Inequality underlies deepening COVID depression

Plus tech monopoly testimony and enhanced unemployment's final whimper

Hey everybody, welcome to another seven minutes of “destroy mode” dissident business news from Contention. This week: 

  1. Busy business news week has nothing for workers

  2. Tech monopolies testify, gain $200 billion  

  3. Inequality underlies deepening COVID depression 

  4. Rapid Round: ExxonMobil’s desperate accounting, TikTok’s baseless ban, Kodak’s front run payday, South Africa’s strings attached 

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Busy business news week has nothing for workers

The crisis engulfing the U.S. consumer economy got worse last week even as markets gained on good news for monopoly firms. The Dow was unchanged, the S&P 500 moved up 1.6%, and the tech monopoly-dominated Nasdaq gained 3.1%.

It was an exceptional week for business news:

This data is already out of date, and high frequency indicators all point to large-scale economic stagnation: Bloomberg’s Recovery Tracker stalled for the fourth straight week, and the New York Fed Weekly Economic Index continued its freeze.

Despite this, Congress failed to agree to any new relief package for struggling families, and enhanced unemployment benefits have now expired. Powell urged policymakers to extend fiscal support, but right-wing demands around liability protections for negligent companies, funding for the F-35 fighter jet, and forcing workers back into a non-existent job market scuttled talks. 

Senate Majority Leader Mitch McConnell confessed that it will be weeks before the negotiations bear any fruit, and state workforce agencies reported that it will be months before they can actually implement the policies. 

Meanwhile, 40% of renters are now at risk of eviction, and 30 million Americans do not have enough food to eat. This blow to demand could have wide impacts, as more than a third of small business owners are tapping personal savings or credit cards to cover expenses. 

Lost consumer income means reduced sales, which means defaulting on high-interest debt without any savings cushion to cover the impact. Subsequent defaults mean more layoffs, more lost incomes, and a negative feedback loop that could depress the economy for years to come. 

U.S. policymakers do not have any ideas about how to pull out of that spiral, and now they are abandoning even the things that worked to minimize harm. As unrest fills the vacuum left by this political failure, expect more busy news weeks to come. 

Tech monopolies testify, gain $200 billion  

Apple CEO Tim Cook, Amazon CEO Jeff Bezos, Alphabet CEO Sundar Pichai, and Facebook CEO Mark Zuckerberg each pleaded innocence to accusations of monopoly power before Congress on Wednesday. Committee members largely responded with grandstanding

Nonetheless, documents secured by committee investigators planted seeds that could prompt future antitrust action against the digital megacaps:

  • Committee Chair David Cicciline (D-RI) confronted Facebook’s Zuckerberg with evidence that prior to the company’s 2012 acquisition of Instagram, the photo-sharing platform’s executives feared that Facebook would go into “destroy mode” if they didn’t sell.

  • Rep. David Scanlon (D-PA) pressed Amazon’s Bezos about the company’s 2010 acquisition of Amazon engaged in aggressive price cutting on diapers prior to the transaction, and may have automated their pricing to always undercut the competitor, forcing them to sell.

  • Alphabet’s 2006 acquisition of YouTube followed internal discussions about the “orthogonal threat” posed by web users searching for videos on the site and not Google, and fears of being “displaced” by “end-user time tradeoff.”

  • Documents also show Apple colluding with Amazon to give the latter preferential commissions for their Prime Video app. 

Earnings reported by each of the companies the next day validated their choices:

  • Apple beat earnings forecasts and exceeded revenue expectations by $7.5 billion in the second quarter. They surpassed Saudi oil company Aramco to become the world’s largest firm, valued at over $1.8 trillion.

  • Amazon beat earnings expectations by 700% and revenue also exceeded forecasts by $7.5 billion.

  • Facebook revenues increased 11% in the quarter, though that was the slowest growth since their 2012 IPO. They also passed the three billion user mark for their family of apps. 

  • Alphabet was the odd company out, with their first ever decline in revenue, though they still beat estimates.

Altogether the four companies gained $214 billion in value in the hours following Thursday’s announcements -- the GDP of New Zealand. This, and the hundreds of billions gained by their executives in recent months motivate continued abuses:

Good news for the giants: marquee conservative groups are gearing up for a new push against antitrust regulation. The hearings Wednesday indicate that the lobbyists will have their work cut out for them, but the stock prices Thursday suggest the market thinks they’ll win.

Inequality underlies deepening COVID depression 

The United States surpassed 150,000 deaths from the coronavirus last week, and while the latest surge of cases began to plateau, more than 30 states still had increasing infections. Global news about the disease likewise continued to raise the spectre of a sustained economic depression for the foreseeable future. 

The only hope: a major shift in global distributions of power.

Two countries experiencing worsening conditions last week highlighted key pandemic risks:

Both Pfizer (along with its partner BioNTEch) and Moderna began Phase 3 testing of their vaccine candidates last week, but deploying such a vaccine has significant risks of its own.

First, rich countries are likely to hoard the vaccine. The United States and the United Kingdom both signed exclusive agreements last week with GlaxoSmithKline and Sanofi for vaccine doses. This is a problem because the vaccines being developed may not actually prevent infection. Moderna said that their primary aim is to prevent only symptomatic infections, with a secondary goal of preventing severe infections requiring hospitalization. 

This means vaccinated patients can still get the virus and potentially spread it to others. If large populations of the world do not have the vaccine -- either through lack of access or unwillingness to be vaccinated -- it will only slow, not stop, the pandemic.

Infection risk increases transaction costs and drags down aggregate demand. Recent market gains reflect unprecedented concentration in a single sector -- big tech -- and the sector’s wins come from commerce reallocated to a pandemic-proof “market without mouths and noses.”

Other sectors present a better picture of demand at large: energy stocks got hammered last week with Chevron, Total, and ExxonMobil losing billions. Waste Management also announced a 10% drop in collection volumes and a $400 million revenue loss. These earnings indicate that goods aren’t moving and they aren’t getting consumed, at least not at a rate to support full production. 

This depression isn’t showing up in equity markets focused on swelling slices of a shrinking pie, but plummeting consumer confidence sees it. Things will stay bad as long as people fear getting the disease, and governments in rich countries can only solve that crisis by valuing lives in poor countries too. If they succeed, that will be an even bigger discovery for them than the vaccine. 

Rapid Round 

After its first consecutive quarterly declines in 36 years, ExxonMobil is planning deep cuts to maintain its “sacrosanct” dividend. The oil giant borrowed $18 billion earlier this year, and has already cut $10 billion from capital spending. Meanwhile, a group of oil and gas industry accountants has filed a complaint with the SEC after ExxonMobil refused to follow its competitors in writing down devalued assets. OIl prices plunged into negative territories in the second quarter, but the company actually increased the claimed value of its inventories for the period. ExxonMobil’s $1.1 billion quarterly loss would have been $3 billion without those accounting adjustments.

U.S. President Donald Trump announced Saturday he would use unilateral executive powers to ban the popular video sharing app TikTok due to its Chinese origins. This follows earlier reports that Microsoft was in advanced discussions to buy the company out. TikTok’s CEO Keven Mayer, a former Disney executive, slammed opportunistic attacks on the company, and independent tech industry leaders noted that there is zero evidence that the company is sharing data with any government. Despite this, support for suppressing the network crosses party lines, much like silence over U.S. social media data sharing with their government.   

Kodak stock soared more than 2,100% at one point during the week over news that the aging brand would receive a $765 million Defense Production Act loan to make chemicals used in generic drugs. The United States is currently dependent on supply chains in India and China for the chemicals. Investors -- in particular speculative retail buyers -- pushed the stock far beyond valuations for generic drug makers, and a huge spike in front-running activity raised questions about possible insider action on the trades. Of particular note: a 1.75 million share stock option issued to Kodak CEO Jim Continenza the day before the loan’s announcement.  

South Africa agreed to terms with the International Monetary Fund last week for a $4.3 billion loan to help address the coronavirus pandemic. The loan prompted widespread popular disapproval, particularly over the possibility of corruption by the country’s ruling party, the African National Congress. The IMF is also likely to require structural adjustments, including a reduction in the public sector wage bill and changes to state-owned enterprises. The loan follows an earlier $1 billion loan from the New Development Bank, a collaborative effort between South Africa, Brazil, Russia, India, and China, which did not come with political strings attached.


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Photo: House Judiciary Committee