Coppola Comment

Do you have a poorly-performing company that you don't know what to do with? Bitcoin fixes this!  At least, that's what Michael Saylor seems to think. Since August 2020, Microstrategy, the company of which he is simultaneously CEO, chairman and principal investor, has invested heavily in Bitcoin. And Saylor has joined the select group of billionaires fronting the campaign to promote Bitcoin's widespread adoption (and talk up its price).  Microstrategy has been bumping along the bottom for quite some time. MarketWatch helpfully reports the income statements for the last five years . They make grim reading. Here are the bottom-line net income and key financial metrics from 2015 to 2019 inclusive: Yes, there's been some improvement in net income, but just look at that EBITDA.... The financials reveal a company that is making little money, generating little free cash and repeatedly reporting operating losses. Sales are disappointing and operating costs are high. At the time...

In a lecture presented at the 2011 IMF Annual Research Conference, Hyun Song Shin of Princeton University argued that the driver of the 2007-8 financial crisis was not a global saving glut so much as a global banking glut. He highlighted the role of the European banks in inflating the credit bubble that abruptly burst at the height of the crisis, causing a string of failures of banks and other financial institutions, and economic distress around the globe. European banks borrowed large amounts of US dollars through the money markets and invested them in US asset-backed securities via the US's shadow banking system. In effect, they acted as if they were US banks, but in Europe and therefore beyond the reach of US bank regulation. This diagram shows how it worked (the “border” is the residency border beyond which US bank regulation has no traction): But it is not the model itself so much as Shin's remarks about the role of European regulation after the introduction of the...

The chart below comes from the Rockefeller Institute's report on Public Pension Funding Practices (h/t @Silver_Watchdog on Twitter) . It illustrates perfectly the point I have been trying to make for quite some time now. Pension funds are not taking on more risky investments because the risk premium has fallen, but because the risk-free rate has fallen: In fact, as the chart shows, the risk-free rate has been falling steadily for over thirty years.  This is not a post-crisis blip. It is a secular trend. Yet pension investors have not adjusted their expectations of returns as the risk-free rate has fallen. Rather than targeting a spread above the risk-free rate that reflects their risk appetite, they target an historic rate. The chart suggests that the rate they are targeting has not significantly changed since 1990. Thus the risk appetite of pension fund investors has increased. In similar vein, the Wall Street Journal mourns the passing of the 100% bond fund: Ther...

S&P forecasts a serious shortage of safe assets by 2050 if the developed nations, in particular, do nothing to adjust their fiscal finances in the light of ageing populations. This has serious implications for government and investor behaviour - and the future of the ratings agency that issued it. Here is S&P's hypothetical sovereign ratings chart out to 2050. Yes, ratings - although as we shall see, ratings will become largely irrelevant in the weird world of the future. Clearly the price of sovereign bonds will rise significantly, particularly for those in the three "A" categories. S&P doesn't indicate which nations would be the issuers of these rare breeds, but it is a fair bet that their sovereign bonds are already trading at negative rates for some distance along the yield curve. So we are looking at fully negative yields for certain countries in the not too distant future. The "A" team These countries will be paid to borrow. Of co...

This is a long overdue response to Nick Rowe's question about whether some kind of "taboo" makes employers less willing to exercise their right to dismiss than workers to exercise their right to leave, thus making it more difficult for them force down wages in response to adverse economic circumstances. The argument that unemployment happens when wages fail to adjust sufficiently to changed market dynamics is a well-aired one . But explanations of "sticky wages" tend to focus on structural rigidities such as employment protection legislation. Nick wonders whether the explanation is more psychological. Just because something is a psychological effect doesn't mean it can't be quantified. Pricing intangibles is something of a black art, but as we move into a post-industrial society it will become increasingly important; you may not even be able to explain what your asset is, let alone kick it, but you go to considerable lengths to obtain it and keep it...

So much has been written about the endogeneity of money that I thought it was now widely accepted. But recent exchanges have shown me that people STILL aren't getting it. Most recently, there have been two themes doing the rounds that bother me: - malinvestment is caused by a growing money supply - the presence of excess reserves in the system indicates a growing money supply (and therefore malinvestment) Both are wrong. They are wrong for slightly different reasons, but they both boil down to the same thing - that money exists independently of the actions of banks. It does not. If there is malinvestment in the system, it is caused by an excess of bank lending, not by a growth in the money supply: very fast broad money growth is a consequence (or better, an indicator) of excessive bank lending. And if there are excess reserves in the system, they are caused by the desperate attempts of central banks to stop the money supply falling as banks deleverage. You could say they are...

" It is time that people took responsibility for managing their own money, and stopped expecting banks to do it for them." My new post at  Pieria  talks about the nature of the relationship between banks and depositors: "I recently  wrote a post  with Euronomist in which we suggested that depositors should be explicitly charged for deposit insurance, rather than insurance being implictly provided by the state or covered by a levy on financial institutions. "This did not go down too well in some quarters. There were a  number of comments  along the lines of "why should I pay for the risks that banks take?" and "banks should look after their customers' money". Underlying these remarks was a fundamentally wrong understanding of the nature of the relationship between modern banks and their depositors. And this wrong understanding is the main source of anger towards banks for putting depositors' money at risk, and anger towards banks ...

The Parliamentary Commission on Banking Standards has produced its second interim report . Predictably, the media homed in on its proposal to include provision in primary legislation for full separation of retail from investment banking across the entire UK banking industry if ring-fencing turned out to be a dud. Not that that would mean much - the only UK bank that still has a major investment banking arm is Barclays, and even that is being scaled down in favour of renewed emphasis on retail banking. In fact the way things are going, by the time the ring-fencing scheme is implemented it will resemble a plan to repair the door on an empty stable. The horses will have long since become Tesco burgers. Yawn. But the report is actually far more interesting if you ignore ring fencing and look at the rest of it. It affords an extraordinary snapshot of the conflicting agendas of Government and Parliament at the moment. Government is in a hole, largely of its own making: the economy is stagn...

I have recently been reviewing various proposals for making the financial system "safer". Most of them involve some kind of full reserve banking, while one (Gary Gorton's) looks at improving the safety of the shadow banking system without subjecting it to the same rules as licensed banking. But all of them rest on the idea that there is such a thing as a "safe" asset. The concept of "safe" (i.e. risk-free) assets has existed for a long time. Pricing models base themselves on the "risk-free rate". The instrument that is usually used as the proxy for "risk-free asset" is the United States Treasury (UST), but until recently all sovereign debt was regarded as risk-free, at least for bank capital adequacy requirements. This led to banks loading up on the debt of Greece, Spain, Portugal etc. because those assets required no capital allocation but gave a better return than German bunds or UK gilts. They should have paid more attention ...