Welcome to the Capital Note, a newsletter about finance and economics. On the menu today: work from home, GM’s investment in Nikola, and a look at the Vegas-Wall Street pipeline.
Cities in the Post-COVID Era
With Labor Day now past, it will be interesting to see whether there will be a mass return to the office (at least here in New York City, wandering around Midtown late last week, things didn’t — whatever the Daily Mail might claim — look post-apocalyptic, but it was still more than a little forlorn).
Writing for the Manhattan Institute’s City Journal, Mark Mills takes a look at the debate over working from home — a concept he broadens out to working from anywhere (WFA), and, I think, gives some comfort to those of us still living in the city.
Mills starts by examining some of the survey data used as evidence that there will be a shift to WFA, starting with a University of Chicago study which found that 37 percent of all U.S. jobs might be amenable, in theory, to remote working:
The authors arrived at this estimate based on an upper bound that ignores efficacy, productivity, and practicality. That share wasn’t derived by considering what, in fact, could be remoted, but rather constituted the remainder after finding that 63 percent of all jobs are impossible to perform remotely for transparent reasons such as those entailing “daily work outdoors” or “operating vehicles, mechanized devices, or equipment.” That doesn’t mean that all the remaining 37 percent are amenable to full-time WFA. Many tasks in that cohort are, at best, ineffectively performed remotely, and some shouldn’t be done remotely even if technically possible…
At the heart of the question is the concept of productivity — the increase in output associated with a decrease in inputs of labor, materials, and energy. Advancing productivity underlies societal growth, but there’s lots of overly optimistic talk these days about how WFA improves productivity. One frequently cited paper, for example, from Stanford, reports that WFA led to a 13 percent gain in employee performance. Setting aside whether that’s a significant improvement, and whether such an anemic gain is in fact outside the margin of error inherent in a study’s assumptions, that conclusion came from studying employees at a call center and a travel agency. Another study measured a 4.4 percent increase in “worker output” of patent examiners working remotely. These studies, and others, examine tasks well suited to WFA—tasks not representative of many, indeed most jobs….
In fact, in the pre-Covid world of 2017, IBM made headlines for canceling its generous WFA policy, reverting to making employees show up in person, at least most of the time. Amazon, no technology laggard, recently made clear that, in a post-Covid world, it will continue building more office space in U.S. cities. An enormous body of research exists on productivity and remote work. If the facts in favor of WFA were indisputable, most profit-seeking businesses would have mandated remote work long before Covid-19.
An enormous body of research also exists on the effectiveness of proximity, and on the design of physical spaces for enhancing workplace productivity and fostering innovation. The easy, unstructured, and spontaneous exchange of ideas, still impossible to replicate online, is a key factor in innovation. The coronavirus certainly made proximity a challenge, but the existence of a virus doesn’t change the nature of innovation.
If more employees do start WFA, that will reduce the demand for office space, and if that occurs, well:
Given that office rents are highly sensitive to vacancy rates, competition for fewer occupants will drive down office costs for employers. That will, in effect, make it harder to justify at-home work if it leads to lower productivity. And the jury is out on whether we see a reversal of the pre-Covid trend of more employees per square foot. In a pathogen-averse future, any drop in employees per building could easily be offset by a demand for increased square footage per employee.
Mills concedes that “the fate of cities hangs in the balance” but maintains that this is largely due to non-tech factors. He concludes, “Politicians can blame technology all they like, but if their cities die, it won’t be the Internet that killed them.”
Mills is right, I think, with one caveat: If the jobs that are most amenable to WFA are at the high-income level, that could have a disproportionate effect on city tax revenues. A 2018 study by the Empire Center (using 2016 data) showed that highest earning 1 percent of New York City residents generated 43 percent of city income taxes, a function of high income, to be sure, but also of sky-high city and state taxes. I doubt the number has changed significantly since then, although the recent sharp limitation on the SALT deduction (a move that was unwise and wrong at many levels, which is, yes, a minority opinion around here: don’t @ me) will have increased the effective rate yet more.
Then again, politicians could always move away from their current tax policies . . .
In addition to tax, politicians can make a mess of cities in many ways. Failing to secure the streets is near the top of the list — a failure that, at the moment, is all too widespread.
And politicians can simultaneously increase a city’s crime and reduce its tax revenues by persisting with the more stringent variant of lockdowns — such as we still see in New York City — long past the point that it makes any reasonable risk-adjusted sense.
And on that topic, it is well worth looking at what the Swiss, a generally sensible bunch, are doing.
The Financial Times (my emphasis added):
For some policymakers in Bern, the whole idea of a trade-off between the economy and public health was a false one. The strategy was never to defeat the virus using public policy tools, said one senior scientific adviser to the government in Bern, but to cope with it…
Switzerland in March took an early decision to shut down public life but it was also one of the first in Europe to reopen its hospitality sector. Restaurants and bars have been bustling since mid-May while shops have been filled over the summer. . . .
“We were confronted with something we had no clue about,” Effy Vayena, professor of bioethics at ETH Zurich, said of the outbreak of the pandemic and “needed to buy time and figure out what was happening”.
Five months on, Swiss public health authorities much better understood the dynamics and “that [lockdowns] are not sustainable”, she said. “There’s been a big shift in focus. What we’re seeing now in Switzerland is people getting used to the idea of living in a risk society. We’re asking: ‘how do we live with this?’”
Questions, it seems, that, in New York, at least, de Blasio and Cuomo are incapable of asking.
NikolaSince it listed on the Nasdaq in early June, electric-truck maker Nikola has been a microcosm of the exuberance in technology stocks. The company at one point touched a $35-billion valuation — higher than that of the Ford Motor Company. Never mind that Ford recorded $115 billion in revenues last year, while Nikola has never made a sale. The excitement around electric vehicles has sufficed to keep Nikola’s market capitalization above $11 billion since June, albeit with a great deal of volatility.
Many have chalked up Nikola’s rise to day traders’ gambling on shiny stocks, but today’s news may put a wrench in that narrative: General Motors took a $2 billion stake in the electric-truck maker, sending the company’s shares up more than 40 percent.
The Detroit carmaker will engineer and contract manufacture the Badger truck for Nikola. It will also allow Nikola to access its parts and components.
Nikola plans to issue $2bn in new shares for the deal. The start-up has a market capitalisation of more than $13bn, although it has yet to make or sell a vehicle.
For GM, the investment serves to expand its footprint in the electric-vehicle space. GM will manufacture the batteries and hydrogen-fuel cells used in Nikola’s vehicles. Nikola, on the other hand, will avail itself of GM’s massive supply chain, circumventing the logistical hurdles of building out its out distribution and procurement platform.
It remains to be seen whether Nikola’s trucks will gain traction with consumers. If not, the company can always fall back on its solar-panel business: It recorded $80,000 in revenue this year for solar installation services provided to . . . its Executive Chairman.
Around the Web
Last week’s unemployment numbers were better than expected, but . . .
The ranks of the permanently unemployed — people who say they don’t expect to be called back to their job — continue to shoot up at a faster pace than the Great Recession…
There was a brief pause in the permanent layoffs in July, but then in August they shot right back up again. This is what’s concerning. Even with total employment accelerating much faster than economists had forecasted, the pace of permanent layoffs is happening faster than during the last crisis. Furthermore, we’re already undergoing fiscal tightening, with the failure to extend the UI expansion and PPP, not to mention ongoing fiscal stress on towns, cities, and states. Beyond that, other headwinds may possibly emerge in the weeks and months ahead, as outdoor dining eases (due to weather), college towns suffer due to the lack of on-premise learning, and public school issues further disrupt economic activity to varying degrees around the country.
More collateral damage from the pandemic.
The Wall Street Journal:
Manhattan parking-garage operators say they have lost thousands of monthly customers as many residents packed up their cars and moved out of New York City during the new coronavirus pandemic.
“People are calling and canceling permanently saying they are leaving the city,” said Rafael Llopiz, president of the Metropolitan Parking Association, whose members often charge upward of $500 a month for a spot.
Mr. Llopiz said almost all of the parking-association members’ monthly business is residential. Of the 82,000 monthly customers who usually patronize the trade group’s garages, Mr. Llopiz said only 33,000 spaces were filled by mid-August.
Mr. Llopiz said monthly business is usually down about 5% in August. This August it is down 60%.
Automation and the pandemic, again.
Spot, a four-legged robot about the size of a golden retriever, went on sale last year for industrial uses—inspecting construction sites, patrolling power plants, and other chores in places a wheeled robot can’t go.
Then the COVID-19 pandemic struck, and Spot learned some new tricks. . . .
Meanwhile in Boston, at Brigham and Women’s Hospital, a Spot equipped with an iPad greeted arrivals, enabling staff to screen prospective patients remotely. Other Spots outfitted with sensors allowed doctors and nurses to take temperatures, measure respiration, and even monitor blood oxygen levels without being in the same room as a patient.
Michael Lewis named his breakout book Liar’s Poker after a bar game popular among bond traders in the 1990s. The book portrays Wall Street traders as consummate bluffers, taking advantage of their competitors with sheer brashness.
A number of financiers have embraced the similarities between investing and poker. Hedge-fund manager David Einhorn placed sixth in a $1-million-buy-in World Series of Poker event, in which he regularly participates.
On the flip side, a number of professional poker players have taken their talents to the trading floor. Vanessa Selbst, the most successful female poker player of all time, retired to Westport, Conn., where she works on the investment team of hedge fund Bridgewater Associates. It “feels a lot like poker did back in the day — a bunch of nerdy kids collaborating to try to beat our opponents at a game,” says Selbst of the money-management industry. It is unclear whether her Yale law degree helped her get the job.
Jason Strasser likewise went from Vegas to Wall Street, spending two years playing poker full time before joining Morgan Stanley’s derivatives-trading desk. The Duke grad now runs his own hedge fund called Caption Partners.
It turns out that talented poker players make for talented investors, according to a study by three business professors:
We find that hedge fund managers who do well in poker tournaments have significantly better fund performance. This effect is stronger for tournaments with more entrants, larger buy-ins, larger cash prizes and for managers who win multiple tournaments, suggesting poker skills are correlated with fund management skills. Investors appear cognizant of this as after a manager wins a poker tournament, net flows to the manager’s fund increase significantly.
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