Higher Interest Rates Are Splitting the Economy in Two

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Today’s Agenda

• Interest rates aren’t always bad for business.
• Biden shouldn’t copy Xi’s mistakes (free read!).
• How the hype machine swallowed fintech.
• Fukushima’s lesson for the nuclear renaissance.

The Rich Get Richer

The SparkNotes version of A Tale of Two Housing Markets goes something like this:

Once upon a time, during Covid, Wannabe Homeowner No. 1 managed to lock in a low, fixed-interest mortgage rate. They can now “relax on the veranda as their money-market fund investments pay off,”  Chris Bryant  writes. Then there is Wannabe Homeowner No. 2 , who did no such thing. Now, if they go to buy a house, they have to deal with the giant sucking sound coming from this evil chart:

At the heart of the mortgage market meltdown sits the inflation-fighting Federal Reserve. The bank has “raised interest rates by 525 basis points since March 2022,”  Jonathan Levin  explains. Soaring mortgages have been an unfortunate byproduct of that rate-hiking campaign: The 30-year-fixed rate jumped to almost 7.5% on Tuesday — the highest since 2000.

Maybe you’re thinking: I’ve read this book a million times! The story of the housing market is old hat to me. That may be true, but I bet you haven’t read the sequel, A Tale of Two Corporations.

This story takes place in the same universe with the same doom-and-gloom scenery: Interest rates are sky-high. Everyone wonders whether there’s going to be a recession. GDP is sitting in the corner with a question mark over its head. And the two main characters, Corporation No. 1 and Corporation No. 2, couldn’t be any less alike. Their story goes something like this:

The CEO of Corporation No. 1 is I-Take-a-Corporate-Jet-to-Dinner rich. This company was “able to lock in low interest costs during the pandemic via fixed-rate, long-dated bonds, and since then earnings on their cash deposits have soared,” Chris explains. Naturally, they — and many of their Fortune 500 frenemies — now have buckets and buckets of cash. The company could pay its bills ‘til kingdom come! Or it could invest it all. Or return it to shareholders — whichever lands the CEO a book deal for their self-titled memoir, The Secret to Earning $1 Billion? Do Nothing.

But for the CEO of Corporation No. 2 — a small-cap company — it’s an entirely different ballgame. Ever since the interest-rate hikes, they’ve been feeling the squeeze of floating-rate loans. Last year, the corporate retreat was at the Ritz-Carlton. This year, it’s at the Ramada Inn. Calling the company’s cash balance “modest” would be generous, like saying August is Pumpkin Spice Latte Season. It’s clear that they — and most of their Russell 2000 brethren — are staring down a financial black hole that some have the audacity to call a “death cross.”

Sound familiar? Like many a YA novel on Goodreads, this sequel is not unlike its predecessor: It’s also about the haves and the have nots, just on a corporate scale. Most people expected interest-rate hikes would be a wet blanket on the entire economy. They failed to realize that so far, the blanket has managed to cover only the unlucky half of society: the small-cap stocks and the wannabe homebuyers. But for the FAANGs and the fortunate ones who locked in a low mortgage rate, it’s all water under the bridge.

Obsessed

Last night at the GOP debate, North Dakota Governor Doug Burgum declared China to be “the No. 1 threat to our country.” What he failed to mention is that China is the No. 1 threat not because China is America’s rival, but because China is America’s obsession. “Look no further than this recent study from the Pew Research Center, which shows that around four in 10 Americans describe Beijing as an enemy of the US,”  Karishma Vaswani  writes.

Not only does the China-Is-Evil narrative give rise to harmful anti-Asian sentiment, as Karishma writes, it can also cause economic damage. “When President Joe Biden signed the CHIPS and Science Act a year ago, he did not talk just about how it would revive the US’s manufacturing base and enhance its national security, he also emphasized how it would help America compete with China,”  Allison Schrager  says. While Washington was busy trying to emulate Beijing’s large-scale industrial policy, China began to creep closer and closer to the brink of a financial meltdown, which Minxin Pei warns could be a disaster for Xi Jinping.

But why was Biden putting China on his economic policy Pinterest board in the first place? “The US is a fully developed market; it never made sense to compare its growth rates to China’s when the latter was in catchup mode. Sustaining growth is a different challenge. It requires coming up with new industries, not bringing back old ones,” Allison argues. The twin obsessions with Belt and Road and Build Back Better are proving to be financially dire for both countries, as  Shuli Ren  observes: “US and Chinese banks are in a horse race to see who spirals to the bottom first.”

Telltale Charts

Digital payment startups Adyen, PayPal and Block were once valued more highly than the average European bank. Today, the fintech darlings are down more than 70% from two years ago,  Lionel Laurent  writes. “Adyen, one of Cathie Wood’s ARK Innovation fintech picks, has had a brutal hit, its shares down 50% in the space of one week, wiping around $25 billion off its market capitalization,” he notes. While it’s a painful tumble to watch, you can hardly call it a business failure: “They’ve developed a lot of genuinely clever tech to improve choice and simplify digital payments,” Lionel says. But the reality is that the overhyped valuations weren’t warranted for a sector that’s still ultimately about volume.

Contrary to the rumors you may have heard, Tokyo is not embarking on a program to poison the region’s water supply. Its decision to discharge contaminated wastewater from an abandoned nuclear plant has attracted mass hysteria, all of which is unscientific nonsense. “Drinking a glass of the cleaned-up water direct from Fukushima’s outflow pipe would expose you to about as much radiation as you’d get from eating a dozen bananas,” and “the effect when diluted in the waters of the Pacific is infinitely smaller,”  David Fickling  writes. Over the past 60 years, the atomic power industry has worked tirelessly to develop extensive safety protocols to quell the fears around nuclear advocacy. Those regulations are “fundamental to the social license that nuclear power requires if it’s to exist at all, let alone expand,” he says.

Further Reading

Putin’s Prigozhin nightmares may be over, but the ruble's slide still haunts him. —  Bloomberg ’s editorial board

Donald Trump and Tucker Carlson: A bromance made in conspiracy heaven. —  Tim O'Brien

India’s moon landing is a wake-up call for smug businesses. —  Andy MUKHERJEE

London’s rental market is about to be squeezed into oblivion. —  Marcus Ashworth

The World Cup’s unwanted kiss offers a lesson for all organizations. —  Bobby Ghosh

The stock market has already found a culprit for Maui’s deadly wildfire. —  Liam Denning

Brain-to-text technology could change lives, and not just Elon Musk’s. —  Lisa Jarvis

ICYMI

A lot of people took a sick day today.

Trump is mixing up his legal team.

Korean Air wants to weigh you.

Sam Bankman-Fried won’t get his Adderall.

Hum-to-search has finally arrived.

Kickers

NYC’s newest fine dining eatery, hidden underground.

Miami’s roaming monkey problem, a concern to all.

Europe’s ancient village, submerged beneath a lake.

TikTok’s egg-cracking trend, a medical emergency.

New Jersey’s power outage, blamed on a fish.

No kissing small turtles, it’s a salmonella risk.

Notes: Please send pumpkin spice lattes and feedback to Jessica Karl at jkarl9@bloomberg.net.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.