Business meets turmoil with inaction, austerity
Washington, Wall Street, IMF/WB, Britain all profit off more of the same
Welcome to another edition of Contention! Get ready for just about eight minutes of fiscally consolidated dissident business news. This week we cover:
U.S. leaders answer econ turmoil with inaction
Wall Street banks profit despite “long grind”
IMF/World Bank “war” plan: more austerity
Rapid Round: U.K. says “Go Fish,” Pentagon 5G aims a bridge too far, Xi’s whistful Shenzhen trip, media tips hands with Hunter
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U.S. leaders answer econ turmoil with inaction
Markets inched forward after yet another volatile week dominated by hopes for a new stimulus package. The Dow gained just 0.1%, the S&P 500 0.2%, the Nasdaq 0.8%. Volatility was up nearly 10%.
The story of the week: conflicting data reflects an economy undergoing rapid transformation, all to the benefit of the wealthy.
Working people remained distressed last week, with a significant miss on jobless claims -- analysts predicted “only” 830,000 new losses, but 898,000 came in, the worst level since Aug. 22. Continuing claims again fell sharply -- a sign of an improving labor market, but still one with three million more jobless Americans than the worst days of the Great Recession.
This hole in the economy helps explain last week’s major miss on manufacturing output: economists expected 0.6% growth in September, but producers actually cut output by 0.3%. Since February, plant use has dropped from 75% to 70%, a gap that will suppress demand for capital expenditures until it is filled. If it persists long enough, plant owners will have to write down their assets, permanently downgrading the economy.
But while production missed expectations, consumption beat them: retail spending gained 1.9% in September versus an expected growth of 0.8%.
Auto sales contributed nearly a quarter of the gain, but that had less to do with more cars being sold than with soaring prices distorting expenditure totals. During the last three months, used auto prices have risen 15%, and September saw the biggest one-month price spike since 1969. Retail liquidations following bankruptcies may also have drawn in more shoppers, driving up retail spending.
What’s with the production/consumption disconnect? One possible explanation: producers are looking past current spending and forecasting weak demand to come. Congress and the White House did little last week to reverse those expectations, failing yet again to pass any meaningful fiscal stimulus.
On Wednesday, Treasury Secretary Steve Mnuchin acknowledged that with an election two weeks away it is nearly impossible to hammer out all of the remaining issues at hand. When called out on her role in the obstruction, House Speaker Nancy Pelosi melted down on national television. Trump wants more, McConnell wants less -- they all keep doing the same things but markets expect different results.
It’s not as irrational as it looks though: Wall Street will be fine no matter what happens, and the families going hungry don’t really matter to the bottom line. Somebody’s spending money still, it seems, and that’s enough to justify market gains today.
Wall Street banks profit despite “long grind”
The other big news on Wall Street last week was the official start of earnings season -- the period when most publicly traded companies disclose their performance for the previous three months.
The season usually kicks off with reports from major banks and last week sounded eerily similar to what we reported last quarter: bank fortunes reflect the stark divide between capital and consumers.
Banks with a focus on trading did gangbusters last quarter:
Goldman Sachs reported record earnings-per-share -- $9.68, blowing away expectations of only $5.57. Asset management profits were up 71% for the quarter.
JPMorgan Chase beat on both the top and bottom lines, exceeding revenue expectations by $1.5 billion and earnings by 31%.
Morgan Stanley profits increased by 25%, beating expectations. Revenue was $1 billion more than anticipated, and up 16% year-over-year.
Citigroup experienced a 34% year-over-year drop in profits but its $1.40-a-share earnings blew away predictions of just $0.91.
But banks with a retail and consumer focus struggled:
Bank of America stocks were down 3% following their report, with the company missing revenue expectations, barely beating profit forecasts, and net income down $2.1 billion year-over-year.
Wells Fargo missed expectations with profits down 57% for the quarter. The bank also booked $961 million in ongoing customer remediations following its fake account scandal.
Altogether, the banks are on pace for their first $100 billion trading year in a decade, but that activity is not evenly distributed, hence the differences in performance last quarter.
The major distinction between the quarter before last and this one is the move away from major set asides for bad loans. Last quarter, the banks socked away billions in anticipation of major defaults, but this quarter they saved much less. In the cases of JPMorgan and Citi, they actually took money out of those reserves.
Their forecasts, even without a new stimulus package, take the previous worst-case scenarios off the table but still anticipate a “long grind” with elevated unemployment and blunted output through next year.
This works fine for the banks, because as long as the Fed keeps boosting asset values they’ll keep profiting from the trades, and the same volatility terrorizing middle-class families means more fees. If the stimulus ever does come, they know a big chunk will come right back to them as their debtors seek breathing room. As long as they aren’t exposed to the broad public interest, they can’t lose.
IMF/World Bank “war” plan: more austerity
Annual meetings for the International Monetary Fund (IMF) and World Bank kicked off last week and the gatherings’ major themes were predictable: big talk about the need for development and a relentless push for austerity to make real gains for the poor impossible.
The IMF made headlines by improving global economic forecasts, a 4.4% reduction in global output as opposed to a previous estimate of 5.2% -- still the worst since the Great Depression. But virtually all of the improvement comes from China’s rapid recovery, the only major economy expected to grow this year. Poor countries, especially those in the Middle East, North Africa and Latin America, are seeing worsening conditions: they are expected to shrink 5.7% versus 5.0% previously anticipated.
World Bank top economist Carmen Reinhart likewise expressed fears that the extraordinary efforts taken in the aftermath of the health crisis could prompt a financial crisis.
“This is a war,” Reinhart said, “During wars governments finance their war expenditures however they can and right now there are dire needs. The scenario we are in is not a sustainable one.”
Chief among the looming crises: external debt default by the world’s poorest countries. World Bank President David Malpass chaired a meeting of G20 officials to discuss the group’s Debt Service Suspension Initiative (DSSI), but the group could not settle on any plans for absolute debt reduction. They could only agree to extend debt service deferral for another six months.
The DSSI already represents the “bare minimum” creditors can do for debtor nations struggling to respond to the pandemic, covering less than 1% of developing country external debt. Most eligible countries have declined to participate, as most of their debt is now held by private institutions. Even asking about deferrals can mean credit downgrades.
Furthermore, the DSSI operates with the same “structural adjustment” policies that have ruined health and quality of life outcomes in poor countries for decades. Participating countries must commit to “fiscal consolidation” and fully 84% of COVID-related IMF loans have austerity requirements attached.
IMF President Kristalina Georgieva admits that austerity failed after the last crisis, so why is her institution pushing it again this time around? Because their true stakeholders aren’t the poor people struggling in desperate countries, they are the financial institutions profiting from their debt. These investors are happy as long as their interest gets paid, and if paying it leaves the countries desperate to sell their exports cheaply while taking on new debt down the line, all the better.
It’s a cycle the IMF and World Bank are very familiar with in their multi-generation war against the world’s poor.
Rapid Round
Brexit talks founder on fishing, state aid
Officials expect negotiations over a trade deal between the United Kingdom and the European Union to resume this week despite passing U.K. Prime Minister Boris Johnson’s self-imposed deadline without an agreement. Johnson told British businesses and officials to prepare for a “no deal” end to the relationship between the two entities, a scenario that will entail significant new barriers to commerce between the two major trading partners.
U.K. Foreign Minister Dominic Raab expressed “surprise and disappointment” at the E.U.’s negotiating position, with E.U. fishing rights in the English Channel and U.K. state aid to business as the most significant sticking points. Fishing is only 0.12% of Britain’s economy and Channel fishing is crucial for the industry in France in particular, but the issue has emotional resonance for nationalist voters in the United Kingdom.
Johnson has demanded a “Canada-style” agreement with Brussels to allow for lax labor and environmental regulations on U.K. businesses without countervailing E.U. tariffs. European officials refuse as they point to Canada’s very different relationship with Europe -- historically and geographically -- than Britain. The stalemate comes as U.K. unemployment last week exceeded levels experienced during the Great Recession.
Pentagon nationalized 5G pushback
Major lobby groups from the wireless telecom industry issued a letter last week to U.S. President Donald Trump pushing back on suspected plans to create a nationalized 5G network. “Policies supporting privately-led innovation rather than government controls and mandates are a time-tested model for American success and prosperity,” the groups said.
Their fears follow a September “Request for Information” from the Department of Defense to wireless carriers exploring the possibility of a Pentagon-owned 5G network for its domestic needs, and the opportunity for then sharing parts of its spectrum with private 5G service providers.
Both Republican and Democrat members of Congress have pushed back on the proposal, likewise urging the Pentagon to drop the effort. Democrats also raised concerns that the plan seems to reflect the interests of Rivada, a telecom company represented in Washington by Karl Rove and Newt Gingrich. Rivada denies that they want a nationalized 5G network, only a wholesale network with “huge advantages” for the industry.
Xi marks Shenzhen’s 40-year boom
Chinese President Xi Jinping visited Shenzhen on Wednesday to commemorate the 40th anniversary of the city’s “Special Economic Zone” -- a planned experimentation in market economics launched by former Chinese leader Deng Xiaoping in 1980.
At the time a small fishing village, Shenzhen is now one of Asia’s wealthiest cities, with GDP growing by four orders of magnitude over the 40 years. Annual growth averaged 20.7% over the period, making it a “model city of a great modern socialist country,” according to Xi.
Xi’s speech also laid the groundwork for a new set of reforms meant to extend the city’s role as a demonstration zone for changes that can then be extended to the rest of China. Key among these reforms:
Land use -- much of Shenzhen’s land is designated for agricultural use, but its local government will be empowered to develop more land for urban uses without needing provincial or Beijing approval.
Foreign investment -- the plan is short on details, but new offerings of stock index futures, offshore local government bonds, and reduced restrictions on foreign investment in some strategic areas including private R&D are likely.
Integration with the economies of the “Greater Bay Area” including Hong Kong and Macau -- Hong Kong leader Carrie Lam attended the speech.
Mainstream, social media tip political hands
Twitter and Facebook last week briefly banned and/or discouraged distribution of a New York Post article detailing emails from a laptop purportedly belonging to Hunter Biden, son of former Vice President Joseph Biden. The emails appeared to confirm long-standing accusations that Hunter Biden leveraged his father’s position on behalf of a shadowy Ukrainian company that gave Hunter a lucrative seat on its board of directors.
Facebook’s announcement came from Andy Stone, the company’s Policy Communications Director and a veteran Democrat political operative. Twitter later reversed its ban, with CEO Jack Dorsey saying the company was “wrong” to block the story and a new hacked materials policy allowing users to share stories so long as they are not working “in direct concert with” the hackers.
The moves raised new concerns about explicit partisan bias on the parts of the major social media platforms as well as the mainstream press that reported on the documents only as they affected the upcoming U.S. elections. Investors, meanwhile, began to shift expectations away from a “Blue Wave” favoring Democrats, with some analysis of voter registration data indicating that a Biden victory may not be as certain as media accounts seem to assume.
Disclaimer
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Photo Credit: IMF