buy now, pay later

Two recent transactions show, I think, that buy now, pay later has arrived as a mainstream purchase/payment option. They are: Square’s proposed acquisition of Afterpay for $29 billion and Amazon’s just-announced partnership with Affirm.

what it was

When I was growing up, we shopped at a local grocery store just up the street. The grocer, Mr. O’Dowd, kept a record of our purchases in a school notebook. When my father got paid, we settled the bill.

Layaway plans, a Great Depression-era device, have had a revival during the Great Recession. In its simplest form, a merchant “lays away” in a storeroom an item that a customer pays for in installments. Once the final payment is made, the merchant retrieves the item and turns it over to the customer.

Key features: no interest payments (at least no explicit interest component in the payments); and, in the layaway case, the customer is assured of its availability but gets the merchandise only after paying in full.

what it is now

It’s either an app the buyer has or a purchase option at online checkout. No interest payments, small amounts of credit, installment payments for a purchase over a month or so, limited if any credit check in advance. There’s also the possibility of an increased credit limit based on on-time payment history. The biggest difference, however, is that the user gets the merchandise right away.

how do BNPL providers make money?

They charge a fee, usually higher than a credit card issuer would, to merchants. Again like credit card companies, they charge late fees. Customer payment history gives BNPL firms an edge in deciding the risk in offering customers longer-term interest-bearing loans.

Merchants sell stuff they otherwise wouldn’t. Apparently return rates are lower, too, for BNPL customers.

the market

BNPL appeals to Millennials and younger, maybe because it’s (for them) new, maybe because of scars from the recession. Something like one in six Americans operates outside the traditional banking system, so BNPL can be a way to get credit services cheaply, as well as develop a credit history that will make traditional credit more accessible.

The big question for me is how dependent BNPL firms are on the current zero interest rate environment. Are they really an innovative disintermediation of traditional credit services or will they wilt away if the cost to them of the short-term loans they make begins to rise above zero.

My guess is that the industry will have more wiggle room than I fear as/when rates begin to rise. Also, this is not a near-term problem.

Cathie Wood on China

I listened to a Bloomberg interview last week in which Cathie Wood, founder of the ARK fund complex, gave her take on the ongoing Chinese crackdown on capitalist tendencies in that country. Measures have ranged from repudiating its agreement with the UK, half way through its term, to grant Hong Kong fifty years as a Special Administrative Region, free from direct political control by the mainland, to punitive measures taken against ultra-wealthy Chinese tech entrepreneurs and their companies.

The latter group were of particular focus, given Woods’ very recent decision to eliminate her holdings of mainland stocks, like Alibaba and Tencent, whose owners had run afoul of Beijing. Her new strategy is, unsurprisingly, to pick through the Chinese stock market carnage to find firms whose clear domestic social purpose will likely insulate them from Premier Xi’s wrath.

The way Wood chose her words suggests she was relatively late in figuring out what was going on. But that’s not what bothered me.

Wood went out of her way in the interview to suggest that the trigger for Xi’s actions was the inauguration of President Biden. This despite the fact that his repudiation of the joint UK-China handover agreement came in early 2019. Also, Jack Ma’s threat to use Ant Financial to radically undermine the Chinese banking system–and his subsequent disappearance–came during the Trump administration. His reappearance came at the beginning of Biden’s.

She also observed that Chinese citizens were tending to leave the US to return to China, suggesting a period of disengagement with the rest of the globe. Her explanation? …our Third-World infrastructure.

Yes, the US has neglected communications and transport infrastructure for decades, and, yes, my Chinese acquaintances remark it’s much easier to do US business from, say, Taiwan. But Wood made no mention of other important causes: the health threat posed in the US by the bungled covid response or Trump’s anti-Chinese rhetoric that spawned a wave of anti-Asian violence, and the Stop Asian Hate movement; and the budding tech war begun by Trump’s attack on Huawei, which has reignited Beijing’s interest in creating its own chip domestic manufacturing capabilities.

To my mind, the white racism and the inject-yourself-with-bleach covid advice are deeply wrong. It’s possible, though, that no matter how ill thought out the Trump initiative, the denial of US intellectual property to China will do some good. My suspicion is that a lot depends on how strong the domestic anti-science movement remains and how long we continue to starve our schools.

When will it be safe to invest in China? …during the next Republican administration, when China will fear the US again.

my take

I have two thoughts about the interview I mention above:

–the view that the Trump presidency has somehow been a good thing for the US economically and that the rest of the world recognizes this is, I think, both deeply mistaken and an opinion held by a significant minority of Americans.

I remember Wood justifying her personal support for Trump on one occasion by saying she approved of his economics (as opposed to the rest of him), which I see as like my high school German teacher opining that Hitler wasn’t so bad because he gave Germany the Volkswagen. As long as this misapprehension (again, my view) doesn’t seep into the portfolio, it’s not a performance problem per se.

–there’s also a typically American view that American culture is the goal toward which every other country is, consciously or not, striving. Think: the Noam Chomsky view that English is the Ur-language, from which all others stem; or the neoconservative view that in the body of everyone in the Middle East there beats the heart of a Republican waiting to be freed by our invading troops.

Countries of all stripes share this kind of idea, except, of course, that their ideal is not American culture but the German, French, British, Japanese, Chinese…one, depending on where you are.

Thirty+ years of investing in markets outside the US have reinforced for me again and again that it’s a ground-level investing mistake to assume one’s own cultural values hold for any other country. Almost as bad is assuming that the stock market in a foreign country runs according to the same principles that the home country’s does.

To my mind, Wood not realizing this is an indication of her relative lack of portfolio management experience. How worried am I about this? Not enough to sell any of the significant (for me) amount of ARK EFT shares I own, but enough not to add to my ARK positions other than ARKF and ARKG.

“The Currency” and “the Road to the Airport”

The Currency

The UK artist Damian Hirst launched his The Currency project late last month.

He auctioned off 10,000 signed small paintings of groups of dots for $2000 each. Holders are required to choose between receiving the physical painting or a nonfungible token (NFT), that is, a crypto-protected digital file. For anyone who chooses an NFT, the corresponding painting will be destroyed.

I don’t know much about Hirst and his ideological underpinnings, although The Currency could be seen as an attempt to create a new kind of performance art, or a new criterion of authenticity in a work of art, replacing the editioning common with, say, photographs.

What interests me as an investor, though, is that:

–the entire issue was sold almost immediately, grossing $20 million, and

–in the online secondary market, 184 paintings sold online last week for an average of just under $30,000–up 15x in a month.

the Road…

In the final days of the high-yen, low interest-rate era in Japan in the late 1980s, when virtually every piece of usable Tokyo real estate had been bid to the sky, enterprising stockbrokers launched a sales campaign aimed at big institutional investors touting the companies holding the land along the forty-some mile stretch on the road from downtown Tokyo to Narita Airport. Although mostly farmland, Nomura et al claimed that the road would soon be chockablock with corporate office buildings as the Japanese industrial juggernaut kept on rolling. Therefore, get in on the ground floor, as it were, by buying equity in the otherwise ramshackle enterprises there. No economic merit for this at all.

My memory is that the Road… campaign turned out to be the last gasp of a stock market rising on fumes. But it also points to the area of the greatest speculation during the endaka era–real estate.

The carryover for here and now: the real speculative Wild West for investment today is not in stocks but in cryptoland. I can see two differences arguing that things like The Currency are less bad than the Road… The former is a speculation on the shape of the future rather than an extrapolation of the recent past into the future; and, for now a least, crypto is absorbing fewer economic resources (I think) than Japanese real estate did, so there is no urgent need to use government policy to stamp it out.

Personally, I’m thinking of NFTs as the coal mine canary for more traditional long-term investments like stocks and bonds. At the very least, however, cryptoland shows no sign of adjusting to possible higher interest rates in the way I think the stock market is beginning to. So speculation is alive and well in today’s financial markets, just not as visible to most professional investors.

my thoughts on the Chartered Financial Analyst (CFA) program

I read a Bloomberg article over the weekend that asserted that the CFA program is pretty worthless. I thought I’d add my take.

I entered the financial world in late 1978, as a trainee securities analyst. This was mostly because I needed a job and had had three serious black marks on my resume: I had been a soldier in the Vietnam War, I had studied philosophy in school and I was over thirty. But, as they say, Wall Street takes everyone.

After a short while I realized I liked the work and thought I could be good at it. I started an MBA in finance at night at NYU and at the same time began to prepare for the CFA exams. I did the first to get the accounting and economics background I needed to be an insightful analyst. I did the second as proof that my suspect background shouldn’t be fully taken against me.

Unlike today, at that time, the CFA program was only open to people actively working in the boiler room of the investment industry, either as analysts studying specific industries and companies and creating detailed spreadsheets projecting potential future earnings, or as portfolio managers (almost always former analysts) shaping packages of securities intended to generate better returns than a specified target index.

The CFA Institute and affiliated organizations focused mostly on the needs of analysts and PMs, generating papers, for example, that discussed the ins and outs of accounting for oil and gas leases or how to detect the scammy ways that 1970-80s-era tech firms artificially pumped up their earnings (and the accounting standards put in place to combat that).

Somewhere along the way, that all changed. Perhaps because practitioners (as the academics call us) weren’t paying enough attention, control of the CFAI shifted away from financial analysts to academics. Several changes resulted:

–the useful industry-specific information disappeared

–university professors with no practical knowledge or experience became board members and/or featured authors in the CFA publications

–dues went up a lot, as did the fees for taking the exams

–membership was widened to also include virtually anyone involved in marketing or administration of investment products.

As an analyst, I have to conclude that this was a brilliant move, akin to the new-management remake of a classic underachieving “value” stock. Tons more money for a watered-down product. As a former user of CFA services, I’m tempted to say this is like anti-vaxxers taking over the AMA. But that’s not right. Academic finance is crazy and irrelevant, not crazy and harmful.

My conclusion: for someone with no background in the industry, this is a good first step, like a set of online tutorials in pottery-making. Is it as useful for would-be investors as an MBA? No way, provided your school has a concentration in investments and lots of accounting and economics courses.

Me? I received my both CFA charter and my MBA in Finance (concentration in Investments) three years after I started in 1979.

Am I still an MBA? yes.

Am I still a CFA? I think I am. Unlike any institute of higher learning I’ve ever heard of, however, the CFAI requires that I pay it $275 a year to say that I am. In some sense, this is a brilliant stroke. At the same time, its scamminess says a lot about the current organization.

macroeconomic analysis vs. company analysis

There are two complementary approaches to trying to figure out the prospects for securities (both stocks and corporate bonds) and markets: analysis of economies (macroeconomic analysis) and analysis of companies and the industries they’re in (microeconomic analysis).

Around the world the favored–and much easier, in my view–path is macro analysis. It’s the focus of most academic training. There’s usually plenty of government-collected data available. And there are legions of sovereign bond analysts continuously assessing a given country’s performance as a way of gauging its creditworthiness and therefore its bond prices.

What has made the US unique over the 40+ years I’ve been watching markets–and the reason US equity investors have eaten everyone else’s lunch, has been its strong concentration on figuring out industry and individual company prospects. One or the reasons, I think, of the almost continuous underperformance of the hedge fund industry is that those firms’ principals generally have backgrounds in marketing and trading, not research or economics.

(an aside: one of the reasons for the failure of macro-only analysts is that there’s no reason to think that there’s a strong relationship between a country’s GDP and its stock market. GDP and banks, maybe (the traditional British approach). But not elsewhere. One simple example is the S&P 500, which consists completely of US-owned enterprises. About half the S&P earnings are derived abroad, however.)

I mention this because I’m struck by how much current US stock market seems to be influenced by macro data–strong GDP on the plus side, the increasingly negative effects of official pandemic denial in the South and Southwest, on the other. The ins and outs of individual company success and failure, the traditional heart of Wall Street, seem to be being ignored.

This creates an unusually good opportunity for individual stock pickers. One kind of company seems to be particularly interesting. It’s last year’s pandemic beneficiaries. These will, I think, separate into two cases: firms that had a gigantic one-time jump in sales in 2020 and are now beginning to come back to earth; and businesses that have found new customers who are sticking around even as the country starts to shift back to (what will pass for) normal.

I think there’s a potentially a big difference between companies whose profits doubled last year and are now reporting flat-to-down yoy comparisons and those who doubled in 2020 and are reporting up comparison. The latter is quite a feat, I think. Wall Street, or maybe just trading bots, seem to be lumping both together as cases of decelerating earnings gains–meaning stocks headed for trouble. That is usually the case, but 2020 was so unusual that I think dismissing the ability to make any higher earnings in 2021 is a mistake–that we can profit from by looking carefully.