Cost of Capital

Capital is both an instrument and a metric. Economic agents use capital as an instrument that provides market efficiency and boosts the relevant sectors of the economy. The financial services industry uses capital as a metric to steer and optimise the risk-return ratio. Capital represents the link between labour, resource and value. What is the role of capital in the current environment? What is the cost of capital when capital is illiquid?

The classical school of thought for economics teaches that capital is supposed to employ labour and buy raw materials for producing goods and services. Capital can also measure the value of those goods and services, thereby determining their value-added.  Therefore, the cost of capital is directly related to its ability to generate economic growth.

What if capital is not able to employ labour and buy services? What if the economy does not need capital anymore? Capital can become illiquid, meaning nobody needs it. History shows us that there were periods when currency completely lost its value, and any amount of capital became overnight useless.

The excess of capital injected in the pipeline of the real economy leaked across all strata of society, thereby disrupting the fragile equilibrium between labour, resources and money.  As a result, labour and commodities are scarcer than capital, which cannot create surplus value. If capital is not able to generate real growth, its cost becomes zero or even negative.

Are we witnessing a paradigm shift?

From a high-level perspective, capital becoming irrelevant represents the dream of every liberal and Marxist. Indeed, labour being a major stakeholder in the real economy is not such a bad thing. Nevertheless, there is one major limitation. Labour is a motley concept, encompassing various sectors, skills and backgrounds. In a world where capital is dysfunctional, it would be difficult to compare the labour values of a butcher and a medical doctor. Let’s not forget that capital not only employs labour but also provides a useful metric for the value of labour.

Inefficient capital leads automatically to dysfunctional labour. The resultant imbalance shifts all the bargain power to resources’ owners, who will be able to set the pace of the real economy. But, raw commodities without labour that generates value are also useless.  

The only solution would stem from a monetary system with a stable mass and global adoption. Bitcoin is in a pole position to repeal and replace the current fiat-driven capital. Bitcoin and other crypto have the capacity to reverse the dip in the cost of capital that could be fatal for capitalism.

As a capitalist, he is only capital personified. His soul is the soul of capital. But capital has one single life impulse, the tendency to create value and surplus-value, to make its constant factor, the means of production, absorb the greatest possible amount of surplus-labour. Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks. Karl Marx,  German philosopher

Market overview

Leading stock market indices recovered sharply on Friday after a bumpy ride during the week. Hyperinflation fears put investors in a tight spot. The temptation for shorting the market is significant, but until now, equities seem to be the best hedge against inflation. The low level of market volatility confirms this hypothesis.  The tapering of assets repurchase will be a game-changer, which could result in more turbulence.

Focus:

Tesla

When the CEO of a company sells a big stake of its shares, markets generally have a bearish reaction. It delivers a strong message to investors that the bullish cycle of the company is close to an end. Tesla chief executive Elon Musk asked his 63 million Twitter followers whether he should sell 10% of his shares in the electric car producer. After a positive vote, Musk sold USD 5 billion worth of Tesla shares. The stock price dipped by more than 16%. The Twitter poll could be the perfect cover for an insider job. What is the SEC watching?

Focus:

Pfizer

Pfizer is becoming the leading supplier of therapeutic drugs and vaccines for COVID-19. Comirnaty is already the best-selling COVID vaccine, and the new COVID-19 pill Paxlovid shows good results from clinical tests.

Pfizer shares spiked after the announcement of the results. Moreover, there are good chances that the rally does not stop here. The booster jab has become mandatory in many countries, and the fifth-wave of the pandemic shows that therapeutic pills are needed as much as vaccines.

Commodities:

Coffee

Commodity prices are going through the roof, and coffee makes no exception. Arabica coffee futures surged up 25% this year amid harsh weather conditions affecting the production in Brazil.

The recent heavy rains have also triggered crop-damaging fungus. The global coffee supply is 20 %below the usual levels, resulting in a spike in prices accentuated by the cost of logistics.

Market outlook

Despite a late rally on Friday, The Dow Jones Index lost ground over the past week ending just near 36,100. The anticipated tapering of bond repurchases should trigger the beginning of the decline.

Bitcoin ended the week following a positive pattern at  USD 65,000 after a short-lived peak above USD 68,000.

The energy crisis triggered by a bubble in power, gas, and coal prices impacts oil prices. Thus, there are sound reasons to believe that Brent could climb above 90 USD in 2022.

As expected, the Gold ounce ended the week on a positive note closing near USD 1,865. Prices could increase further because investors are giving signs of interest amid a long run inflationary context.