Art, Options and Pre-Defaults
I was out last week and I guess a lot happened? I don't have especially well-formed opinions on a lot of it, but I feel like you might expect me to -- there are those who would argue that it is even my job -- and so let's just do a quick tour of the highlights so we can all agree that I have discharged my obligations and move on to other things.
On Thursday, the House Republicans unveiled their tax plan, which would raise taxes on the middle class and potentially end graduate education in America. It is getting mixed reviews. My general rule is not to analyze legislative proposals too extensively, because they so rarely become laws in their proposed forms, so let's follow that rule here.
Also on Thursday, Donald Trump nominated Jerome Powell to replace Janet Yellen as chair of the Federal Reserve. Back when Gary Cohn was rumored to be a front-runner for the job, I wrote that "Cohn is not a traditional candidate to be the chairman of the Fed, or even a good candidate necessarily, but he is a reasonable candidate. He's not an economist, but he's sort of economist-shaped." Powell is a distinct step up: He's currently a Fed governor, for one thing, and he gets great reviews for his "formidable work ethic" on unglamorous projects, for having "studied economics assiduously after joining the Fed," and for his "odd ability to repeat people's sentences backward to them." On the other hand, like Cohn, he is not an economist, but he is sort of economist-shaped. Actually he's more than sort of economist-shaped: "One White House official described Mr. Powell as a 'safe' choice as well as the candidate who most closely fit Mr. Trump’s penchant for filling top jobs with characters from 'central casting,'" reports the New York Times. The consensus is that Powell "represents a bit of the continuation of the status quo without being named Yellen," and I cannot quite put my finger on what it is that makes Janet Yellen not a Fed chair out of central casting.
And also on Thursday, Robert Mercer announced that he would step down as co-chief executive officer of Renaissance Technologies, possibly because Renaissance employees and clients were upset about Mercer's political activities.
Then this weekend, Saudi Arabia arrested a bunch of princes and government officials for corruption and/or insufficient loyalty to the crown prince. Conveniently many of them have been locked up at the Ritz Carlton in Riyadh, which had room because it had just wrapped up a big conference -- a "Davos in the Desert," if you will -- for global investors. Among those arrested was Saudi Arabia's most famous and visible investor, billionaire Prince Alwaleed bin-Talal, whose Kingdom Holding Co. is a big investor in Citgroup Inc., Apple Inc. and Twitter Inc. I suppose locking up the most prominent investor in the country is not the best look for Saudi Arabia's coming initial public offering of Saudi Aramco?
The purge led by the powerful Saudi crown prince has triggered uncertainty among investors who fear a campaign against established business leaders. It has alarmed executives working on Prince Mohammed’s ambitious transformation plan and sent shockwaves through a Saudi business community wondering whether they might be next in line.
But perhaps I am thinking of the wrong audience. Donald Trump tweeted about his enthusiasm for the Aramco IPO -- and his desire to have it listed on the New York Stock Exchange -- in between calling for the arrests of his own political opponents.
And now the International Consortium of Investigative Journalists is out with an alliterative sequel to last year's Panama Papers report. This one is called the "Paradise Papers," and focuses on the law firm Appleby and its work on behalf of clients doing various sorts of offshore stuff. What sorts of stuff? Well you will just have to read a bajillion pages' worth of documents to find out. Some highlights include details on Glencore Plc's activities in Congo, including a loan to controversial Israeli billionaire Dan Gertler that may have exposed Glencore "to the risk of non-compliance with anti-corruption rules," and news of Commerce Secretary Wilbur Ross's "stake in a shipping firm that does business with a Russian company with ties to the son-in-law of Russian President Vladimir Putin and an oligarch under U.S. sanctions."
The work of art in the age of financialization.
"There really is no such thing as Art," wrote E.H. Gombrich. "There are only artists. Once these were men who took coloured earth and roughed out the forms of a bison on the wall of a cave," but nobody lives in caves anymore. Now we live in computers, and in financial markets, and the artists' tools have changed. And so we have talked here from time to time about artists whose medium is financial markets, who create art projects that consist of manipulating stock prices. And why not? You can use stock prices to draw lines just like you can chalk or ink or Microsoft Paint, and if you can draw lines then you can make art.
But so far that art has been abstract: The art consisted of pointing out that the artist was drawing the lines for Art, rather than to make money. (Or: She was drawing them to make money by selling the art.) The lines may have had a certain beauty of their own -- I for one would love to hang a Sarah Meyohas stock-chart painting on my wall -- but they looked like stock charts. Here, though, is as far as I know the first instance of representational art produced in the medium of stock prices:
James Gubb created what must rank as the first piece of protest art on a financial media platform in the world – trading between two accounts, illiquid Oakbay Resources and Energy shares in order to create the image of an “up yours” middle finger in the price chart.
There is a picture. It does kind of look like a raised middle finger! It is crude work, but arguably we are in the cave-art stage of financial art, and some future Dürer of high-frequency trading will perfect the draftsmanship and produce fully realistic drawings of hands in the medium of stock prices. I guess you are a bit constrained by the requirement that a stock price be a function? You can't really double back in time. You need more complicated charts; throw in some volume bars and a few moving averages and you can probably draw a face.
"The elk portrayed by the man of the Stone Age on the walls of his cave was an instrument of magic," wrote Walter Benjamin. You draw the elk, and it becomes operative in the world -- the spirits see it and it brings you back a good hunt. We have made progress since then. The middle finger portrayed by the man of the information age on the screen of his Bloomberg terminal is the result of magic: Gubb punched a few keys that caused activity in the world -- notionally at least, he mobilized economic resources to invest in energy exploration -- and the spirits brought him back an image of that activity.
Gubb is also, as far as I know, the first stock-market artist to get in trouble with regulators for his art. (I mean, you know, the first one who was doing it for art: Plenty of stock-market "artists" have gotten in trouble, for some loose usage of the term.) South Africa's Financial Services board fined Gubb 100,000 rands, saying that "These transactions created a false and deceptive appearance of the trading activity of the Oakbay share and also created an artificial price for the Oakbay share." Well yes of course but the traditional purpose of art is to create a false and deceptive appearance! The birds couldn't really eat Zeuxis' grapes, and you couldn't really buy much Oakbay stock at the prices Gubb was producing. "Ceci n'est pas une trading price for Oakbay shares," Gubb might have captioned his trades.
How's Bill Ackman doing?
On Wednesday, Bill Ackman cut his losses on his short bet against Herbalife Ltd., closing his straight short position and replacing it with put options. The conventional thing to say about this is that it limits Ackman's downside if Herbalife continues to move against him:
Instead of shorting Herbalife, Ackman is now shelling out cash for put options, which will pay off if Herbalife shares drop but which don’t pose the risk of a short squeeze.
Unlike holding shares short, where Pershing Square’s losses could be unlimited, Ackman said losses would now be capped at 3 percent of capital — what he called “modest investment.”
But this is only approximately true. Yes, strictly speaking, if you buy puts, the most you can lose is the put premium. But what happens if you buy puts and they expire worthless because Herbalife still hasn't gone to zero? "Well then you lost the put premium, oh well," is the textbook answer, but it is a bit unsatisfying in the case of Ackman's crusade against Herbalife, which he has vowed to pursue until the bitter end. If his puts expire worthless, won't he just buy more puts? And spend more money? Replacing a short position with a put position limits your downside, but it also limits the amount of time you have to achieve your upside. And if you run out of time, well, you can always make the choice to throw on more downside.
To put it another way: Ackman could have capped his losses on Herbalife at 3 percent of capital any time he wanted, just by closing his short position on Herbalife when losses reached 3 percent of capital. You don't need derivatives to do that. It's a liquid stock. Just buy it in. The fact that he kept the bet on has nothing to do with the technical makeup of his position, and everything to do with his views on the stock. Changing the makeup of the position doesn't change that underlying dynamic.
Elsewhere in Bill Ackman news, his fight with Automatic Data Processing Inc. will have a result this week, when shareholders vote on Tuesday on whether to give Ackman three seats on ADP's board:
Tuesday’s vote is the first time Mr. Ackman has had to woo investor votes since his bad bet on Valeant Pharmaceuticals International Inc. caused billions of dollars in losses at his hedge fund more than two years ago. A win—or even a close vote—for Mr. Ackman could be a reprieve and show that big investors believe he can help improve companies. A bad loss could raise questions about his future.
"The result will be a litmus test of the shifting power of activists in an era of record corporate profits," writes David Gelles, and I often find myself wondering how much proxy-fight votes are about these sorts of big themes -- the power of activists, the future of Bill Ackman -- and how much they are about just the specific operational issues raised in the fights. Presumably you could vote for ADP because you like its strategy, or for Ackman because you like his, without wanting to pass judgment on activism generally.
Venezuela finally ... sort of ... pre-defaulted on its debt?
President Nicolas Maduro said Venezuela will seek to restructure its global debt after the state oil company makes one more payment, blaming U.S. sanctions for making it impossible to find new financing.
The government will transfer funds for a $1.1 billion principal payment on Petroleos de Venezuela bonds that came due Thursday, Maduro said from Caracas. From there on out, the nation will renegotiate its debt with banks and investors, he said in a national address.
I am not quite sure what that means, and I am not alone. ("Some analysts even raised the idea that perhaps Maduro was confused about bond terminology and didn’t mean to say that he plans on restructuring the debt," and one economist said that "It makes no sense defaulting while paying tomorrow." "And how in the world is there going to be a restructuring when there are US sanctions prohibiting just that," asks Mitu Gulati.) But I suppose that to some extent these things are self-operative: If you are the president of a country and you go on TV and say "I decree a refinancing and restructuring of external debt and all Venezuelan payment," then it has happened. Or, I mean, the refinancing and restructuring haven't happened -- those will take a lot of work! -- but the default has.
Elsewhere in sovereign debt: "FBI Investigates European Banks for Allegedly Aiding Corruption in Mozambique."
Blockchain blockchain blockchain.
Look, here is the most important blockchain news: Three people went as "Blockchain blockchain blockchain" for Halloween.
Honestly it is hard to imagine a bigger career highlight than inspiring a (group!) Halloween costume, though technically the honor here goes to Daniel Krawisz, whose rant about "blockchain blockchain blockchain" I quoted last July, and have appropriated ever since. It just kind of rolls off the tongue. Really the only way to describe blockchain is thrice.
Elsewhere in blockchain blockchain blockchain, here is Nathaniel Popper on Floyd Mayweather's cryptocurrency cryptocurrency cryptocurrency endorsements:
Mr. Mayweather, who has promoted three different tokens — Centra, Stox and Hubiits — has even taken to calling himself Crypto Mayweather in social media posts, a play on his better-known nickname, Money Mayweather.
And: "The bubble will never burst," says another unrelated cryptocurrency promoter.
And here is a story of a guy who lost $30,000 worth of bitcoin because he forgot his PIN. "Hahaha what a n00b," you say, but he is also -- of course -- "a research director at the Institute for the Future’s Blockchain Futures Lab." His research reveals that the future is stupid! (Eventually he was able to hack into his wallet and get his bitcoins back.)
And here is the story of the initial public offering (yes, initial public offering, not initial coin offering) for crypto firm NextBlock Global, which was pulled because its investor deck was full of misrepresentations about who was involved with the company:
Vinny Lingham, CEO of blockchain identity startup Civic and a shark on South Africa's Shark Tank, told Alex via email he was hearing he had been named an advisor and Tapscott wrote back, “You are (obviously) not an advisor and have not been listed as one! So bizarre.” Lingham responded he was looking at the deck with his face and bio on it and said, "please don't lie to me."
Alex Tapscott, the chief executive officer of NextBlock, "when asked by Forbes about the four falsely named advisors, said, 'I currently have an order book for this financing of $250 million. To me that’s really the big story.'" Umm! The really big story is those two things in combination. Lots of people lie in investor presentations, and $250 million capital raises are not so uncommon, but raising $250 million based on a false investor presentation is interesting.
People are worried that people aren't worried enough.
"The Only Thing That Crashed This October Was Volatility." Can volatility crash? (Can bond yields crash?) I guess it is a good lesson in financial writing: Why say "nothing happened" when you can say, equivalently, "VOLATILITY CRASHED"?
Here's a conversation between me and Tyler Cowen at Bloomberg View about finance, and technology, and financial technology. One thing I say is:
The point of most innovations in consumer finance has been precisely to reduce its presence in our lives: Instead of talking to a bank teller to get money, you use an ATM. Instead of physically walking into a broker's office to talk about which stocks to buy, you buy index funds through a web page. Or, now, you click to enroll in an app and it does all of your asset-allocating and stock-picking and tax-harvesting and so forth for you. I think that a lot of financial technology is heading in the direction of perfecting that vanishing act, so that in 20 years you'll just think about financial things less than you do now.
But I concede that a lot of people would take the other side of this bet. For instance, up above in this very column, I suggested that financial markets are a natural artistic medium because they have become so omnipresent -- that just as prehistoric people painted caves because they lived in caves, so modern artists paint the tape because we live in stock markets. I suppose those ideas are in tension, though they also make a kind of sense together. The telos of financialization is, perhaps, to make finance both pervasive and invisible, and the role of the artist is to draw attention to things that the rest of us have just gotten used to.
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