Is business braced for global unrest?
Plus -- guess what -- inflation, Cuba, semiconductors, and Irish groceries
Thanks for reading another week of Contention! This should be about eight minutes of still inflated dissident business news. In this edition:
Another week, another big inflation report
Is business braced for global unrest?
Rapid Round: Cuba responds to its people, Intel tries to buy a foundry, more Irish supply chain troubles
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Another week, another big inflation report
Markets opened the Q2 earnings season with a whimper, as all three major indexes fell for the week. The Dow lost 0.5%, the S&P 500 dropped 1%, and the Nasdaq gave up 1.8%. It was the end of a three-week win streak for each of them.
The culprit is a familiar one: inflation, with new figures repeating the story we’ve been hearing for months -- a generational shift in economic regimes has prices noisier than they have been in decades. And the economy’s most important financial institutions spent the week pretending like it’ll all be okay.
The Bureau of Labor Statistics issued its monthly consumer price index (CPI) report on Tuesday, the most prominent measure for inflation. For the fourth month running, prices came in hotter than expected, with overall inflation up 5.4% and “core” CPI -- excluding volatile fuel and food costs -- up 4.5%. That’s the biggest gain in overall prices since 2008 and the worst core inflation since 1991.
Base effects account for some of this, as last year’s comparison data was depressed by the COVID crisis, but core goods gained 2.2% month-over-month -- the most ever in the data series. On a three-month, annualized basis CPI inflation is at 10.7%. That pace is still accelerating, and the worst since the summer of 1982.
It’s not just consumers feeling the pinch -- producer prices also came in on Tuesday, with a 7.3% year-over-year overall increase, 5.6% core. This is the largest gain in the data set, going back to 2010, and month-over-month actual producer inflation was double expectations. More businesses are now passing on higher costs to their customers than at any time since 1981.
Fully 20% of the PPI cost increase and a third of the CPI bump came from increased automobile and auto part costs, with used car prices jumping an outrageous 45.1% year-over-year. This, in turn, was caused by the global bottleneck in semiconductor supply. Some observers see this as a good reason to blow off the inflation figures. Their comfort disregarding unprecedented chaos in two of the most strategically important industrial sectors speaks volumes about their insight -- or lack thereof.
Enter Federal Reserve Chairman Jerome Powell, with two days of testimony in front of House and Senate committees last week. Powell walked a fine line between acknowledging reality and towing the party line on the “transitory” nature of the changes. Inflation was “higher than we expected and a little bit more persistent,” Powell said, but “to the extent that it’s temporary it wouldn’t make sense to react to it.” Any changes in the central bank’s subsidies to capital markets are “still a ways off.”
This was music to the ears of the week’s other newsmakers: the world’s largest banks, kicking off reporting season with big beats. The headlines didn’t fool markets, however, as a deeper dive into the numbers indicated unsustainable revenue structures:
JPMorgan Chase only beat forecasts due to a $3 billion release from its bad loan reserves stockpiled during the COVID crisis last year.
Goldman Sachs only beat estimates due to big gains in its equity portfolio, not its core banking business.
The three major consumer banks -- Bank of America, Citigroup, Wells Fargo -- all saw flat or falling banking revenues.
Morgan Stanley relied on its acquisitions -- most especially E*Trade -- for its revenue gains.
Across the board, the banks saw a crash in trading revenues following last summer’s Fed-fueled bond market frenzy. In the absence of churn of that sort, the banks need to figure out how to make money with interest rates pinned down by near- or below-zero rates of profit in the economy overall.
If the banks can’t make money, it begs the question how anybody else can too. This question only gets more urgent as inflation makes it harder to keep up. But don’t worry -- the people who created the mess have it all under control.
Is business braced for global unrest?
Riots, protests, martial law, and large-scale sabotage have broken out in multiple countries in recent weeks, predictable consequences of the rapid de-development of much of the world over the last year. While rich countries celebrate their good fortune, risks from a seething Global South may be waiting on the horizon.
A quick look at some of the most prominent uprisings over just the last month helps draw out exactly what risks we’re talking about, and the calculations business will have to make about them soon.
The most well-known recent unrest for U.S. news consumers: Cuba, where hundreds of demonstrators took to the streets in Havana to protest food shortages and rising food costs. We cover the story more in our Rapid Round below, but the pressures on Cuban families are part of a global crisis. Worldwide food prices rose for 12 months straight, until a small dip in June. Hunger increased by 118 million people last year, wiping out 15 years of progress.
This crisis was an aggravating factor in massive riots sweeping South Africa this month. Sparked initially by the sentencing of former Pres. Jacob Zuma to a 15-month prison term, the country’s deepening economic crisis fueled more than a week of violence starting July 8. More than 200 people were killed in the uprisings, with the country’s economic centers of Durban and Johannesburg hardest hit.
South Africa is the world’s most unequal nation, with its small white minority still in possession of more than 72% of the land a generation after apartheid’s end. Unemployment exceeds 30%, with a $4 billion IMF loan last year forcing austerity, including a three-year public sector wage freeze, on the country. Now the riots have created a new food crisis in KwaZulu-Natal and other areas where violence destroyed infrastructure.
Hunger and unemployment aren’t the only precipitating causes for recent violence. In Iraq, ongoing power outages have prompted the country’s largest demonstrations since 2019. Iraq’s government has spent $81 billion since 2005 on its electrical infrastructure and adopted a series of World Bank recommendations over that time with little-to-no lasting improvement to the country’s grid.
Now Iran has cut electricity exports to the country in hopes of recouping some of the $4 billion Iraq owes it. U.S. sanctions make it impossible for Iraq to pay for the power directly, and workarounds only delay payment -- and increase pressure on infrastructure -- further.
Iran too is in the midst of violent protests, with at least one demonstrator killed in the southwest province of Khuzestan last week as severe drought has struck 8,000 villages across the country with severe or serious water shortages. Precipitation is down 43% this year, also sapping hydroelectric power generation, with rolling blackouts affecting Tehran.
Corruption is an aggravating factor in all the unrest. In Brazil, it is the primary grievance, with 40 cities experiencing major protests earlier in July. Congressional hearings have exposed a major kickback scheme in a $316 million deal to purchase 20 million untested, unapproved COVID vaccine doses from an Indian company while the government refused to accept cheaper shots from Pfizer.
Right-wing Pres. Jair Bolsonaro allegedly knew of the scheme and did not report it to authorities, and Brazil’s Supreme Court authorized a criminal investigation of Bolsonaro on July 3. The news has hammered his popularity, but the president has now threatened to ignore any election loss in an expected match-up with leftist former president Luiz Inácio Lula da Silva in 2022.
These are only the most notable crises around the world. Palestine, Sudan, and Sri Lanka have all seen violent or suppressed demonstrations against their respective governments over austerity and corruption this summer.
The background for this unrest: developing countries paid $194 billion to foreign creditors last year, almost all of them in the Global North. Those banks and investors then financed rich country governments that were the very ones demanding the wage cuts, imposing the sanctions, and low-key encouraging the corruption at hand. Rich countries could solve most of these problems instantly, but there is big money to be made in poor economies.
That’s money helping to fuel the “recovery” in the United States and Europe, and there’s a lot more where it came from -- emerging markets added $11 trillion in debt last year alone.
For now, business thinks it can afford to write off the violence while it keeps collecting the checks. How that calculation shifts could define global politics in the years to come.
Intel grabs for semiconductors
Intel is seeking a $30 billion deal to buy GlobalFoundries, the semiconductor manufacturer owned by Abu Dhabi's sovereign wealth fund. If this happens, Intel -- which owns 15.6% of the global chipmaking business -- would secure its largest acquisition deal ever and bolster its plans to expand its contract manufacturing unit. GlobalFoundries spun off from Intel rival AMD in 2008, and controls around 7% of the industry.
A buyout wouldn't help Intel compete directly with the world's most advanced chipmaker, Taiwan's TSMC. GlobalFoundaries's processes are not as advanced as TSMC's which holds a dominant position globally. But that position is coming under pressure just as the world faces a chip shortage hitting everything from toothbrushes to cars.
The U.S. government is worried about chipmaking concentrated so close to the Chinese mainland, and wants more domestic manufacturers. But Intel boss Pat Gelsinger recently criticized a U.S. decision to subsidize a $12 billion TSMC fabrication plant in Arizona because TSMC "will keep their valuable intellectual property on their own shores, ensuring that the most lucrative and cutting-edge manufacturing stays there."
TSMC chief Morris Chang said it's not so easy. "More complex technology has led to the supply chain going offshore," Chang said Friday. "If we try to turn back the time, costs will go up, technology development will slow down."
Cuban government responds to protests
Following protests on July 11 sparked by rising food prices and rolling blackouts, the Cuban government announced it is lifting tariffs and limits on imported food, medicine and hygiene products brought in by travelers until the end of year. The last time Cuba made such a measure on imports was after Hurricane Ike in 2008.
Cuba is experiencing related shocks from the pandemic which has raised costs of imports as tourism plummeted. At the same time, the Cuban economy is adjusting to a new currency system. For the past three decades, Cuba has used two currencies, the national peso (CUP) and a convertible peso (CUC). On Jan. 1, or "Day Zero" in Cuba, the government unified the currencies into one after years of planning. The change stoked inflation on top of the rising prices caused by disruptions to global supply chains.
To balance the inflation, the government raised wages for state employees, pensions and social assistance programs.
Then there's the U.S. embargo -- the world's longest and most punitive blockade. This embargo, tightened under the Trump administration, has restricted Cuba's access to external finances and has made it difficult to import syringes to vaccinate the population. If foreign companies want to ship goods into Cuba, the U.S. will leverage steep penalties on them.
"Even if the new Biden administration does lift some sanctions, this year promises to be another tough one for Cuba," Cuba economics historian Helen Yaffe wrote. Following the disturbances on July 11, government supporters organized mass rallies which U.S. and British media misrepresented as anti-government demonstrations.
British grocers, medical industry buck Brexit
British supermarket chains are now threatening to shift some of their supply chains to Europe because of an impasse over Northern Ireland’s trading status wrought by Brexit. As we covered last week, Northern Ireland remains politically bonded to the United Kingdom, but has remained inside the E.U. single market to preserve the Good Friday Agreement.
The protesting grocers include Sainsbury, Tesco and Asda, which already warned of disruptions to Northern Ireland’s food market. This is because of increased paperwork and food-safety checks at ports. “The challenges this will create in sourcing could force many retailers to move supply chains from GB to the EU,” the group has now said.
Meanwhile in the United Kingdom, the medical industry is warning about losing business because the British government is refusing to implement European-level regulations on medical devices known as MDR. This will be a problem for British companies that want to export to Europe, a much larger market. “The reality is that we’ve got to sell into Europe, so all companies have to comply with MDR anyway,” one medical executive said. “The last thing they need is yet another audit trail.”
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