Are our leaders siding with the virus?

Plus bad job numbers, bursting bubbles, Myanmar’s coup and Bezos bows out

Welcome to another edition of Contention! Hope you’re ready for seven minutes of bubbly business news from a dissident point of view! In this edition:

  1. January jobs numbers disappoint, tech stocks soar

  2. Big squeeze loosens, but will the bubble pop?

  3. Are rich country leaders siding with the virus? 

  4. Rapid Round: WTO’s new leader, Bezos’ swan song, Myanmar’s coup

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January jobs numbers disappoint, tech stocks soar

U.S. equity markets experienced their best week since November as the speculative frenzy around meme stocks unwound, relieving pressure on Wall Street’s biggest players. The Dow was up 3.9%, the S&P 500 up 4.7%, and the Nasdaq rose 6%. The latter two closed Friday at record highs.

And yet the same story persists, as new data indicate a moribund job market with little hope to come. The news reiterates the accelerating divide between returns on capital and returns on work, with working families getting the short end once again. 

Weekly jobless claims did come in at a nine-week low, with “only” 779,000 new layoffs beating analyst expectations for 830,000. Friday, however, saw the release of January’s federal employment report, and the picture was worse than expected. Economists anticipated 105,000 new jobs for the month, but only 49,000 came in. Only 6,000 of these were on private payrolls

The slowdown was unexpectedly broad, reaching beyond leisure and hospitality industries brutalized by pandemic shutdowns. The “employment diffusion index” -- a measure of how many industries are cutting jobs -- stood at its highest point since April, with 62% of industries shedding workers in January. The unemployment rate dipped to 6.3% mostly from workers giving up on their job hunts altogether. 

But stocks hit records nonetheless. High-tech names drove the rally, with 95% of tech companies in the S&P 500 beating earnings estimates this reporting season. The major tech megacaps -- Facebook, Amazon, Apple, Alphabet, Microsoft, Google, and Netflix -- all finished 2020 with increased sales and gross margins. For Amazon, profits more than doubled year over year. 

So waged workers have seen little recovery in nearly a year while Wall Street captures huge new profits. Higher-wage positions like tech and finance professionals actually have more jobs listed now than before the crash, but “moderate” Democrats last week killed any hope for a minimum wage increase in the short-term. 

We’ve covered this before: capital capturing more and more economic output means declining returns from labor, which makes declining workforce participation perfectly rational. Gangbuster markets have empowered othodox economic leaders to call for more and more “stimulus,” masking efforts to push workers out of the labor force entirely and onto swelling government payrolls.  

But when markets turn, expect a return to austerity and terrible consequences for those abandoned families. For now things are bad, but at least Wall Street is too busy making money to make things even worse. 

Big squeeze loosens, but will the bubble pop?

GameStop lost 80% of its value last week as January’s “Big Squeeze” in meme stocks quickly unwound. Hedge funds hammered by Reddit-based traders breathed a sigh of relief, adding gross exposure at the fastest rate since the market bottom last March. 

Yet while this episode may be ending, it has put a spotlight on what many consider a swelling market bubble. Its unique characteristics and growing inflation risks in the economy could intersect with more chaos to come. 

Congress and the Treasury Department stepped into the aftermath of the crash to call for hearings and reports, but the story’s protagonist may already be dead: Reddit’s r/wallstreetbets forum has split into warring factions as long dormant moderators emerged to take over the page last week. An attempt to execute a coordinated squeeze in the silver market failed. 

The whole thing nonetheless amplified growing concerns that the market’s problems are much bigger than Reddit, with a bubble ready to burst any day. Various indicators support this thesis. Compared to a historic trend line for the S&P 500, stocks are 154% oversold -- an all-time high. Price-to-equity ratios, cyclical price-to-equity ratios, and the replacement costs of stocks are all overpriced by 108-245%.

But there is another side to the story, as rock bottom interest rates indicate that stocks aren’t that expensive after all. Interest rates move inversely to bond prices, government bonds are “risk-free,” and stocks are not. Higher risk = higher reward = higher prices for stocks. Interest rates are lower than ever and thus bonds are more expensive than ever; stocks should have their highest prices ever too. 

Either way, any significant rise in interest rates could weigh heavily on stocks. If rates rise because the economy is growing -- reflecting “demand-pull” inflation -- the new business should offset those downward pressures. If costs are rising for unrelated reasons, it could mean both plunging valuations and eroding bottom lines from “cost-push” inflation, a disaster for business.

Inflation is definitely on the rise: derivative bets on future consumer prices are up to 2.3%, a multi-year high. Consumers have shifted their spending from shutdown-sensitive services into goods, especially durable goods. This has put an unexpected strain on supply chains, raising input costs across the economy. The increases are at 10-14 year highs, with businesses passing these costs on to their consumers

This is not good, and the very sort of “irrational exuberance” typical of a market bubble has made things even riskier. Swelling margin debt -- borrowed money bet on stocks -- and shrinking investor cash reserves could spark a chain reaction similar to the Big Squeeze: deteriorating portfolios make lenders demand new collateral which prompts a sell off to raise cash, further eroding prices. 

In the meantime, workers see their paychecks cover less and less of their expenses. Last month’s debacle only underscores what they already knew: there’s no beating the house when it comes to this economy.  

Are rich country leaders siding with the virus? 

The United States reached a pandemic milestone last week as for the first time more of its citizens have been vaccinated against the coronavirus than have been infected. A total of 26.5 million Americans have received at least one dose of a vaccine, while 26.3 million have contracted the disease since last March.

The country is now on a pace to reach herd immunity -- 75% of its population inoculated or with natural antibodies -- in 10 months, though accelerating deliveries should shorten that time soon. The global pace, however, is at an alarming 6.7 years. 

Financial inequality, unequal development, and bad politics have all become obstacles to eradicating the disease. Together they raise an alarming question: have rich country rulers sided with the virus?

Rich countries spent much of 2020 securing exclusive deals for vaccine doses from pharmaceutical companies. Most governments bought far more than they will need: the United States has 3.7 immunizations per person, the European Union 3.5, and Canada a whopping 9.6.

Poor countries, on the other hand, did not have the money to make these deals. African Union countries have 0.2 vaccinations per person, Latin America only 0.4. To overcome this, the World Health Organization created the COVAX international vaccine distribution program, but bad deal-making has put the fund at risk of failure. The poorest countries will not get vaccinated until 2024 at the earliest. 

Aggravating the problem: Canada has decided to take 1.9 million of COVAX’s doses. This highlights the second leg of the distribution problem: even rich countries without domestic vaccine production can’t get the doses the pharma companies promised them. 

Europe became the flashpoint for this conflict last month, as the European Union threatened export controls to block AstraZeneca vaccines made in Belgium from reaching their buyers in Britain. The crisis cooled last week as the company finally began delivering sufficient doses, but similar delays plagued Moderna and Pfizer vaccines going from the United States into Canada. 

Add into this mix countries like South Africa and India which could theoretically make their own vaccines, but are barred by international intellectual property (IP) accords from doing so. Since October, these countries have sought a waiver from the WTO to allow them to make their own drugs, but the United States and its allies have used delay tactics until last week when they finally vetoed the waiver

This makes good business sense. New strains of the disease will mean an ongoing need for booster shots and a reliable revenue stream for the pharma companies holding that IP. Experts say Africa needs 60% vaccine coverage in the next two years to prevent endemic infections, a viral reservoir that can generate occasional flare ups in rich countries, new rounds of booster shots, and more money for Pfizer, Moderna, AstraZeneca et al. for years to come. 

Right now the governments of rich countries are subtly choosing to make this pandemic a permanent way of life, confident that investment markets can perform well no matter what. Whether their populations will catch on and care remains to be seen. 

Rapid Round

WTO finds a new leader, finally

South Korea’s Yoo Myung-Hee dropped out of the World Trade Organization's leadership race last week, clearing the path for former Nigerian finance minister Ngozi Okonjo-Iweala to take the WTO's top position.

The economic organization had been without a director general since last August when Brazilian Roberto Azevêdo resigned during an appeals dispute with the United States. The WTO found itself squeezed in the middle of the escalating U.S.-China trade war. The Trump administration backed Yoo, while Okonjo-Iweala carried the support of the European Union, Japan and China. The Biden administration has thrown its support behind Okonjo-Iweala.

Okonjo-Iweala’s record in office includes a massive deal with the "Paris Club" of rich creditor nations to restructure Nigeria's debt, privatizing publicly-owned assets, and ending fuel subsidies in 2012, leading to a doubling in transport costs. The move sparked a national strike and the Occupy Nigeria protests.

Okonjo-Iweala’s future legacy hinges on whether the institutions that govern global trade will tolerate different development paths. Given her record of austerity and a 25-year-long career at the World Bank, expect a return to business as usual.

Bezos steps back, prepares for liftoff 

Amazon founder and former hedge fund manager Jeff Bezos announced last Tuesday he will step down as CEO, a position he has held for the past 27 years. Andy Jassy, the chief of Amazon’s cloud computing division, will take over the job.

Little will change at the trillion dollar brand. Bezos will become Amazon’s executive chairman, which affords significant sway over company decisions. The move will allow Bezos to spend more time with his other companies such as private spaceflight firm Blue Origin, competing with Elon Musk’s SpaceX. 

This comes as Amazon reported record profits over the holiday season and growing scrutiny from the Federal Trade Commission for anticompetitive practices. Congress summoned the Amazon boss to testify for the first time last July along with three other big tech CEOs. It’s not clear whether Congress will ask Bezos to come back now that Jassy has taken his place.

Far more importantly for Amazon’s workers, the company’s management failed to halt a mail-in union vote at a distribution warehouse in Bessemer, Alabama, which begins Monday. If the 6,000 workers at the warehouse vote yes to join the RWDSU, an AFL-CIO affiliate, they will form the first such union at an Amazon facility in the United States.

Myanmar coup disrupts development plans 

Myanmar's military overthrew the country's government last week, installing Senior Gen. Min Aung Hlaing as the Southeast Asian republic’s new leader. The junta placed Aung San Suu Kyi, the former state counsellor since 2016, under arrest.

One theory behind the generals’ move: protect their business interests from investigation by an emboldened Suu Kyi, who won reelection in a landslide in December. Myanmar’s top military officers and their families are enmeshed in rackets ranging from pharmaceuticals, mining, resorts, and beer to commercial ports. Their grip exercises strength through two military conglomerates, the Myanmar Economic Corporation and Myanmar Economic Holdings Limited.

Investors attracted to the country under Suu Kyi’s liberal reign are now in a wait-and-see mode. China blocked language at the U.N. Security Council which would have outright condemned the coup, consistent with Beijing’s non-interventionist foreign policy. But China's economic interests are also on shaky ground, having expanded under Suu Kyi, who endorsed the Belt and Road Initiative while also strengthening ties with the United States.

In any case, China doesn't stand to benefit from instability on its borders. "Beijing tends to view the Myanmar military as ungrateful, rapacious, greedy and a poor business partner," wrote Enze Han, an expert of China-Myanmar relations at the University of Hong Kong.


Our only investment advice: Bump the new Kota.

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