Do not rule out a market panic next month

Immediate signal has been plunge in short-term T-bill rates since start of the year

John Dizard

The dollar is mocked by the well informed, but aggressively hoarded by the fearful © Paul Yeung/Bloomberg

“Beware the Ides of March” (Julius Caesar, act one scene two)

Everybody seems to be having a hard time finding the most tradeable forms of dollar cash. 

In the financial markets this has led to a shortage of T-bills, the form of issuance that can be most readily used as collateral for other trades. 

As Zoltan Pozsar of Credit Suisse says: “The long, three-year period of front-end collateral glut, which lasted from 2018 [to the beginning of February] is over.”

At the other end of dollar asset respectability, the Fed has ordered a record amount of $100 bills to be printed. 

At the high end of its estimates, that will be nearly $320bn of $100s — enough for every man, woman and child in the US to have another thousand dollars in ready cash. 

Of course the C-notes are not going to American civilians — at least 80 per cent are shipped from the bureau of printing to non-US banks.

The dollar is mocked by the well informed, but aggressively hoarded by the fearful, and those who do business in the shadows.

Financial panics, especially the ones that do not trigger broad economic recessions, can be useful for some. 

Coming out of ‘nowhere’, they force markets and politicians to pay attention to excesses that have been excused and problems that have been ignored. 

Random financial speculation and party politics are at least momentarily set aside so that some unpopular, complicated or unfamiliar changes can be agreed.

The last two weeks of this coming March look like a set-up for some sort of panic in the US Treasury and mortgage-backed securities markets. Not the end of the world, but something like being a passenger in an aircraft that suddenly drops several thousand metres.

The most salient and immediate signal to me has been the plunge in short-term Treasury bill rates since the beginning of the year. 

In the first six weeks of 2021, one-month T-bill rates have fallen by more than 66 per cent. The yield of two-year Treasuries declined by more than 21 per cent. 

Those are more dramatic moves than you see in any other broadly traded securities.

Unlike the Fed’s favourite instrument, bank ‘excess reserves’ on deposit with the central bank, T-bills are ‘collateral’. 

They can be readily lent and relent to secure other, unrelated transactions. 

When people or institutions in the global financial system are not feeling eager to trust each other, they demand more collateral.

The degree of that distrust appears to be rising, quickly. You can see that by looking not only at the outcome of official T-bill auctions, but at the range of bids in the auctions. Low bids mean that dealers are willing to accept very low rates, as little as 1 basis point recently, just to make sure they get some of that collateral. 

That historically happens at systemic stress points.

Simultaneously, the supply of T-bills is shrinking. Because the Treasury wants to rebalance its issuance, it is redeeming bills and selling more long-dated bonds.

That explains part of this year’s unexpected rise in 10-year and 30-year bond yields, which in the past week sailed past the 1.25 per cent level. 

This in turn triggered a wave of hedging activity by leveraged mortgage banks. As interest rates rise, fewer of the mortgages they own are refinanced at lower rates, and so the “duration” of their assets increases.

To offset this ‘convexity’ risk, they have to sell the equivalent of tens, or even hundreds, of billions in Treasury bond derivatives. This is reinforcing the sell-off in Treasuries and threatening a ‘convexity spiral’ of the sort not seen since 2003. 

Oh, and the increased derivatives activity needs to be collateralised by T-bills, which you will recall are already in short supply.

If my guess is right, then we have the makings of another ‘event’ like we saw a year ago. Market freezes have a way of happening in March and September, an echo of the crop cycle. 

That might make it momentarily easier to get past the politics of raising the ‘debt ceiling’. And the big banks might get one more year’s waiver on shrinking their asset base.

SPAC invasion

Why SPACs are Wall Street’s latest craze

Blank-cheque firms appeal to everyone, from sophisticated financiers to sportsmen

WHAT LINKS Martin Luther King III, the son of the civil-rights leader; Shaquille O’Neal, a former basketball player; and Kevin Mayer, the former boss of TikTok? 

The unlikely trio sponsors a special-purpose acquisition company (SPAC), a listed pot of capital that seeks a firm to take public through a merger. 

Mr O’Neal is not the only sportsman turned SPACman. Colin Kaepernick, the former quarterback famous for kneeling during America’s national anthem to protest against racism, has teamed up with a private-equity firm to launch a “socially conscious” SPAC. 

Alex Rodriguez, a former baseball player, plans to raise up to $575m for a SPAC targeting sports-related firms.

Financiers are in on the action, too. Bill Ackman, the boss of Pershing Square, a hedge fund, launched a SPAC that raised $4bn in July, making it the biggest to date. 

Gary Cohn, a former Goldman Sachs banker and adviser to President Donald Trump, has one too. 

So do several private-equity giants, including Apollo, Ares, Bain, KKR and TPG.

Around 250 SPACs were launched last year in America, raising $83bn. Things have only sped up since: in January an average of five were created each working day, amassing more than $26bn in capital. 

Because they tend to raise more cash once they find a target—around five times that in the initially listed pot—SPACs may be looking to buy firms worth as much as $500bn, about 1% of the value of all listed American companies. 

Look beyond the frenetic growth and you find a spectrum of SPACs, ranging from the earnest to the exuberant.

The life cycle of a SPAC tends to be at most two years. 

It begins with the sponsor taking the blank-cheque firm public. Investors typically pay $10 a share and also receive warrants, which give them the right to buy more shares at a later date. 

The sponsor then searches for an acquisition target that is looking to raise capital and go public. Once it is found, shareholders vote on the merger; often new investors are brought in. 

When the deal is done the sponsor gets a slice of the merged firm’s equity, and typically a seat on its board. The pot of capital is now cash to be used by the newly public firm.

Proponents say SPACs are cheaper than conventional initial public offerings (IPOs), but they still incur underwriting fees, and the sponsor’s share of the proceeds dilutes other shareholders. 

The path to going public can be shorter and less uncertain than an IPO, though. A firm merging with a SPAC knows exactly how much capital it will raise.

Though SPACs have been around for almost two decades, they were regarded warily for much of that time—as a route to be used only by firms shunned by sharp-suited investment bankers. 

The latest mania can be traced to a serendipitous deal struck in 2019 by Chamath Palihapitiya, a venture capitalist turned boss of a SPAC, and Sir Richard Branson, a billionaire businessman.

Mr Palihapitiya’s SPAC had raised $674m, wooing investors with promises of disrupting the IPO scene. Sir Richard had sought funding for Virgin Galactic, a space-venture company, from Saudi Arabia’s sovereign-wealth fund. 

But after Jamal Khashoggi, a journalist, was killed in a Saudi consulate in Turkey, Sir Richard suspended the plan. A year later, Virgin Galactic merged with the SPAC. 

It received the $674m pot, and another $100m in investment from Mr Palihapitiya, and went public at a valuation of $2.2bn. 

Its market capitalisation is now $12bn.

That success set off the trend. Today SPACs range from the tiddlers, with less than $50m in capital, to the titans, such as Mr Ackman’s $4bn SPAC. (The median SPAC raises $240m at the initial stage.) 

Some issue vast quantities of warrants and hand sponsors fat slices of firms; others are leaner. Some have target industries in mind; others are ambivalent. High-profile deals spawn mini-trends. 

After Virgin went public several space deals took off; when Nikola, an electric truck-maker, merged with a SPAC, a spate of electric-vehicle deals ensued; the enthusiasm for sports-SPACs follows the listing of Draft­­­Kings, a betting platform, in April.

Their sudden popularity and the sheer variety of their size, scope and structure raise the question of which SPACs are sensible and which show signs of mania. A financier in charge of a big investment bank’s SPAC business sees a clear bifurcation. 

There are plenty of good SPACs with excellent management teams that can help turn mediocre companies into good ones. But the rest, perhaps a third to two-thirds, “don’t know the first thing about the businesses they are dealing with”.

That seems to be confirmed by a recent study by Michael Klausner and Emily Ruan of Stanford University and Michael Ohlrogge of New York University. 

The authors look at SPACs that struck deals between January 2019 and June 2020. 

They find that, in 25% of cases, the sponsor’s payout exceeded 12% of post-merger equity, compared with a median stake of 7.7%.

They also conclude that some SPACs deliver far worse returns for investors than others: firms that went public through the SPAC route fell in value by an average of 3% after three months, 12% after six months and by a third after 12 months. 

They lagged behind the wider market and even further behind an index of firms that listed via IPO. However, about half the sample is made up of “high-quality” SPACs, defined as those run by former Fortune 500 bosses or set up by large private-equity firms. 

These perform much better, outperforming IPOs and the market over six months (though not over 12).

How might the craze play out? About three-quarters of SPACs launched last year are yet to do a deal. One scenario worth considering is that bumper issuance leaves many SPACs unable to find suitable targets. 

Investors can redeem their shares at cost until a target is bought (the proceeds from the SPAC’s IPO are kept in an escrow account in the meantime). The burden of failure—the SPAC’s set-up and search expenses—would therefore probably fall on sponsors. To avoid this, many might take any willing firm public. 

Voting and redemption mechanisms guard investors against dodgy deals, though they have not prevented investors from losing money so far.

Investors’ willingness to accept poor returns may fade as they become more familiar with SPACs. 

They certainly grasp that those like Mr Ackman’s, which will issue him 6.7% of the shares in the merged firm only once investors earn a 20% return, are more sensibly structured, valuing it more handsomely than the rest. 

But they also still want to take a punt on Nikola and other electric-vehicle copycats, in the hope of finding the next Tesla. 

Seen this way, the mania around SPACs is simply an expression of wider exuberance.

Should the Feds Guarantee You a Job?

Not long ago, the question was rarely asked. Now, politicians and economists of various stripes are willing to consider it.

By Eduardo Porter

Credit...Tom Haugomat

What should the president do about jobs?

For 30 years, Democratic administrations have approached the question by focusing on the overall economy and trusting that a vibrant labor market would follow. But there is a growing feeling among Democrats — along with many mainstream economists — that the market alone cannot give workers a square deal.

So after a health crisis that has destroyed millions of jobs, a summer of urban protest that drew attention to the deprivation of Black communities, and another presidential election that exposed deep economic and social divides, some policymakers are reconsidering a policy tool not deployed since the Great Depression: to have the federal government provide jobs directly to anyone who wants one.

On the surface, the politics seem as stuck as ever. Senator Cory Booker, the New Jersey Democrat, introduced bills in 2018 and 2019 to set up pilot programs in 15 cities and regions that would offer training and a guaranteed job to all who sought one, at federal expense. Both efforts failed.

And after progressive Democrats in Congress proposed a federal jobs program as part of their Green New Deal in 2019, Representative Liz Cheney of Wyoming, the No. 3 House Republican, asked, “Are you willing to give the government and some faceless bureaucrats who sit in Washington, D.C., the authority to make those choices for your life?”

But when it comes to government intervention in the economy, the political parameters have shifted. A system that balked at passing a $1 trillion stimulus after the financial crisis of 2008 had no problem passing a $2.2 trillion rescue last March, and $900 billion more in December. President Biden is pushing to supplement that with a $1.9 trillion package.

“The bounds of policy discourse widened quite a bit as a consequence of the pandemic,” said Michael R. Strain, an economist at the American Enterprise Institute, a conservative think tank.

On the left, there is a sense of opportunity to experiment with the unorthodox. “A job guarantee per se may not be necessary or politically feasible,” said Lawrence Katz, a Harvard professor who was the Labor Department’s chief economist in the Clinton administration. “But I would love to see more experimentation.”

And Americans seem willing to consider the idea. In November, the Carnegie Corporation commissioned a Gallup survey on attitudes about government intervention to provide work opportunities to people who lost their jobs during the Covid-19 pandemic. It found that 93 percent of respondents thought this was a good idea, including 87 percent of Republicans.

Even when the pollsters put a hypothetical price tag on the effort— $200 billion or more — almost nine out of 10 respondents said the benefits outweighed the cost. And hefty majorities — of Democrats and Republicans — also preferred government jobs to more generous unemployment benefits.

The question is, would the Biden administration embrace a policy not deployed since the New Deal?

“We tried to set the bar at a federal job guarantee,” said Darrick Hamilton, an economics professor at the New School for Social Research. He was among advisers to Senator Bernie Sanders who worked with Mr. Biden’s representatives before the November election to devise an economic strategy the Democratic Party could unite behind. “It was the cornerstone of what we brought in.”

On paper, at least, a job guarantee would drastically moderate recessions, as the government mopped up workers displaced by an economic downturn. But unlike President Franklin D. Roosevelt’s programs to provide jobs to millions displaced by the Great Depression, the idea now is not just to address joblessness, but to improve jobs even in good times.

If the federal government offered jobs at $15 an hour plus health insurance, it would force private employers who wanted to hang on to their work force to pay at least as much. A federal job guarantee “sets minimum standards for work,” Dr. Hamilton said.

The president does not seem ready to go all the way. “We suspected we weren’t going to get there,” Dr. Hamilton said.

Mr. Biden’s recovery plan includes efforts to train a cohort of new public health workers, and to fund the hiring of 100,000 full-time workers by public health departments. His commitment to expand access to child care and elder care comes paired with a promise to create good, well-paid jobs in caregiving occupations.

And he has pledged — in ways not yet translated into programs — to foster the creation of 10 million quality jobs in clean energy.

“There are a number of proposals to pair programs for people to be at work with the needs of the nation,” said Heather Boushey, a member of Mr. Biden’s Council of Economic Advisers.

And yet the idea of a broad job guarantee is still an innovation too far. For starters, it would be expensive.

Dr. Hamilton, who favors a federal job guarantee, was co-author of a 2018 study — with Mark Paul, William A. Darity Jr. and Khaing Zaw — that sought to estimate the cost. 

Based on 2016 employment figures, and assuming an average cost per job of $55,820, including benefits, the study found it would cost $654 billion to $2.1 trillion a year, which would be offset to some extent by higher economic output and tax revenue, and savings on other assistance programs like food stamps and unemployment insurance.

And the prospect of a large-scale government intervention in the labor market raises thorny questions.

First, there’s determining the work the government could offer to fulfill a job guarantee. Health care and infrastructure projects require workers with particular skills, as do high-quality elder care and child care. Jobs, say, in park maintenance or as teaching aides could encroach on what local governments already do.

What’s more, the availability of federal jobs would drastically change the labor equation for low-wage employers like McDonald’s or Walmart. Dr. Strain argues that a universal federal guarantee of a job that paid $15 an hour plus health benefits would “destroy the labor market.”

Some wealthy countries have job guarantees for young adults. Since 2013, the European Union has had a program to ensure that everyone under 25 gets training or a job. But those programs are built on subsidizing private employment, not offering government jobs.

Many European countries have also subsidized private payrolls during the pandemic, allowing employers to cut hours instead of laying off workers.

The United States has a limited wage-subsidy program, the Work Opportunity Tax Credit, passed in 1996. It extends a credit of up to $9,600 for employers who hire workers from certain categories, like food-stamp recipients, veterans or felons.

Developing countries have tried job guarantees, which the Organization for Economic Cooperation and Development said in 2018 “go beyond the provision of income and, by providing a job, help individuals to (re)connect with the labor market, build self-esteem, as well as develop skills and competencies.” 

But in more advanced economies, the report added, “past experience with public-sector programs has shown that they have negligible effects on the post-program outcomes of participants.”

A 2017 overview of research on the effectiveness of labor market policies — by David Card of the University of California, Berkeley; Jochen Kluve of Humboldt University in Berlin; and Andrea Weber at Vienna University — concluded that programs that improve workers’ skills do best, while “public-sector employment subsidies tend to have small or even negative average impacts” for workers. 

For one, private employers seem not to value the experience workers gain on the government’s payroll.

Another economist, David Neumark of the University of California, Irvine, is skeptical that new policies are needed to ensure a decent living for workers. Programs like the earned-income tax credit, which supplements the earnings of low-wage workers, just need to be made more generous, he said.

“I’m not sure we are missing the tools,” he said. “Rather, we have been too stingy with the tools we have.”

Dr. Neumark notes that the idea of government intervention to help working Americans is gaining traction even on the political right. “Republicans are at least talking more about the fact that they need to deliver some goods for low-income people,” he said. “Maybe there is space to agree on some stuff.”

While opposed to a broad guarantee, Dr. Strain of the American Enterprise Institute sees room for new efforts. “If the question is ‘Do we need more aggressive labor market policies to increase opportunities for people?’ the answer is yes,” he said. “I think of it more as a moral imperative than from an economic perspective.”

Europe’s Pandemic Debt Is Dizzying. Who Will Pay?

Pandemic aid has cushioned workers and businesses from a severe recession. But as governments face trillions in debt, there’s no rush to rein it in.

By Liz Alderman

A closed restaurant in Paris. With interest rates low and the need for pandemic relief high, European governments have shed their past concerns about deficit spending.Credit...Andrea Mantovani for The New York Times

PARIS — For nearly six months, Philippe Boreal and 120 of his fellow workers have been paid to stay home from their jobs at a Cannes luxury hotel that was forced to close for the pandemic.

Mr. Boreal, a janitor for 20 years, is grateful for the aid, which is bankrolled by the French government under a sweeping plan to rescue people and businesses from economic calamity. But as the Covid-19 crisis drags on, he wonders how long the largess can last.

“At some point you ask yourself, ‘How are we going to pay for all this?’” asked Mr. Boreal, who is collecting more than 80 percent of his paycheck, allowing him to pay essential bills and buy food for his wife and teenage daughter. Most every other hotel along the Cannes waterfront is also keeping staff on state-funded furloughs — as are countless businesses across Europe.

“The bill just seems so big,” Mr. Boreal said. “And it keeps on growing.”

For households trying to balance their budget each month, the fact that European countries are incurring trillion-euro debts is dizzying. In France alone, the national debt has topped 2.7 trillion euros ($3.2 trillion) and will soon exceed 120 percent of the economy.

The Ritz hotel in Paris last August. Many hotel workers across France have been put on furlough, with the government bankrolling their pay. Credit...Dmitry Kostyukov for The New York Times

But governments are far from worried about piling up debt right now, as rock-bottom interest rates empower them to spare no expense to shield their economies from the pandemic.

And spend they do.

Billions of euros are being deployed to nationalize payrolls, suppress bankruptcies and avoid mass unemployment. Trillions more are being earmarked for future stimulus to stoke a desperately needed recovery.

The European Union has upended its policies to finance the largess, breaking with decades of strict limits on deficits, and overcoming visceral German resistance to high debt.

Austerity mantras led by Germany dominated Europe during the 2010 debt crisis, when profligate spending in Greece, Italy and other southern eurozone countries pushed the currency bloc toward a breakup.

The pandemic, which has killed over 450,000 people in Europe, is seen as a different animal altogether — a threat ravaging all the world’s economies simultaneously. While German officials initially warned about runaway spending on the pandemic, European policymakers agree it would be folly to cut spending or raise taxes now to pay debts incurred to counter the economic fallout.

Those debts are surging to levels not seen since World War II. In some European countries, debt is growing so fast that it is outpacing the size of national economies.

But interest rates for many rich nations are around zero because of years of low inflation. While the amount of debt that countries have taken on has grown, the amount that governments pay to service the debt has not.

So can there be such a thing as a free lunch after all? 

In the current unusual zero-interest world, maybe yes.

Le Servan, a Paris restaurant, in December. The International Monetary Fund expects the European economic recovery to lag that of the United States.Credit...Andrea Mantovani for The New York Times

Governments are borrowing heavily, issuing an ever growing pile of bonds. The European Central Bank is helping by buying large chunks of that debt, pushing already low interest rates lower still, and creating a mountain of cheap money for countries to tap.

In the United States, President Biden is pursuing an aggressive strategy to combat the pandemic’s toll with a $1.9 trillion economic aid plan. While the national debt is now almost as large as the economy, supporters say the benefits of spending big now outweigh the costs of higher debt.

In Europe, pandemic spending has so far largely focused on floating people and businesses through the crisis. For Mr. Boreal and millions like him around Europe, the support has been vital for surviving through a sputtering recovery that now threatens to turn into a double-dip recession.

“Without the aid, things would be much worse,” said Mr. Boreal, who receives an after-tax salary of €1,700 (about $2,050) a month while on furlough, financed by the state. “It’s allowing us to ride out the pandemic and hopefully get back to work soon.”

For now, such spending is affordable. And government debt may never have to be fully paid back if central banks keep buying it. Countries can essentially roll over their debt at low interest rates, an operation akin to refinancing a mortgage.

The European Central Bank effectively lent eurozone governments around €1.2 trillion last year, and pledged to continue through summer. Public debt in the euro area could rise as much as €4 trillion by the end of 2023, according to the Institut Montaigne, an independent think tank in Paris.

The Louvre, one of Paris’s most popular attractions, is currently closed. The French government has borrowed heavily to support the economy through the pandemic, with national debt topping 2.7 trillion euros. Credit...Dmitry Kostyukov for The New York Times

“If there’s no risk of a return of inflation, then the sky’s the limit for debt,” said Nicolas Véron, a senior fellow at the Peterson Institute for International Economics in Washington.

And that points to the risk in this strategy. Some economists worry that inflation and interest rates could rise if stimulus investment revives growth too rapidly, forcing central banks to put a brake on easy-money policies. If borrowing costs rise, weaker countries could fall into a debt trap, struggling to pay down what they owe.

“If inflation starts to return but there’s no growth, then the situation gets a lot trickier,” said Simon Tilford, director of the Oracle Partnership, a strategic planning firm in London.

And if debt piles up year after year, governments will have a harder time stimulating their economy when the next recession rolls around.

To people in charge of steering their economies through the pandemic, those troubles seem far away.

“We need to reimburse the debt, of course, and to work out a strategy for paying down the debt,” Bruno Le Maire said in an interview with a small group of journalists. “But we won’t do anything before growth returns — that would be crazy.”

For the strategy to work, Europe must act quickly to ensure a robust recovery, economists warn. 

While leaders approved a €750 billion ($857 billion) stimulus deal last year, countries haven’t been unleashing stimulus spending nearly as rapidly as the United States has to kick-start a revival and create jobs.

“With interest rates at historic lows, the smartest thing we can do is act big,” the new Treasury secretary, Janet L. Yellen, told senators during her confirmation hearing, adding that failing to do so would risk muddling a recovery.

Shuttered stores in a suburban mall north of Paris. “Without the aid, things would be much worse,” said Philippe Boreal, a furloughed French janitor.Credit...Andrea Mantovani for The New York Times

By contrast, “most of what’s been done in Europe is survival support,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The current policies on their own will not bring back growth.”

The International Monetary Fund expects growth to bounce back this year to 5.1 percent in the United States, where Congress authorized a $900 billion package in late December. Europe will lag with a rebound of 4.2 percent, the fund said.

As a more contagious variant of the virus races through Europe, triggering new lockdowns, recoveries that were expected as early as summer may be delayed, with implications for national finances. The halting rollout of vaccines adds a further complication to hopes for economic expansion.

Thomas Flammang, 28, a materials engineer at an aerospace consulting company in Rouen, is under no illusions about the weakness of the recovery.

During his first months on furlough, he kept expecting things to return to normal. Stuck at home, he went for long walks and caught up on his reading. But as weeks stretched into months, the company’s order books never picked up enough for him to return to the job.

Without a full reopening of the economy, things are likely to get worse. “For now, my company has saved our jobs,” Mr. Flammang said. But if things don’t perk up, he said, layoffs may be inevitable.

He sees little light at the end of the tunnel.

“Our generation will have to pay for many things: the baby boomers who retire, the cost of the climate crisis,” Mr. Flammang said.

“And now we are using the printing press for the pandemic, and we will have to pay back all this aid,” he said. “It’s maddening when you think about it.”

Thomas Flammang, a French engineer, worries that “our generation will have to pay for many things.”Credit...Andrea Mantovani for The New York Times

Antonella Francini contributed reporting.

Liz Alderman is the Paris-based chief European business correspondent, covering economic and inequality challenges around Europe. She was previously an assistant business editor, and spent five years as the business editor of what was The International Herald Tribune. @LizAldermanNYT