A Bourse With No Name has emerged as the new home both for insider trading and for political espionage. The prediction exchanges have been prominent recently as people won millions betting on the exact date of the U.S. attack on Iran, on the date Maduro would be removed from office and on the date of exit of Iran’s Supreme Leader. Suspicion that the winners have insider information from within the government is high. $529 million was traded on the timing of the first Iran attack. Bizarrely, political leadership or their friends can win large amounts by placing bets on events they can manipulate. These virtual exchanges are regulated in the U.S. by the CFTC. The participants are anonymous in the offshore versions of these markets. Will it be long before financial transactions, perhaps cloaked under another guise, informed by inside information, enter the bourse?
Various publications frequently rank private equity firms by the amount of capital invested in a year. Notably, the biggest new entrant to the PE business and the largest investor has not been included in these rankings. The new investor, The Donald Fund, LP, also known as the U.S. government, has contributed $10 billion in equity in the last year to semiconductor, rare earth minerals and nuclear energy companies. In addition, they have taken a “golden share” in U.S. Steel which gives the government veto rights on plant closings and on merger decisions. This arrangement is similar to France’s cumbersome stake in Renault. These actions were foreshadowed by the government’s 2009 $535 million dollar investment in solar panel manufacturer, Solyndra, an investment that filed bankruptcy in 2011. The stock price of each of these companies soared after the announcement of the government investments. In the case of the rare earth firm, Vulcan, the President’s son’s investment firm invested in it three months prior to the government announcement, a commitment with astonishing prescience. Setting aside the obvious conflicts of interest, there are two other issues that these investments pose for equity markets, public and private, and for policy considerations. Should the government be in the business of picking favorites in industries and what are the implications for markets if they do? These are not cases such as in 2008 / 2009, when entire industries such as autos or banking were offered bailouts. In addition to the funds being allocated based on political caprice, not on an economic analysis of investment merit, the benefitting companies are perceived as having a government “umbrella” of protection from regulation and a commercial “edge” selling to the government to the great disadvantage of competitors. Stocks can soar, not because of free market valuation metrics, but instead due to a political halo. When control of the White House inevitably changes, will another favored group be anointed? The absence of a level playing field (or a perceived one) will foster chaos in markets allocating capital. The recent skirmish between the Pentagon and Anthropic in favor of Open AI is a precursor of where this may lead
Letters of Marque were authorized by Article I of the Constitution and used in the Revolutionary War and in the War of 1812. The letters permit private, nonmilitary vessels to legally attack, seize or destroy enemy ships during wartime. The U.S. has not yet revived this practice, but the use of contract troops like Blackwater and the seizing of private oil tankers from Venezuela coupled with the extremely broad interpretation the administration made of IEEPA to levy tariffs raises the question of what break from the commercial norm will be next. Managing business in anticipation of these on again / off again policies causesabnormal behavior in pricing, in supply chain schedules, in inventory management and in capital planning. It is possible that the replacement tariffs will also not survive a court challenge. This will leave a permanent liability in limbo related to the collected tariff duties as the uncertain process of providing rebates and the related pricing “pass through” to customers is daunting.
I’m Rob Morris and I approve this blog.