Macro Roundup

Economist Staff, “Companies have raised more capital in 2020 than ever before,”The Economist, December 9, 2020, https://www.economist.com/business/2020/12/09/companies-have-raised-more-capital-in-2020-than-ever-before

Companies have raised more capital in 2020 than ever before

IN MARCH THE corporate world found itself staring into the abyss, recalls Susie Scher. From her perch overseeing global capital markets at Goldman Sachs, a bank, she witnessed firms scrambling for money to keep going as the wheels of commerce ground to a halt amid the pandemic. Many investors panicked. Surely, the thinking went, public markets would freeze in the frigid fog of covid-19 uncertainty—and then stay frozen.

Instead, within weeks they began to thaw, then simmer, kindled by trillions of dollars in monetary and fiscal stimulus from governments desperate to avert an economic nuclear winter. In the past few months they have turned boiling hot.

Initial public offerings (IPOs), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (VCs) patience with loss-making business models. VCs still plough three times as much into American startup stars than public investors do. But proceeds from listings are now growing faster than private funding rounds (see chart 2). The boom is global (see chart 3). On December 2nd JD Health, a Chinese online pharmacy, raked in $3.5bn in Hong Kong. A week later DoorDash, an American food-delivery darling, and Airbnb, a home-rental platform, both more or less matched it in New York.

The original spark that lit capital markets on fire was the $6.25bn in debt and equity that Carnival Cruise Lines secured in April, remembers Carlos Hernandez of JPMorgan Chase, a bank. Investors reasoned that cruises will one day sail again—by which time some of Carnival’s flimsier rivals will have sunk. Other dominant firms have benefited from this logic. Boeing, part of a planemaking duopoly, has sold $25bn in bonds this year, even as its bestselling 737 MAX jetliner has remained on the ground and the near-term future of travel up in the air. Many Chinese companies have taken to issuing perpetual bonds, which are never redeemed but pay interest for ever, to repair their balance-sheets.

Even cheap debt, of course, must be rolled over and, perpetuities aside, eventually paid back. With stockmarket valuations propped up by loose monetary policy, and only a slim prospect of tightening, many firms opted to shore up their balance-sheets with new share issues. Danaher, a high-rolling industrial conglomerate, raised over $1.5bn by selling new stock just after its share price returned to its pre-pandemic highs in May; it has risen by 39% since. On December 8th Tesla, an electric-car maker whose market value has grown eight-fold this year, to $616bn, said it plans to issue $5bn-worth of shares.

With shareholder payouts trimmed or suspended until the covid fog lifts, the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year (see chart 4). Even if you exclude America’s abnormally cash-rich technology giants—Apple, Microsoft, Amazon, Alphabet and Facebook—corporate balance-sheets are brimming with liquidity.

It is still too early to tell what firms will do with all that cash. The merger market is showing signs of life, though mostly as deals put on ice during the pandemic are being revived. Many companies will content themselves with maintaining liquidity, at least until a covid-19 vaccine becomes more widely available.

Startups, for their part, will use IPO proceeds to blitzscale their way to profitability. The pandemic has made business models that might not have matured for years, such as digital health, suddenly viable. Many will fail. But for now giddy investors are pouring money into any firm whose IPO prospectus features the words “digital”, “cloud” or “health”. Headier still, “special purpose acquisition companies”, which go public with nothing but a promise to merge with a sexy startup later on, and which have raised $70bn in 2020, mostly on Wall Street, are shattering previous records.

Markets seem no more discerning in mainland China, where proceeds from listings hit $63bn, the most since 2010. Hong Kong added another $46bn. Shanghai’s STAR Market, a year-old technology board, this week welcomed its 200th member, bringing its IPO haul to $44bn. In September demand for shares to be traded on the Hong Kong Stock Exchange by Nongfu Spring, a water-bottler, outstripped supply by 1,148 times. Even the authorities’ last-minute suspension of Ant Group’s record-breaking $40bn IPO in Hong Kong and Shanghai, after the fintech titan’s co-founder annoyed regulators, may not frighten other listers. And so long as geopolitical tensions between America and China persist, more Chinese firms with an American stock ticker may avail themselves of a Hong Kong one, observes Julien Begasse de Dhaem of Morgan Stanley, a bank.

For now, capital is likely to keep flowing. Mr Hernandez says his bank’s pipeline of IPOs looks “the most robust in years”. The ten-year Treasury yield is below 1% and the spreads between American government and corporate bonds have narrowed to pre-pandemic levels. As a result, even riskier firms’ paper yields less than 5%, according to JPMorgan Chase. Investors expecting meaningful returns are therefore eyeing stocks. For the pandemic’s corporate winners, the choice between cheap debt and cheap equity is a win-win.

Record cash on hand, “…,the cash held by the world’s 3,000 most valuable listed non-financial firms has exploded to $7.6trn, from $5.7trn last year (see chart 4).Even if you exclude America’s abnormally cash-rich technology giants—Apple, Microsoft, Amazon, Alphabet and Facebook—corporate balance-sheets are brimming with liquidity….

Factoids on record capital formation in 2020, “…. According to Refinitiv, a data provider,this year the world’s non-financial firms have raised an eye-popping $3.6trn in capital from public investors(see chart 1). Issuance of both investment-grade and riskier junk bonds set records, of $2.4trn and $426bn, respectively. So did the $538bn in secondary stock sales by listed stalwarts, which leapt by 70% from last year, reversing a recent trend to buy back shares rather than issue new ones. Initial public offerings (IPOs), too, are flirting with all-time highs, as startups hope to cash in on rich valuations lest stockmarkets lose their frothiness, and venture capitalists (VCs) patience with loss-making business models. VCs still plough three times as much into American startup stars than public investors do. But proceeds from listings are now growing faster than private funding rounds (see chart 2).The boom is global (see chart 3)….”

New NBER offers a (narrative based) historical perspective at the relationship btw fiscal deficits and inflation. They find“…We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax…”

And that condition won’t hold true coming out of the pandemic, “…During the pandemic, central banks have shifted to highly expansionary policies as fiscal authorities have implemented record-breaking deficits that have pushed debt ratios close to WWII levels (and beyond in the US). Currently, inflation in the US is well below the Fed’s 2% target. What are the risks that could trigger moderate or even high inflation?One possibility is that the unprecedented peacetime deficits and monetary accommodation raise the risks of sustained (money growth fueled) excess demand. Also the Fed’s new strategic goal of raising inflation may inadvertently run the risk of unanchoring inflationary expectations. Second, the mounting debt could exert fiscal dominance over monetary policy. The lessons from our historical survey are: avoid war, be cautious of sustained monetary accommodation of fiscal deficits, avoid fiscal dominance, maintain central bank independence, keep inflationary expectations anchored, and pursue pro-growth economic policies. The evidence suggests that ignoring the lessons from history could be at the policy makers’ peril….”
Michael Bordo and Mickey Levy, "Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record," National Bureau Of Economic Research, December 2020, https://www.nber.org/system/files/working_papers/w28195/w28195.pdf

They argue that the slow recovery from the crisis was a headwind to inflation, “…The primary reason why inflation stayed low is that the unprecedented monetary easing, including the Fed’s massive balance sheet and sustained zero interest rates, and the record deficit spending,did not stimulate any sustained acceleration in aggregate demand(Levy 2017). This constrained excess demand and product pricing and wages…”

Their primary takeaway, “.. We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax.There were two peacetime episodes in the early twentieth century when bond financed fiscal deficits that were unbacked by future taxes seem to have greatly contributed to inflation: France in the 1920s and the recovery from the Great Recession in the 1930s in the U.S. In the post-World War II era a detailed examination of the Great Inflation in the 1960s and 1970s in the U.S. and the U.K. suggests that fiscal influences on monetary policy was a key factor….”

Ed Yardeni bets on continued deflationary pressure “....Our money is on the 4Ds. They should continue to keep a lid on inflation.... Détente. In the grand sweep of economic history, inflation tends to occur during relatively short and infrequent episodes, i.e., during war times. The more common experience has been either very low inflation or outright deflation during peacetimes....Technological Disruption. Nevertheless,recent global trade tensions and the pandemic are likely to cause businesses to diversify their offshore supply chains away from China and to onshore more of them. That could be costly and inflationary. It could also be cost effective now that labor shortages attributable to global demographic trends are stimulating technological innovations in automation, robotics, artificial intelligence, and 3D manufacturing. These all enable onshoring and boost productivity to boot.... Demographics. Fertility rates have plunged below population replacement in recent decades around the world as urbanization has changed the economics of having children. Instead of being an important source of labor and elder care, as they were in agrarian communities, children are all cost in urban settings. Nursing homes have few vacancies, while maternity wards have plenty. Increasingly geriatric demographic profiles are inherently deflationary....Debt. During the 1960s through the 1980s, debt was stimulative; more of it stimulated more demand and added to inflationary pressures. Now, easy credit conditions aren’t as stimulative to demand as in the past because so many consumers have so much debt already. However, easy monetary conditions are a lifeline to zombie companies, enabling them to raise funds to stay in business and add to global supplies of goods and services, which is deflationary....) …The dollar’s descent. Yet another interesting set of correlations is the ones between the inverse of the dollar versus the price of copper and versus expected inflation (Fig. 19 and Fig. 20). All three variables are consistent with rising inflation pressures. However, similar past episodes in recent years signaled that deflationary pressures were abating rather than inflation rebounding….”

Ed Yardeni, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?,"Yardeni Research, December 12, 2020, http://blog.yardeni.com/2020/12/inflation-was-sooo-1970s-will-it-roar.html