Interest Rates and Inflation

The Fed is trying to fight inflation and to reduce it by raising interest rates (I’m omitting the Progressive-Democratic Party-controlled Congress’ and White House’s countervailing profligate spending that fuels inflation). There are growing questions regarding how fast the Fed should raise rates after its last few .75% rate increases. As The Wall Street Journal noted, that debate tends to obscure a related and more important argument over how high rates need to go in the end in order to halt the current inflation (and reduce inflation to a more manageable and historically targeted rate of 2%).

Some officials have argued for slowing the pace of rate rises after this week’s meeting. But the debate over the speed of increases could obscure a more important one around how high rates ultimately rise.

But the discussion as a whole misses another factor impacting market interest rates: the private—nonbank—market in lending. These entities are private individuals or private companies outside the traditional financial industry—banks, investment banks, credit unions—who extend loans (in the context of this post) to companies. These private lenders mostly lend into the housing industry (which is falling on interest rate-driven hard times), but in today’s environment they’re branching out.

The question of private lending matters here because in order to make the loans—and so to make money—the private lender must offer terms more favorable to the borrower than the banks offer (keeping in mind that what banks can offer is heavily influenced by the Fed). The private lender’s terms can center on a variety of parameters—loan period, collateral required, and so on, as can the bank’s—but the primary parameter is the interest rate demanded. That private lender rate must be lower than the bank’s rate, or the borrower will stay with the bank.

The private lenders’ lower rates mitigate the Fed’s efforts to fight inflation with rising interest rates. There are two aspects to this conflict. One is that rising interest rates are intrinsically inflationary—they drive up the cost of money and so of prices. Private lender competition through interest rates would seem to be counter-inflationary. However, the inflationary impact of rising rates takes time to develop, while the counter-inflationary impact of rising rates is relatively immediate: that immediate increase in the cost of money reduces producers’ nearby demand for goods and services, which reduces cost for producers’ goods and services, and that percolates through to reduced consumer prices—the inflation consumers face—relatively quickly.

The other aspect is how large a role private lending plays in the loan/borrower market, and so how much conflict there really is between the Feds’ need to raise rates to kill excessive inflation and the private lenders’ playing into this new market niche of bank vs private lending with lower rates. That’s unknown, so far; the expansion of private lending is a new, investment technology- and communications technology-driven phenomenon.

And this whole discussion, including mine, doesn’t account for venture capital investing, including SPAC investing, which is glorified lending: these entities invest in small (usually) companies. Usually, the investments are with a view to the company growing and with that value increment, the venture capitalists and the subgroup that is SPACs get their investment back.

But often, those investments are loans, or have serious loan components, with the company as collateral: the investors get the company if the loan isn’t repaid, or by design of the loan component, the repayment is the company. Such venture capital “lending” dilutes the lending market as a whole, and so tends to weaken the impact of Fed actions to the extent that dilution grows.

What the Ratings Mean

Viewpoint Diversity Score is a relatively new organization; it’s a project of Alliance Defending Freedom. VDS’ goal:

Through our Business Index and Resources we’re providing a roadmap for businesses to meaningfully respect customers, and other external stakeholders who hold diverse religious and ideological beliefs, foster viewpoint diversity in their workplaces, and reflect a commitment to the underlying principles of American democracy through their giving and political engagement.

This isn’t, though, a crowd pushing diversity, equity, and inclusion claptrap; it’s much more serious than that. They’re not demanding that everyone comport themselves in accordance with VDS’ viewpoints or be cancelled. Instead,

The Business Index evaluates corporate policies, practices, and activities to determine whether companies respect their stakeholders’ freedom of expression and freedom of religion or belief as a standard part of doing business.

And from their Business Index report,

Viewpoint Diversity Score’s annual Business Index is the first comprehensive benchmark designed to measure corporate respect for religious and ideological diversity in the market, workplace, and public square. True diversity requires protecting freedom of expression and belief for employees, customers, shareholders, and other stakeholders.

VDS’ Business Index surveys companies, and based on their answers along with outside, publicly available information regarding what the surveyed companies actually do, the Business Index awards a Market Score, a Workplace Score, a Public Square Score, and a composite of the three. Each score and the composite could range from 0% (a terrible score) to 100% (and outstanding score).

Market-related questions for the survey include things like

  • Terms of Use/Service Avoid Unclear or Imprecise Terms
  • Harmful Conduct Policies Apply Equally
  • Terms of Use/Service Avoid Viewpoint Discrimination
  • Public Anti-Viewpoint Discrimination Policy
  • Notice of Content or Service Restrictions
  • CSR/ESG Reporting Includes Freedom of Expression and Belief

under Respecting Customers’ Freedom of Expression and Belief. There were similarly probing questions under Respecting Venders’ Freedom of Expression and Belief and Transparent Screening and Enforcement Practices.

Workplace-related categories included Religious and Ideological Diversity in the Workplace, Respecting Civil Rights and Promoting Viewpoint Diversity, Respecting Religious Diversity at Work, and Respecting Employee Charity Choice.

Public Square-related categories included Political Spending and Advocacy Reflects Diverse Views, Respecting Shareholder Support for Viewpoint Diversity, and Respect Diverse Views in Charity and Society.

The Business Index surveyed 50 companies in this first survey; it expects to expand the number surveyed in the coming years.

The results of this survey were…disappointing. The highest score any company achieved was 35%, and most of the scores were in the range of 18% or less, including 16 of the companies in single digits and 6 of the companies doing no better than 6%. One barely made it onto the board at 2%.

From the Executive Summary [emphasis in the original]:

Benchmarked companies scored an average of 12% overall on respecting religious and ideological diversity in the market, workplace, and public square. This poor performance is cause for concern, especially because these companies represent some of the largest businesses in America and provide essential services to millions of people and organizations every day. While no industry exhibited strong performance, there were a handful that scored particularly poorly. The two industries with the lowest overall scores were computer software at 6%, and internet services and retailing at 8%. The financial and data services industry also came in at a low overall average score of 11%. These subpar results paint a grim picture of Corporate America’s respect for religious and ideological diversity.

And [emphasis in the original]:

One finding of particular concern is that social media companies, which provide services critical to the freedom of individuals and groups to participate equally in the digital public square, are concentrated in an industry (internet services and retailing) with one of the lowest average overall scores. Not surprisingly, nearly all of those companies are also among the lowest performers across industries.

This is how far the Left’s Woke Culture has penetrated, and deprecated our society—it’s deeply into our businesses, especially those dominating our ability to speak and to debate the questions of concern to us.

The complete report, including a review of the survey’s outcome and details of how the scores were generated, can be found here or via Viewpoint Diversity Score’s site here.

Another Power Grab

This one by the Securities and Exchange Commission.

A proposal under consideration by the agency would generally require brokers to route small investors’ market orders into auctions, where trading firms would compete to execute them, people familiar with the matter said. …
Brokers would have a way out. Instead of sending the orders to auctions, the brokers could attempt to have them filled at the midpoint price or better, the people said.

And

The proposed midpoint requirement and auctions would apply to market orders. Commonly used by small investors, market orders are instructions entered through a brokerage to buy or sell stocks at whatever their current market price is.

This sounds good, but in reality, it’s a solution for a nonexistent problem.

I’m one of those poor, downtrodden small investors, and my broker already uses a price improvement procedure whereby my market orders are routed to the trading house that offers the best execution price—which is the price shaded above the mid-point toward the buy price if I’m selling and below the mid-point toward the sell price if I’m buying. I’m already getting a better price than the mid-point.

My broker isn’t alone, either; most brokers offer/provide that procedure: it’s a means of competing for the small investors’ business.

But wait—don’t those trading houses pay the brokers for the orders to be routed to them? Why yes, yes they do. And those trading houses compete among themselves for the brokers’ business, which means the brokers get a range of trading houses from which to select the best price improvement for their customers.

The SEC’s…proposal…is just another exercise in power for the sake of power being carried out by SEC Chairman Gary Gensler.

Putin Wants an Arms Race

Russia threatens arms race in space if commercial satellites do not stop assisting Ukraine in war, goes the subheadline.

And:

[Russian Foreign Ministry Spokesman Konstantin] Vorontsov argued that commercial satellites used to benefit Ukraine in the war violates The Outer Space Treaty and warned it could start a “full-fledged arms race in outer space.”

An arms race in space.

I say bring it. The Soviet Union couldn’t handle a Reagan arms race in space; the USSR couldn’t keep up with the technology developments, and its economy couldn’t keep up with anything—military or civilian.

The Russian economy is in worse shape. Let’s have that arms race. Russia will lose this one, and just as catastrophically, even if the nation doesn’t actually disintegrate the way the USSR did.

Here’s Another Thought

Two in a week. Settle down.

NASDAQ is (rightfully) suspicious of small-cap companies domiciled in the People’s Republic of China listing their IPOs on NASDAQ’s exchange. The one-day spikes in share prices followed quickly by nearly total collapse of those share prices in so many of the IPOs is what’s drawn attention. For instance:

Shares of more than 20 recently listed companies have risen over 100% on their first day of trading. They include Hong Kong-based fintech company AMTD Digital Inc, which briefly jumped over 320-fold after its July listing, and Chinese garment maker Addentax Group Corp, which rose more than 130-fold on its market debut in August. The two stocks have since lost more than 98% of their value.

As a result, NASDAQ has stopped approving PRC small-caps for listing, for the time being. Which brings me to my thought.

Don’t list any companies domiciled in the PRC on any American exchange, and encourage the other nations in the OECD to do the same. After all, at least since the PRC’s 2017 National Intelligence Law, those PRC companies are too closely tied to the PRC’s intelligence community, and as such, they have no legitimate business raising money through any nation’s stock or bond exchanges other than their own.