This week’s reading list is about arrangements we have mistaken for laws of nature. The tax treatment that makes debt cheaper than equity was a wartime improvisation, not a conclusion reached in a finance faculty, and a century of corporate capital structure has been built on top of it. The trading day has edges because exchanges decided it should, and a venue almost nobody had heard of a year ago has now cleared half a trillion US dollars of oil derivatives outside them. A trading relationship that seemed beyond question two years ago is now a trade war, and the assumption about which side holds the leverage turns out to rest on imports rather than exports. A platform that felt permanent for two decades is being described, plausibly, as a zombie. Even the protection of a coral reef, long assumed to be a matter of guarding what is already there, now appears to require rebuilding it with something tougher. The useful lesson for investors is that durability and familiarity are different qualities, and only one of them is easy to observe. The best investors are not trying to work out which structures will last forever. They are trying to notice which ones are being quietly renegotiated while everyone is still quoting the old rule.
📚 The Debt-Equity Distinction: A Century of Policy by Accident: Daniel Peris on the single most consequential rule in corporate finance, and the fact that nobody really designed it. Interest on debt is deductible against pretax profits and dividends are not, which makes borrowing structurally cheaper than raising equity and tilts almost every capital structure decision before the analysis even begins. That tilt did not come out of Chicago. It came out of the exigencies of financing the First World War, hardened into expectation, and is now simply the water we swim in. Worth reading with leveraged balance sheets, private credit and buyback-funded equity shrinkage in mind. (American Affairs)
📚 The Moose That Roared: Why the US Will Lose Its Trade War With Canada: Paul Krugman on the negotiations that collapsed on Friday and the asymmetry that everyone has the wrong way round. On paper the match is absurd. The US economy is roughly twelve times larger, it buys about three quarters of Canada’s exports, and Canada buys about a sixth of America’s. His argument is that in an extreme trade conflict, access to critical imports matters more than access to export markets, and the US is more dependent on Canadian goods than most Americans realise: high strength to weight framing lumber, heavy crude that upper Midwest refineries are actually configured for, hydro power into New York and New England, and an integrated auto supply chain. A useful corrective for anyone sizing trade risk by GDP. (Paul Krugman)
📚 The $500 Billion Experiment to Build 24/7 Markets on Blockchain: Trade.xyz, built on top of the crypto exchange Hyperliquid, lets speculators buy and sell blockchain-based oil derivatives continuously, including when the traditional venues are shut. It has done roughly US$500 billion of volume since launching in October and accounts for more than 99 per cent of activity across Hyperliquid’s third-party market system. Whatever you think of the plumbing, the interesting question is what happens to price discovery in a commodity when a meaningful pool of liquidity trades in the hours the regulated market does not. Market structure is being rewritten in public, and slowly enough that most people have not looked up. (Bloomberg)
📚 Meta Is Dying: David Dayen and Matt Stoller sit down with Julia Angwin to work through her argument that Facebook, Instagram and WhatsApp have entered a zombie phase, in the mould of Yahoo, Myspace and AOL after their peaks. The evidence she points to is a first ever dip in reported user numbers alongside years of expensive strategic wandering, from the metaverse to the acquisition record to the fraudulent advertising problem on Marketplace. The more useful half of the discussion is the part investors tend to skip: a business can lose cultural relevance and reach long before it loses cash flow, and a declining company with gatekeeping power is still a dangerous competitor. (Organized Money)
📚 Why Scientists Are Using Cheap Picnic Coolers to Protect Some of the World’s Most Endangered Animals: Benji Jones reports from Palau, with a super typhoon churning the famously postcard-blue water offshore, on a coral garden planted two miles out and the low-tech test that decides what gets planted. Researchers put coral fragments in ordinary store-bought picnic coolers, heat the water, and score which ones tolerate it. The tests are admittedly crude, and the scientists say so. Their point is that crude and available beats elegant and unavailable when the thing you are trying to save is on a clock. Something in that will be familiar to anyone who has watched a perfect model lose to a rough one that could actually be implemented. (Vox)
