COVID crisis now just a very bad recession
Markets flip on Trump’s illness, more stimulus games, oil, Facebook, food security in trouble
Thank you again for reading Contention! This week we have under eight minutes of infection-free, dissident business news. In this edition:
Layoffs, outbreaks, debt swamp recovery
Trump, Republicans fall ill to renewed virus
More political games override stimulus
Rapid Round: Oil struggles, Big Tech testifies, hunger looms, Palantir debuts
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Layoffs, outbreaks, debt swamp recovery
Markets ended a volatile week with their first uptick -- for the most part -- in nearly a month: the Dow was up 1.1%, the S&P 500 0.4% and the Nasdaq essentially flat, down 0.08% .
But a week dominated first by empty hopes for new stimulus action and then by a major coronavirus outbreak across the national leadership of the Republican Party made these advances feel irrelevant. The big picture: the COVID crisis is giving way to a classic -- if especially deep -- recession facing new risks of another shutdown.
These new crises almost obscured news of September’s big miss on jobs expectations:
Employers added 661,000 new jobs in September, while economists had expected 859,000.
This confirmed deeper fears of a slowdown in recovery -- May and June each saw 4% job growth, but July, August and now September saw just 1% each.
The economy has restored 11.4 million out of the 22 million jobs lost in the original shutdown. But at September’s pace it will be at least 13 months before we completely fill the hole.
The unemployment rate did drop more than expected -- now at 7.9% versus a predicted 8.2% -- but that’s largely driven by a drop in labor participation. The share of adults actively working or looking for work dropped to 61.3%, a level last seen in 1976.
And even that long timeline for recovery is probably optimistic, as a wave of major employers -- Disney, Shell, Continental AG, Allstate, and Goldman Sachs -- announced new layoffs this week. We are facing years of elevated unemployment.
So what happened? An economy already teetering on the brink of a downturn at the start of the year got blown open by pandemic-related shutdowns. Unprecedented direct relief led to the largest income spike in recorded history, feeding a rapid partial recovery.
But now that these relief programs have expired, personal income dropped 2.7% in August, down 7.4% from the April high. Consumers have re-leveraged the credit they paid down earlier and spent their new savings, leaving the economy on its own footing -- weak, uneven, with no clear way out. Much of the growth to come has been spoken for, as record levels of pre-crisis debt will drain it off the productive economy.
History is full of lessons about what happens to societies when hope and leadership fail in these ways. The best investment right now may be to study and learn them.
Trump, Republicans fall ill to renewed virus
U.S. President Donald Trump announced late Thursday evening that he and his wife had both contracted the coronavirus. Over the next 48 hours no fewer than 25 top Republicans announced that they too had tested positive, some becoming sick enough to require hospitalization. Trump entered the hospital on Friday, timing his admission for after stock markets closed.
The D.C. Republican outbreak is just the latest sign of the pandemic’s stubborn persistence, a looming presence in the global economy for perhaps years to come.
Markets reacted negatively to Trump’s diagnosis, first in Europe, and then in U.S. stocks. Oil also took a 4.8% hit. Analysts predict more volatility to come, benefiting gold and Asian stocks -- their leaders have shown much greater competence in limiting the disease.
Trump’s illness also overshadowed the week’s earlier milestone marking one million dead worldwide from the virus. Overall mortality for the disease has declined -- though Republicans eschewing masks are at risk of more severe symptoms -- but its spread is newly resurgent:
At least 22 U.S. states have seen increasing cases, reversing earlier declines, with new daily records in Wisconsin, South Dakota, Montana and Utah.
Brooklyn -- where thousands of people died earlier in the year -- has new clusters, many centered around the ultra-Orthodox Jewish community.
The Netherlands recently surpassed 2,000 cases in a day -- a record.
Spain is facing another round of nation-wide shutdowns, this time enforced by the military.
A vaccine is the only hope for escape, it seems, with only 9% of the U.S. population exposed to the virus so far, putting herd immunity years into the future. But the vaccines on tap are likely to be incomplete in their protectiveness, and reaching vaccinated herd immunity will be a global effort taking years.
So why then is the United States -- along with China and Russia -- still refusing to join the COVAX international effort to ensure fair vaccine distribution? Failure of the COVAX project will mean persistent pockets of disease around the world, waiting to break out again and imperil lives and economies. Major power rivalries and disregard for lives in the Global South could mean additional years of risk.
Maybe now that the risk has struck those least concerned with real human life, leaders will shift their calculations, but that’s doubtful. Markets will recover in the short-term, even if Trump and some of his coterie do not. In the meantime, Contention wishes them as much goodwill as they’ve extended to the million who’ve died so far.
More political games override stimulus
Prior to Trump’s diagnosis, markets waited all week for a breakthrough in negotiations over a new fiscal relief package from Congress. By Friday, however, the bill’s prognosis was even worse than the president’s.
Yet again those with the most power to move the needle to relieve working families’ economic suffering have made narrow political calculations their highest priority.
Here’s the story of the week:
On Monday, House Speaker Nancy Pelosi and U.S. Treasury Secretary Steve Mnuchin re-opened stimulus negotiations, ending up only with an agreement to continue talking.
Markets simmered with hope for a breakthrough on Tuesday, and White House Chief of Staff Mark Meadows expressed optimism that the two sides could reach a deal.
Talks continued on Wednesday, with Mnuchin saying he was “hopeful” for a deal. Senate Majority Leader Mitch McConnell -- sidelined in the negotiations -- said he understood the parties to still be far apart.
On Thursday House Democrats closed the door on a deal, passing their own $2.2 trillion package before leaving on recess Friday. Democrat moderates voted against the bill as a waste of time -- it has no chance in the Republican-controlled Senate.
Pelosi’s stance to date has been “we came down, they have to come up” -- referring to the Democrats’ earlier $3.7 trillion bill and the GOP’s $1.5 trillion bid. The sides also disagree about the size of stimulus checks, the level of supplemental unemployment benefits, how businesses should be allowed to account for pandemic losses, and aid for distressed state and local governments.
But all of this begs the question: why does Pelosi not just take what she can get? Republicans’ $1.5 trillion will likely not help as much as the $2.2 trillion Democrats passed, but why not take the limited boost and then come back for more if needed?
Because the boost might lift markets enough to benefit Trump and GOP Senate incumbents in the upcoming elections. Republicans also have an interest in not moving: Democrats are likely to do well in November either way, and Republicans will be able to blame the incoming officials for the fallout still to come.
As long as “politics” means “elections” both sides have an interest in these cynical games -- somebody has to win, and snatching well-timed temporary advantages is the most efficient strategy. Only when politics shifts to a broader context with much higher stakes will the parties be compelled to consider interests other than their own. By then it may be too late.
Rapid Round
Oil companies struggle, fail to offload assets
Trump’s diagnosis sent oil prices into a “nosedive” on Friday, but it was only the latest blow to the world’s most important commodity. Crude prices were down for the second straight week, and the fourth week out of the last five. Prices broke below the $40 level with Brent down 7% on the week and West Texas Intermediate dropping 8%.
Oil majors are already feeling the pinch: ExxonMobil issued Q3 earnings considerations last week indicating that the company will face its third straight quarterly loss. The company has already been borrowing to support its “sacrosanct” dividend; if it is forced to cut it for the first time in 37 years its stock will take another blow.
Now ExxonMobil and its competitors are trying to shore up their operating positions by unloading $110 billion in assets, but they are finding very few buyers. Executives themselves may not have much to fear however, as the Wall Street Journal reported last week that shale company CEOs got four straight years of raises this decade despite losing investors 35% of their money.
Big tech CEOs prepare for more grilling
The Senate Commerce Committee issued subpoenas on Friday for Facebook CEO Mark Zuckerberg, Alphabet (i.e. Google) CEO Sundar Pichai, and Twitter CEO Jack Dorsey to testify before the committee on Oct. 28. This will be the second time this year Zuckerberg and Pichai appear on Capitol Hill.
Twitter’s inclusion -- the company’s market cap is an order of magnitude smaller than the other two -- reflects the panel’s focus on Section 230 reform, the federal law shielding digital platforms from liability for things their users say. Right-wing politicians have accused digital companies of silencing their speech. Committee Republicans secured Democrat buy-in for the hearing by adding data security and market consolidation to the agenda.
Facebook faced these same accusations in the Philippines last week as the country’s President Rodrigo Duterte threatened to ban the platform following its removal of a network of trolls tied to Phillipine security agencies. The platform is nonetheless seen as a boon to right-wing movements, with one anonymous Facebook executive telling journalists recently that this was because right-wing content is inherently compelling.
Global South faces food crisis, U.S. grocers stockpile
More voices are sounding the alarm about a growing global food crisis. The World Food Program has warned that severe food insecurity will increase 270% in Latin America this year, with countries across the region facing hunger threats eliminated decades ago. Some of the worst-hit countries are those recently targeted with sanctions or political interventions by the United States, including Venezuela, Nicaragua, Bolivia, and Honduras.
Global food supply chains are currently under extraordinary pressure from the COVID-19 pandemic, with food prices rising worldwide for three straight months. Communities in the United States may not be entirely out of the woods either: U.S. grocery stores are already stockpiling products in anticipation of further shortages.
The government’s Coronavirus Food Assistance Program might have helped, but seems to have served a different set of priorities: 10% of the largest industrial ag enterprises received 60% of the money, with the smallest 10% receiving an average support check of only $300.
Palantir’s market debut
Palantir finally went public on Wednesday, selling first at $10 a share before settling at $9.73, a 34% boost over its $7.25 reference price. The company is now valued at $24.8 billion.
Earlier in the week arch liberal U.S. Rep. Alexandria Ocasio-Cortez submitted a formal letter to the SEC claiming that Palantir’s S-1 filing failed to disclose material risks to investors. The representative reported the company for failing to disclose the size of In-Q-Tel’s stake in the company -- In-Q-Tel is the CIA’s venture capital fund -- as well as risks associated with Palantir’s business in Qatar, a state with a history of human rights abuses.
Amazon also announced a suite of new products described as “surveillance as a service” -- including a small indoor drone to help consumers watch their homes. Palantir’s success indicates market appetite for the space.
Disclaimer
Our only investment advice: Read more poetry.
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