China drops an anvil on Jack Ma
Plus workers weaken in the U.S., the virus surge, and Ethiopia’s crisis
Welcome to another edition of Contention! This week we have about eight minutes of microlent dissident business news. This week:
Jobs, stocks gain but weakness persists
China puts Ant Group on ice
Virus surge puts economies under pressure
Rapid round: Rideshares take California, Ethiopia on the brink, Palantir’s plans
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Jobs, stocks gain but weakness persists
Stocks rose at their fastest pace since April following U.S. elections last week, with the Dow up 6.9%, the S&P 500 up 7.3%, and the Nasdaq up 9%. We reported on Thursday that markets rewarded post-election reductions in uncertainty, and Joseph Biden’s confirmed victory on Saturday will likely boost stocks even more.
One thing Wall Street didn’t register last week: important new data indicating ongoing economic trauma awaiting the incoming administration.
The U.S. Department of Labor reported October employment numbers on Friday:
Employers added 638,000 new jobs in the month, substantially more than the 530,000 analysts expected.
The unemployment rate dropped to 6.9% also significantly better than the forecast of 7.7%. Both numbers are roughly twice the February figures.
1.2 million new people moved into long-term unemployment -- out of a job for longer than six months -- with 32% of all unemployed workers now in that category, up from 19% the month before.
This weakness showed up in the weekly jobless claims report on Thursday, as 751,000 new claims came in versus only 741,000 expected. If you strip out seasonal adjustments and add in rising long-term claims, 1.1 million new Americans applied for benefits last week, virtually the same level we’ve seen for weeks now.
And speaking of things that sound the same every time you hear them, the Federal Reserve met on Wednesday, with Chairman Jerome Powell announcing the same near-zero interest rates, $120 billion monthly security purchases, and pleas for new fiscal stimulus we’ve heard for months now. A relief bill looks less likely than ever, and outgoing President Donald Trump probably wouldn’t even sign it if it got out of Congress.
Now experts are saying this is GOOD for markets because it will relieve inflation fears, keep interest rates low, and boost stocks. The fact that these same observers have been saying the exact opposite for months -- that we need massive new stimulus ASAP -- is a perfect indicator of Wall Street credibility.
At the end of the week they really only needed to worry about one number: $57.4 billion. That’s how much the 164 richest U.S. individuals added to their net worth -- on Wednesday. No matter what story analysts tell, the 164 end up the heroes every time.
China puts Ant Group on ice
Last Tuesday, Chinese regulators cancelled what was expected to be the largest IPO ever -- for fintech giant Ant Group -- less than two days before the company was set to debut on the Hong Kong and Shanghai stock exchanges.
Ant’s fate illustrates the stark differences between the two major economic systems competing in the world today.
On Monday, Chinese financial regulators informed Ant Group CEO Jack Ma and other top executives that the company would soon be subject to new, major oversight on their marquee microlending business. Since the company hadn’t disclosed these regulations to prospective investors, securities regulators cancelled the Shanghai listing on Tuesday. The company independently pulled down its Hong Kong listing as well.
Ant Group’s rapid growth poses financial and political risks to China’s banking system. Microlending has already caused crises in Cambodia, India, and many other countries. The new rules clarify exactly which levels of government have the right to police Ant and other microlending facilitators so they can’t arbitrage provincial rules. The regulations also cap the size of loans and strengthen consumer protections.
Chinese officials are also concerned about a system that rewards Ant for making millions of new loans while already struggling small banks take on all the risks. Right now, Ant underwrites less than 2% of the amount they lend -- the new rules would require them to finance at least 30%.
Politically, the billionaire Ma made waves just last month at a financial forum in Shanghai when he seemed to question the Communist Party’s economic authority. China’s Vice President Wang Qishan raised concerns at the forum about risks to the financial system. Ma responded by saying that risk wasn’t China’s problem, but rather “pawn shop”-like banks with their high collateral requirements.
Tuesday’s move demonstrated that no business or individual -- even the country’s largest and wealthiest -- has the power to abrogate the leadership of the Communist Party of China, particularly in the most strategic sectors of the Chinese economy.
And Ma actually got off relatively easy, only losing $3 billion. Former Hengfeng Bank chairman Cai Guohua was sentenced to death last week for his role in mismanaging the bank to the brink of collapse and embezzling funds. His sentence will likely end up being commuted to life in prison, but the state confiscated all of his property.
Meanwhile, U.S. President-elect Biden was reportedly calling tech executives and lobbyists last week to ask them what his agenda for their industry should be. In the United States, political leadership is accountable to corporate power. China used the Ant IPO to demonstrate that their system works very differently.
Virus surge pressures Western economies
The rate of new U.S. coronavirus infections continued to accelerate last week, crossing 100,000 cases a day for the first time ever. The global economy now faces new, potentially long-term threats from the disease’s rampant spread in Western countries and the Global South.
The United Kingdom entered a new phase of lockdowns, with restaurants, pubs, and non-essential businesses shuttered until at least Dec. 2. At least 20 European countries have imposed new lockdowns.
With the restrictions come new economic crises, and the Bank of England announced last week that the country was entering another round of recession. Real-time mobility data indicates that other European countries are in a “double dip” downturn as well.
In the United States no such measures seem to be forthcoming, despite 48 states experiencing an effective reproductive number greater than one -- indicating exponential spread almost everywhere in the country. Moody’s chief economic analyst Mark Zandi warned on CNBC that the economy was at significant risk of “backtracking” with a weak job market and uncontrolled viral spread.
So far stocks have not priced in this risk, possibly because investors are betting that the new administration -- with little to no political capital following a narrow win -- will fear upsetting markets with new restrictions. But at a 5% hospitalization and 1% ICU rate the disease has its own ways of punishing economies, with health care systems across the country under extraordinary pressure. Efforts to “flatten the curve” earlier this year failed.
In an ironic twist, this surge has helped researchers, particularly the Oxford/Astra Zeneca project in the United Kingdom, determine the efficacy of their vaccine candidates more quickly than expected. Astra Zeneca said last week that they might be ready with a vaccine by year’s end now, or early next year at the latest. This puts it within a month of the Moderna and Pfizer trials, expected later this month or next.
More concerning: health officials in Denmark identified a new mutation of the virus in the country’s commercial mink population last week, and now plan to cull as many as 17 million animals to prevent its spread. If this strain had gotten into the wider population it could have rendered the vaccines being developed right now ineffective.
Now the hope-for-a-vaccine strategy has a major new question mark: what if another round of the pandemic emerges out of the global system of industrialized agriculture or from the poor countries last in line for the shot? We can hope for the best, but we should be unsettled that Western leaders seem to have no better strategy than that.
Rideshare firms win big in California
Uber, Lyft, Doordash, and other gig economy companies won a major victory in California last week as voters approved a ballot initiative stripping workers of their full employment rights with more than 58% of the vote. Uber’s stock was up 12% premarket following the vote, Lyft’s 15%, and Uber CEO Dara Khosrowshahi said that the company would “more loudly advocate for laws” such as California’s in more states in the future.
The gig employers spent at least $205 million on the campaign -- the most ever in California history.
In other states the picture was more complex:
Florida voters overwhelmingly approved a new $15 minimum wage to be phased in over five years and indexed to inflation after that.
Louisiana voted to effectively increase property taxes on oil and gas producers by including the value of future production in tax assessments.
Arizona passed a 78% income tax hike -- from 4.5% to 7% -- on all incomes over $250,000, with the additional money ear-marked for education.
Illinois failed to pass a graduated income tax, keeping its current flat tax structure. Hedge fund billionaire Ken Griffin bankrolled the campaign against the proposition.
Five states legalized marijuana for recreational or medical use -- or in South Dakota’s case, both. Oregon legalized psilocybin mushrooms for medical purposes and decriminalized small amounts of all other drugs.
Ethiopia on brink of civil war
Ethiopian Prime Minister and Nobel Peace Prize winner Abiy Ahmed launched a new military offensive against a powerful ethnic party on Tuesday, threatening a broader conflict that experts worry could spread throughout the Horn of Africa.
The campaign targets the Tigray People’s Liberation Front (TPLF) -- at one time the leading party in the country’s governing political coalition, expelled from power in 2018. Ahmed claims that the party crossed “a red line” by raiding a military outpost for weapons, and the PM responded by launching a series of airstrikes and armed confrontations in at least eight locations, leading to dozens of casualties so far.
Ahmed postponed elections earlier this year due to the coronavirus, which Tigray leaders refused to honor. The state organized its own elections, which the Addis Ababa government refused to recognize. This weekend the country’s parliament -- under Ahmed’s control -- voted to dissolve Tigray’s state government.
The conflict represents a major escalation of ongoing ethnic strife in the country: less than a week before Ahmed’s strike on Tigray another ethnic party -- the Oromo Liberation Army -- massacred at least 54 members of the Amhara ethnic group.
Tensions have increased in recent years as Ahmed and his Prosperity Party have pursued an aggressive liberalization policy. The previous Tigray-led government used a state-led development model financed in part by $12 billion in Chinese investment to reduce the country’s poverty by half. Ahmed reversed course, accepting billions of dollars in loans from the IMF and World Bank in return for “fiscal consolidation” policies and major privatizations of the country’s national airline and telecom system, as well as other state assets.
Palantir preps earnings, plugs into defense
No particular news seemed to be driving the rally, though the company has recently announced new contracts associated with Western government responses to the coronavirus. The U.S. government has made plans to partner with the Denver-based company to track the manufacture, distribution, and administration of COVID vaccines. The U.K. government has tapped the company to reboot its flawed track-and-trace program.
Palantir CEO Alex Karp clarified his company’s role in defending the historic power of “the West” recently, saying that he hopes its technology can become “the central operating system for all U.S. defense programs.”
Our only investment advice: Enjoy the other other Four Seasons.
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Photo Credit: Russian Federation Press Service / Wikimedia