Bank Of England Plans A Digital Currency, But Not Yet
The Bank of England has announced a a four-month public consultation process on a a British central bank digital currency (CBDC) that could launch by the end of the decade. The Bank’s Governor, Andrew Bailey, says that a digital pound of some kind would provide a new way to pay that will “help businesses, maintain trust in money and better protect financial stability.”
Think Platform, Not Product
The Bank today released its consultation document together with an associated technology working paper on CBDC. Sir Jon Cunliffe, the Deputy Governor for Financial Stability, gave an interesting speech on the need for such a digital currency. How exactly such a retail CBDC will work is yet to be determined, naturally, but Sir Jon spoke about a public-private partnership in which the Bank would provide the digital pound and the central infrastructure and the private sector (banks or “approved non-bank firms”) would provide the wallets and associated payment services, the “two tier” approach favoured by central banks worldwide.
There are many, many stakeholders who will need to form a view and provide input to the consultation process. Andrew Griffith, the Economic Secretary to the Treasury (Britain’s Ministry of Finance) says there should be a “national conversation” about it and he is spot on: In addition to the views of the government and financial institutions, it is important to understand what retailers, law enforcement agencies, consumer groups and others want from such a currency.
Nevertheless, while the devil is in the details, generally speaking this is very good news. Why? Well in my view, there are probably three key things to bear in mind about this interesting announcement about a retail central bank digital currency from one of the world’s oldest financial institutions.
First of all, and I think most people understand this crucial distinction now, digital currency is not cryptocurrency. Digital currency is linked to something in the real world (such as, this case, Sterling), while the value of cryptocurrency is determined only by supply and demand. When it comes to supplanting the pounds in our pockets, the stability of a digital currency is the fundamental requirement and stability supports trade, which support prosperity.
Secondly, and I think most people do not quite understand this important difference yet, digital currency is unlike the electronic money that is currently in bank accounts (which is, by the way, almost all of the money that exists today) because when you send money to a friend for a pizza or something using online banking or Swish in Sweden or Zelle in the USA or PhonePe in India, the money goes from your bank account to their bank account through the banking system. In the future, when you send them a digital ten pounds it will go directly from your laptop to their mobile phone or your car to their laptop or from your smart card to their mobile phone over the Internet, Bluetooth, NFC and who knows what over communications channels, but it will never go anywhere near the banking system. This should mean much cheaper, quicker and more transparent transactions.
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Thirdly, I think it is better to think of a digital currency as a platform for innovative new products and services rather than as a product in its own right. I wrote here some time ago that the role of digital currency as a means to bring innovation to the financial world is critical for the UK. Given Britain’s leading role in fintech, and the renewed commitment to the sector following the “Kalifa Review”, the role of digital currency in creating a new generation of products and services will be where the long-term boost to the economy comes from. The point well made in the Bank of England’s 2020 original report on digital currency, where they pointed to the creation of “smart money” (either by some form of smart contract usage or API interface) as where the benefits of a digital currency will come from. People are going to build some amazing new things on top of money that has an API!
Once In A Lifetime Change
In essence, the Bank of England and Treasury (who already have job listing for a head of digital currency) are saying a digital pound will be needed but that as it is what the Governor of the Bank of England calls a “profound” decision about the future of money, they want to get it right. I could not agree more with them on both points. As a long-time advocate for digital currency, I look forward to digital Sterling in action, but it has to be the right kind of digital Sterling, a digital currency that responds to the needs of civil society and not simply the dreams of technologies.
The launch of digital currency will be a once in a generation change in the way that money works, so it is very important that the Bank of England, the European Central Bank, the Federal Reserve and everyone else takes the time to work out exactly how it should work and make sure that it is implemented correctly. There is no burning platform, as they say: We do need digital currency but we don’t need it tomorrow and it’s much more important to get it right than to get it quickly.
Don’t Make A Mess Out Of The Texas Citizens Participation Act
The Texas legislature is considering a proposed amendment to the Texas Citizens Participation Act (TCPA), which is the Texas Anti-SLAPP law and roughly the equivalent to the Uniform Public Participation Act (UPEPA) which is in the process of being adopted nationwide. Because the proposed amendment has the potential to create more problems than it solves, and in fact may create a mess of things, some analysis is in order.
The TCPA is found at Texas Civil Practice and Remedies Code § 27.001, et seq. The TCPA basically provides that if one party files an action some sort of action which infringes upon certain constitutional rights of another party, that second party (movant) may file a motion to dismiss the action of the first party (respondent) in certain circumstances.
I will not go into the entire operation of the TCPA, but will instead here focus upon only the part that is relevant to the proposed amendment.
If the movant’s motion to dismiss is unsuccessful, then the movant may appeal under § 27.008 of the TCPA and the corresponding § 51.014(a)(12) that provides for an interlocutory appeal of a trial court’s denial of a motion to dismiss. Very importantly, § 51.014(b) provides that while this appeal is ongoing, all other proceedings at the trial court are stayed pending the appeal.
The stay pending the resolution of the appeal is necessary to avoid potential wasted effort by the trial court and the litigants. Otherwise, if the litigation were to proceed before the trial court while the appeal was ongoing, but the appeal later reversed the denial of the TCPA motion, everything that the trial court and the litigants would have done in the interim would be totally wasted activity.
Of course, the respondent who defeated the motion to dismiss wants to get on with their case, but the truth is that the stay pending appeal is probably not going to be very long anyhow, because § 27.008(b) provides that “[a]n appellate court shall expedite an appeal or other writ, whether interlocutory or not, from a trial court order on a motion to dismiss a legal action under Section 27.003 or from a trial court’s failure to rule on that motion in the time prescribed by Section 27.005.” So, if there is a delay in the litigation, it should be only a short one and thus there is no need for a relief from the stay.
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The bottom line is that there is nothing wrong with this stay during appeal as it currently exists in the statutes. It doesn’t need fixing. Nevertheless, in SB896/HB2781 the Texas legislature is considering tinkering with § 51.014 to limit the application of the stay pending appeal to three circumstances:
First, where the motion to dismiss failed because it was untimely under § 27.003(b);
Second, where the motion to dismiss not only failed, but was also deemed to be either frivolous or assert solely for the purposes of delay, per § 27.009(b); or
Third, where the motion to dismiss was denied because an exemption to the authorization of the motion existed (such as commercial speech, wrongful death claims, insurance disputes, evictions, etc. ― Texas has a bunch of such exemptions) under § 27.010(a).
The reason for this tinkering is implicit: If the TCPA motion to dismiss does not seem like a close call, there is no reason to delay the litigation while the movant (who lost the motion to dismiss) prosecutes what is likely a fruitless appeal.
Except that there is.
The hard truth is that trial courts frequently get things wrong. So frequently, in fact, that states such as Texas have full-time appellate courts with numerous districts to review purported errors by the trial courts. Particularly where the state courts are asked to consider matters with constitutional implications ― issues which, unlike the federal courts, they rarely deal with ― the state courts have a tendency to err. Plus, once a trial court has made one misjudgment, the effect is usually to snowball and result in other bad rulings that follow, such as sanctioning a party who was right in the first place.
Thus, long ago it was determined that it did not make any sense for litigation at the trial court level to go on at the same time that there was an appeal pending, for the reason that if the appeal ends in a reversal then whatever the courts and the parties were doing up to that point in the trial court becomes a giant pile of wasted judicial resources and efforts. This is the very reason why § 51.014(b) stays activity at the trial court level for interlocutory appeals. Such is even more important in the Anti-SLAPP context, such as with the TCPA, where one of the primary purposes of such statutes in the first place is to conserve the judicial resources of the courts and the parties — and particularly the party against whom abusive litigation has been brought.
However, the single counterargument against allowing the litigation to go forward during the appeal as in the proposed Texas amendment is this: The appeal is not going to last very long anyway, because of the mandate of § 27.008(b) that the appellate court must resolve a TCPA appeal expeditiously. Because the appeal period will be short, there is really no compelling reason to risk wasting judicial resources and the parties’ resources in the meantime. The proposed amendment to the TCPA is a solution in search of a problem.
It also must be considered that what the Texas amendment really attempts to do is to negate what amounts to a frivolous appeal by a party that has lost its TCPA motion. However, there is already a remedy for that, which is that the Texas Court of Appeals may itself award monetary sanctions for a frivolous appeal. Thus, if a party files a bogus appeal of the denial of their TCPA motion, the Court of Appeals may award appropriate monetary sanctions, not just against the party who brought the appeal but also against the counsel who filed that appeal. This is a significant deterrent to the bringing of such appeals.
But let us consider what might be done in these circumstances if somebody really just wanted to do something for the sake of doing something. It would not be the proposed Texas amendment. Instead, the appropriate solution would be to allow the Court of Appeals the discretion to lift the stay under § 51.014(b) upon the request of a party or upon its own initiative in the described circumstances.
What happens with all appellate courts, including the Texas Court of Appeals, is that the particular panel makes a decision on the outcome of the appeal pretty quickly. The delay in the Court of Appeals issuing its ruling is that it takes time to write the opinion to support the ruling. If the Court of Appeals knows that it is going to rule to deny the appeal, then the Court of Appeals at that time could lift the stay at the trial court level in anticipation of their future formal decision denying the appeal.
The problem of the stay pending appeal is not a trial court issue, and should not be resolved by changing what goes on with the trial court, but instead is an appellate issue that should properly be resolved (if at all) by allowing the Court of Appeals the option of terminating the stay. One thing is certain: The proposed amendment to the TCPA that automatically terminates the stay is not the way to deal with this issue ― if, indeed, an issue actually exists at all.
What Are The 2nd Quarter Teflon Sectors?
The FOMC decision last week fulfilled most expectations, but it was the details that hit stocks Wednesday afternoon. The conflicting comments between Fed Chair Powell and Fed Secretary Yellen on bank guarantees spooked the market as the futures dropped 70 points in the last hour.
It was not surprising that the concerns over the banking system continued last week after last weekend’s emergency buyout of Credit Suisse. The pressure on Deutsche Bank (DB) increased Friday as the US shares were down 5.5% in reaction to their credit default swaps (CDS) hitting a four-year high on Thursday.
For the month DB is down almost 25% as the German Chancellor Olaf Scholz came out with supportive comments on Friday. Most banking analysts do not appear to be worried as Stuart Graham and Leona Li, analysts at global financial research firm Autonomous, said that “Deutsche is in robust shape.” Also, DB has turned in 10 straight quarters of profits.
What was surprising for most was the stock market’s ability to rally on Friday as most of the major averages did close the week higher. Once again the Nasdaq 100 led the way up 2% to push its year-to-date gain to 16.7%. The S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU) had smaller gains of 1.4% and 1.2% respectively. The disparity on a YTD basis has widened further as $INDU is down 2.7%.
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The iShares Russell 2000 had a volatile week but closed up 0.7% while the Dow Jones Utility Average was the weakest, down 1.4%. It is now down 5.9% YTD as it is the weakest performer. For the week the NYSE advance/decline ratio was positive as 1808 issues were advancing with 1385 declining.
As of Friday’s close, the Invesco QQQ Trust (QQQ) was up 1.97% in March as it closed just above the 20-month EMA at $305.24. The next monthly resistance is the August high at $334.42. The multiple-month highs from early in 2022, line a, are in the $370 area. The March low at $285.19 is now an important support level to watch.
The Nasdaq 100 Advance/Decline line is a bit higher this month but still below its WMA as it has been since August 2022. A move above the WMA does not look likely this month. The weekly A/D line (not shown) is fractionally above its WMA as is the daily A/D line.
The monthly relative performance (RS) has moved above its WMA for the first time since late 2022. This is a sign that the QQQ is leading the SPY higher as we move into April. In late January the weekly RS signaled that QQQ was leading the market higher.
The outperformance of growth stocks was not the consensus view at the start of the year or in February. Now the question is whether the growth stocks will continue to move higher despite the strong recessionary fears.
So far in March, the iShares 1000 Growth ETF (IWF) is up 3.5% while the iShares 1000 Value ETF (IWD) is ETF is down 4.3%. The ratio of IWF/IWD formed a V-shaped bottom at the start of the year and moved back above its 20-week EMA in late January.
The downtrend (line a) was broken two weeks and the resistance at line b has also now been overcome. The August peak at 1.631 is the next barrier for the ratio. The ratio is well above its 20-week EMA so it is a bit extended on the upside. The MACD-His did form a slightly positive divergence at the late 2022 lows, line c, and is still rising strongly with no divergences yet.
The monthly analysis of the iShares 1000 Growth ETF (IWF) shows that it closed on Friday just below the 20-month EMA at $237.87. The February high was $242.87 while the monthly starc+ band is at $290.06. The long-term support from 2020, line a, was tested in October.
The monthly RS has just moved above its WMA suggesting that IWF can continue to lead the SPY over the next quarter. The volume has declined over the past two months and the OBV is still slightly below its WMA. The weekly indicators (not shown) are positive.
Of the eleven sectors, there are just two where the monthly RS is rising and it is above its 20-month WMA. The Technology Sector Select (XLK) is up 7.1% so far in March and is currently trading above the February high. The high from August at $150.72, line a, is the next barrier.
The monthly RS has moved further above its WMA in March consistent with a market leader. The volume increased a bit in March and the OBV has moved above its WMA for the first time since April. The weekly indicators (not shown) are positive as the RS is well above its WMA.
The Communications Services Sector (XLC) is up 6.2% in March with the next resistance at $60.24. On a move above this level, the monthly starc+ band is at $67.60. The March low at $51.37 should be good support.
The monthly RS has just moved above its WMA indicating that XLC is leading the SPY. The RS dropped below its WMA in October 2022, one month after the high. The volume has been strong this week and the OBV has moved above its WMA and the resistance at line c, which is a good sign. The weekly studies (not shown) are positive with last week’s close.
Crude oil reversed on Friday to close back below $70. In last week’s review I shared my concerns over this sector as it could hold the major averages back. Sharply lower crude oil prices also could add pressure on some of the regional banks which is not what they need.
In conclusion, the analysis of the Growth/Value ratio and the monthly RS analysis suggests that growth stocks and EFFs should be favored on any pullback. The technical evidence indicates they should be Teflon-like in the next quarter and hold up better than the value stocks.
The Calculus Behind The ESG Battle Between The White House And Capitol Hill
When President Biden used his first veto (less than 60 days after his party no longer controlled both houses of Congress), the media reported on the event with much fanfare. That it had to do with a very narrow subject didn’t matter. But was all the chest pumping justified? Could it be that the issue was already moot even before Congress passed the joint resolution that inspired the veto?
On Wednesday, March 1, 2023, the Senate voted 50-46 to overturn the Department of Labor’s new Fiduciary Rule. This new Rule was to replace a similar Rule promulgated by the DOL under the Trump administration. At issue was the application of ESG criteria by ERISA fiduciaries to retirement plan investments.
What does ESG stand for?
“ESG stands for environmental, social, and governance,” says Andrew Poreda, VP and ESG senior research analyst at Sage Advisory Services in Austin, Texas. “ESG factors are non-financial (yet important) factors that are critical to the success of a corporation or entity.”
The concept isn’t entirely new. A similar philosophy called “Socially Responsible Investing” (“SRI”) emerged as a favorite among activists in the 1980s. It primarily targeted institutional investments in South Africa.
Going further back, religious organizations have practiced this form of exclusionary investing for quite some time. For example, it’s not unusual to see portfolios for church groups prohibit investments in “sin” stocks (alcohol, tobacco, and gambling) or stocks in the defense industry.
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Why is ESG important?
If ESG is just an SRI rose by another name, why has it suddenly become the center of such controversy? In short, it’s because it’s a little hard to define, and when it’s defined, it seems to run contrary to fiduciary practices.
Lawrence (Larry) Starr, of Cornerstone Retirement, Inc./Qualified Plan Consultants in West Springfield, Massachusetts, says, “There is no way to mandate something that is so poorly defined and differs widely in application from company to company and from investor to investor.”
As one of those investors, however, it’s critical you understand how other investors view ESG for the same reason it’s important for value investors to understand how growth investors think and vice versa.
“ESG is data that can provide a more complete picture of how a company operates beyond financial analysis alone,” says Bud Sturmak, the head of impact investing and a partner at Perigon Wealth Management in New York City. “ESG analysis helps to better understand a company’s overall stability, its opportunity to create shareholder value, and its exposure to critical business risks. ESG data can help inform sound investment decisions and allow you to tailor your portfolio to reflect your personal values.”
What is the main focus of ESG?
Starr says the primary reason ESG exists is “to provide ‘socially conscious’ investors with guidance as to a company’s attention to these (not well-defined) subjects.”
Again, if you look at things from the point of view of proponents, ESG, no matter how ill-defined up close, has a sincere intention when looking at it from the 30,000-foot level.
“The main purpose of ESG investing is to reward good corporate citizenship and encourage companies to act responsibly by allocating capital to companies that share the investor’s values,” says Rob Reilly, a member of the finance faculty at the Providence College School of Business and an investment consultant at North Atlantic Investment Partners in Boston. “Environmental criteria consider how a company deals with environmental risks and natural resource management, including corporate policies addressing climate change. Social criteria evaluate how a company manages relationships with customers, suppliers, employees, and the communities where they operate. Governance deals with a company’s leadership, board of director diversity, internal controls, executive pay, audits, and shareholder rights.”
This broad objective can have multiple tactics. How do these varying approaches impact the definition of ESG?
“This depends on one’s perspective,” says Matthew Eickman, national retirement practice leader at Qualified Plan Advisors in Omaha. “At a binary level, it’s either to invest in companies in an effort to support or advance social and environmental agendas, or it’s to invest in companies whose commitment to environmental, social, and/or governance issues situates the companies to perform well in the future.”
This confusion can lead some to question the real aim of ESG.
“It is a Machiavellian and subversive attempt by ESG woke proponents to seize and control how boards of directors in America run their company on ESG goals rather than profit and loss goals,” says Terry Morgan, President of OK401k in Oklahoma City.
What did the President and Congress hope to achieve by their actions?
Given the passion ESG generates on both sides, is it any surprise that it has become a political hot potato? And when something becomes a political hot potato, you need to guard against hyperbole.
“First, it should be noted that there is a disconnect between what the bill does and what some politicians are claiming it does,” says Poreda. “The intent of Congress’s joint resolution appears to be aimed at preventing retirement plans from investing in strategies that are aimed at pushing political and ideological agenda (e.g., ESG strategies are seen as being aligned with climate activism and ‘woke’ agendas).”
Indeed, it could be that both proponents and opponents of ESG may not have read the fine print of either the Trump or Biden Rules.
In a post published in the Harvard Law School Forum, Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School) wrote, “Much of the confusion that the 2022 Biden Rule endorses ESG investing, and that the 2020 Trump Rule opposed it, traces to the original proposals for those rules. The Biden Proposal favored ESG factors by deeming them ‘often’ required by fiduciary duty. The Trump Proposal disfavored ESG factors by subjecting them to enhanced fiduciary scrutiny. However, following the notice-and-comment period, the Department significantly revised those proposals before finalization. Neither final rule singled out ESG investing for favored or disfavored treatment. The final Trump Rule did not use the term ‘ESG.’ The regulatory text of the final Biden Rule refers once to ESG investing, but only to state that ESG factors ‘may’ be ‘relevant to a risk and return analysis,’ depending ‘on the individual facts and circumstances.’ This statement is true for all investment factors, ESG or otherwise.”
Certainly, political leaders possess the legal literacy to discern this similarity. Why, then, did we have all the fireworks surrounding the Joint Resolution?
“Unfortunately, this issue has become politicized and certain politicians believed these factors were being taken into account to achieve political rather than financial goals,” says Robert Lowe, a partner (through his professional corporation) of Mitchell Silberberg & Knupp LLP in Los Angeles.
Clearly, there is no consensus on the meaning of ESG. Perhaps, given there are multiple ideas concerning the definition of “ESG,” it’s only natural that the reasons behind the various maneuverings might also be divergent.
“Different supporters of the vetoed proposal had different intents,” says Albert Feuer of the Law Offices of Albert Feuer in Forest Hills, New York. “Many supporters believe risk return analysis should be subordinated to ESG factors that are not called ESG factors, such as investing in United States fossil fuel ventures to preserve jobs in those ventures even if they have poor risk-return profiles. These same supporters criticize ESG advocates of the divestment fossil fuel investments, which the regulation prohibits absent a showing that these investments will be replaced by those with a better risk-return profile. Other supporters have little confidence in financial analysts and free markets. They believe ESG factors are inherently bad and thus fiduciaries should be prohibited from considering them absent compelling evidence that in a particular situation, such factors would improve the risk-return profile of an investment.”
Marcia S. Wagner, Esq., president/founder of The Wagner Law Group in Boston, Massachusetts, in a Forbes.com interview, said that President Biden faced pressure from his own party. Starr agrees. He says Biden had no choice but “to bow to his far-left constituency, especially since he just approved major drilling for oil in Alaska. This gives him a countervailing argument to show he hasn’t abandoned his ‘progressive’ policies completely.”
In the end, you could have easily predicted the actions by all actors in the dance between the joint resolution and the veto.
“This was a foregone conclusion,” says Eickman. “Biden knew he couldn’t appear weak on this, even if he may not view the DOL regulation as having nearly the impact as Congress had suggested with its votes.”
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