Barron’s Weekend Summary: Costs are rising as insurers try to price in losses from more frequent and unpredictable storms, wildfires, and other effects of climate chang
Cover Story:
-Costs are rising as insurers try to price in losses from more frequent and unpredictable storms, wildfires, and other effects of climate change. Inflationary pressures, combined with population growth in susceptible areas, are making insurance costlier for everyone. Barron’s has identified four stocks that could capitalize in extreme climate: Allstate, Arch Capital Group, Ryan Specialty Holdings, and Guidewire Software. Each has specific growth and stock drivers, and each focuses on a different part of the industry, from front-line coverage (Allstate), to reinsurance (Arch), brokerage services (Ryan), and software (Guidewire).
Interview:
-This week Barron’s features an interview with Invesco CEO, Marty Flanagan. During 18 years as chief executive of Invesco, Flanagan expanded the asset manager’s foray in Asia and acquired the PowerShares exchange-traded fund brand. He recently stepped down from the top job. Flanagan guided Invesco from a loose collection of eight investment firms with disparate brands and cultures into an integrated top global asset manager. As of June 30, the Atlanta-based company’s assets under management reached $1.54T, up from $386B in 2005 when he took over. That puts Invesco in the top 20 largest global asset managers by AUM. He made two key decisions. First, he significantly expanded Invesco’s existing joint venture with a state-owned firm in China, Huaneng Power). And second was acquiring the PowerShares ETF brand in 2006, which gave the company control of the now-$200 billion Invesco QQQ Trust Series), the most popular index fund following the Nasdaq 100. It set the company on the path to become the fourth-largest ETF provider globally, with 393 ETFs.
Tech Trader:
-Nvidia’s fiscal second quarter, reported Wednesday, was historic in scope. There is little precedent for a chip maker as large as Nvidia doubling its revenue—to $13.5B—in one year. Its data center business, driven by AI demand, was even more impressive, growing 171% year over year and rising 141% from the prior quarter.
“A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI,” Nvidia CEO Jensen Huang said in the company’s earnings statement. “The race is on to adopt generative AI.”
The Trader:
-Shares of Best Buy have fallen 7.7% so far this year, worse than the SPDR Retail exchange-traded fund, which has gained 2.8%, and the S&P, which is up 15%. There’s a good reason for that. Analysts have reduced their 2023 earnings estimates for the retailer by about 12% in the past six months, according to FactSet, more than the consumer-discretionary sector’s 10% drop. The problem is the electronics that Best Buy sells. Following a Covid-era boom, manufacturers and retailers alike had too much inventory, which caused prices and the number of items sold to decline, squeezing profit margins and the bottom line.
-China’s economy was supposed to get a boost when the nation ended its zero-Covid policy—and it did, but an all too brief one. Deflation is a reality, with the consumer price index down 0.3% year over year in July, unemployment among 16 to 24-year-olds so bad that the country will no longer release the data, and the real estate market in turmoil. The People’s Bank of China seems reluctant to do much more than the bare minimum, which risks a further slowdown.
“Investors are waiting for signs that Beijing, facing mounting downside pressures on growth, will adopt significantly more forceful and effective stimulus policies,” writes 22V Research’s Michael Hirson. “The latest signals aren’t very encouraging, suggesting continuation of a conservative approach despite the risks that it is insufficient to address China’s current challenges.”
Features:
-China’s economy is worse now than in the 1970s, says Charlene Chu, senior analyst at Autonomous Research. The country’s economic recovery from three years of strict Covid restrictions and crackdowns on its property and internet sectors appears to be losing momentum. The property sector, which holds 70% of Chinese households’ wealth, is ailing. Existing home prices slid 9% month over month in big cities in July, the steepest decline in a decade. Property developer Country Garden Holdings 2007 +5.19% didn’t make a bond payment and financial products managed by Zhongrong International Trust missed payments to investors, feeding concerns about financial contagion. Chu, a former Fitch Ratings analyst, has become a go-to source for understanding China’s opaque banking system and all things debt. We talked about whether the country is on the edge of a “Lehman” moment, and why she sees no easy fix to get China out of its predicament.
-SharkNinja SN –1.80% has been a consistent and successful innovator in small appliances, an industry marked by slow growth and few exciting new products. Now, its stock can be a consistent and successful investment as well. Vacuums, hair dryers, and ice-cream makers aren’t glamorous products, but SharkNinja has repeatedly come up with distinctive entries that have helped grow and redefine what these products can be. The results speak for themselves. Sales have risen at a 20% annual rate since 2008, when current CEO Mark Barrocas took the top job, and revenue is on track to hit $4 billion this year.
Europe:
-The jet aboard which the Russian warlord and head of the mercenary organization, Wagner Group, Evgeny Prigozhin was flying was an Embraer Legacy 600, but the incident isn’t affecting Embraer’s U.S.-listed American depositary receipts, or ADRs. They rose 3% in Wednesday trading, while the S&P 500 and Nasdaq Composite rose 1.1% and 1.6%, respectively.
The reaction, or lack of reaction, shows that investors don’t attribute the cause to an issue with the plane. Social-media channels close to Wagner said Russian air defenses shot down the jet, The Wall Street Journal reported. Images of debris published by Russian media appeared to have holes like those created by air-defense missiles, the newspaper said. Russian aviation regulators cited by state media didn’t provide a reason for the crash, while some Russian lawmakers said the cause could have been a bomb on board, the Journal said. The government said it is investigating, it reported.
Emerging Markets:
-No updates this week.
Commodities:
-The lack of a big premium results from several factors. For one thing, oil companies are no longer focused on getting bigger at any cost. Instead, shareholders have been demanding that they focus on sending more cash back to shareholders. It’s also becoming more difficult for small and mid-cap oil producers to attract investor attention—and the kind of multiples that lead to rich premiums. Andrew Dittmar, an analyst at Enverus Intelligence Research, expects more acquisitions ahead, because several smaller producers would probably fit well into larger companies and help them expand their resource base.
Streetwise:
-No related updates from Jack this week
ech Leaders Emerge Behind Plan to Build New City Near California Air Base
Group has spent nearly $1 billion to buy thousands of acres northeast of San Francisco
A group of high-profile Silicon Valley entrepreneurs and investors emerged Friday as backers of a group that plans to build a new city in Northern California, after its purchases of land around an Air Force base had raised national-security concerns among U.S. officials.
Flannery Associates said Friday it planned to construct a new housing development in the area. The Wall Street Journal previously reported that it has spent nearly $1 billion over five years becoming the largest landowner in Solano County, northeast of San Francisco.
“We are proud to partner on a project that aims to deliver good-paying jobs, affordable housing, clean energy, sustainable infrastructure, open space and a healthy environment to residents of Solano County,” Brian Brokaw, a spokesman for the group, said in a statement. “We are excited to start working with residents and elected officials, as well as with Travis Air Force Base, on making that happen.”
The group’s investors include a high-wattage list of technology entrepreneurs and investors, according to a person familiar with the group. They include LinkedIn co-founder Reid Hoffman; former Sequoia Capital partner Michael Moritz; and venture capitalists Marc Andreessen and Chris Dixon, who are general partners at Andreessen Horowitz.
Other investors include Patrick Collison and John Collison, co-founders of Stripe, a payments processor to internet companies; Laurene Powell Jobs, a philanthropist and the widow of Apple co-founder Steve Jobs; and Nat Friedman, the former chief executive officer of GitHub.
The project was spearheaded by Jan Sramek, according to people familiar with the group. Sramek, a 36-year-old former trader at Goldman Sachs, had been considered a rising star in the financial world. After leaving Goldman in 2011, he founded two startups before doing advisory work, according to his LinkedIn profile.
The revelation that Flannery’s backers include many well-known American tech titans and the group’s first public comments on how it plans to develop the land it has acquired provide some answers to the residents, local and federal officials, and the region’s congressional delegation. The questions surrounding Flannery’s purchases had fueled concerns of foreign ownership and prompted federal probes, the Journal has reported.
The Air Force has been investigating the identity of Flannery’s backers for months, and Reps. John Garamendi and Mike Thompson, Democrats who represent the area, called for a national-security panel known as the Committee on Foreign Investment in the U.S. to investigate the land deals.
The lawmakers said Friday that Flannery representatives had requested meetings for next week.
People in the area this past week received anonymous text surveys seeking their opinion on the creation of a city with “tens of thousands of new homes,” along with a large solar energy farm, orchards and open space, according to screenshots viewed by the Journal.
Officials have said the survey was most likely commissioned by Flannery. A spokesman for Flannery declined to say if the firm was behind the poll.
Garamendi said in an interview Friday that he still had many questions about Flannery and what its plans would mean for Travis Air Force Base. “There’s just a whole host of questions about their megacity,” he said. “What are you guys doing with Travis? What are your intentions here?”
Most of the land owned by Flannery is currently zoned for agricultural use, and building a housing development there would require voter approval, among other possible hurdles, according to local residents and officials.
On Friday, Sramek updated his LinkedIn page to include his residence as Fairfield, Calif.—the Solano County seat—and with a new profile image illustrating housing construction. He added to his bio: “California forever.”
A representative for Greylock, where Hoffman is a partner, said she couldn’t comment on his personal investments. Moritz didn’t respond to a request for comment. A representative for Andreessen Horowitz declined to comment.
A spokesman for Stripe declined to comment on whether the company’s co-founders had invested in Flannery. Friedman declined to comment. A representative for Jobs didn’t immediately return an inquiry seeking comment. The names of investors were reported earlier by the New York Times.
Flannery sued dozens of landowners in a federal price-fixing lawsuit in May, alleging that they had colluded to drive up real-estate prices. It told the court that it was a wholly owned subsidiary of Flannery Holdings, a limited liability company registered in Delaware. LLCs registered in Delaware don’t have to publicly disclose the identity of their owners. Lawyers for the landowners rejected these allegations in court documents, but didn’t return requests for comment.
“Flannery Associates has developed a very bad reputation in Solano County through their total secrecy and mistreatment of generational family farmers,” Garamendi said in a statement.
Questions surrounding Flannery’s identity raised alarms among some of those who sold land to the group, including the Sacramento Municipal Utility District. SMUD provides power in and around the state capital and sold more than 6,100 acres to Flannery in March.
Flannery paid $45 million for the land and gave an additional $5 million donation to a “sustainable communities” fund that helps low-income residents, according to emails obtained by the Journal under a public-records request.
FTC Pauses Challenge to Amgen’s $27.8 Billion Deal for Horizon Therapeutics
Maneuver suspends agency’s litigation over bid for rare-disease drugmaker and charts a path toward settlement
WASHINGTON—The Federal Trade Commission suspended its challenge of Amgen’s AMGN -0.09%decrease; red down pointing triangle $27.8 billion acquisition of Horizon Therapeutics HZNP 0.31%increase; green up pointing triangle, giving the agency time to weigh a settlement that would allow the deal to close with conditions.
The FTC said in a court filing late Friday that it would pause a challenge it filed in its internal court that alleged the deal violates antitrust law. The FTC’s lawyers have argued that Amgen, one of the world’s largest pharmaceutical companies, could abuse its power to entrench the monopolies of Horizon’s top-selling therapies for thyroid eye disease and gout.
The pause, effective until Sept. 18, allows the FTC’s three commissioners to decide whether the agency should settle the case. Amgen has said its purchase of Horizon would improve the availability of Horizon’s drugs for rare diseases and panned the FTC’s theory opposing it as far-fetched.
Amgen said Friday that it has committed to renounce any future sales tactics that FTC officials believe would be illegal. Amgen said it wouldn’t, for instance, bundle Horizon’s Tepezza and Krystexxa treatments with its own products, which the FTC said could give them a preferred position on insurers’ lists of covered medicines.
“We would be pleased if our commitment were honored instead of going through a lengthy court process,” Amgen said. “That said, we are prepared to demonstrate to the courts that there is no legal or factual reason to prohibit this acquisition of Horizon and to finally bring medicines to more patients suffering from rare diseases.”
A FTC spokesman declined to comment.
If the FTC proceeds to settle the case, it would be a rare instance of the agency throwing in the towel on litigation. The FTC under Chair Lina Khan has been more aggressive about probing deals and then suing to block them. Khan, a merger critic, has said she favors blocking deals outright rather than implementing conditions that allow them to pass legal muster.
But the FTC has stumbled in court several times after filing aggressive merger challenges. It recently lost a federal-court case in which it sought to block Microsoft from buying Activision Blizzard. A judge also rejected its challenge of Meta Platforms’ acquisition of a virtual-reality company.
The internal, or administrative, case the FTC filed against Amgen is part of a two-step legal process often used to thwart mergers. The agency needs time to prosecute the internal case, so it also seeks an injunction in federal court to block the parties from closing while the administrative trial plays out.
The FTC and Amgen are scheduled to argue over the injunction in Chicago federal court next month. If the two sides agree to settle, the injunction hearing won’t be necessary.
Amgen has argued to the federal court that the FTC’s ability to wage merger lawsuits in both administrative and federal court is unconstitutional. The FTC shares antitrust authority with the Justice Department, which can only challenge mergers in federal court.
Screens, Lack of Sun Are Causing an Epidemic of Myopia
Nearsightedness is on the rise worldwide, but there are ways to help children preserve their vision
Kids aren’t spending enough time outside. It’s fueling an epidemic of nearsightedness.
Nearsightedness develops in childhood, typically between ages 5 and 16, and it’s closely linked to a lack of exposure to sunlight. Eye doctors say more kids are developing the condition and at earlier ages. Half the global population is expected to be nearsighted by 2050, up from 30% now, according to the World Health Organization.
Sure, kids choosing screens over outdoor fun is a long-running—potentially overplayed—theme. And as annoying as it is to parents, it’s been hard to quantify the damage. In the case of eyesight, however, the research is clear. Our vision is getting worse because of our relationship with our devices.
While there’s no consensus on how much time kids spend outside, doctors like to cite one stat, from a 2015 University of Michigan study: Kids spent just seven minutes a day in unstructured outdoor play time. If anything, that figure has shrunk in recent years.
Schools and child-care centers still have recess, and many kids play outdoor sports, so they’re likely getting more outdoor time than that. But they aren’t wandering the streets or riding bikes like they did in past decades.
People with myopia, the condition’s formal name, have a hard time seeing things clearly in the distance. It’s referred to as nearsightedness or shortsightedness because people can see things up close more easily. When eyes don’t get enough natural light, they grow longer, say researchers. The longer shape makes it harder to focus, so objects in the distance appear blurry.
“There’s something in the spectrum of visible light that prevents the eyeball from growing too much,” says Dr. Tommy Korn, an ophthalmologist in San Diego.
If myopia is left untreated with glasses or contact lenses, it can eventually lead to cataracts or blindness. Korn and other doctors say myopia diagnoses have accelerated in the past three years as schoolwork shifted online and kids spent more time inside during the pandemic. Myopia progression among children increased by up to 35% during the pandemic, according to one report.
Tech reminders
“Kids are busy with structured activities and when they’re given the opportunity to have free time, they often choose inside activities like electronics,” says Dr. Jennifer Haggar, a clinical associate professor of pediatrics at the University of South Dakota Sanford School of Medicine.
Children spend more than seven hours a day looking at screens, on average, and some studies find teens are online almost constantly.
But tech can be part of the solution. Apple this fall is offering two new features to assist in the prevention of myopia.
With WatchOS 10, which is expected next month, the device’s ambient light sensor will track how much time people are spending in daylight. The feature will be available on Apple Watch Series 6 and later and on Apple Watch SE, which is the model worn most by young kids. That data will show up in the Health app of the iPhone with which the watch is paired.
Apple is also introducing a new feature in iOS 17 and iPadOS 17, also due out next month, for devices that have Face ID. It prompts people to hold their iPhones or iPads farther away if the devices’ sensors detect they’re being held closer than 12 inches for an extended period. Once you get the software update, you can enable the feature by going to Screen Time in Settings and turning on Screen Distance.
Korn says decreasing the amount of time you spend looking closely at books or digital devices can reduce the progression of myopia.
What else you can do
Find small chunks of time. The International Myopia Institute recommends children spend 80 to 120 minutes in daylight every day. This doesn’t have to be all at once, say doctors—15 minutes here and there adds up. Send your kids to the backyard while you prepare dinner, have them walk to school if possible and build in other routine ways for them to catch some rays.
Do any outside activity. The time kids spend outside doesn’t have to involve sports or other strenuous physical activity. Taking a walk or reading a book under a tree is fine. (Just be sure your kids hold their books more than a foot away from their face.)
Don’t worry about the weather. You don’t have to be exposed to direct sunlight to derive benefits. Being in the shade or under clouds is fine.
Make it a family thing. Haggar, the pediatrician, says kids are more likely to spend time outside if their parents do, so do outdoor activities together.
Track it. Tracking goals is thought to lead to more accountability, so keep a log of how much time your kids spend outside. You can use plain old paper if you don’t have a watch or other device.
Ferragamo Taps Tyler Mitchell for Renaissance-Inspired Campaign at the Uffizi Gallery
For visuals promoting the brands forthcoming Fall/Winter 2023 collection, the Italian fashion Ferragamo brought on photographer Tyler Mitchell to capture Renaissance-inspired visuals shot at the Uffizi Gallery in Florence.
Director Maximilian Davis’s second campaign as the house’s newly appointed director features models donning sleek Ferragamo clothes before backdrops printed with Italian paintings from the Uffizi’s collection. In a statement announcing the Uffizi collaboration, Davis said, “The Renaissance is hardwired into Florence.”
Works from the 15th and 16th centuries were among the scenes that appeared in his images for Ferragamo. Models were posed in front of canonical subjects: Italian nobles, biblical figures, and Tuscan landscapes visible in works like Botticelli’s The Annunciation of San Martino alla Scala (1481) and Piero della Francesca’s Diptych of Federico da Montefeltro and Battista Sforza (1467–72). At various points, Mitchell also serves as a model.
Over the past few years, Mitchell has gained a following for his imagery that have centered Black subjects, ranging from the famous to unrecognized. In 2020, Mitchell joined the roster of Jack Shainman Gallery; he was just 25 at the time. Not long beforehand, he’d been the subject of a traveling museum exhibition that opened at the Fotografiemuseum in Amsterdam and traveled to New York at the International Center of Photography in 2019.
Mitchell’s work has collapsed divisions between the worlds of fashion and art. In 2021, Mitchell told Art in America that he leans on his background in filmmaking to inform his art and commercial projects, saying, “I think of myself as basically a director.”
It is slowly coming clear that the fiat dollar’s hegemony is drawing to a close. That’s what the BRICS summit in Johannesburg is all about — rats, if you like, deserting the dollar’s ship. With the dollar’s backing being no more than a precarious faith in it, it is bound to be sold down by foreign holders. Being only fiat, it could even become valueless, threatening to take down the other western alliance fiat currencies as well.
How do you protect your paper wealth from this outcome? Some swear by bitcoin and others by gold.
This article looks at what is likely to emerge as a replacement currency system, and concludes that from practical and legal aspects, bitcoin and the entire cryptocurrency industry will fail with fiat, while mankind will return to gold, as it has always done in the past when state control over currency fails
Introduction
It is gradually dawning on market participants that the era of fiat currencies is drawing to a close. Monetarists, who first warned us of the inflationary consequences of the expansion of money and credit were also the first to warn us that the slowdown in monetary expansion would lead to recession, and since then we have seen broad money statistics flatline, with bank lending beginning to contract. This is interpreted by macroeconomists as the end of inflation, and the return to lower interest rates to stave off recession.
Unfortunately, this black-and-white interpretation of either inflation or recession but never both has been challenged by bond yields around the world which are rising to new highs. And the charts tell us that they are likely to go considerably higher. Consequently, conviction that inflation of producer and consumer prices will prove to be a temporary phenomenon is infected with doubt.
For those of us steeped in free market economics and with experience of the monetary and economic scene in the 1970s, the possibility of both inflation and recession occurring at the same time is less of a surprise. They called it stagflation, though the Keynesians never managed to reconcile the existence of the two conditions being present at the same time. The error, surely, is in Keynes’s denial of Say’s law, which postulates that we produce to consume. The Keynesian error was to ignore the plain fact that rising unemployment is the consequence of falling production first, so there can never be a general glut of goods in a slump which is the basis of Keynesian assumptions.
Consequently, we should concede that a return to stagflation, or worse, is eminently possible. And that rising bond yields from here are also possible, indeed even likely as the charts so clearly indicate. In the coming weeks and months as bond yields continue to rise dragging interest rates up behind them, the debate as to how to hedge this unexpected condition is bound to intensify. In one corner, we have gold, and in the other cryptocurrencies, headed by bitcoin. Both have their vocal enthusiasts.
But enthusiasm is not a sensible basis for an investment or trading strategy. It misleads investors and those seeking to protect their wealth from the debasement of currencies, which is what continuing and rising inflation of prices represents.
Sentiment driven investment tends to overlook important facts. In this article, I compare the relevant facts from very basic legal and monetary standpoints, first for cryptocurrencies represented by bitcoin and then for gold.
Bitcoin as practical money
Bitcoin and crypto currency fans argue that they are the future money. Bitcoin in particular is seen as incorruptible, secured, and self-audited on a blockchain. It is strictly limited to its hard cap of 21 million coins. It is this limitation which has led to estimates of its future value in fiat currency, depending on how much more fiat currency debasement a forecaster expects. And it can be convincingly argued that the fiat currency debasement rate is likely to accelerate further as stagflation returns, leading to ever greater government deficits and escalating increases in government debt. This might be expected to lead to a resurgence in interest in bitcoin, taking it to new highs.
Enthusiasts argue that bitcoin will increasingly replace fiat as the general public begins to realise that fiat currencies are losing purchasing power, which is why the general level of prices is rising. But we must make a distinction between using a currency, crypto or otherwise for day-to-day transactions and as a store of value. In the former case, the possession of currency resulting from the sale of something is temporary, so its changing value in terms of goods over time is of little interest to the seller of goods who receives it in payment. But it does matter to the saver with a longer time horizon.
Saving, or more correctly hoarding in the case of bitcoin, is the issue which we must address. To a saver an increasing purchasing power for currency units in which his savings are denominated is desirable. Therefore, it is likely that savers will hoard their bitcoin instead of letting them circulate because the hard stop on their quantity would be expected to continually increase its value. So powerful is this deflationary tendency likely to be that other than for bare essentials, all commerce, currently depending on credit, would grind to a halt. Taken to its logical conclusion, the world would simply regress to a feudal state with mass poverty.
The solution can only be for holders of bitcoin to lend their bitcoin to borrowers so that commercial activities could take place. This is credit and is the basis of all banking and all economic progress. The need for credit will not go away with the end of fiat currencies, nor will its counterpart, debt. Indeed, the possession of debt obligations is wealth and makes up the majority of it. I shall go into this topic later in this article. But for now, let us consider the difference between bitcoin and bitcoin credit.
In order to produce anything, capital is required. It is a simple fact that production precedes consumption. It can take years for factories to be built, and people with the relevant skills trained and employed. Most if not all of this funding requires credit. It entails a business plan to take all cost factors including the cost of funding into account in order to estimate a project’s viability.
When assembling a business plan, not only does an entrepreneur have to estimate all the input costs and the product’s final sales value, but he has to estimate the cost of repaying borrowed capital. But presumably, a hard stop of 21 million bitcoins will lead to higher bitcoin costs of future capital repayments. Uncertainty as to what bitcoin’s future value would be will likely scupper most projects, even before the difficulty of predicting future demand for goods priced in rising and volatile bitcoin. Bitcoin’s limitations would almost certainly lead to an intensely deflationary outlook, because it is simply not suited as a basis for valuing credit.
In this respect, bitcoin is fundamentally different from gold, the extraction of which in the long term has grown roughly in step with the world’s population. Furthermore, there are substantial reserves of above ground gold in the form of jewellery, which can be reallocated to monetary functions if markets demand its change of use. The flaw in the bitcoin as money argument is gold’s strength: its unsuitability to act as backing for credit, and its total inflexibility of supply.
I am not aware that anyone in the bitcoin camp has properly addressed these issues or is even aware of them. It appears that hodlers do not understand how dependent humanity is on credit. Instead, they tend to dismiss credit as being the problem. Nor is there any understanding of the relationship between money and credit in a functioning, stable economy. The very conditions which are supposed to give bitcoin its value as incorruptible currency are enough to render it entirely unsuited to act in that capacity.
The dismissal of credit is even before we are asked to swallow the fact that it is wholly inappropriate for the vast majority of users who are not tech savvy enough to even understand it. A currency must be simple enough to be understood by its users. The promotion of bitcoin and other cryptocurrencies is the dream of an elite of technological literates and speculators hitching a ride on its concepts.
Then there is the legal position. In the absence of specific legislation passed to give bitcoin or any other cryptocurrency the legal status enjoyed by gold it does not have the legal status required. Hodlers do not appreciate that legally only certain things can act as money.
In order to understand the distinction between what can pass as money and what cannot, we must define the difference between the right of possession and the right of property. If I lend a book to a friend, I allow him to have a right of possession for a period of time, but it still remains my property. The property in the book has not been transferred to him. If I went to his house to collect the book, and he was not at home, I would be free to recover the book if I saw it (though out of politeness I should let him know that I’ve recovered my property). This in Roman law was referred to as a commodatum, which is defined as “a gratuitous loan of movable property to be used and returned by the borrower”.
Money and credit are treated differently, along with consumable items, such as food and drink. When these are loaned, the property in them transfers absolutely, in return for which an obligation by the receiver is created to restore the equivalent of similar quality and quantity. To continue on from the example of the commodatum, if instead of a book I had loaned my friend $100, and going to his home to recover his obligation to me I found he was away but saw his wallet left behind, and I took $100 from it, I would be guilty of theft.
In Roman law, the loan of money, credit, and items to be consumed is a mutuum, which is defined as “a loan of a fungible thing to be restored by a similar thing of the same kind, quality and quantity”.
While in the English language the use of the terms lend and loan are ambiguous, the difference between commodatum and mutuum is still clearly recognised by us all to this day, as the examples of the different treatment of a loaned book and $100 illustrate. The same conditions apply with respect to criminal theft. If a thief steals your car and sells it on to an unsuspecting buyer, it remains your property and you are fully entitled to recover it without compensating the hapless buyer. But if a thief steals your wallet, or empties your bank account, you only have recourse against the thief and your property in the money or credit is lost.
In this legal context, the question arising is in the treatment of fully identifiable bitcoins, whose possession is recorded on a blockchain. Clearly, if someone sells you a bitcoin in return for currency you receive it as entering into your possession. But if the bitcoin had previously been stolen, say from a crypto wallet, it was nobody’s to sell and it almost certainly remains the possession of the person it was stolen from. The point is that while each bitcoin, or fraction of a bitcoin has the same value as another, the blockchain means that each bitcoin or part of it has a specific identity. Therefore, it is not fungible like banknotes or credit, nor is it consumed and so it almost certainly cannot be a mutuum. The precedents in law therefore point to the property in it having not been transferred if in the past it was the proceeds of crime, so it must be regarded as a commodatum.
This is a significant problem for bitcoin, which has become the money laundering medium of choice for criminals and tax evaders. While in Roman times, criminality was more basic, today governments have extended it to include mere suspicion as grounds for property confiscation. Software allows investigators to link bitcoin wallets with real world identities, which are easily available to the authorities from crypto exchanges. Companies such as Chainalysis have been working with the FBI successfully to identify wallets linked with criminal activity. The trail from these wallets clearly leads to those who subsequently bought bitcoin and are under the impression they are now their property.
Therefore, you cannot be sure that the bitcoin you have bought through an exchange will not be seized by the authorities on the grounds that a previous owner acquired it through the proceeds of crime. You cannot be certain you have clear title. On legal grounds alone, without the certainty of ownership bitcoin cannot act as a general medium of exchange.
Why credit matters
In discussing the practicality of bitcoin as money, its unsuitability as a medium from which credit takes its value has been mentioned, and that enthusiasts appear to have overlooked this vital function. Indeed, the creation of bank credit is seen by many in both gold and bitcoin camps as evil and therefore they say that one of the key benefits of bitcoin is it does away with the creators of credit. Those following this line of reasoning fail to understand that all money and obligations to pay are in fact credit, representing the temporary storage of unspent production. Because all of our consumption has its origin in production, the medium of exchange is a matter of intermediation.
There are two distinct forms of this credit, one in which there is no counterparty, and it is only in the form of gold, silver, or copper coined for convenience. It cannot be anything else if we rule out barter. The proper term for coin is money, to distinguish it from promises to pay in money at a future date, which is credit.
As a right to future payment, credit is always matched by an obligation on the part of the debtor. Ultimately, that right and corresponding obligation are to be settled in money — though in practice, today they are novated by way of settlement into other credit. It is not the transfer of money, but nevertheless credit is a form of property. That credit is property and has value in terms of goods and services arises from its transferability. This is apparent in valuations of financial assets, which together with the possession of the property in physical objects make up a person’s wealth.
In any economy which has progressed beyond a feudal state, it is credit which makes up the vast bulk, if not all of the circulating medium. And the more perfected the economic system becomes the less money circulates. It is simply more convenient to use credit, whether it be bank notes, bank deposits, or individual credit agreements, such as exist between families and friends.
Legally, money has a general and permanent value, while credit has a particular and precarious value. The problem we have today is that these distinctions between money and credit are poorly understood. Those who profess to support “sound money” rarely appreciate this vital distinction, routinely stating that sound money is a policy and not a definition. Accordingly, they incorrectly assume that bank notes issued by a central bank is money when it is in fact credit with counterparty risk, whose value in terms of goods and services can become subverted.
This leads us into the topic of how credit is valued. All credit, including bank notes issued by government authority, must take its value from something. But without being a credible substitute for what the Romans originally defined as money the value of credit obligations becomes inherently unstable. Furthermore, abandonment of credit’s attachment to money encourages a government to spend beyond its tax revenues by debasing the currency, and that is what is happening today at an increasing rate. It is not credit, which is the evil, but its detachment from money.
The legal position and history of gold as money
As a medium of exchange, the function of money is to adjust the ratios of goods and services one to another. Thus, the price expressed is always for the goods, money being entirely neutral. It is therefore an error to think of money as having a price. This should be borne in mind in the relationship between legal money whether it be gold or silver, which is habitually given a price nowadays in fiat currencies, and the fiat currencies themselves which, given the status of legal tender, are erroneously assumed to have the status of money. The relationship between money and credit has become stood on its head. The magnitude of this error becomes clear with understanding what legally is money, and what is credit. Again, this understanding starts with Roman law.
Roman law became the basis for legal systems throughout Europe, and by extension those of European settled regions, from North America, Latin America through Spanish and Portuguese influence, the Dutch in the Far East, and the entire British Empire. In common with the Athenians, Rome held that laws were the means whereby individuals would protect themselves from each other and the state. But it was particularly Rome which codified law into a practical and accessible body of reference generally.
The first records of Roman statutes and the case law which followed were the Twelve Tables of 449BC. These became the basis upon which individual jurors subsequently expounded, developed, and evolved their rulings over the next thousand years. The whole legal system was then consolidated into the Emperor Justinian’s Corpus Juris Civilis, otherwise known as the Pandects. When the empire relocated to Constantinople, the Corpus was translated into Greek and eventually reissued in the Basilica, at the time of the Basilian dynasty in the tenth century. It was that version which became the foundation for European law in the Middle Ages, except for England. As an eminent nineteenth century lawyer specialising in banking put it, the reason common law differed in England was that:
“The Romans abandoned Britain at the end of the fifth century and the common law of England on the subject of credit was exactly as it stood in Gaius which was the textbook of Roman law throughout the empire at the time when the Romans gave up Britain. But on the 1st of November 1875, the common law of England relating to credit was superseded by equity which is simply the law of the Pandects of Justinian.”[i]
In all, two thousand years of legal development had elapsed between the Twelve Tables and the reaffirmation of Justinian’s Pandects in Dionysius Gottfried’s version in Geneva of the Corpus Juris Civilis, translated back into Latin in 1583AD from the Greek Basilica.
It is the Digest section of the Corpus which is relevant to our subject. The Digest is an encyclopaedia of over nine thousand references of eminent jurors collected over time. Prominent in these references are those of Ulpian, who died in 228AD and was the juror who did much to cement the legal position and distinction between money and credit. The Digest defined property, contracts, and crimes. Our interest in money and credit is covered by rulings on property and contracts.
The regular deposit contract is defined by Ulpian in a section entitled Deposita vel contra (on depositing and withdrawing). He defined a regular deposit as follows:
“A deposit is something given another for safekeeping. It is so called because a good is posited (or placed). The preposition de intensifies the meaning, which reflects that all obligations corresponding to the custody of the good belongs to that person.”[ii]
Another jurist commonly cited in the Digest, Paul of Alfenus Varus, differentiated between the regular deposit contract defined by Ulpian above and an irregular deposit or mutuum. In this latter case, Paul held that:
“If a person deposits a certain amount of loose money, which he counts and does not hand over sealed or enclosed in something, then the only duty of the person receiving it is to return the same amount.”[iii]
So, a mutuum is taken into the possession of the person receiving it. In return for a right of action in favour of the depositor to be exercised by him at any time, the receiver has a matching duty to return the same amount until which it becomes the receiver’s property to do with as he wishes. This is the legal foundation of modern banking.
Clearly, the precedent in the Digest is that money is always metallic. While anything can be deposited into another’s custody, it is the treatment of fungible goods, particularly money, which is the subject of these legal rulings. It is only through an irregular deposit (or mutuum) that the depositor becomes a creditor. By laying down the difference between a regular and irregular deposit, the distinction is made between what has always been regarded as money from ancient times and a promise to repay the same amount, which we know today as credit and a matching obligation to pay.
There is still one issue to clarify, and that is to do with credit rather than money. As noted above, Justinian’s Pandects were compiled a century after the Romans had abandoned Britain. From what was subsequently unified as England and Wales out of diverse kingdoms, common law differed in that debts were not freely transferable. The transferee of a debt could only sue as attorney for the transferor. This placed debt as property in a different position from other forms of transferable property. Justinian took away this anomaly as a relic of old Roman law (the laws of Gaius, referred to above), allowing the transferee to sue the debtor in his own name. Without this amendment, the status of a particular and precarious debt as an asset would be in doubt.
This anomaly in English law was only regularised when the Court of Chancery merged with common law by Act of Parliament in November 1875. Since then, the status of money and credit in English law has conformed in every respect with Justinian’s Pandects.
While the legal position of money is clear, the economic position is technically different. Jean-Baptiste Say pointed out that money facilitates the division of labour. Technically, money is unspent labour, and is therefore a credit yet to be used. Various other classical economists made the same point. Adam Smith wrote that a guinea might be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighbourhood. Henry Thornton said that money of every kind [including credit] is an order for goods. Bastiat and Mill opined similarly.[iv] The similarity of function between money and credit has undoubtedly led to confusion over the true meaning of terms.
But it is the legal difference which is of overriding importance because it was founded on the principal that there is a clear distinction between metallic money and a duty to pay. Money is permanent while credit is not. Money has no counterparty risk, whereas credit does.
The modern belief that money can be done away with and substituted with banknotes is therefore incorrect. And it is common ignorance of the established relationship between money and credit both in law and in practice which has led to the error of thinking that bitcoin can be the new money for modern times. Accordingly, we must put any such thoughts out of our minds.
The future of cryptocurrencies
It has been easy to point to the benefits of the cryptocurrency revolution. The blockchain concept promises a transformation in the recording of property ownership. And the popularity of bitcoin has alerted a wider public to the debasement of fiat currencies by governments — that surely is a public good. But it appears to have done nothing to enhance anyone’s understanding of money and credit.
The crypto revolution has created a potential evil in the form of central bank digital currencies, originally conceived by central bankers, seemingly ignorant of their own craft as a response to the threat from private sector money to their fiat monopolies. Their ignorance is of the legal position described above: after all, to detach a national fiat currency from legal money requires a denial of the true, legal position on the part of the perpetrator.
Central banks further demonstrated their denial of the laws of money by appointing a committee of the Bank for International Settlements, which coordinates central bank policies, to examine the benefits of a CBDC to a central bank and its government. Pursuing statist interests, the BIS committee’s conclusion is that CBDCs could give governments totalitarian control over economic activity. Nowhere has the legal position established millennia ago been respected, or even mentioned in their deliberations.
The reason the legal position of gold as money has persisted as authoritarian governments have come and gone is that the Romans defined an entirely natural relationship between money, what it is, and credit. Originally, money was and still is determined by people who are its users. And they create credit based upon money’s value. The practice evolved from the creation of credit based on goods that could be bartered. Credit must have been the way the Phoenicians financed their trade long before their city-states took to the convenience of coining metals, thought to be at about the same time as Rome’s Twelve Tables.
While the Romans paid close attention to the practicalities of trade and the natural evolution of payment in gold, silver, copper, or bronze coin and embodied it in their law, the state theory of money has always failed. The introduction of CBDCs is just another state theory of money. And while it promises to further the objectives of authoritarianism, it is bound to fail as well.
The sheer impracticalities involved have already caused the Bank of England in its White Paper to reject the BIS’s central proposition, that a sterling CBDC will bypass the commercial banking system and be totally under a central bank’s control. The reasons for the Bank’s approach are entirely sensible: the bureaucracy involved in setting up a CBDC, with everyone and every business required to open an account at the Bank of England would take years in the planning, testing, and implementation. And in the US, where the large majority of lawmakers depend on contributions from the banks to fund their election expenses, we can be certain that if any CBDC proposition was to be put forward by the Federal administration, it would be heavily watered down so as to not undermine existing banking interests.
The fate of the entire CBDC saga is likely to turn out to be a red herring. And in this article, I hope I have demonstrated convincingly the impossibility that bitcoin or any other cryptocurrency can fulfill the role of a currency. There only remains the question over their future if this role is denied to them.
It is now 52 years since the dollar and all other currencies with it became entirely fiat. While it is beyond the scope of this article to describe the factors involved, there is growing evidence that the current dollar-based fiat currency episode, like all others before it, is coming to an end. That being so, we can expect a new monetary system to replace it. But with bitcoin not suited to the task, we can be sure that the reason for bitcoin’s existence will turn out to have been purely speculative.
Therefore, when fiat dies, we can expect the whole cryptocurrency and the CBDC phenomenon to die with it. Mark it down as a modern Mississippi venture, or South Sea Bubble, both of which owed their existence to speculative excesses financed by credit — just like bitcoin.
The Insider-Trading Case Against Joe Lewis
Wall Streeters are still buzzing and scratching their heads over the indictment of British billionaire Joe Lewis late last month in the Southern District of New York on insider-trading charges; he pleaded not guilty.
Lewis, 86, came on the big stage in the early 1990s, when he made a fortune shorting the pound—the same trade that famously enriched George Soros. Lewis continued to coin money and has controlled English Premier League team Tottenham Hotspur and developed Florida golf communities Isleworth and Lake Nona.
His most eye-catching holding, though—where Lewis liked to hang offshore in his 321-foot superyacht Aviva—is the Bahamas’ Albany Resort, which he owns with Tiger Woods and Justin Timberlake, among others.
That resort was where Sam Bankman-Fried holed up before his arrest, in an apartment near a unit owned by Dan Snyder, the controversial former owner of the Washington Commanders. At Albany, you might bump into Jimmy Fallon at the pool, or baseball player Justin Verlander and his supermodel wife, Kate Upton, at lunch, or pass by the mansion being built by Denise Rich, ex-wife of indicted and pardoned financier Marc Rich, who died in 2013.
Lewis’ alleged insider-trading scheme appears to be as brazen as it was idiotic. The indictment maintains that Lewis tipped off his two pilots and then-girlfriend, a 33-year-old former Miss U.S. Virgin Islands, to nonpublic events in companies, including biotechs Solid Biosciences and Mirati Therapeutics , in which Lewis indirectly held stakes. In one instance, he allegedly lent money to the pilots to make the trades.
Lewis’ lawyer didn’t return phone calls about the case, but did make a statement accusing the government of “an egregious error in judgment."
The whole affair is curious for a number of reasons. To wit: Why would a billionaire, who was said to be a generous sort, engage in this risky form of gift giving? (Lewis isn’t accused of trading himself.) Also, what precipitated the investigation? In other words, who or what tipped off the feds to trades in six figures?
Some on Wall Street have speculated that Lewis’ indictment was somehow connected to Sam Bankman-Fried, who faces multiple charges after the collapse of his crypto exchange FTX. After all, both cases have Albany in common; both are being prosecuted by Damian Williams, the U.S. attorney for the Southern District; and the court hit both with megabond amounts for release, $250 million for SBF, $300 million for Lewis. Is this a coincidence? Or did SBF or one of his associates flip on Lewis?
Calls to the U.S. attorney’s office were not returned. But after some digging, it appears that a connection between the cases is unlikely.
People familiar with the investigation tell me the government first contacted Lewis’ pilots in May of 2021, at which point SBF was still a golden child to most of the world—a good 18 months before his house of cards collapsed last fall.
It’s tough to prove a negative. During an initial conference in federal court in Manhattan on Aug. 8, Assistant U.S. Attorney Jason Richman told the court that “discovery is an extremely large volume of material….We think there will be over 20 terabytes of data in total, millions of pages of documents. The material includes five electronic devices, 14 email accounts, 11 iCloud accounts…”
As such, the court allowed that Richman et al. would have until November to complete discovery—unless they needed more time after that. As for a trial, that might not happen until early 2025—when Lewis would be pushing 90. Sure, Lewis could cop a plea. But the government might also insist on sending the soon-to-be-nonagenarian to the pokey, if he’s convicted.
None of this should be surprising. As the young son of a Wall Street notable said to me on a trip there, “The Bahamas is a sunny place for shady people.” I was struck by the lad’s astute adaptation of the Somerset Maugham assertion—used originally to describe Monaco, another oasis of yachts, celebrities, and dreams of riches.
Tesla Is More Than Just a Car Company, for This Bullish Analyst.
Tesla TSLA +3.72% Bulls and Bears might want to look at Tesla as more than just a car company or risk missing out on a valuation trend.
Wedbush analyst Dan Ives looked at Tesla (ticker: TSLA) on a sum-of-the-parts, or SOTP, basis Friday. SOTP valuation tries to look at, and value, the separate businesses within a company to see if there is a big difference between business valuations and where the stock is currently trading.
Recently, Wall Street has gone through a similar exercise with General Electric (GE), 3M (MMM), and Alibaba (BABA). Those companies are either spinning out assets or have announced plans to shake things up.
Tesla isn’t breaking apart, but things are happening. Tesla has signed deals with several automakers opening up its supercharging network to non-Tesla EVs. That forced investors, and the Street, to value the company’s EV charging network.
Along with the charging business, Ives sees separate AI, battery, and energy businesses inside Tesla, along, of course, with its car business.
Tesla uses AI to train its self-driving features. Elon Musk hopes his self-driving software will get good enough to turn all existing Tesla vehicles into self-driving robotaxis with, essentially, the flip of a switch. Musk also hinted that Tesla could license its self-driving software to other automakers, at the second-quarter conference call
Tesla also sells battery storage products to consumers and utilities. That business grew more than 220% year over year in the second quarter of 2023. Tesla also makes some of its own batteries. There is good money in batteries. The world’s largest battery maker Contemporary Amperex Technology Co Ltd (300750.China), which is better known as CATL, has a market capitalization of about 1 trillion Chinese Yuan, or about $137 billion.
“Musk & Co. have developed a diverse portfolio of products,” wrote Ives. Tesla’s battery production represents lower costs for the auto business, he says, adding Tesla’s self-driving software products have logged more than 150 million miles of driving. AI is helping those systems get better faster. “Tesla’s implementation of AI within its continuous rollout of new [self-driving] software updates provides an opportunity to expand its [addressable market] with full autonomy becoming an increasing focus.”
It’s a bullish outlook and SOTP valuations can come into and out of favor based on what’s going on at a company. What’s more, Tesla still makes, essentially, all of its money and free cash flow from selling cars.
Ives is a Tesla bull though, rating shares Buy. His price target is $350 a share, one of the highest on Wall Street. That worked out to about 73 times his 2024 earnings estimate of $4.80 a share.
Overall, 39% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target is about $254 a share. That price works out to about 53 times the consensus 2024 estimate of $4.78 a share.
Tesla stock is up 0.1% in premarket trading at $230.39 a share, while S&P 500SPX +0.67% and Nasdaq CompositeCOMP +0.94% futures are up 0.3% and 0.1%, respectively.
Coming into Friday trading, Tesla stock is off about 14% so far in August. A combination of price cuts by Tesla and its competitors in China as well as the market sell-off have weighed on investor sentiment.
The authorities classified (https://rtvi.com/news/vlasti-zasekretili-vladelczev-krupnejshego-aktiva-prigozhina/) the owners of the largest asset of Prigozhin, drew the attention of RTVI
According to the publication, the sole founder of Europolis was CJSC Neva - Valery Chekalov acted as its head and co-owner. He was a member of the council of commanders and was responsible for logistics at Wagner PMC. His name was among the passengers of the crashed plane of Yevgeny Prigozhin.
Who can now take possession of Prigozhin's oil asset is unknown. RTVI drew attention to the fact that for some time now the structure of the Europolis co-owners has been hidden in accordance with the law “On State Registration of Legal Entities and Individual Entrepreneurs”.
Article 6 of the law states that the list of cases in which it is possible to conceal information about co-owners is established by the government.
There are only two such grounds in the relevant decision:
1. "The legal entity is a credit institution classified as an authorized bank in accordance with the Federal Law "On the State Defense Order""
2. "The legal entity is located in the territories of the Donetsk People's Republic, the Republic of Crimea, the Lugansk People's Republic, the Zaporozhye region, the Kherson region or the territory of the city of Sevastopol"
Based on the information available in the SPARK database, Europolis does not fit any of these requirements