Wednesday Briefs – 10 March 2021

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THIS WEEK: ARK Invest; Robinhood 2.0; Benevolent Ruthlessness; Social Capital.

ARK Invest

If your name is on everyone’s lips, there are benefits and drawbacks. The main benefit is you can achieve your marketing goals with greater ease, for example raise billions of dollars for your fund. One of the drawbacks, as noted last week, is that ubiquity can be the sign of a top. Since nothing is supposed to be easy and God has a zest for irony, this means that you reach asset-raising heaven at the precise moment when your performance starts to fade.

Cathie Wood of ARK Invest rose to prominence last year on the back of her outlier calls on Tesla stock and others. In early 2020, she had a $1,400 target for Tesla which seemed very far when the stock was at $200, and then suddenly within reach at $900 (prices are adjusted for a 5-1 stock split). But in the past six weeks since that peak, Tesla stock has fallen in what is either the pause that reinvigorates (Wood’s view) or the beginning of an inevitable unwind (the view of shorts). On Monday, Tesla closed at $563 validating the unwind, but yesterday, it jumped 20% to $673 showing the new vigor. Along on the ride, Wood’s main vehicle ARK Innovation ETF (ARKK) fell 25% from February 12th to Monday and bounced back 10% yesterday.

Valuation will have its day but in this market, it is for novices or the very experienced. Tesla’s stock and ARKK’s performance in the remainder of 2021 will depend in large part on stimulus inflows and interest rates.

Robinhood 2.0

Congress is on track to pass another very large stimulus and relief bill intended to assist individuals and households who are struggling in the pandemic. This will be welcome relief for millions of people. But as was the case last year, some recipients have no pressing need for their checks and will once again plow them into savings, stocks, and… leveraged options of left-for-dead companies at a Robinhood trading account.

Along with the market, these freshly-minted dollars will be climbing the usual wall of worries which is now steel-reinforced with rising interest rates. From the end of January, the yield on 10-year Treasurys has risen from 1% to 1.55%, essentially recovering its pre-pandemic level. But that level was itself historically low. Going forward, any whiff of inflation over 2% would send yields to 3% or higher, and wipe out in an instant Uncle Sam’s misdirected largesse.

Benevolent Ruthlessness

This phrase caught our eye when a March 2020 Maureen Dowd article about Governor Andrew Cuomo was recently resurfaced by cynics reveling in his more recent troubles. Dowd passes on, as if it were an awesome thing, a quote by Democratic strategist Lis Smith: “Trump is selfishly ruthless for his own personal gain while Cuomo is more benevolently ruthless.” Our main interest here is not in the Governor’s problems but in the phrase “benevolently ruthless”, an apparent oxymoron.

Napoleon Bonaparte by Jacques-Louis David (1812)

The problem with benevolent ruthlessness is this: the benevolence is abstract and subjective, but the ruthlessness is felt immediately. Ruthlessness is defined as “the quality of lacking pity or compassion for others”. If ruthlessness can be benevolent at all, it is only when applied narrowly in the same sense as its neighboring phrase “tough love”.

Tough however is not the same as ruthless. We are tough with the people whom we love and who depend on us for some guidance, for example with our children (“you cannot go out until homework is done”) or our elderly parents (“you need to have a physical every year”). But no one outside of neurotic tiger moms would argue that we should be ruthless with children or the elderly. That is because ruthlessness has a devil may care attitude towards the other person, while tough love clearly does not.

Benevolent ruthlessness is a tricky concept when applied to governance because we are not children or elderly dependents of the state. Here, tough love or benevolent ruthlessness imply that a leader knows better and that the people can be infantilized and treated in the way of children or the very old. But the very idea of democracy is that no single person “knows better” and that the best outcomes coalesce from different branches working together.

Giving benevolent ruthlessness some breathing space feeds directly into the paternalistic style that is cultivated by some politicians. This kind of governance has a disastrous track record, worldwide. Nicknames such as “the father of the nation”, “Uncle Joe”, “the great helmsman” have all been licenses for abuse of power (euphemistically). Among such historic figures is Napoleon Bonaparte (literally the Lion of Naples) who died two hundred years ago this May 5th. Napoleon was benevolently ruthless. He forced the modernization of European institutions, advanced the meritocratic economy and introduced the Napoleonic Code. But he also invaded several countries, caused countless deaths and subverted France’s budding democracy. The modernization was inevitable with or without him. War and destruction were not.

READ MORE >>> France Can’t Cancel Napoleon.

Social Capital

While we are talking about oxymorons, we must reckon with social capital. “Social” means the coming together of people. “Capital” is the pooling of money. In sociology, social capital has nothing to do with money. It refers to the goodwill that accumulates and to the networks that form within a community, large or small, as a result of thousands of social interactions between its members. L. J. Hanifan, a West Virginia schools supervisor in the early 1900s, is credited by the sociologist Robert Putnam with having coined the phrase in this passage:

“I do not refer to real estate, or to personal property or to cold cash, but rather to that in life which tends to make these tangible substances count for most in the daily lives of people, namely, goodwill, fellowship, mutual sympathy and social intercourse among a group of individuals and families who make up a social unit.… If he may come into contact with his neighbour, and they with other neighbours, there will be an accumulation of social capital, which may immediately satisfy his social needs and which may bear a social potentiality sufficient to the substantial improvement of living conditions in the whole community. The community as a whole will benefit by the cooperation of all its parts, while the individual will find in his associations the advantages of the help, the sympathy, and the fellowship of his neighbours.”

But Social Capital today is also the name of the investment firm run by SPAC-man of the hour Chamath Palihapitiya. Though also high-minded, this Social Capital does appear to be interested in property and cold cash. Nothing wrong with that, even if prima facie incongruous with the origin of the phrase.

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