Discover more from CONTENTION
Didi debacle shows who’s boss in China
Plus the Fed starts to worry, OPEC+ splits, Lebanon & Haiti in crisis
Thank you for reading another edition of Contention! This week we have about eight and a half minutes of di-di-dissident business news. We cover:
Narrow market gains hide growth worries
Didi debacle shows who’s boss in China
Rapid Round: OPEC+ can’t agree, Lebanon faces historic failure, mercs hit Haiti
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Narrow market gains hide growth worries
A Friday rally in stocks undid a major selloff on Thursday -- the Dow gained 1.3%, the S&P 500 1.1% and the Nasdaq 1%.
But a peek under the market’s hood only amplifies unsettling noises about an economy doing things no one has ever heard of before. Policymakers came closer than ever last week to admitting they have no clue what to do other than more of the same.
Thursday’s plunge was a classic risk-off moment, with economic uncertainty across multiple fronts all driving capital out of equities and into safer spaces like bonds. China’s widening crackdown on tech giants -- covered below -- didn’t help. Neither did Japan’s decision to bar spectators from this month’s Olympic games, a sign of a resurgent coronavirus threat in rich countries. Lackluster economic data including a worse-than-expected weekly jobless claims report set the stage for a nearly 1% decline in all three benchmarks.
Things got better on Friday, bringing all three indexes to record highs, but the wins were narrower than the surface numbers indicate. Only 44% of stocks in the S&P 500 were trading above their 50-day moving average on Friday, despite the index’s best-ever close. The day’s bump reflected “panic buying” rushing into a small number of fast-moving stocks. The rest of the market underperformed.
Tech stocks were the big winners, riding a wave of crashing interest rates that peaked -- for now -- on Thursday. Before that, 10-Year Treasury bond yields fell for eight straight days, their biggest two-week decline in 13 months.
This is a remarkable turnaround from earlier this year when yields soared, reaching as high as 1.78% in March. Observers now suspect that the bond market ran ahead of the actual recovery, prematurely betting on growth to push up rates. Now the unresolved contradictions in the rebound are raising questions about whether growth has already peaked.
Among the newly concerned: the Fed’s Federal Open Market Committee (FOMC), which on Wednesday released the minutes from its June policy meeting. Committee members admitted at last that they had underestimated the present inflationary surge, and that “the speed at which (inflation) factors would dissipate was uncertain.” A “substantial majority” now see inflation projection risks tilted to the upside.
The minutes confirmed that while the Fed’s actual policies remained as loose as ever after the meeting, policy recalibration is definitely on the table. The market now relies upon central bank subsidies, and a hawkish recalibration threatens future returns -- risk-averse bond buying weighed on yields more than inflation fears boosted them.
Labor shortages remain the most important factor in these inflationary pressures, but data indicates that they too may have peaked. The June jobs report -- which came out while we were on break -- significantly beat expectations, returning 850,000 jobs vs. 720,000 expected. Employers seemed to have less trouble finding workers than in earlier months, and while May job openings hit a new record of 9.21 million, this barely edged out the 9.19 million figure reached after a big jump in March and April.
More and more evidence suggests that the pandemic upturned the labor market apple cart in ways that left employers and workers severely “mismatched.” Researchers from Princeton and the University of Texas found vacancies in the wholesaling, food services, entertainment, finance, and healthcare sectors all exceeding the number of qualified unemployed workers. And customer traffic data shows a demand shift from urban areas -- with large working class populations -- to rural and suburban communities great for telework, but missing service-industry labor supply.
The upshot: wages rising at historic rates, with three-month annualized pay increases in the warehousing and transportation sector of 17.7%, in leisure and hospitality 15.1%, and in retail 8.9%. The impact is showing up on business bottom lines, as the ISM Services PMI missed expectations last week, dragged by its employment subindex which fell below 50 for the first time in five months.
That means that service businesses are stepping back from hiring, which is exactly what we’ve been anticipating: if inflation caused by excess demand is costing business, then businesses will likely withdraw that demand. This is bad news for growth, and new virus fears can only make things worse.
Markets picked up on this last week, even if the bulls had their way with an illusory rally on Friday. How much longer that game will work remains to be seen.
Didi debacle shows who’s boss in China
On June 30, Chinese tech giant Didi Global -- owner of the country’s ubiquitous Didi Chuxing rideshare app -- debuted as Wall Street’s largest Chinese IPO since Alibaba. Less than two weeks later, the company is facing multiple lawsuits, possible delisting, and investigations in both countries as its business is all but banned in its home market.
How and why Didi’s mess unfolded offers important lessons in China’s distinct political and economic system. This has big implications for the future, as U.S. investors are slowly coming to realize.
Didi’s IPO raised $4.4 billion, landing the company with a $70 billion valuation. This was a major downgrade from earlier expectations, which hoped the stock sale would generate $10 billion at a $100 billion valuation. But the same antitrust campaign that cost Ant Group its mega-IPO hopes last year forced Didi management to walk back their price. They said they believed the Chinese government would see any violations as “minor offenses,” and told bankers in the days before the IPO that the company had a greenlight from the party to launch.
They were apparently seeing things, however, as Chinese officials now accuse Didi executives of “deliberate deceit” in pursuing a public offering they had warned them not to complete. At issue: not just the company’s anti-trust violations -- which remain under investigation -- but its data security risks.
Just two days after the IPO, the Cybersecurity Administration of China (CAC) barred the company from accepting any new customers on its rideshare app, pending a security review. Two days after that -- July 4 -- the CAC banned the app from Chinese app stores. On July 9, the government ordered the removal of 25 other apps owned by the company, including its enterprise and freight-shipping solutions. Didi pledged that it would “resolutely obey” the orders.
The moves were not limited to Didi. On July 5, the CAC suspended three other apps, including two with major U.S. IPOs this summer -- “Uber for trucks” app Full Truck Alliance and recruiting platform Kanzhun. The next day, the Chinese Securities Regulatory Commission (CSRC) announced plans to tighten overseas IPOs of Chinese companies, for the first time requiring government sign off before they list. Then on Saturday, the CAC announced that any company with data on more than one million users will need a cybersecurity review as well.
China’s moves this year have not been good for business -- Chinese companies have lost $823 billion on the U.S. stock market this year -- but they reflect strategic concerns for the Communist Party. First is the party’s commitment to reduce financial risk. “For a long period of time, due to shortcomings of the system, the cost of violations of securities-related crimes has been relatively low,” CSRC head Yi Huiman said recently. But now “capital markets have such power that a slight change could affect everything else in financial operations.”
Perhaps even more crucial: national security risks posed by U.S. financial regulations. The SEC requires companies to disclose “material contracts” -- all major vendors and customers. The party worries that the U.S. government could identify equipment and service contracts between U.S. companies and companies like Didi and then collaborate with the U.S. firms to create backdoors to data with significant intelligence value.
The CAC’s new cybersecurity review rules explicitly cite new risks of overseas data transfer and theft and exploitation by foreign governments. Ongoing U.S. military aggression in the South China Sea makes the threat especially urgent for Beijing.
Finally, the move is just the latest in a long-term, deep-seated commitment to data privacy on the part of the Communist Party. China is set to launch a new Personal Information Protection Law this year, based largely on Europe’s GPDR policy and explicitly contrary to business-friendly U.S. alternatives. The main difference is a commitment to “minimization.” The law will move from a soft prohibition on collecting “unrelated” data to a strict limitation to only “necessary'' data.
But what about state surveillance in China? Notably, U.S. fearmongering on the topic rings hollow in light of Edward Snowden’s 2013 revelations and the absolute non-response that followed. It also misses an important point: China has never claimed to be a liberal country. Instead of abstract rights for property owners, it prioritizes an explicit program of state planning in the national interest.
Didi rushed its IPO under pressure from its major investors impatient for a payday, but the company had zero power to persuade the Chinese government to give it a pass. China’s economy relies upon capitalist enterprises, but its party-state owes nothing to any of these firms or their wealthy backers -- a fact they’ve left unquestioned this year.
There is no doubt in anyone’s mind in either country that the United States will do whatever it takes to prevent this model from developing further. China proved this month that they are not afraid to sacrifice billions of dollars to protect it.
Oil prices rise as OPEC+ can’t decide
Oil prices rose last week due to U.S. summer demand and a weaker dollar, with West Texas Intermediate crude trading at $74.57/barrel. At the same time, talks at the OPEC+ consortium of oil-producing nations broke down.
Saudi Arabia wants to increase capacity by 5.8 million barrels per day by the end of the year. The United Arab Emirates disagreed. The main issue: the UAE invested heavily in expanding oil capacity since 2018, but current OPEC+ output limits mean the country can’t tap it until 2023. Saudi Arabia is concerned about pumping too much, causing prices to crash.
The immediate fallout will be no increase in supplies, which should cause prices to rise by another 10 to 20 cents in August. That means more inflationary pressure at the pump, and putting more pressure on net oil importers such as India, threatening its economic recovery. Goldman Sachs expects Brent prices to rise above $80/barrel this year, and Bank of America expects it to reach $100/barrel by next summer.
Lebanon faces total collapse
Lebanese Prime Minister Hassan Diab warned that his country is on the brink of collapse, facing an economic crisis the World Bank has described as one of the worst anywhere in the world in the past 150 years. “Lebanon is a few days away from the social explosion,” Diab said. “The Lebanese are facing this dark fate alone.”
Fuel prices have increased by 50 percent. Food prices have soared by 400 percent. The Lebanese pound has lost 95 percent of its value, destroying most personal savings in the country, while the wealthy elite have scrambled to transfer their money overseas using a rigged and complex system of currency arbitrage. Now the Lebanese Armed Forces are on the verge of disintegration because the government can’t pay its soldiers.
Lebanon’s central bank has also run out of its foreign reserves and has tapped into its mandatory reserves -- hard currency deposits from local lenders available only in extreme circumstances. This will fund $556 million in direct cash payments. The IMF is considering a $900 million allocation to bolster Lebanon’s foreign reserves, but no sooner than August.
U.S., Colombian mercenaries kill Haitian pres
Twenty-eight mercenaries murdered right-wing Haitian Pres. Jovenel Moïse last week. The mercenary squad burst into Moïse’s home on July 7 and riddled him with bullets, wounding Haitian First Lady Martine Moïse. Haiti’s interim prime minister, Claude Joseph, declared a state of siege, imposing martial law and closing the borders.
The gunmen, including at least 17 Colombians and two Haitian-Americans, had business ties to the Florida company CTU Security run by Venezuelan emigre Antonio Enmanuel Intriago Valera, who had boasted of ties to U.S. agencies, according to the Miami Herald. One mercenary, 35-year-old James Solages of Fort Lauderdale, had worked security for prominent Haitian businessmen Reginald Boulos and Dimitri Vorbe.
The Boulous family owns Haiti’s biggest pharmaceutical company which was responsible for a mass poisoning in 1996. A U.S. Embassy cable leaked by WikiLeaks also pinpointed Reginald Boulous as having delivered arms to the Haitian National Police after the 2004 coup which ousted popular Pres. Jean-Bertrand Aristide.
Haiti is undergoing worsening economic and humanitarian crises, fueling popular protests. In Haiti’s shantytowns, armed gangs have organized under the banner of the “Revolutionary Forces of the G-9 Family and Allies” to topple what they describe as a whole “rotten system.”
“I think this assassination was essentially to set the stage for the repression, for the destruction of the G9 movement, and, if necessary, to bring in a foreign military force -- the fourth one in the past century,” Haiti Liberté journalist Kim Ives said.
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