The Lex Newsletter: can you pass the US immigration service’s financial pop quiz?

Dear reader,

I was on the cusp of conforming to the historic description of a transatlantic immigrant when I joined the line for passport control at JFK airport in New York a week ago. I was tired, time-poor and yearning to breathe free after six hours wearing a face mask aboard an airliner.

The official in the booth raised an eyebrow on learning I was not entering the US for the purposes of smuggling or organised crime, but for business journalism, an activity almost as nefarious. “Oh yeah?” I could see him thinking.

I still don’t know whether he would have sent me back to the UK if I had failed the well-informed financial pop quiz to which he then subjected me. Today’s Lex newsletter is structured around his questions, as echoed in our coverage.

1. Who coined the phrase ‘comparative advantage’?

David Ricardo. According to the theories of this English economist, nations specialise in industries where their opportunity cost is low, even as they trade across borders.

Russia has a comparative advantage in oil and gas, for example. International trade in its hydrocarbons is partially unravelling as a result of sanctions, however. This contributes to oil price inflation and global heart-searching over energy policy. In China, refiners will struggle to pass on higher input costs to customers. In the UK, higher prices could trigger a fresh round of drilling in the North Sea.

The UK government is meanwhile dusting off plans for new nuclear plants to keep the lights on when renewable generation falters and hydrocarbons have been phased out.

Russia’s comparative advantage is mirrored in a stock market dominated by resources companies and businesses dependent on them. The Moscow bourse staged a limited reopening on Thursday. Lex reckoned support of up to $10bn from Russia’s National Wealth Fund was a bigger reason for surging prices than any desire among locals to hedge against inflation.

The US has a comparative advantage in technology, which companies such as Adobe can no longer sell to Russians, triggering financial hits. The UK has comparative advantage in speciality insurance underwriting, as embodied by Lloyd’s of London. This institution expects to chalk up some big losses of its own from the Ukraine war. The corollary is that claims payouts tend to lure new premium income.

2. What is ‘the invisible hand’?

In free markets, the profit motive ensures goods and services are priced efficiently and capital is allocated well, according to the Scottish economist Adam Smith, as freely interpreted by me.

Swaths of his great book The Wealth of Nations are devoted to the returns on land ownership, reflecting the agrarian character of 18th-century economies. These days, replacing a well-located wheat field with an ecommerce warehouse is a no-brainer, even when cereals prices are temporarily surging. Worries over supply chain security mean more of these “enormo-barns” will be needed.

Amazon now owns or leases about 600mn sq ft of depots, offices and data centres. Other big tech companies are expanding their property footprints, as much from sheer corporate opulence as functional need.

3. Who first spoke of ‘creative destruction’?

This was the great gift to the world of swashbuckling Austro-American economist Joseph Schumpeter. Innovation pulls the rug on businesses that fail to keep up.

That threat is probably why JPMorgan Chase, America’s dominant universal bank, is investing heavily in fintech. A lack of payback targets has spooked some investors, who oddly don’t mind when Silicon Valley businesses are equally vague on paybacks.

We can assume that Euroclear is investing a lot less in payments consortium Fnality than the $15bn JPMorgan is shelling out on new systems. The motive is the same, though: to avoid falling behind. Euroclear wants to clear and settle trades in the tokenised securities that might one day supplant the conventional kind.

Non-fungible tokens are already well-established, though I’m personally sceptical whether they are anything more than a fad.

It makes more sense to invest in ad-peddling tech giants such as Meta and Google. These have plenty of cash flow, even if their role is morphing from that of creative destroyers to mature businesses. They seek to retain competitive advantage and catch up with rivals in neglected specialisations such as cloud tech. Uber meanwhile figures as a creative destroyer that is running out of road itself, as reflected in a rapprochement with its erstwhile adversaries, New York’s yellow cab drivers.

The other questions

The guy in the passport booth covered a lot of ground in the 15 minutes he spent quizzing me while the queue lengthened behind me. Among his other questions were:

4. What does the acronym CDO stand for?

5. Likewise CDS?

6. Who said ‘You shall not crucify mankind upon a cross of gold’?

7. What is the ‘Texas Two-Step’?

8. What did John Maynard Keynes say about markets?

You can find the answers at the end of this email. I got enough of them right to merit admission to the US.

The official said I had done about as well as Dominique Strauss-Kahn. The Frenchman had also taken the JFK Airport Finance Pop Quiz when he was managing director of the IMF.

I will leave you with the quote often attributed to Mark Twain that my new friend required me to complete as a final flourish before I was allowed to drag my suitcase through the automatic doors and into the arrivals hall.

It is as follows: “If you don’t read the newspaper, you’re uninformed. If you do, you’re misinformed.”

We try hard every day to disprove that statement. Please let us know whether we’re succeeding at [email protected].

Jonathan Guthrie
Head of Lex

Answers:

4. Collateralised debt obligation

5. Credit default swap

6. William Jennings Bryan

7. A restructuring that yanks valuable assets away from creditors

8. ‘Markets can stay irrational longer than you can stay solvent’