Job market, oil, Brexit face big contradictions
Plus Tesla's index plans, Google's terminations, and China's "shadow banks"
Welcome to another edition of Contention! This week we have about seven minutes of sovereign-ly fishy dissident business news. This week we cover:
Big jobs miss boosts scaled-back relief
Oil giant moves belie big problems
Brexit talks near final failure
Rapid Round: Tesla goes S&P, Google fires its best, and China confronts “shadow” risks
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Big jobs miss boosts scaled-back relief
All the major U.S. stock indexes closed out in record territory last week, the Dow up 1%, the S&P 500 1.7%, and the Nasdaq 2.1%. The all-time highs came as official employment reports show an unmistakably weakening recovery. This, however, was good news for investors: it seemed to finally spur Congress into action on new fiscal relief.
Even better for business: the austere shape and stingy conditions of the latest proposals will keep a lid on any significant gains for working families.
Official November jobs numbers came out on Friday: the economy added 245,000 new jobs, a sharp drop from October’s 610,000 gain. It was the worst monthly report since May -- when the most recent recovery began -- and a big expectations miss, as analysts anticipated 469,000 new jobs.
It was even worse than meets the eye. Despite the big miss on job numbers, the report actually beat expectations for the official unemployment rate -- down 0.2 points to 6.7% versus 6.8% expected. This is because more workers are dropping out of the workforce altogether: 3.7 million since March, taking labor force participation to its lowest levels since the 1970s.
Altogether the situation is still much worse than the Great Recession, with 9.3 million jobs still lost since March.
The report, however, fueled restarted relief bill negotiations, as House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell met by phone Tuesday to express their mutual desires to get a bill done. On Wednesday, Pelosi joined with Senate Minority Leader Charles Schumer to endorse the $908 billion bipartisan Problem Solvers Caucus proposal.
Pelosi had previously blown off this bill, which is less than half the $2.4 trillion she’d refused to budge on before the elections. She and her Senate counterpart are now ready to go all-in on a more austere package. Compared to the CARES Act, the bill cuts enhanced unemployment benefits in half and scraps direct stimulus payments altogether. Roughly a third of its funds will underwrite a new round of Paycheck Protection Program loans, despite the last round overwhelmingly benefitting the largest firms eligible.
President-elect Joseph Biden says that the bill is just a “down payment,” but the lust for austerity is bipartisan, and asset owners will do just fine as long as the Fed keeps the spigot going. Desperate families make for cheap labor, and capital is just as happy taking a bigger piece of a shrinking pie as growing the economy. November’s job market and Washington’s low expectations indicate they have a lot to look forward to right now.
Oil giant moves belie big problems
The OPEC+ coalition of oil exporting countries agreed last week to a significant modification of its planned production increases for 2021 -- a hard-fought compromise among members seeking to take advantage of rebounding oil prices.
The good news did not extend to U.S. oil supermajors, however, and the deep contradictions in the hydrocarbon industry only promise more crises in the years to come.
OPEC+ responded to the coronavirus crisis in April with a 10% cut in global petroleum production -- 9.7 billion barrels of oil per day below January’s baseline. The cuts were to be phased out six months at a time, with a planned two million barrel a day increase in January.
This step up was too much for OPEC leader Saudi Arabia, however, who feared that new lockdowns would sink demand, combining with oversupply to crush prices. The Gulf monarchy sought a three-month freeze on production increases. Other countries, on the other hand, are eager to take advantage of recent price rallies, with the United Arab Emirates -- the Saudis’ historic ally -- leading the pushback.
After two delays to allow for more negotiations, the OPEC cartel and its 10 non-member OPEC+ allies announced on Thursday a one-month increase of only 500,000 barrels per day. Prices gained 1% on the news, following a 2.4% gain earlier in the week as the deal first emerged.
Things are bleak for the industry nonetheless, as it faces two sets of contradictions, one short-term, and one long. Short-term is the OPEC+ risk: supply increases threaten fragile prices as long as the pandemic is ongoing, but these governments need more revenue to support their own economies and virus responses. This risk is mitigated by the OPEC+ planning mechanism.
Long-term, the industry faces a much deeper problem represented by news last week that ExxonMobil and Chevron will make 28% and 27% cuts to long-term investment, respectively. If producers don’t invest in their core hydrocarbon businesses, they have no chance of generating any of the $30-40 trillion -- minimum -- needed for a clean energy transition.
But whatever investment they put into the hydrocarbon business goes down the drain one way or the other. Either those assets will get stranded after the transition, or they will block solutions to the climate crisis and the global economic system as a whole dies.
The better the industry does at transitioning, the less money they have to pay for the transition, and the more money they generate, the less likely transition becomes. Will these institutions solve this problem on their own, or will other institutions step in to force change upon them? Time will tell…
Brexit talks near final failure
Last minute negotiations on a trade deal between the European Union and the United Kingdom were near collapse as of press time, with both sides refusing to budge on key issues. At bottom of the stalemate: contradictory demands from Britain, and E.U. political priorities that make compromise unattractive.
The current customs union between the two sides ends on Dec. 31, but on Thursday the sides issued contradictory assessments of the negotiations. European representative Michel Barnier said they were “closer than ever” to a deal, while Britain’s lead negotiator Lord David Frost said the chances of a deal were “receding.”
By the weekend, negotiators had kicked the talks upstairs to their respective leaders -- British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen -- to try and reach a breakthrough. The two said on Sunday that “no deal is feasible” if disputes are not resolved.
Three main sticking points still threaten the deal:
Fishing rights
State aid to business
The deal’s future governance
Europe’s fishing industry depends on catches in U.K. waters, and while fishing is a negligible industry for Britain, the issue has taken on emotional resonance for nationalist voters.
The E.U. also wants the right to issue countervailing tariffs in response to U.K. state aid to industry. British negotiators oppose this, in particular rejecting the idea of retaliatory tariffs in industries unrelated to the aid. Also anathema: “ratchet clauses” that would tie changes in British labor and environmental policies to European changes.
Britain has no clear way out of this conundrum. The E.U. is not going to allow the U.K. to undercut European industries without a response. Britain’s dominant right-wing political establishment cannot surrender the nation’s “sovereignty” over fishing waters or economic policymaking. But Brexit won by making the E.U. the target of working-class resentment, and “no deal” means new tariffs and administrative hassles shocking the economy, making working-class conditions even worse.
Finally, the E.U. has a political interest in making an example out of the first country to leave the Union. European leaders are much more worried about Barnier giving away too much than they are about “no deal.” The trillions of dollars leaving the City of London financial center for European capitals likely more than makes up for any losses to their fishing industries or other businesses.
So either Britain submits to European predominance in everything but name, it sabotages its own economy, or the E.U. makes secession cheap -- empowering nationalist forces across the continent. No matter what, political crisis is guaranteed to increase across the Atlantic in the years to come.
Rapid Round
Tesla set to join S&P 500 all at once
Tesla’s stock rose last week following the S&P 500’s announcement that the electric automaker will be added to the index on Dec. 21. The move will forsake a two-step approach previously considered to roll out over a period of weeks.
The index previously considered a phased approach because of Tesla’s size. Its market capitalization of $550 billion will make it the largest company ever to be added to the S&P 500. The dramatic rise of Tesla’s price -- rising nearly 600% in 2020 -- also comes despite slowing sales and falling market share in Europe due to competition from rival producers.
Tesla is profitable, but its margins are thin given the capital-intensive and competitive nature of the auto industry. What explains the mismatch between a sky-high valuation and the company’s fundamentals? For one thing, central bank action to suppress interest rates have fueled risk-on speculation, inflating the company’s stock price. Investors justify the bet by assuming Tesla will bring in bigger profits down the road. CEO Elon Musk, however, warned that reality might intrude on those dreams if investors reckon those profits will not materialize.
Google fires fairness advocate, employee activists
On Dec. 2, tech giant Google fired A.I. ethics researcher Timnit Gebru after she co-authored a paper titled “On the Dangers of Stochastic Parrots.” The paper discusses ethical complications arising from very large language models important for Google’s business. Gebru and her colleagues called out the energy-intensive processing required for large models and the related implications for climate change. Poor people bear the brunt of these impacts, while wealthy organizations benefit from the data. Gebru’s firing prompted protests from A.I. researchers and Google employees.
The news dropped the same day the U.S. National Labor Relations Board accused Google of unlawfully retaliating against two workers last year who organized protests against the tech giant’s partnership with union-busting firm IRI Consultants.
The company fired one worker, Kathryn Spiers, for creating a pop-up notification for employees visiting the IRI Consultants website. Google fired another worker, Laurence Berlan, after using illegal spying practices to monitor his calendar use, the means by which Berlan was able to discover the company’s partnership with IRI. "Google's hiring of IRI is an unambiguous declaration that management will no longer tolerate worker organizing," Berland said.
China cracks down on “shadow banks”
For the first time, the China Banking and Insurance Regulatory Commission (CBIRC) has moved to define the criteria for the country’s complex, $13 trillion shadow banking sector and “systemically important” banks -- i.e. those too big to fail. Chinese President Xi Jinping has described efforts to contain financial risk as one of the country’s “critical battles.”
What is the shadow banking sector, according to CBIRC? An array of financial activities outside the purview of banking supervision with lower credit standards than for banks. Online peer-to-peer lending, entrusted and microfinance loans, nonequity mutual funds and a bewildering array of other instruments and commercial companies fall under the new definition.
“The sector also faces greater payment pressure, is highly interconnected in the financial system and has high risk of contagion,” Caixin reported.
China’s property boom and debt-fueled stock market speculation have been catalysts for the sector’s expansion. Retail stock speculation resulted in a 2015 market crash, and Beijing has tightened regulations in response. Shadow banking has tightened as a result, with core assets shrinking 2.8% from a year ago.
Disclaimer
Our only investment advice: the best kind of lockdown
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Photo credit: Path for Europe