cultural differences:
For Whole Foods, whose ethos was once so crunchy granola that it did not originally sell beer or meat, Amazon and its vast empire of warehouses and robots might seem an odd match. But the deep pockets of Mr. Bezos offer Whole Foods a way to escape the harsh glare of public investors who demanded cost cuts, shake-ups in management and on the board and more.
It seems to me that the robots are superficial and the long-term focus is essential. Here is Farhad Manjoo's guess at what will happen next:
Amazon almost certainly doesn’t know yet how exactly Whole Foods will fit into its long-term plans. You can expect it to make few dramatic changes to Whole Foods in the near future. Instead, Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more.
Doesn't that sound so soothing? Don't fire your managers and put in place an urgent cost-cutting plan to focus only on the highest-margin businesses: Keep everything the same, but play around with it, with no particular plan, until you find something you're happy with. Just focus on making customers happy and don't worry too much about the numbers. Whatever Amazon's ethos is -- and I am not sure it is quite "conscious capitalism" -- it certainly isn't short-termist.
Whole Foods, on this theory, was undervalued by the short-term-oriented public markets, and properly valued by the long-term-oriented Amazon, so there was a value-enhancing trade to be done by moving its ownership from the public markets to Amazon. Jana are greedy bastards, sure, but they also brokered a trade that made everyone better off: The public shareholders got a lot of money fast, while Whole Foods avoids all that glare. Of course "Jana stands to make around $400 million," so it is a satisfying result for them too. It is not an entirely happy story: If it is true that public markets are structurally short-termist, that they cannot properly value companies with long-term visions, then that is a sad fact about our markets. It can't be entirely true, though. Amazon itself is public, and investors seem to like it just fine.
Oh, by the way, everything Mackey said in his cantankerous Texas Monthly interview came true immediately. The complaints about Jana's short-term greed led immediately to a short-term gain for Jana, but also:
“The CEO of Goldman [Lloyd Blankfein] wanted to meet with me because, of course”—he adopts a sardonic tone, a tic that tends to make his handlers stiffen up—“ ‘Goldman Sachs would love to represent you. If you guys are going to be sold, we’d love to make one hundred million dollars doing that. Don’t forget your buddies at Goldman Sachs!’ ” (A spokesperson for Goldman says no such meeting occurred.)
Well, Goldman ended up advising Amazon, and "has the coveted 'lead left' role on a $13.7 billion bridge loan that ranks among the year’s biggest deal-related financing packages." The value of being insulted in print by John Mackey seems to be hundreds of millions of dollars.
I like this guy's attitude:
Eaton Vance Corp. portfolio manager John Baur sold his Venezuelan bonds in the fall of 2016 because he expected recoveries in a default to be below market prices. Political and ethical concerns played no part in the decision, he said, but selling out was still a relief.
“Now I don’t have to worry about the ethics anymore,” Mr. Baur said.
If only every unethical action were also unprofitable, no one would ever have to worry about ethics! But here we are. Baur appears in an article about Venezuelan bonds, which, on the one hand, support "the authoritarian government of President Nicolás Maduro," who "is choosing to pay lenders rather than feed its people," but which, on the other hand, are very profitable:
Adding to the dilemma for investors, the 24% yield on some Venezuela bonds places them among the highest-yielding investments in the sector, and the debt has been one of the biggest winners on Wall Street over the past year.
It is a central ethical dilemma: ethics, or money? "We have a fiduciary duty to represent the interests of our shareholders in our Emerging Markets Debt fund," says one fund that owns the bonds, which I guess is one way to avoid the dilemma. It's not you, it's your shareholders! The managers pick the bonds, but don't own them; the shareholders own the bonds, but don't pick them; everyone avoids ethical responsibility.
But the dilemma is a deep one. I am reminded of this post on socially responsible investing from Cliff Asness:
What happens when one group of investors, call them the virtuous, simply won’t own a segment of the market (the sin stocks)? Well, in economist terms the market still has to “clear.” In English, everything still gets owned by someone. So, clearly the group without such qualms, call them the sinners, have to own more than they otherwise would of the sin stocks. How does a market get anyone, perhaps particularly a sinner, to own more of something? Well it pays them! In this case through a higher expected return on the segment in question.
It is a structural feature of finance: Things that are shunned have to promise higher returns in order to attract capital. This is good, as Asness points out: It makes it more expensive to be shunned, which is the point of the shunning. It is harder for the Maduro regime to stay in power if it can't raise money. But of course the higher returns are higher returns. The more unattractive an investment is ethically, the more attractive it has to be financially. The dilemma is always hard. The market is efficient; there are no free lunches; the more ethically important it is for you to pass up an investment, the more painful it will be to pass up its returns.
Blockchain blockchain blockchain.
Here is a story about how you can't actually buy anything with bitcoin:
Even as the euphoria over bitcoin reached a fever pitch last week as the price surged to almost $3,000, slow transaction times and inertia are helping to prevent it from achieving widespread usage. Adoption has slowed, according to Morgan Stanley, after a slew of companies from Microsoft Corp. to Expedia Inc. initially trumpeted its use, and hurdles remain when it comes to longer-term viability.
“We see few reasons for consumers to use bitcoin over a credit/debit card given that paying online with bitcoin represents a marginally more inconvenient way to pay,” Morgan Stanley analysts wrote in a 33-page report released June 13. Processing costs for bitcoin and other digital currencies are likely to grow, they said.
I think that for most digital-currency enthusiasts this is not a particularly insurmountable problem. Obviously you can't buy things with bitcoins, but that was never the idea. (I mean, now, in hindsight, that was never the idea.) The point of bitcoin is that it is a digital asset, a store of value, a means of transferring large amounts of money across borders -- not a way to pay for a pack of gum. The success of bitcoin is measurable in its market capitalization -- it sure is storing a lot of value! -- rather than its transaction volume -- it sure isn't paying for a lot of gum!
And, you know, fine, Apple Inc. is a successful company even though it's a pain to use Apple shares to buy gum. Still it is a bit disappointing for blockchain utopians. The true blockchain-utopian idea involves putting a huge chunk of economic activity on "the blockchain," for some blockchain; the universality is part of the appeal. Bitcoin's uselessness in everyday transactions isn't just a mark against bitcoin as a currency; it's a mark against the blockchain as a universal mechanism for effecting and recording transactions. Turns out it's slow and expensive for everyone in the world to keep an encrypted ledger of every transaction!
Elsewhere, here's another story about Brooklyn's blockchain-based artisanal electricity microgrid, which we have discussed previously. "Oh, this is shared economy," says a member. "This is Airbnb, this is Uber, this is 21st century."
Are hedge funds doomed?
According to data released by Hedge Fund Research (HFR), the number of new hedge fund launches totaled 189 in the first quarter of 2017, up from 153 in the prior quarter and marking the first increase in launches since the first quarter of 2016. At the end of the 1st Qtr, total assets invested in hedge funds rose to a record $3.07 trillion.
It is one of the great puzzles of modern finance: Every article you read about hedge funds discusses poor returns, excessive fees, client dissatisfaction, an endangered business model, titans of the industry closing up shop to become family offices, etc. Also assets under management keep going up.
Elsewhere: "Hedge-Fund Revival Quickens as Event-Driven Trades Prosper."
Here is Samuel Buell of Duke University School of Law on the problem of unsatisfying punishment for corporate crime:
Finding only “line” level workers criminally liable does not merely let all others who bear responsibility off the hook. There is a sense in corporations that line workers have, to some extent, a moral if not legal excuse when management created a culture and incentives that made the relevant conduct and ensuing harm likely or even inevitable. This is what people, including jurors in several high-profile cases, mean when they say the prosecution treated the low or mid-level worker as a “scapegoat.” It is not just that management is also responsible. It is that management appears to be more responsible.
The natural reaction is "well, throw the managers in jail too then," but Buell correctly resists that temptation:
Making it easier to use criminal law to punish corporate managers for wrongdoing within corporations might yield some additional deterrence, and perhaps some public satisfaction. But only at the cost of badly compromising principles of punishment, not to mention the potential for costly and excessive deterrence.
More to the point, the impulse to expand criminal liability for managers is not going to get us what we seem so badly to want: a humanizing of the corporation—a compression of this unwieldy legal and economic institution down to a size or into a form that appears amenable to control and punishment. For that, we need to look outside the criminal law and to the law and institutions that created the modern corporation and that bear primary responsibility for its constitution and regulation.
The Goldman alumni network.
Here is Max Abelson on two former Goldman Sachs Group Inc. bankers who are running for political office as progressive Democrats:
If there’s a common thread, something Goldman Sachs teaches its people that can’t be easily unlearned, it might be reflexive respect for fellow elites. They tend to share a worldview that glorifies growth and markets instead of the populist ideals of free college, government healthcare for all and breaking up big banks.
Is that true? I guess a little; disclosure, I am a Goldman Sachs alumnus with a reflexive respect for fellow elites. But Steve Bannon is a Goldman Sachs alumnus in the White House with a reflexive disdain for those elites. Gary Cohn is a Goldman Sachs alumnus in the White House with a ... I don't know, a vague half-baked sense that the big banks should be broken up? Goldman is a big institution, and for large portions of the last few decades it served as a sort of default finishing school for ambitious people. Its influence and network are probably best understood as being like the influence and network of, say, Harvard: It selects a lot of people who will probably be powerful later, marinates them in elitism for a little while, and then spits them out to eventually become powerful and reminisce fondly about their days at the old firm. There is not much in the way of a shared ethos, other than that a lot of Goldman alums share a belief in their own elite status.
Lunch with Buffett.
How much would you pay to have lunch with Warren Buffett? He auctions a lunch every year, and people pay millions of dollars for it. The appeal, generally, is not the food; it's the chance to talk to Buffett about investing, to get his wisdom firsthand, or to validate your own investing prowess by spending so much money to hang out with him. But what on earth is this, Deutsche Bank?
Everyone reckons the anonymous bidder who paid $2.7m for lunch with Warren Buffett this week must be rich. In fact the tab makes sense for regular Joes, too. Take the average US worker: 42 years old with a pension pot of $92,500 earning seven per cent annually. Even with no more contributions those savings will be worth $284,000 in real terms by the retirement age of 65. But when, over dessert, Warren whispers the secret to Berkshire Hathaway’s 19 per cent annualised return since inception, the expected pot becomes $3.8m. Hence the average American should be willing to pay $3.5m for the lunch – more than last year’s record amount – minus any real borrowing costs to fund the bid. And if someone with just $92,500 to invest should spend that much, every billionaire hedgie who has dined with Warren has underpaid.
I don't know where to begin with this. This is not how anything works. First, of course, Buffett's secret is not whisperable; it's about reading a lot of 10-Ks and having a huge insurance float and getting pitched a lot of attractive deals, not just buying stocks that start with the letter K or whatever. Second, as reader Jianchi Chen points out by email, you wouldn't pay $3.5 million now to get $3.5 million in 23 years. If that deal sounds appealing to you, why didn't you instead pay me $100,000 and I'll have coffee with you and explain the time value of money. Third, Buffett's "secret" is backwards-looking: Buffett, by hypothesis, knows how to get 19 percent annual returns over the past 50 years, not the next 50 years. Of course, if he could give you that secret -- the secret of time travel -- you should pay more than $3.5 million for it, but you should also make more than 19 percent annualized with it.
People are worried about unicorns.
We talked on Friday about reports that Amazon.com Inc. might buy Slack Technologies Inc., the meta-unicorn that is always raising money just because it is so pleasant to raise money these days. "I guess if Slack sells, that might be a sign that the party is coming to an end," I said. Well, just kidding, Slack is just gonna raise some more money instead:
Slack, an office messaging company, is in talks to raise around $500 million at a valuation around $5 billion, according to two people with knowledge of the discussions, who were not authorized to speak publicly about the financing.
Elsewhere, Casper Sleep Inc., the Ghost Unicorn, has raised $170 million in an investment round led by Target Corp., and is contemplating an initial public offering, while Bonobos Inc., the Chimp Unicorn, sold itself to Wal-Mart Stores Inc. for $310 million. I guess neither of those are unicorns. They're not billion-dollar companies, for one thing, and ghosts and apes are not unicorns, for another. Also they are not tech companies: Casper makes mattresses, and Bonobos makes pants. And yet they are obviously tech companies. They exist in proximity to the internet. Casper advertises on podcasts. Podcasts! That pretty much makes you an honorary unicorn.
Billionaire John Paulson Joins Valeant’s Board of Directors. Brexit Talks Kick Off in Brussels as May Urged to Soften Stance. Skin-in-the-game securitizations. CEOs Have Access to Trump, but Do They Have Clout? Less Stressful Tests Seen Boosting U.S. Bank Payouts $30 Billion. Robo Advisers’ Latest Foray: Socially Responsible Investing. London Currency Trader Is Taking On World's Biggest Stock Market. "Economic globalisation has contributed to a substantial rise in living standards and falling poverty over the past half-century," says the Bank for International Settlements. "We find that Mr. James has a statistically and economically significant positive effect on both the number of restaurants and other eating and drinking establishments near the stadium where he is based, and on aggregate employment at those establishments." Oxford-Cambridge wine-tasting competition. A pet snake is on the loose in New York City.
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