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Crackdown on Ant Group will be echoed elsewhere

Jack Ma’s disappearance tells us a lot about the nature of China’s brand of capitalism. It also speaks to just how political a weapon currency is, the world over.

Soon after the reappearance of Jack Ma last week, the FT’s China team had a story detailing how the country’s central bank was about to clamp down on Ant Group, the payments and technology arm of his business empire:

That this is the area of Ma’s empire that Beijing is now targeting does not surprise us in the slightest. Alipay has revolutionised the way China buys and sells things, enabling people to make instant payments using their mobile phones. The company says it has 1.3bn active users, most of whom are in China, and accounts for more than half of all mobile payments there. Indeed, we’d long suspected that the threat to the PBoC’s monetary authority presented by Alipay and other mobile payments operators was what had led the central bank to start work on creating its own digital currency.

In both the private and official sector, China has a solid claim to being a world leader. So much so that there is, as Izzy has pointed out, some concern outside of the country that the PBoC is so far advanced in its efforts that the digital yuan could become the de facto official digital reserve currency globally. And why would this surprise anyone? Would China’s central bank really miss an opportunity to not only retain control of currency production and distribution, but to create a mass ledger that could record the history of every single digital yuan that ever came into existence?

Beijing is far from alone in its ambitions.

The supreme power of the world’s central banks is to hold the monopoly power to issue currency as they see fit. We’re not talking about all money here — the bulk of which is made by private sector lenders via fractional reserve banking — but cold hard cash and electronic reserves. They also control distribution, usually through public-private payments systems, set up with the major banks who fall under their jurisdiction. This monopoly is increasingly at risk from digitalisation.

Payments have been becoming more digital around the world for decades now — this is an old story. But the pace at which people have ditched cash has quickened during the pandemic. Even in Germany, where they absolutely can’t get enough of the stuff, the Bundesbank thinks only 60 per cent of all purchases were paid for in cash in 2020, compared with 74 per cent three years ago. The European Central Bank also reported last week that the amount of euro banknote counterfeits recovered had fallen by a record amount last year, which we think owes much more to payments trends than anything the central bank has done to improve the notes’ security features. The trend might reverse, but it might not. As time passes, more people will buy things with Alipay or other mobile payments, and the more Ant Group build trust. It still makes transactions denominated in yuan now, but if it were to grow bigger and better, would Ma at some point not want to invent his own currency? He strikes us as the sort of guy who would like to see his face emblazoned on the back of a banknote (a digital one of course).

Private currencies have always existed. But the capacity of tech companies to supersede the public-private operation we have now in enabling speedier and cheaper payments is a growing threat. That’s for three reasons: the mass adoption of mobile phones, the proliferation of social media and apps, and officials’ neglect of the existing infrastructure — particularly that for cross-border payments.

We have written in the past that it has only been since the advent of Facebook’s Libra (now called Diem, and still not launched) that European financial officialdom has truly awoken to the dangers of tech companies snatching away its currency monopoly. That there are all sorts of flaws with Libra didn’t really matter — that’s not what we’re concerned with here. What we are concerned with is that, as Benoît Cœuré, who is always worth listening to on this topic, highlighted in his ECB farewell in 2019, the response to Libra was driven by politics:

European officials, like their Chinese counterparts, have attempted to snatch back control over the payments infrastructure, both by improving existing payments systems and proposing CBDCs (without, it must be said, much clarity about what problem an official digital currency would actually solve). Christine Lagarde might have struggled to get up to speed on monetary policy, but her political acumen has meant that she has been fast to recognise the importance of a digital euro to the ECB’s status. She has quickly stolen the limelight back from the likes of Bruno Le Maire, France’s finance minister, who at one point seemed to be leading the anti-Libra charge.

There are differences between Europe’s and China’s approach — Mark Zuckerberg has not disappeared from public view for months on end; the EU does have a more benevolent attitude towards its citizens’ right to privacy than Beijing.

Yet it has taken the tech industry’s inroads to awaken both sides to just how political the creation and proliferation of currency is. Both now realise that the issue is, as Cœuré put it recently, about “a balance of power between governments and big tech” in who controls currency. There are many unknowns in how these tensions will play out, but we’re pretty sure Ant Group will not be the last of its kind to face the wrath of the state.

Sotheby’s sale breaks artist’s record, could buoy struggling art market

Sotheby’s sold Sandro Botticelli’s circa-1480 portrait of a “Young Man Holding a Roundel” for $92.2 million to a Russian-speaking collector during a live-streamed online sale Thursday, breaking the Italian Renaissance artist’s sales record and reaffirming a global appetite for trophy art following a tough year in the art market.

The portrait was estimated to sell for around $80 million, but a pair of anonymous telephone bidders vied for the work, with an Asian bidder losing quickly to a Russian-speaking bidder. The competition lacked the typical sizzle of a blockbuster sale moment, though.

Still, the work easily surpassed the artist’s previous record of $10.4 million when in 2013 Christie’s sold his “Madonna and Child with Young Saint John the Baptist,” also known as the Rockefeller Madonna because of its ties to the banking family.

The portrait also marked the year’s first major test of the art market and may go some way toward shoring up collector confidence in blue-chip masterworks—after collectors largely retrenched to lower-priced art amid the pandemic. Christie’s didn’t auction off a single work of art for over $80 million last year; Sotheby’s sold one work, a Francis Bacon, for $85 million. Overall, Sotheby’s sales fell 12% to $5 billion last year.

It may have helped that the Botticelli was being sold by the estate of New York real-estate developer Sheldon Solow, who spent decades amassing an enviable collection of Egyptian antiquities as well as art by Pablo Picasso, Alberto Giacometti and Vincent Van Gogh. Mr. Solow, who died last November, paid $1.2 million for the Botticelli in 1982.

Botticelli’s portrait depicts an unknown young man holding a small, round 14th-century panel painting of a saint. The auburn-haired man’s fingers appear to grip the round inset beyond the painting’s framework, a trompe l’oeil virtuosity—or an optical illusion of depth—admired by fellow Florentine painters of his day, including Leonardo da Vinci. Its bold, simple composition also likely appealed to a broader set of modern and contemporary art lovers who don’t typically buy old masters, said Evan Beard, managing director of Bank of America Private Bank.

“It doesn’t feel old and fussy,” Mr. Beard said. “It feels clean.”

Even before Mr. Solow’s example came to market, Botticelli’s prices appeared to be enjoying another comeback. His rarer portraits tend to outsell his religious scenes, but last month Sotheby’s sold a Botticelli featuring “Christ on the Cross adored by Saints Monica, Augustine, Mary Magdalen, Jerome and Bridget of Sweden” for $1.4 million. The same painting sold in 2003 for $284,500.

Botticelli, the son of a tanner, was born Alessandro di Mariano di Vanni Filipepi in Florence in 1445. Botticelli was a nickname meaning “little wine cask.” He is best known for his elegant, mythological scenes like the “The Birth of Venus” and “Spring,” both in the Uffizi Gallery, but he also painted wall panels on the Sistine Chapel in Rome, made more famous by Michelangelo’s later work on the ceiling. While held in high esteem for much of his life, his works fell out of fashion after his death in 1510 until Pre-Raphaelite artists like Dante Gabriel Rossetti in the mid-19th century started claiming him as a major influence.

Wall Street Hedge Funds Stung by Market Turmoil

The pain that has afflicted Melvin Capital Management and Maplelane in recent days is spreading

More hedge funds are being hit by losses on the recent market turmoil.

Traders say the pain that has afflicted top hedge funds Melvin Capital Management and Maplelane Capital in recent days is spreading, as an increasing number of stocks with significant short interest surge and as funds dealing with losses pull back their exposure to the stock market on both the long and short sides of their portfolios.

That means funds are getting hurt even on previously profitable bets on companies as other funds exit their investments in the same firms. The pain is largely being caused by the broad market turmoil and not one specific stock.

Candlestick Capital Management, a roughly $3 billion Greenwich, Conn., hedge fund started by former Citadel portfolio manager Jack Woodruff, was down in the low- to midteens for the year through Wednesday, said a person familiar with the fund. It was up 26% in 2020, its first year.

D1 Capital Partners, a top-performing fund in recent years founded by former Viking Global investment chief Dan Sundheim, was down about 20% for the year through Wednesday. Its substantial portfolio of investments in private companies has buffered the fund from a bigger loss. D1 managed $20 billion at the start of the year.

Steven A. Cohen’s Point72 Asset Management, which together with Citadel and its partners injected $2.5 billion in emergency financing into Melvin Monday, was down about 10% for the year through earlier this week and suffered losses Tuesday and Wednesday, said people familiar with the matter.

Bloomberg News was first to report the performances of D1 Capital and Point72.

Some funds that have sustained severe losses are seeking influxes of cash to help stabilize their firms.

Maplelane, which started the year with about $3.5 billion and was down roughly 30% for the year through Tuesday, sustained additional losses that saw it down about 45% for the year through Wednesday, said people familiar with the fund. One of the people said the losses Wednesday stemmed from degrossing, or cutting back its exposure to the stock market. That included reducing position sizes and exiting names to limit losses.

Maplelane is a low-profile hedge fund started by former Galleon Group trader Leon Shaulov that has rarely marketed to investors in the past. But it has discussed raising between $300 million and $500 million with potential clients, said people familiar with the fund.

The losses have come during a period of frenetic trading, with shares of companies touted by retail investors such as GameStop Corp. and AMC Entertainment Holdings Inc. shooting wildly higher. Individual investors on forums like Reddit and Discord have claimed victory for the violent moves, which are unmoored from the underlying fundamentals of companies and which have caught the attention of the White House and regulators.

A social-media stock bubble is a new version of an old phenomenon.

The GameStop stock mania has captivated market speculators, spectators, politicians and even morning TV. It’s certainly high financial drama to see armies of retail investors on Reddit hunting the so-called wolves of Wall Street. This may be a new example of the power of social media, but it isn’t a crisis of capitalism or the stock market.

There are two broad theories of how equity markets work. One is to focus on fundamentals like the growth path of the U.S. economy and the prospects and earnings of companies. You buy and hold a stock, or you invest in a fund that tracks an index like the S&P 500 or Russell 2000. This is what most people do.

Yet we market fundamentalists have to admit that more than a few people have become very rich betting on the famous phrase “popular delusions and the madness of crowds.” Stock manias are common—and wonderful until they become panics. This is where we seem to be this week as investors used online brokerage platforms like Robinhood Markets to bid up shares in companies hyped on social media that may or may not deserve their soaring market capitalization.

The drama was heightened as the Reddit pack pumped up stocks like GameStop and the movie-theater company AMC that were shorted by hedge funds. Most are hoping to make a quick buck by riding the roller-coaster up and selling before shares crash, though some also want to squeeze the hedgies.

Short sellers have to deliver real shares when their short contracts expire, which means buying shares and raising the price even more. The losses can be high. Some in the Reddit pack triumphed this week when Citadel LLC and Point72 Asset Management had to rescue Melvin Capital Management from its short bet against GameStop. Hedge funds are sophisticated investors and know the risks.

As for the Reddit investors, many may soon learn Herbert Stein’s Law that if something can’t continue, it won’t. If GameStop’s future earnings don’t warrant a valuation of $28 billion, which it reached this week, it will eventually fall back down to earth.

That process has already begun as Robinhood and other online trading platforms first raised margin requirements for investors and then put restrictions on buying shares like GameStop and AMC. GameStop shares fell 44% Thursday. Many Robinhood customers are angry, and so are politicians who want to speak up for small investors.

New York Rep. Alexandria Ocasio-Cortez and Texas Sen. Ted Cruz lambasted Robinhood’s restrictions. “Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” AOC tweeted. “Tax the Rich.” Naturally.

Politicians are calling on financial regulators to investigate the GameStop rally. But investor platforms and brokerage firms have every right to police their own sites with borrowing limits or other rules to protect customers. Robinhood hopes to go public this year and doesn’t need an investor bloodbath.

The focus of regulators should be fraud or those who might be coordinating a pump-and-dump scheme. It’s possible someone nefarious is driving the mania in one or more stocks. But the Occam’s razor explanation is the madness of crowds rather than market manipulation.

The government body that should come in for more introspection is the Federal Reserve. The central bank may be feeding the asset frenzy as it holds interest rates near zero and crushes the long bond yield curve so it doesn’t send accurate price signals. As investors search for yield, they have moved into commodities, real estate, junk bonds, foreign currencies—and stocks.

We don’t profess to know if stock prices are overvalued, and perhaps investors are right that Tesla deserves its price-earnings ratio of 1,600 based on future sales of its electric cars. But in the Federal Reserve’s current world of negative real interest rates, there is also plenty of speculative money chasing higher returns.

Many young people can’t go to Las Vegas or even a bar, so they are playing roulette on Robinhood. Asked about the craze, White House press secretary Jen Psaki said Wednesday that Treasury Secretary Janet Yellen was “monitoring the situation” and “it’s a good reminder, though, that the stock market isn’t the only measure of the health of our economy.”

How about reminding people that investments carry risk, that stocks fall and rise, and that the GameStop losers won’t be bailed out?