The Breakdown - An Unintended Consequence of Low Interest Rates? The Big Get Bigger

Episode Date: August 26, 2020

Today’s episode of The Breakdown is an extended edition of the Brief. NLW discusses: The “COVID-19 vaccine trade” on Wall Street kicks markets higher The latest on TikTok vs. the U.S. and what it means for the U.S.-China relationship More companies move reserves from cash to bitcoin The final topic today looks at news that some large money market funds are shifting fees from users and taking the financial hit themselves. This creates a dynamic where only the largest companies can survive long term, and reflects a key unintended consequence of low interest rates.

When interest rates go to zero, one of the unintended consequences is that the firms that are so large that they can shoulder the burden for a little while tend to beat out smaller firms. That is inherently anti-competitive. And it creates another dynamic by which capital and power is concentrated in an ever-shinking number of hands. This isn't how a capitalist economy is supposed to work. artificially low rates have the net impact of driving out competition. And that's something that we really need to consider, alongside all the other critiques of current monetary thinking. Welcome back to The Breakdown with me, NLW.

It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, August 25th, and today we are doing one of our extended versions of the brief. I don't have a full analysis today. Instead, I'm going to go just a little bit deeper

on a few topics that I think are really, really important in the larger context of the economy right now. So let's dive into this extended edition of the brief. First on the brief today, the COVID-19 vaccine trade is in full swing. So what happened? Yesterday, the Wall Street Journal had a headline that said, global stocks rally on potential coronavirus treatment. And basically what happened is that the FDA made an emergency use approval of convalescent plasma, which, according to the Wall Street Journal, quote, increased appetite for risky assets, putting S&P 500 index on

track to hit a record high. So convalescent plasma is a treatment that uses antibodies from recovered COVID-19 patients, and this emergency use approval is not the same thing as a full authorization. It is a temporary authorization that allows them to try things in a very specific set of circumstances, in a very specific set of patients. Now, this news coincided with good news on the actual caseload front. the number of new cases was down to 34,567, which was the lowest in two months and the ninth straight day with fewer than 50,000 cases. I do think that there's reason to be somewhat skeptical about certain numbers, particularly in the context of Florida, which has gone from 85,000 tests or so per day just a couple weeks ago, to more like 20,000 now. But still, the larger trend is looking good. But still, at least in terms of the market trying to read the tea leaves and trends, this is

positive directionality. Now, why is this relevant? Well, Seema Shah, the chief strategist at Principal Global Advisors, put it really well, saying any news that's positive on the virus is going to drive markets higher. However, any news on a vaccine or treatment has to be treated with skepticism, given the process it has to go through before it's used by the general population. I started off this section talking about the COVID-19 vaccine trade, and this is something I've referred to a number of times on the breakdown.

Effectively, I think that the markets right now are driven by a small handful of forces. One, they're driven by this overarching narrative of the Fed put or the Fed will never let stocks go down, and that's certainly more embraced by the retail rally crowd, but it certainly translates up into other parts of the market as well. Two, it's the S&P 5 versus the S&P 500. We did a whole podcast on that last week about how much this is a rally driven by tech stocks. And as I said then, that may not be inaccurate. In fact, part of what we may learn this COVID-19 period was about was about the full

assent, perhaps inevitable in retrospect, of technology companies over every other type of business, whether it's in terms of how we work or how we live or what we're. we buy. But whatever the case, it is unignorable that is those tech stocks that are driving this market. The third narrative piece of this, however, is this vaccine trade. And any time that things that say that they could take care of COVID-19 or that COVID-19 was going in the right direction come up, it tends to have an immediate impact, even if temporary, on the market. So yesterday was just another example of that. Next up on this extended edition of the brief, we're talking TikTok. So there are three new things on the TikTok front. The first is that Oracle has emerged as a new

alternative to Microsoft in the forced sale of TikTok to a U.S. buyer. For those of you who have somehow missed the news, the Trump administration has signed an executive order that will go into effect in September, disallowing Americans to do business with Bite Dance, which is the Chinese-owned parent company of TikTok. This is the same type of of restriction that we use for other very high target sanctions. So it's a big deal. The one potential out is that if TikTok's U.S. operations are bought in full by a U.S. company that may prevent this from happening. For a long term, it seemed like the leading contender was Microsoft. There has been talk of others like Twitter, but now, like I said, Oracle has emerged in a big way. Apparently,

Currently, Oracle is being pushed by two of BiteDances investors, General Atlantic and Sequoia, who were worried about getting a piece of the action in a Microsoft deal. President Trump, for his part, has signaled support of this, saying that Oracle is certainly a company that could handle TikTok, but we'll have to see how this shakes out. If this acquisition process should fail, TikTok is planning to file a lawsuit claiming that the Trump administration failed to follow due process on the executive order. If that was to be successful, that would obviously have some pretty big ramifications going forward for what tools are at the U.S.'s disposal in this sort of growing trade war between the U.S. and China.

Speaking of that, the third interesting detail on TikTok comes from a Wall Street Journal investigative report, and basically what they found is that behind the scenes last fall, Facebook's Mark Zuckerberg was absolutely hammering the threat of Chinese internet companies to American business, in his round trip around Washington, D.C. Now, you'll remember that trip for his appearance to talk about Libra in front of Congress, but it turns out that behind the scenes, he was saying an even more dramatic case of the argument he presented there, which is effectively that if Facebook wasn't allowed to do things like Libra, then the Chinese would.

According to this report, he was saying that in much more dramatic terms behind closed doors. All that said, there was the first high-level dialogue between the U.S. Treasury Secretary and the Chinese Vice Premier since early May that happened this morning, and both sides reaffirmed their commitment to a phase one trade deal, which obviously the markets were very happy about. Part of the potential reasoning for this now is that currently Chinese purchases of U.S. goods are running behind the pace needed to meet an increase. that was specified in the deal. China is committed to buying $36.5 billion worth of U.S. agricultural goods, which is really important from the standpoint of elections coming up this fall.

That sort of purchasing power could have a major impact on a huge number of farmers that could have an impact on this election. So expect the election cycle to increasingly get interconnected with the U.S.-China trade talks. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more?

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Another company has moved its reserve assets from U.S. cash into Bitcoin. Christopher Gimmer, the CEO of Snappa, wrote yesterday a post called Why We're Holding Bitcoin as a Reserve asset, and it starts like this. Let me ask you a question. Would you rather save money in a currency whose supply is a... inflating each year? Or would you rather save in a currency whose terminal supply is programmatically fixed? Given everything going on in the global economy, this is a question we've had to start taking seriously as SNAPA continues to scale and produce growing amounts of free cash flow.

It became even more important when our banks slashed the interest rate on our high interest savings account to 0.45% earlier this year. That means that the purchasing power of our Canadian and US dollars is actually decreasing after adjusting for inflation. Fortunately, I believe we now have a far superior savings technology available to us. That technology is Bitcoin. Gimmer followed up with CoinDesk via private message and said that the allocation represents something like 40% of their cash reserves. Now this is a few days after an Ontario-Midal Eastern food chain called Dahini's made a similar announcement about moving their cash reserves into Bitcoin. And obviously after the big micro-strategy news from a couple weeks ago, which I talked

about extensively with Preston Pish on this show. Now, overall, it may feel like these are small companies, but this is a real trickle becomes a flood situation. And the more that the narrative of moving into Bitcoin is rewarded, the more people consider it. And the more people are going to consider it, both from the standpoint of a PR win and more important, ultimately, fiduciary responsibility. So it's really interesting to watch this move start to happen. And really the question will be over the course of the next year, how these early movers are rewarded by the market. Last up on the brief today, low interest rates equals less competition and more centralization. I've talked extensively over the last few weeks about things like yield curve control and just

the low interest rate background that we have currently. And there was an enlightening piece in the Wall Street Journal on Monday called Money Funds Wave Charges to keep yields from falling below zero that I think has a lot to tell us about the state of affairs right now. Basically, this article was telling the story of how money managers at big companies are waiving customer costs for money market funds to keep what investors are earning from dropping to zero. Let's read an excerpt. All types of investors, from individuals and corporations to pensions and hedge funds, use money market funds to park cash safely while earning some pocket change. If an investor deposits money with a broker for example, that money can sit in a money market fund until the investor decides what to buy.

But investment firms don't just hold those funds. They buy highly rated debt with the money, passing on some of the returns to investors. As this industry has grown, money funds have become a critical source of short-term funding for the U.S. government, companies, and municipalities. Quote, the reality of money market funds is it's no longer about return on capital, says Keith Berlin, had a fixed income at consulting firm fund evaluation group. quote, you're not going to make any money until the Fed raises rates. Add fees, and investors could end up losing part of what they originally invested. That possibility might make stuffing cash under a mattress more attractive.

So firms running those funds must either forfeit fees or find ways to shift costs away from investors. Said Mr. Berlin, quote, It's going to become a battle among the largest firms who can shoulder costs longer until their clients get more comfortable moving into the firm's riskier strategies. So it's that last line that I think is really important, a battle to see who can shoulder the costs longer. And what that reminded me of was another thread on Twitter from Sheila Bear, who was a former FDIC chair in the U.S. It's a short thread, but incredibly important. She writes, I'm all for a robust antitrust enforcement.

markets don't work without competition. Yet overlooked is the role low interest rates play in driving market concentration. As with the related side effects of yawning wealth and income inequality, sustained low interest rates help the big get bigger, stifling innovation and productivity, while inflating the value of financial assets overwhelmingly owned by the rich. Yet no one in either party talks about this. If there is bipartisan consensus on anything, it is to rely more, not less on cheap debt to fuel economic growth. Ironically, I think the general public gets it, but our political leadership seems unwilling to fundamentally rethink the role of monetary policy in our economy. So the really key point here that Sheila is making is that when interest

rates go to zero, one of the unintended consequences is that the firms that are so large that they can shoulder the burden for a little while, tend to beat out smaller firms. That is inherently anti-competitive, and it creates another dynamic by which capital and power is concentrated in an ever-shinking number of hands. This isn't how a capitalist economy is supposed to work. artificially low rates have the net impact of driving out competition. And that's something that we really need to consider, alongside all the other critiques of current monetary thinking. Anyways, that's a theme that I'm going to come back to more as I see more examples and more

analysis. But for now, I wanted to leave on that really acute and important point that low interest rates have the unintended consequence of the big getting bigger. Anyways, guys, that's it for today's slightly extended version of the brief. I hope you enjoyed this. Tomorrow, I'm back with a really interesting interview about, well, you'll have to see, but effectively it's about how digital currency is being used as a tool to fight authoritarianism. So keep your eyes out for that.

And until tomorrow, guys, be safe and take care of each other. Peace.