The Forever Bond

The business news through the weekend has been all about bank failures and their effect on interest rates and the economy. At the heart of the problem is the inability of banks to pay off deposits when customers show up during a bank run.

Bank deposits are "hot money" because they are liabilities that can be redeemed at any time. Silicon Valley Bank and Signature Bank failed because they didn't have enough cash on hand (or could get cash quickly enough from asset sales or borrowings from other institutions).

"When this bond was written on vellum in 1648,...
its wide margins were empty. Over many years,
the margins were covered with the records of the
interest returned to its owner."

At one end of the duration spectrum are bank deposits. At the other is a 375-year-old “perpetual” Dutch bond.

One of Yale’s most intriguing investments is a 375-year-old “perpetual” Dutch bond that still pays interest. It was issued by the Hoogheemraadschap Lekdijk Bovendams, a semi-public organization charged with maintaining the dike along the Lek river in the Netherlands.

The water authority was founded in 1323; its successor still operates today, in the province of Utrecht, as the Stichtse Rijnlanden.

The bond is a "bearer bond," which is a key plot point of many a murder-mystery novel:

The text makes clear that the bond was transferable, and payment was to be made to the bearer of the security, not to someone listed in a registry.

However, what may dissuade someone from acquiring the instrument via foul means is that the bearer must show up in person to receive the interest. Also, the amount at stake is not enough to quit one's day job:

Beinecke curator Timothy Young presented the allonge in 2015 at the Stichtse Rijnlanden offices to collect the subsequent twelve years of payments. The latter amounted to the equivalent of $153.

The water company paid its obligation, even when the Netherlands were annexed by France in 1810. When the debt was issued in 1648, the payment of same was viewed as a moral imperative. It's nice to know that some people and cultures still subscribe to that principle.

Blowback

Margrethe Vestager, EU Competition Commissioner 

The field of international tax planning was specialized, complex, cloistered, and quiet---until the European Commission ruled on Tuesday that Apple has to pay €13 billion ($14.5 billion) in back taxes to Ireland. Tax-the-corporations crusaders "hooted with delight" and seemingly didn't care about the methods used to arrive at the result. The overwhelming majority who adhere to the rule of law--whether the law cuts for or against their preferences--saw the danger.

The Economist [bold added]:

"The commission concluded that Irish rulings in 1991 and 2007 artificially lowered the tax Apple was due to pay, and that although the firm did not break any law, this arrangement was in breach of EU state-aid rules preventing member states from offering preferential treatment to particular firms."

Normally laws trump "rules" in the hierarchy of legal authority, but not, apparently, when the laws of the sovereign state of Ireland are measured against the rules of the European Commission.

The Wall Street Journal:

For a quarter-century, Apple relied on agreements from Irish authorities that all of a sudden are adjudged to have provided it with billions of dollars in what the EU has now ruled to be illegal state aid.

There's no question that Apple and other multinational corporations take advantage of inconsistencies between tax jurisdictions ("tax arbitrage"). To achieve significant tax reduction under the law, however, multinationals must have employees and other attributes of a "real business" in low-tax countries, hence explaining why Dublin is a boomtown.

Apple CEO Tim Cook: "Total political crap"

Quite apart from the merits of its case, the European Commission ruling can be viewed as an attempt to reassert its authority (and finances) after Brexit. However, the blowback may have been stronger than they had anticipated.

Apple's EU tax ruling has sparked talk of an 'Ir-exit'. Other European countries are watching and weighing the benefits of staying in the union.

Apple, as well as other multinationals like McDonald's and Amazon, will contest the judgment for years. Meanwhile, they have also begun moving some operations out of the Eurozone to reduce exposure to EC rulings. We are seeing either the resuscitation of the European experiment or the beginning of its end. If I had to bet, it would be on the latter.

The Upper Hand

The major stock market averages are down about 3% three hours before the close. Yesterday's British referendum to leave the European Union ("Brexit") has injected a huge dose of uncertainty. Normally, your humble small investor would view the current circumstances as a buying opportunity, but the problems may well extend beyond the impact on Great Britain.

According to British WSJ columnist James Mackintosh we can foresee either a short correction or a "rolling crisis": [bold added]

If the world sees Brexit as a cry of anguish from a small island somewhere to the northwest of the world’s biggest trading bloc, then the market correction elsewhere could be nasty and brutish, but short.

As a British passport holder I tend to think an impending disaster for the world’s fifth-largest economy could be the next round of the rolling crisis that started with U.S. subprime, crushed Lehman and then the eurozone before flattening emerging markets. Each showed the weaknesses in the global economy, and prompted proper arm-waving panic before central banks got them under control. I may be biased, but it feels as though there could be a lot further to fall before the central banks can stabilize markets.

The market is driven by both fear and greed, and fear is holding the upper hand.

That Can Won't Roll Very Far

(From Vivify Change Catalyst)

So Greece "won" by negotiating a third bailout of Greek banks:

Eurozone finance ministers agreed “in principle” Thursday to grant Greece an expensive third bailout designed to keep it in the euro. But the likelihood that the prospective three-year deal will fail—possibly before it even starts, let alone is completed—is now estimated at higher than 50% by some senior officials in Europe.

No politician on either side wants to be responsible for the write-offs, economic contraction, impoverishment, and even riots that will occur if Greece reneges on its Euro debts and departs the European Union. Better to lend a few more Euros and let the next man or woman deal with fixing a bigger problem.

Yes, the Greeks "won," but in the end they got worse repayment terms:

the radical-left party led by Alexis Tsipras played a reckless game of brinkmanship with the rest of the euro area, and in particular with Germany. Though the aim was to secure a better deal for Greece, the negotiations simply further injured the economy. The game of bluff culminated in a far worse deal on July 13th following bitter negotiations in Brussels last weekend between Mr Tsipras and other euro-zone leaders.

That kicked can has so many dents that it hardly rolls very far.

Borrowing Is Easy, Repayment Is Hard

Anglican priest and Guardian columnist Giles Fraser says the current Greek-German-euro crisis harks back to different perspectives on the Crucifixion(!) [bold added].

As Mr Fraser recalled, traditional Protestant and Catholic teaching has presented the self-sacrifice of Christ as the payment of a debt to God the Father. In this view, human sinfulness created a debt which simply had to be settled, but could not be repaid by humanity because of its fallen state; so the Son of God stepped in and took care of that vast obligation. For Orthodox theologians, this wrongly portrays God the Father as a sort of heavenly debt-collector who is himself constrained by some iron necessity; they prefer to see the passion story as an act of mercy by a God who is free.

The Greeks, obviously steeped in the Orthodox notion of a merciful God, had over 15 years of fun in the Mediterranean sun at the expense of those dyspeptic German bankers. C'mon, Angela, forgive us our debts and we'll try real hard to pay you back next time.