The Capital Note: Commodities, Cars & Climate

Welcome to the Capital Note, a newsletter about finance and economics. On the menu today: the unraveling of LVMH’s Tiffany acquisition, the tech selloff, and the economics of the Olympics.

Jewelry packaging from Tiffany & Co.

© Mike Blake/Reuters
Jewelry packaging from Tiffany & Co.


Earlier this week, we wrote about General Motors’ $2 billion investment in electric-truck maker Nikola. Shares of the company, which went public in June through a special-purpose acquisition company (SPAC), gained 50 percent on the news.

Enter Hindenburg Research, a forensic-accounting firm, which released a report this morning calling Nikola “an intricate fraud built on dozens of lies over the course of its” founder’s career. The stock has pared nearly all its gains from earlier this week.

The report claims, among other things, that Nikola never developed the proprietary battery technology at the heart of its business:

In October 2019, Nikola announced it would revolutionize the battery industry. This was to be done through a pending acquisition, but the deal fell through when Nikola realized (a) the technology was vaporware and (b) the President of the battery company had been indicted months earlier over allegations that he conned NASA by using his expense account to procure numerous prostitutes.

Nikola has never walked back claims relating to its battery technology. Instead, Trevor continued to publicly hype the technology even after becoming aware of the above issues. The revolutionary battery technology never existed – now, Nikola plans to use GM’s battery technology instead.

Hindenburg also alleges that Nikola faked a demonstration video for its signature semi-truck.


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Two interesting aspects of these allegations:

  1. If it’s true that Nikola’s whole business model was based on acquiring a battery company, then Nikola is effectively a SPAC. And since it was taken public by another blank-check company, VectoIQ Acquisition, it’s a SPAC within a SPAC. Christopher Nolan should make a movie about it.
  2. Nikola’s partnership with GM makes the allegations less troubling for investors. Founder Trevor Nilton may have exaggerated the extent of the company’s proprietary technology (Hinderburg claims they have none at all), but now that it’s using GM’s batteries and fuel cells, Nikola can sell trucks without its own tech. On the other hand, manufacturing truck frames isn’t the most profitable business.

— D.T.

Commodities & Climate

Whatever the disagreements over climate change, there ought, at least in a democracy, to be some consensus that the decisions on the broad approach towards it be made by elected governments, not selected committees, unaccountable regulators, central banks, “socially responsible” investors, NGOs or, even, citizens’ assemblies.

Unfortunately, as this story reminds us, that consensus does not exist.

The Financial Times:

Climate change threatens not only fires, drought and surging seas but profound risks to the financial system, a federal advisory panel has warned in a first-of-its-kind report from a Wall Street regulator.

The finding was published on Wednesday by a special climate subcommittee to the Commodity Futures Trading Commission, which has oversight for the US futures and swaps markets. The body reached outside its turf to recommend changes in corporate disclosure, investments and central bank asset purchases, the domain of other federal agencies.

The words to note in that extract are that the body “reached outside its turf.” As so often when it comes to responding to climate change (FWIW, I am a ‘lukewarmer’), the ordinary rules do not seem to apply.

To be fair, this was only the work of a “special climate subcommittee” (that the CFTC even has such a thing is…of interest) and:

The views laid out in a 165-page report of the subcommittee were not necessarily in line with the thinking of the entire commission, the report noted. While all of the climate advisory committee’s 34 members voted to release the report, some remained neutral on certain recommendations.

But who is on this subcommittee?

Members included delegates of banks such as Citigroup and JPMorgan Chase, fund managers such as Allianz Global Investors and Vanguard, commodities and energy companies such as Cargill and ConocoPhillips, and environmental organisations.

“Environmental organizations.” On a CFTC subcommittee. Oh.

Dig a little deeper and you’ll find that members include someone from a Bloomberg research group (designed to help “you gain a clear perspective on the financial, economic, and policy implications of industry-transforming trends and technologies to drive to a cleaner, more competitive future”), the director of Oxford University’s Sustainable Finance Program, Bunge’s Senior Vice President, Sustainability and Government Affairs, an investment advisor focused exclusively on “investments in low-carbon and sustainable real assets—clean energy, efficient transportation, green real estate, and sustainable natural resources”, the director of Purdue’s Climate Change Research Center, BNP Paribas’ Chief Sustainability Officer, Citigroup’s Global Head of Environmental and Social Risk Management, JP Morgan Chase’s Executive Director, Climate Risk Executive, Global Environment and Social Risk Management, the Environmental Defense Fund’s Senior Vice President for Climate, and so it goes on.

If anyone had any doubts about the flourishing ecosystem created by the fusion of climate change, “socially responsible” investing and “stakeholder capitalism”, this little list ought to help clear things up.

The subcommittee agreed with most economists that putting a price on carbon would be the most efficient way to curtail greenhouse gases, while acknowledging that this must be done by lawmakers, not regulators.

That’s a welcome nod to democracy, but:

“The central message of this report is that US financial regulators must recognise that climate change poses serious emerging risks to the US financial system, and they should move urgently and decisively to measure, understand, and address these risks,” the committee said.


The subcommittee’s recommendations are not binding. However, Nathaniel Keohane, senior vice-president for climate at the Environmental Defense Fund who served on the subcommittee, said the findings of the report could be central to discussions over the appointment of new commissioners at the CFTC and SEC, who must be confirmed by the US Senate.


The FT noted disapprovingly that the CFTC Chairman, a Republican, who had joined the commission after it authorized the climate committee last July, “sounded a hesitant note”:

“The subcommittee’s report acknowledges that ‘transition risks’ of a green economy could be just as disruptive to our financial system as the possible physical manifestations of climate change, and that moving too fast too soon could be just as disorderly as doing too little too late…”

Well, yes.

Even allowing for the eccentricities of Climateworld, I was a little surprised to read this from someone with Wall Street experience:

“Financial markets today are not pricing climate risk. The financial markets cannot do that on their own. Until this fundamental flaw is fixed, capital will flow in the wrong direction,” wrote Bob Litterman, a former Goldman Sachs executive who chaired the subcommittee.

Somehow, I don’t think that Friedrich Hayek would have agreed that this “fundamental flaw” needs “fixing” by, in effect, central planners:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

 — A.S.

Around the Web

The Elusive V (continued)

U.S. unemployment claims held steady at 884,000 last week, the Labor Department reported Thursday, a sign the labor-market recovery is losing steam six months after the coronavirus pandemic struck the U.S.

Claims have fallen from a March peak of about seven million but remain at historically high levels—above the pre-pandemic record of 695,000.

The total number of workers receiving assistance from state and federal programs also remained high in late August, as more workers turned to pandemic-related programs for assistance. The total of about 29.6 million people, which isn’t seasonally adjusted and lags two weeks behind new state claims figures, includes temporary federal pandemic-related programs for self-employed and gig workers in addition to those receiving regular state benefits.

One of the arguments for the removal of the SALT deduction was that it would force high tax red states to change their ways. The argument was never credible owing to the mismatch between the reliance of some of the worst red state offenders on a relatively small number of taxpayers and the need for their politicians to win over a relatively large number of voters.

And so, now that it is being put to the test, that feeble argument is, predictably, proving feeble.  We have already discussed California’s plans to increase taxes on the wealthy, so let’s move over to Illinois:

Billionaire hedge funder Ken Griffin is going head-to-head with the billionaire governor of Illinois over a plan to increase taxes on the wealthy…

The measure would repeal the state’s constitutional requirement for a flat income tax, meaning all taxpayers pay the same state income-tax rate, currently at 4.95%. Repealing the requirement would allow for a graduated income tax, imposing higher rates on the highest earners. Pritzker, a Democrat, and the legislature, which has Democratic majorities in both houses, have proposed a series of higher tax rates on those making more than $250,000 — or roughly the top 3% of earners in Illinois. The rates rise to 7.99% for joint filers making more than $1 million a year.

Pritzker and other supporters say the tax hike would only affect the wealthy, while those making less than $250,000 would get a tax cut. They say the additional revenue, which they project at about $3 billion a year, is needed to prevent widespread cuts in jobs and services given the state’s budget shortfall of more than $6 billion, which is partly the result of the coronavirus pandemic.

Yet Griffin and other opponents say the tax hike will eventually hit all Illinois taxpayers without solving the state’s deeper problems of overspending, waste and corruption. In a statement to CNBC, he said Illinois residents have been leaving the state for the past decade because of tax hikes and spending.

My predictions: (1) the measure will pass, (2) more people will leave.

Rising food prices:

It’s a sign of the times. In China, teachers are gobbling up the leftovers from their students’ lunch plates, on the spot. Their diligent economising follows an exhortation by President Xi Jinping that the nation needs to reduce food waste, in part to increase Chinese food self-sufficiency.

There are several specific reasons why China is worried about food scarcity: floods and droughts, growing tensions with food exporters such as the US and Australia, and the mass culling of millions of pigs from last year’s outbreak of swine flu, have all taken their toll. In July, Chinese food prices rose by 13 per cent year on year.

But it’s not just China where food is a growing concern. Similar worries are playing out globally. In rich and poor countries alike, food shortages are a window on to the challenges of the post-pandemic global economy and the consequences of supply chain disruption and lockdowns.

And while on this topic, it’s probably worth taking another look at one of Joseph Sullivan’s chart pieces for Capital Matters. Specifically, this one from early June:

Food prices were a cause for concern even before 2020’s COVID-19 supply-chain disruptions. By December 2019, world food prices had already climbed to a five-year high. This appears to be due to a combination of long-term trends, such as growth in demand for certain agricultural products, and acute afflictions, including a 2019 swine flu that wiped out much would-be pork.

Food prices seem not to have lost their potential to cause political trouble in the 21st century. As the chart above shows, in the new millennium’s two previous episodes of surging food prices, one amid the 2007–08 financial crisis and another around early 2011, accelerating food prices triggered or contributed to unrest. “Pasta protests” appeared in Italy in September 2007, and discontent in Egypt shuttered Cairo’s once-bustling streets by April 2008. The second surge coincided with the onset of the Arab Spring, with consequences that still burn today.

Random Walk

Say you’re buying a car. One dealer offers to sell it for $9,900, while another offers $10,000. Easy choice, right? Not quite.

A working paper from the University of Southern California finds that buyers who purchase durable goods such as cars and homes for prices below round numbers (e.g. $10,000) end up losing an inordinate amount of resale value. In other words, a subsequent buyer will pay more for your car if the price you paid for it exceeds a certain threshold. That’s a result of a cognitive bias called the anchoring effect, which describes how an initial reference point (in this case the purchase price) affects negotiations.

People often strive to negotiate low prices for durable goods such a vehicles, homes, and appliances. In this quest they are influenced by psychologically salient reference points such as round number prices (e.g., $10,000). Although round numbers may generate very different purchasing behavior between nearly identical prices (e.g., $9,999 vs $10,000), existing theory does not capture how these price thresholds affect decision making in future negotiations. In this paper we provide a new implication of round-number prices based in the anchoring and adjustment bias – people paying a price just below a round number may sacrifice money because they receive disproportionately lower prices when subsequently reselling the good.

— D.T.

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