Banks booming, vaccine risks looming
Plus China's safe haven, bad rising wages, and IMF private lender bail outs
Welcome to the latest edition of Contention! This week we’ve got just about six minutes of neuroscientifically automated dissident business news. In this one:
Trading boom benefits banks but vaccine risks loom
China grows from U.S. decline
Rising wages and automation bad news for workers
Rapid Round: Europe dings data practices, IMF bails out bankers, Google gives Jio four more billion, Rutte ruins stim talks
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Trading boom benefits banks but vaccine risks loom
Second quarter earnings season kicked off last week with major banks and financial institutions reporting more of the same: financial performance rapidly decoupling from consumer well-being, and significant forward-looking uncertainty.
Seesawing news left markets mixed: the Dow up 2.3%, the S&P 500 up 1.3%, the Nasdaq down 1.1%.
The second quarter was the first period fully in the throes of the COVID-19 pandemic. Banks dominate the early part of earnings season, and their fortunes reflected their respective exposures to Wall Street booms or consumer busts:
Wall Street-focused banks Goldman Sachs, Morgan Stanley, and JP Morgan beat earnings forecasts by up to 65% and exceeded revenue expectations by billions.
BlackRock, the world’s largest funds manager, added $500 billion to its assets under management and increased profits 21%.
Citigroup nearly doubled earnings expectations, but saw its consumer banking revenue drop 10%.
Bank of America only squeaked past its revenue expectations because trading fees offset consumer banking losses.
Consumer finance-focused Charles Schwab and Wells Fargo both missed forecasts with a big dividend cut for the latter.
Altogether the banks announced at least $28 billion of stockpiles against future loan defaults.
This future is all about the pandemic, and without an explicit strategy, the United States is pursuing an implicit one: secure a vaccine as soon as possible.
This is a profitable strategy for business if it works:
fewer outlays for immediate response
wage savings in the context of major unemployment
Increased healthcare profits with few effective COVID treatments to pay for and patients deferring non-COVID care
bailouts, stimulus, and Fed action generating liquidity to drive big bank trading gains
a coming huge score when the vaccine gets approved and sold
There are real economic upsides to this strategy for capital, but it is far from certain to work. The most well-known vaccine candidates have still only tested on small numbers of people:
Moderna, 45 people
Pfizer/BioNTech, 24 people
Oxford and AstraZeneca, unknown -- data should be out today
CanSino Biologics is approved for military use in China, but early rounds produced antibodies in only 75% of subjects.
The candidates also have unusually high levels of adverse effects, depend upon unproven technologies, may require entirely new manufacturing facilities, or rely upon cold-chain systems that significantly increase the difficulty of delivery.
If the strategy fails, valuations would need a big downward adjustment, which should be a reason to make the leaders staked in Goldman Sachs et al. revisit their plans. But why bother before then? Earnings season has been full of good news so far.
China grows from U.S. decline
China announced its second quarter GDP on Thursday: 3.2% growth. They may be the only major economy in the world to grow this year, and the way they are doing it could have big impacts for the U.S. dollar.
China’s growth came despite a 1.8% decline in consumer spending, offset by a 4.8% increase in industrial activity. That output is largely going to the United States: U.S. retail consumption jumped by 7.5% in June -- prior to the recent wave of outbreaks. The mirror images of the U.S. and Chinese economies swelled U.S. trade deficits with the People’s Republic by 9.7% in May.
The United States has to fund this deficit with debt, which it is doing at a breakneck pace -- its fiscal deficit is at 14% of GDP, higher than at any point since World War II. The dollar is the world’s reserve currency, so normally its debt instruments aren’t just good as gold, they’re actually better, paying interest.
But now foreign investors and governments are selling off U.S. debt, which presents the United States with only bad options:
Hope that domestic investors pour into an asset class with negative real yield -- near-zero interest rates minus expected inflation. Capital is instead moving into gold: zero yield is better than negative.
Monetize its debt by effectively printing money to buy it all up. BlackRock expects the Fed to buy up all net bond supply this year, though that’s not exactly monetization.
Take action to significantly close the trade deficit. The two main options: devaluing the dollar or increasing tariffs.
Significantly curtail government spending and/or raise taxes.
All four boil down to letting the dollar slide or depressing the economy.
China, on the other hand, offers investors the opportunity to put their money into an actual V-shaped recovery, one where the government has not had to take the same extraordinary monetary actions. Instead they have focused on directly capitalizing small businesses and small regional banks. The result is a strengthening currency and attractive sovereign debt yields.
Now foreign capital -- including from major North American institutional investors -- is pouring into the country to escape U.S. risk. Investors see Chinese stocks and bonds as safe haven bets.
Despite this, the yuan is not well placed to replace the dollar, and TINA is true: there is no alternative. But there also wasn’t an alternative when the British pound-led gold standard broke up in 1914. The 31 years between that crisis and Bretton Woods in 1945 might have a lot to teach us on our present trajectory.
Rising wages and automation bad news for workers
Median wages rose 10% in the second quarter, according to the Bureau of Labor Statistics, the largest increase ever recorded.
This is bad news: the increase was driven entirely by low-wage job losses draining the bottom out of the labor market. Now investors are putting their money into innovations that would eliminate these jobs forever.
In just the last two weeks:
Amazon announced a pilot launch of its smart shopping-cart technology. The cart will detect what you’ve picked out, and let you skip the cashier.
UiPath -- a leader in the business task automation space -- ended a $225 million fundraising round with a $10.2 billion valuation.
Elon Musk said that Tesla should have a prototype Level 5 autonomous vehicle -- fully self-driving, no need for a steering wheel -- by the year’s end.
Office tasks, sales, and transportation are three of the four largest job categories in the United States, accounting for 31% of all employment. Investors are banking on machines replacing many -- or most -- of these workers.
And it’s not just the “low skill” positions that are in trouble. Kernel raised $53 million for its “neuroscience-as-a-service” venture. They see their brain scanning innovations as analogous to the jump from mainframes to personal computers, and intend to market their data to AI and machine learning developers. The more we know how human brains work, the easier it is to build machines to replace them.
None of these projects may pan out, but these stories roll out every week as capital bets on automation for a huge array of tasks. Even something as sophisticated as medical diagnosis isn’t safe, with Goldman Sachs putting $15 million into a computer vision cancer diagnosis start up just last week.
Policymakers may turn to some sort of Universal Basic Income (UBI) to close the gap between displaced workers and the consumer demand the market needs. Current stimulus programs and philanthropy is drifting towards that already.
Critics have long criticised the policy for being a subsidy for landlords, and last week landlord lobbyists confirmed that thesis by calling on the government to extend direct payments to their tenants.
Recycling money from the government to permanently displaced workers to landlords and back again is no replacement for the production drained off the economy by COVID job losses and eliminated forever by automation. But just like a 10% gain in wages is actually bad news, such a dire condition might actually be the best we can hope for.
Rapid Round
Europe dealt two blows to the digital oligopoly last week, both related to tech megacap data practices. First, they announced a probe into voice assistants marketed by Amazon (Alexa), Apple (Siri), and Alphabet (Google Assistant) to determine if they are leveraging their massive data collections for anti-competitive purposes. More significantly, the European Union’s highest court struck down legislation that allowed free transfer of data between E.U.- and U.S.-based companies because snooping by the U.S. government violates European privacy laws. The lawsuit began in 2013 following revelations by National Security Agency whistleblower Edward Snowden.
International debt relief NGO the Jubilee Debt Campaign reported that poor countries are spending $11.3 billion in COVID-related IMF loans to service private debt, effectively bailing out the lenders. Meanwhile Western observers fretted that $11 billion in new Belt & Road Initiative project financing in Pakistan could be a Chinese “debt trap.” The Asia Infrastructure Investment Bank (AIIB), a China-led World Bank alternative, also announced $100 million in loans to small and medium-sized enterprises in Vietnam. The loans bypass sovereign structures and are the first projects financed by $424 million in yuan-denominated bonds sold by the AIIB last month.
Google announced a $4 billion investment in Reliance Jio, accelerating the Indian telecom’s partial sell-off to Western investors. Qualcomm likewise announced a more modest, $97 million stake. New reporting indicates that Jio intends to use the investments the way they have used large debt loads in the past: to finance deep, competition-crushing discounts, building out a monopoly market share. Chief in their sights: Chinese smartphone makers now dominating Indian markets.
At deadline Europe’s leaders still had not agreed on a fiscal stimulus package for the Union, with French President Emmanuel Macron and German Chancellor Angela Merkel walking out of negotiations. The leaders are set to scrap negotiations altogether and return in a month. Dutch PM Mark Rutte along with conservative leaders in Austria, Denmark, Sweden, and Finland want a larger share of the aid to be in loans as opposed to grants. They also want the power to cut off hard-hit countries if they don’t implement sufficient market reforms, the sort of thing Europe’s leaders expect to impose on outsiders, not on themselves.
Last week’s newsletter incorrectly referred to Google as the owner of the Safari web browser, and Apple as the owner of Chrome -- the reverse is true. The employee responsible has been terminated.
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