Finance

Hire a wealth manager, and one of their first tasks will be to work out your attitude to risk. If you are not sure exactly what this means, the questions are unlikely to help. They range from the inane (“How do you think a friend who knows you well would describe your attitude to taking financial risks?”) to the baffling (“Many television programmes now have a welter of fast whizzing images. Do you find these a) interesting; b) irritating; or c) amusing but they distract from the message of the programme?”). This is not necessarily a sign that your new adviser is destined to annoy you. Instead, it hints at something fundamental. Risk sits at the heart of financial markets. But trying to pin down precisely what it is, let alone how much of it you want and which investment choices should follow, can be maddening.To get around this, most investors instead think about volatility, which has the advantage of being much easier to define and measure. Volatility describes the spread of outcomes in a bell-curve-like probability distribution. Outcomes close to the centre are always the most likely; volatility determines how wide a range counts as “close”. High volatility also raises the chances of getting an extreme result: in investment terms, an enormous gain or a crushing loss. You can gauge a stock’s volatility by looking at how wildly it has moved in the past or, alternatively, how expensive it is to insure it against big jumps in the future.All this feels pretty risk-like, even if a nagging doubt remains that real-life worries lack the symmetry of a bell curve: cross the road carelessly and you risk getting run over; there is no equally probable and correspondingly wonderful upside. But set such qualms aside, pretend volatility is risk and you can construct an entire theory of investment allowing everyone to build portfolios that maximise their returns according to their neuroticism. In 1952 Harry Markowitz did just this, and later won a Nobel prize for it. His Modern Portfolio Theory (MPT) is almost certainly the framework your new wealth manager is using to translate your attitude to risk into a set of investments. The trouble is that it is broken. For it turns out that a crucial tenet of MPT—that taking more risk rewards you with a higher expected return—is not true at all.Elroy Dimson, Paul Marsh and Mike Staunton, a trio of academics, demonstrate this in UBS’s Global Investment Returns Yearbook, an update to which has just been released. They examine the prices of American shares since 1963 and British ones since 1984, ordering them by volatility and then calculating how those in each part of the distribution actually performed. For medium and low volatilities, the results are disappointing for adherents of MPT: returns are clustered, with volatility having barely any discernible effect. Among the riskiest stocks, things are even worse. Far from offering outsized returns, they dramatically underperformed the rest.The Yearbook’s authors are too thorough to present such results without caveats. For both countries, the riskiest stocks tended to also be those of corporate minnows, accounting for just 7% of total market value on average. Conversely, the least risky companies were disproportionately likely to be giants, accounting for 41% and 58% of market value in America and Britain respectively. This scuppers the chances of pairing a big long position in low-volatility stocks with a matching short position in high-volatility ones, which would be the obvious trading strategy for profiting from the anomaly and arbitraging it away. In any case, short positions are inherently riskier than long ones, so shorting the market’s jumpiest stocks would be a tough sell to clients.Yet it is now clear that no rational investor ought to be buying such stocks, given they can expect to be punished, not rewarded, for taking more risk. Nor is the fact that they were risky only obvious in hindsight: it is unlikely that the illiquid shares of small firms vulnerable to competition and economic headwinds ever looked a great deal safer. Meanwhile, lower down the risk spectrum, the surprise is that more people do not realise that the least volatile stocks yield similar returns for less risk, and seek them out.Readers may not be flabbergasted by the conclusion—that investors are not entirely rational after all. They might still wish to take another look at the racier bits of their portfolios. Perhaps those are the positions that will lead to a gilded retirement. History, though, suggests that they might be speculation for speculation’s sake. Call it return-free risk.■Read more from Buttonwood, our columnist on financial markets: Uranium prices are soaring. Investors should be careful (Feb 28th)Should you put all your savings into stocks? (Feb 19th)Investing in commodities has become nightmarishly difficult (Feb 16th)Also: How the Buttonwood column got its name More

Africa’s tallest building is rising under empty skies. Beneath the Iconic Tower in northern Egypt sits a city that officials expect to one day house 6.5m people. For now, though, it is mostly empty—like the desert that came before it.Egypt’s “New Administrative Capital” is part of a rush of city-building. Firms and governments are planning more settlements than at any time in the post-war period, with many already under construction. Ninety-one cities have been announced in the past decade, with 15 in the past year alone. In addition to its new capital in the north, Egypt is building five other cities, with plans for dozens more. India is considering eight urban hubs. Outside Baghdad, Iraq, workers have just broken ground on the first of five settlements.And it is not just emerging economies that are building. Investors in America have spent years secretly buying land for a new city in California. To the east, the deserts of Arizona and Nevada have lured Bill Gates and Marc Lore, two billionaires, each with plans for their own metropolis. Even Donald Trump, in his bid for re-election, has proposed ten “freedom cities”. In their early stages, many of these projects will attract derision. History suggests that plenty will fail. But the number and diversity of settlements under construction suggests some will triumph.That is a great thing. Edward Glaeser of Harvard University has lauded cities as mankind’s greatest invention. He notes that agglomerations of money and talent make societies richer, smarter and greener. Since companies move closer to their customers and people closer to their jobs, growing cities beget economic growth. Economists think that doubling a city’s population provides a boost to productivity of 2-5%. Given both the pressing need for new urban areas and the constraints on physical growth in existing ones, starting afresh is sometimes a shrewd decision.In much of the poor world, land disputes, shantytowns and poor infrastructure choke development. The problem will worsen as urban areas swell by an extra 2.5bn inhabitants by 2050, according to projections by the United Nations, with the new urbanites appearing in regions where cities are already under extreme stress. Builders hope that new metropolises will help relieve the pressure. In Nairobi, near where Stephen Jennings, a former private-equity boss, is building a new city called Tatu, public-transport commutes run to over an hour for most jobs. Construction is progressing nicely in Kenya’s newest settlement, where 5,000 residents already live and work in a gated village. Mr Jennings is building seven other cities across five countries in the region.Rich-world cities have problems of their own. The push for a new town outside San Francisco—a project that goes by the label of “California Forever”—came from an “epic housing shortage” on America’s west coast, says Jan Sramek, who leads a group of Silicon Valley investors making it happen. The group, which includes Laurene Powell Jobs, Steve’s widow; Reid Hoffman, a co-founder of LinkedIn; and Sir Michael Moritz, a venture capitalist, will put their plans for “homes, jobs and clean energy” to a public vote in November. If approved, the city will house up to 400,000 residents on 60,000 acres of what is now farmland. Starting again is a necessary part of the solution to housing shortfalls, says Mr Sramek, citing the high costs of revamping existing infrastructure.California Forever is among a clutch of planned towns that also aim to improve urban living. The developer is promoting high-density neighbourhoods in which residents can reach schools, jobs and shops without a car. Today’s city-builders have decided that walkability—or what is sometimes called a “15-minute city”—is a crucial selling point. Some, like Dholera in India and Bill Gates’s Belmont in Arizona, are pitching so-called “smart cities”, which use sensors to direct residents away from traffic or tell them the most environmentally friendly time for a shower.A few projects double as social experiments. Mr Lore’s Telosa city (adapted from the Greek word for “highest purpose”) will do away with private ownership of land, which will instead be held in a communal trust, with money generated from leasing it spent on public services. Praxis (another Greek word, meaning “theory in practice”) has raised $19m and collected a waiting list of potential residents who want to “create a more vital future for humanity” in the Mediterranean. A private company is building Próspera, a cryptocurrency-accepting, libertarian special economic zone in the Honduras, with a mission to “maximise human prosperity”. Praxis and Próspera are funded in-part by Pronomos, a venture-capital fund established in 2019 to invest in new cities, which is run by Patri Friedman (grandson of Milton) and counts Marc Andreessen and Peter Thiel, two billionaire investors, among its supporters.Messrs Andreessen, Lore and Thiel are among a crop of wealthy folk with ideas about how to run cities. But governments also want to experiment. Abundant capital and low interest rates in the 2010s allowed politicians to borrow cheaply. Although rates are now higher, enthusiasm for building remains, as countries copy one another. Leaders are keen on using state finances to reshape domestic economies—and believe that new cities will help.Houses built on sandMuhammed bin Salman of Saudi Arabia hopes that several gleaming new metropolises will attract industries that his country lacks, such as financial services, manufacturing and tourism. NEOM, a city made up of a 170km-long building in the desert, is to be the jewel in the crown. Egypt’s New Administrative Capital is purpose-built for the state’s bureaucratic machinery; the government hopes it will reduce congestion in Cairo. The city already includes the Ministry of Defence’s imposing Octagon—not to be confused with America’s Pentagon—which spreads over a square kilometre. In Indonesia workers are clearing forests for a new capital, Nusantara. For leaders such as Joko Widodo of Indonesia and Abdel Fattah el-Sisi of Egypt, a new capital promises a legacy, lots of jobs and the ability to keep voters at arm’s length.image: The EconomistIn other countries, rulers have slightly more esoteric ambitions. El Salvador is planning to sell bonds that pay out in bitcoin in order to fund a crypto-city. The Kingdom of Bhutan said in December that it would build a “mindfulness city”, with neighbourhoods designed on the repeating geometric patterns of a mandala, a Buddhist symbol. The emergence of the China State Construction Engineering Corporation, whose workers are building cities in Africa, South-East Asia and the Middle East, has lowered the costs of all megaprojects, whether fanciful or prosaic.How many of these cities will prosper? Some infrastructure, such as electricity, internet and roads, must be in place before the first resident arrives, which means that upfront costs can be staggeringly large. Mr Sramek’s company has already sunk $1bn into buying land for California Forever and will need an additional $1bn-2bn for just the first stage of construction. Mr Lore expects to marshal $25bn in initial investment for his city in the desert. Prince Muhammed will lean on his kingdom’s oil riches to pay for NEOM at an initial cost of $319bn. But enthusiasm, and money, can run out; grandiose projects can become white elephants. Work on Egypt’s $60bn capital city has slowed as the country’s economy falters. The Chinese developer behind Malaysia’s Forest City defaulted in 2023, before residents had even moved in.History points to characteristics shared by successful projects. State institutions can help anchor cities, as Brasília (in Brazil) and Chandigarh (in India) showed in the 20th century. Although both have had problems, people in Brazil and India are voting with their feet. Brasília’s population is growing at 1.2% a year, more than double the national average. Chandigarh, a state capital, is now India’s fourth-richest region on a per-person basis.The future is less certain for cities that cannot rely on taxpayers to provide jobs and pay the bills, but California Forever and Tatu seem to be based on sensible ideas. As Mr Jennings puts it, the crucial thing is to focus on getting the “boring stuff”, such as roads and sewerage, right in order to create a city that is walkable and green, but not especially smart. In addition to being what he calls “a dumb city”, Mr Sramek’s California Forever shares another advantage with Tatu: both will piggy-back on neighbouring economies. “We are five miles away from cities on both sides,” says the Californian developer. “The strength of the demand makes a big difference to how fast you can grow.” In Britain, Milton Keynes—a city established in the 1960s, less than an hour by train from London—is thriving. Reston, a planned town outside Washington, DC, is another success.Sensible city-builders are wary of taking on debt. Developers have instead started to sell stakes in projects, demonstrating buy-in for what are long-term ventures. “You are looking at a 50-year time horizon,” says Mr Jennings, who admits that it “sounds insane”. He has tapped friends for capital, avoiding private-equity backers and their investment horizons, which normally come in at under a decade. California Forever is entirely funded by equity investments. If the two new settlements succeed, their investors will be rewarded. But so will many others. That is the glory of cities. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

During the past few years of inflation, sceptics have insisted that governments are undercounting price rises—usually without much evidence to support their claims. But a new controversy in American economics has highlighted the challenge of accurately measuring prices. Only this time the implication points in the opposite direction, suggesting that inflation may prove a more stubborn foe.At issue is the manner in which housing fits into the consumer-price index. To the surprise of many casual observers, statisticians typically do not include property prices in their inflation gauges since they view housing as an investment good, perhaps a once-in-a-lifetime purchase for homebuyers. However, statisticians do know that housing is a big part of personal budgets and want to track regular changes in the price of shelter, much as they do for other consumer products. So instead of measuring property prices outright, their inflation indices factor in how much people pay for rent—or would pay for rent if they leased their own homes. The latter is known as owners’ equivalent rent (OER).In America OER accounts for about a quarter of the consumer-price index, making it the single biggest component. Direct rent, by contrast, is just 8% of the index, because renting is less common: about two-thirds of American households own the homes they live in. Where things get tricky is estimating the OER value. It is not as simple as totting up all market rents and assuming that homeowners would pay the same. Rather, wonks assign a heavier weight to rental prices for single-family homes, which are similar to the kinds of houses that people own. The problem is that there is a relative dearth of single-family homes for rent, giving statisticians a small sample with which to work.These intricacies have come to the fore as concerns mount about the persistence of inflation in America. In January the consumer-price index rose by 0.3% from a month earlier, above forecasts for a 0.2% increase, suggesting that the Federal Reserve is struggling to tame inflation. But nearly half of the broader inflation increase was attributable to a rise in OER alone. And strikingly, the rise in OER was much higher than the rise in market rents.image: The EconomistThe question is whether OER is being estimated correctly. It is true that single-family homes have commanded larger rent increases than flats recently, a reflection of the fact that few such homes are available to tenants. Moreover, the Bureau of Labour Statistics, which compiles the consumer-price index, tweaked its methodology in January, lifting the weight of detached single-family homes in OER by about five percentage points, part of its constant efforts to capture changes in how people live. The combination of higher rents plus a larger weighting does explain much of the rise in OER. Added to that, though, is the inevitable volatility of extracting prices from the small sample of single-family homes for rent. This raises the possibility that at least some of the high OER reading was a fluke.Still, the bigger picture is that OER inflation is running well above pure rent inflation (see chart). Continued tightness in the market for single-family homes ensures the divergence will probably continue for some time, and this in turn will place upward pressure on general measures of inflation. The details of how to calculate OER can seem abstruse. But the conclusion is clear: by feeding into stickier inflation, it may well deter the Fed from cutting interest rates anytime soon. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Working out who earns what is surprisingly tricky. Both the very rich, who sometimes try to keep their wealth from the taxman, and the very poor, who are sometimes mistrustful of clipboard-wielding officials, are especially hard to pin down. Nevertheless, before the covid-19 pandemic, household surveys consistently found a fall in the number of people living in poverty. The World Bank counted 659m living on less than $2.15 a day in 2019, down from around 2bn in 1990.Yet this progress came at a cost: a global “precariat” emerged, members of which were barely out of poverty and perilously exposed to shocks, while the top 1% got rich faster. That, at least, is the received wisdom. The World Inequality Database, a project associated with Thomas Piketty and Gabriel Zucman, two economists, combines tax data with other sources of information to estimate the incomes of the uber-rich. They have found that although inequality between countries has fallen, as the rest has caught up with the West, within countries it may have risen. Chinese and Indian elites have done the best relative to their countrymen. American and European plutocrats, who are busy stashing wealth in tax havens, have done well, too.A new paper by Maxim Pinkovskiy, Xavier Sala-i-Martin, Kasey Chatterji-Len and William Nober, economists at Columbia University and the New York branch of the Federal Reserve, challenges this picture. The researchers look at how likely people in different parts of the income distribution are to understate their income. They find that as the poor become richer, they become more likely to do so. Once adjustments are made for this, poverty has fallen faster than previously thought, and inequality within countries has not risen. It may even have fallen slightly.To reach this conclusion, the authors look at the difference between estimates of income from regional household surveys and gross domestic product in the same area. When surveys imply that a region has less overall income than official figures, it suggests more income is going unreported. The researchers find that the richer an area, the larger the gap tends to be. This makes sense, notes Mr Sala-i-Martin. As a subsistence farmer becomes a small business owner or market trader, he develops more complex income streams and has more incentive to mislead the taxman.If the finding holds, it changes the history of globalisation. Rather than a precariat, the researchers conclude that a “true global middle class” has emerged. Its members will not be plunged back into poverty by a financial crisis or a pandemic.Yet the study will not be the final word. Economists have been arguing about trends in global inequality—and the quality of the data that lie beneath them—for decades. When it comes to the world’s richest people, the new research has more to say about the top 10% than the top 1%, who are widely believed to have done so much better than the rest. Like most papers, this one relies on assumptions that could be challenged by other researchers. Working out the global income distribution is one thing; convincing others you have the right answer is quite another. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
Key to these deals is speed and discretion, according to advisors to several recent transactions and external experts.
Steven Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter.

Federal Reserve Chair Jerome Powell fist-bumps former Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” in the Rayburn House Office Building in Washington, D.C., on Dec. 2, 2020.
Greg Nash | Reuters

The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
Led by $450 million from ex-Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, a group of private investors are plowing fresh funds into NYCB. The move soothed concerns about the bank’s finances, as its shares closed higher on Wednesday after a steep decline earlier in the day.

That cash infusion follows last year’s acquisition of PacWest by Banc of California, which was anchored by $400 million from Warburg Pincus and Centerbridge Partners. A January merger between FirstSun Capital and HomeStreet also tapped $175 million from Wellington Management.
Speed and discretion are key to these deals, according to advisors to several recent transactions and external experts. While selling stock into public markets could theoretically be a cheaper source of capital, it’s simply not available to most banks right now.

“Public markets are too slow for this kind of capital raise,” said Steven Kelly of the Yale Program on Financial Stability. “They’re great if you are doing an IPO and you aren’t in a sensitive environment.”
Furthermore, if a bank is known to be actively raising capital before being able to close the deal, its stock could face intense pressure and speculation about its balance sheet. That happened to Silicon Valley Bank, whose failure to raise funding last year was effectively its death knell.
On Wednesday, headlines around noon that NYCB was seeking capital sent its shares down 42% before trading was halted. The stock surged afterward on the news that it had successfully raised funding.

“This is the unfortunate lesson from SVB,” said an advisor on the NYCB transaction. “With private deals, you can talk for a while, and we almost got to the finish line before there was any publicity.”

Mnuchin’s outreach

Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter. Mnuchin isn’t just a former Treasury secretary. In 2009, he led a group that bought California bank IndyMac out of receivership. He ultimately turned the bank around and sold it to CIT Group in 2015.
Now, with the assumption that Mnuchin and his co-investors have seen NYCB’s deposit levels and capital situation — and are comfortable with them — the bank has much more time to resolve its issues. Last week, NYCB disclosed “material weaknesses” in the way it reviewed its commercial loans and delayed the filing of a key annual report.
“This buys them a ton of time. It means the FDIC isn’t coming to seize them on Friday,” Kelly said. “You have a billion dollars in capital and a huge endorsement from someone who has seen the books.”Don’t miss these stories from CNBC PRO: More

New York Community Bancorp has agreed to a deal with several investment firms including Steven Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity.
Shares of the bank were down sharply for the day before the announcement.
A cash infusion would be the latest development in a turbulent start to the year for NYCB, which replaced its CEO last week.

Struggling regional lender New York Community Bancorp announced a $1 billion capital raise and a leadership shake-up on Wednesday, headlined by former Treasury Secretary Steven Mnuchin, leading to a sharp rebound for its stock.
NYCB has agreed to a deal with several investment firms including Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity in the regional bank, according to a press release Wednesday afternoon.

Mnuchin will be one of four new members of the bank’s board of directors as part of the deal. Joseph Otting, former comptroller of the currency, is also joining the board and taking over as CEO.
The stock jumped sharply after the announcement, but trading was highly volatile. Shares were briefly halted, up nearly 30% for the day. They gave back some of those gains when trading resumed and finished the day up more than 7% after several more halts.
Prior to the press release, the stock was down 42%, amid reports from Reuters and The Wall Street Journal that NYCB was exploring a capital raise.

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Shares of NYCB fell sharply on Wednesday.

The stock was below $2 per share at its lowest point on Wednesday, the latest negative milestone for a company that began January above $10 per share.
The cash infusion is the latest development in a turbulent start to the year for NYCB. The bank disclosed in late January that it was dramatically raising the allowance for potential loan losses on its balance sheet, with its exposure to commercial real estate being a potential issue. That was followed shortly by Moody’s Investors Service downgrading the bank’s credit rating to junk status, and NYCB naming former Flagstar bank CEO Alessandro DiNello as executive chairman.

Then last week, NYCB disclosed that it had “identified material weaknesses in the company’s internal controls related to internal loan review” and announced that DiNello was taking over as CEO, for what proved to be a brief tenure. DiNello will stay on as nonexecutive chairman at the bank, according to Wednesday’s press release.

The questions surrounding NYCB are reminiscent of those that swirled around Silicon Valley Bank, Signature Bank and First Republic before all three failed in the spring of 2023. They were among several regional banks that struggled as higher interest rates pushed down the value of older Treasury holdings and led some depositors to move their accounts elsewhere.
With the U.S. economy continuing to show surprising strength and inflation still above the Federal Reserve’s 2% target, traders have been dialing back expectations for interest rate cuts this year. The higher-for-longer rate environment could keep pressure on the banks themselves and on commercial real estate, which is a key business for NYCB and many other regional lenders.
The struggles for NYCB may have caught regulators off guard as well as investors. The regional lender acquired much of Signature Bank out of receivership from the Federal Deposit Insurance Corporation last March.Don’t miss these stories from CNBC PRO: More

For a brief moment, everyone who owned bitcoin had made money from it. On March 5th the crypto token rose to an all-time high of just above $69,000—a level sure to delight the meme-loving crypto-crowd—before slipping back a little. The record capped a remarkable comeback from the dark days of November 2022, when interest-rate rises were crushing risk appetite and ftx, a crypto exchange, had just gone bust. At the time, buying bitcoin on such exchanges seemed like little more than a fun and novel way to get robbed.Bitcoin is hardly rallying in isolation: everything is going up. Stockmarkets all over the world are near record highs. So are gold prices. Even bond prices are climbing after a miserable two-year stretch. The catalyst is a combination of artificial-intelligence hype, joy at the state of the global economy and expectations of looser monetary policy to come.Still, bitcoin is doing better than most assets. On January 10th the Securities and Exchange Commission, an American regulator, approved applications by ten investment firms, including BlackRock and Fidelity, to create bitcoin exchange-traded funds (ETFs). These make it easier for everyday investors to buy the cryptocurrency. Rather than setting up an account with a specialist exchange, creating a crypto wallet, making a bank transfer and then finally buying bitcoin, people can now simply log on to their brokerage accounts and purchase an etf. Assets in the ten largest bitcoin etfs now come to around $50bn. And the activity appears to be self-reinforcing: the more money is poured in, the higher the price goes, the more people chatter about bitcoin etfs, the more money pours in and so on and so on.image: The EconomistBitcoin has been in existence for 14 years. The elegant mechanism by which it validates itself and supply grows has never been hacked, meaning that the token is not going anywhere. Yet it is now obvious that it is of pretty limited use for payments, as it is restricted by both the high costs and slow speed of transactions. Those trying to build applications on top of blockchains are not doing so using bitcoin either. With the creation of etfs, it is now clear that bitcoin is an investment asset and nothing more. So after this initial surge of interest, what will its returns look like?It would be foolish to extrapolate from bitcoin’s entire history. Over the past 14 years the cryptocurrency has morphed from a niche cyberpunk idea into something approaching a mainstream financial asset. Its more recent price movements might provide some clues, however. There are two explanations for them. One is that purchases are basically a broad bet on technological progress, with variations that reflect prospects for crypto itself. For instance, even as tech stocks soared in the middle of 2021, bitcoin slumped after Elon Musk posted negative tweets about crypto payments. Prices were depressed in late 2022, too, even as stockmarkets were rallying, owing to ftx’s failure.The other theory is that bitcoin is a kind of digital gold. After all, supply is inherently limited, just as gold supply is restricted by the amount of the metal in the ground. Neither asset pays a yield or earns profits. This theory fell out of favour in 2021 and 2022, as inflation soared and bitcoin collapsed, but last year the cryptocurrency once again moved in line with gold.Perhaps both theories contain elements of truth. And a hybrid tech-stock-crypto-vibes-gold-bet asset could be useful in even pedestrian portfolios, especially if it is only somewhat correlated with other assets an investor might hold. Diversification among uncorrelated assets is the foundational principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge.If investors buy this argument, bitcoin’s price is likely to rise for a while yet. What happens, then, when the cryptocurrency’s transition into a standard financial asset is complete? Assume that bitcoin has been added to most investor portfolios. Also assume that crypto tech does not really catch on. In this world, bitcoin’s returns probably do come to resemble those of gold: there is a fixed amount of it, and its price would rise over the long term roughly in line with the stock of money. That implies steady single-digit returns. The creation of a bitcoin etf may have set off a frenzy of eye-popping gains—but the future it portends could be slower and steadier. ■ More

The Securities and Exchange Commission voted 3-2 on Wednesday to issue a final rule about climate disclosures.
The regulation requires a baseline transparency around climate risks and greenhouse gas emissions from certain U.S. publicly listed companies.
It is watered down from the initial version proposed in March 2022. So-called Scope 3 emissions were stripped out, for example.

Securities and Exchange Commission Chairman Gary Gensler testifies before Congress on July 19, 2023.
Win Mcnamee | Getty Images News | Getty Images

Climate disclosures aren’t mandatory under the current regime; companies make them voluntarily. They remain “uncommon in all but a few sectors,” according to S&P Global.
The largest companies must start making some climate disclosures as early as fiscal 2025 and about greenhouse gas emissions as soon as fiscal 2026.

‘A sensible rule to protect investors’

“Climate risk is financial risk,” Elizabeth Derbes, director of financial regulation and climate risk for the Natural Resources Defense Council, said in a written statement.
“This is a sensible rule to protect investors: it gives them access to clear, comparable, relevant information on the measures companies are taking to manage climate risks and opportunities,” Derbes said.

Overall, transparency around climate risk may be essential for investors to gauge if a company’s stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it’s well positioned?
Required disclosures include climate risks that have had — or are reasonably likely to have — a material impact on company business strategy, operations or financial condition, according to the SEC.
They also include a company’s climate-related goals, transition plans, and costs and losses related to events like hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea-level rise, the SEC said.
“Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments,” especially retirement investors who may have a timeline decades in the future, Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum, recently told CNBC.

Rule does not include ‘Scope 3′ disclosures

However, the rule is watered down from its initial version. Derbes and other observers say that dilution hinders investors’ ability to accurately gauge risk.
For example, the final rule stripped out a requirement to disclose so-called Scope 3 greenhouse gas emissions. Such planet-warming emissions are those along a corporation’s value chain like suppliers of raw material or by customers using a company’s products.
For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.

“This is not the rule I would have written,” Crenshaw said, citing omissions such as Scope 3 reporting. “They are a bare minimum,” though ultimately better than no rule at all, she added.
Instead, the final rule will require companies report Scope 1 and 2 emissions if they’re deemed material to investors. These are direct emissions caused by company operations and indirect ones from the purchase of energy (from renewable sources or coal-burning power plants, for example).
Only “large accelerated filers” and “accelerated filers” must disclose Scope 1 and 2 emissions. These categories include corporations with an aggregate global market value of $700 million or more, and $75 million or more, the SEC said.

Challenges could be forthcoming

The rule comes as the Biden administration pledged to cut U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to fight climate change in U.S. history.
It also follows other U.S. and international climate disclosure regimes, such as in the European Union and rules recently passed in California.
Congressional and legal challenges to the rule “are likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote last week in a research note.
While proponents say the SEC rule is well within the scope of its mission to protect investors, others say the agency overstepped its authority.
The rule is “climate regulation promulgated under the Commission’s seal,” and “hijacks” the agency to promote climate goals, SEC Commissioner Mark Uyeda said before the vote Wednesday.
Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it “exceeds the [agency’s] mission, expertise, and authority.”
Gensler defended the rule as being consistent with a “basic bargain” in U.S. securities laws.
“Investors get to decide which risks they want to take so long as companies raising money from the public make … ‘complete and truthful disclosure,'” Gensler said in a written statement following the vote. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain.”
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