COVID's hot, the dollar's not

Plus stress tests, climate accounting, Facebook boycotts and Huawei's latest deals

Thanks for reading Contention! Get ready for about 7 minutes of reverse-reverse-radical business reading!

In this issue:

  1. Markets decline, coronavirus crisis may last for years 

  2. U.S. failures starting to weigh on the dollar

  3. Banks want more risk, and they’ll probably get it 

  4. Climate options narrow, markets may not care 

  5. Rapid Round: Facebook facing boycott, Unilever lightening backlash, Wirecard collapses, Enviro litigation advances, Huawei wins two big deals

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Markets decline, coronavirus crisis may last for years 

Markets started caring about the coronavirus again this week as premature rollbacks of social distancing wiped out earlier U.S. progress against the pandemic. The Dow was down 3.3 percent, the S&P 500 2.9 percent, and the Nasdaq 1.9 percent. 

Health care systems in some states were nearing capacity as the viral curve “unflattened,” prompting a new wave of economic restrictions:

This is not a “second wave” of the epidemic for the United States, it is a predictable escalation of the pandemic’s first wave. A second wave is what Korea and Germany are both facing, raising an uncomfortable implication: as long as the disease exists anywhere in the world, repeated waves of infection may be unavoidable. 

There will likely be no real solution until a vaccine is available. Optimistic estimates put this at the middle of 2021.  

From hopes of a “V-shaped” recovery a new consensus is pointing to a “reverse radical” shape -- a backwards square-root sign with a deep plunge, a partial rebound and long period of stagnation.

Few businesses are prepared for a multi-year blow to income. Most are not even ready for the end of fiscal programs next month: one in 10 will lay off workers when PPP money runs out, and 43 percent of PPP recipients will be out of money in July -- 69 percent of non-recipients will be broke. This at a time when policymaking in Washington has broken down.

Despite the success of income support programs to date, any future stimulus is likely to focus on pushing people back into work. The same spirit that drove public health decision-making drives thinking on fiscal support: short-term profit over real security. 

Markets are now starting to price in another round of lessons learned the hard way. 

U.S. failures starting to weigh on the dollar

The tradeoff against long-term stability is now affecting the asset at the heart of the world economy: the U.S. dollar. Analysts are questioning whether the dollar should have a safe haven premium in the first place. Stephen Roach, a Yale fellow and former Morgan Stanley Asia chairman predicted that a 35 percent drop in dollar values could come at “warp speed.”

Analysts blame expansionary monetary policy for the drop, but the decline and the money printing have the same cause: the breakdown of the U.S.-led world system of production.  

Money exists to facilitate the exchange of commodities. Monetary systems depend upon a stable relationship between the value of money and the value of commodities at large. Historically, a representative commodity -- gold, most often -- served as money so that any change in conditions influencing commodity values in general would shift the representative commodity’s value too. 

Since 1971, however, the global economy has centered on the U.S. dollar without the backing of a specific commodity. This has worked because the United States controls world commodity markets through:

  • Global political institutions imposing low-price terms of trade in primary commodities

  • Patronage of strategic commodity exporters, securing their buy-in for this system

  • Military intervention to suppress risks to commodity price stability caused by resistance to the system

The United States is now abandoning this system, sabotaging its ability to address the present crisis on the way out. Just this week: 

The dollar might normally transit such trouble without losing its sheen because the only alternative to the dollar system is chaos. But now threatened sanctions -- a perk of dollar power -- are forcing China to prepare for a payment system outside the dollar. They have already built a set of  “alternative Bretton Woods” institutions, prompting the U.S. to try and build alternatives to the alternatives.

In the meantime, the United States keeps borrowing to finance massive fiscal and current account deficits, debt that has always been secured by the promise of never-ending world domination. As short-sighted political choices and abject policy failures become impossible to ignore, that security is getting a sharp discount. 

The most important thing to remember: the discount isn’t caused by the borrowing, they are both caused by U.S. dependency on a system with no future. 

Banks want more risk, and they’ll probably get it 

The Federal Reserve suspended share buybacks from major U.S. banks and capped their dividend payments on Thursday after stress tests showed that a deepening coronavirus crisis could reduce capital levels to an insufficient level. 

The central bank also announced that the banks would be required to undergo another stress test later this year -- an unprecedented move. The worst part: the test is rigged in the banks’ favor and they still couldn’t pass. At least one Fed governor thinks they should have suspended all dividends.

But on the same day that the Fed exposed this risk to the banking system, the FDIC opened the door to new risks by announcing a rollback of the “Volcker Rule” -- a core reform following the last economic crisis.

The Volcker Rule limits bank exposure to “covered funds” -- hedge funds, private equity and much venture capital. The announced change opens up opportunities for more bank investments in venture capital, increasing risk in the financial system at the very same time that exotic “risk hedging” strategies are blowing up

Boundaries between banks and these funds limited any broader financial fallout, meaning the regulations worked. Now regulators are scrapping them. 

Are banks really at risk though? Bank deposits are at an all time high, but this is actually a risk factor too. Production drives the economy, and producers don’t like the looks of our future right now. Durable goods purchases and Europe’s PMI did beat forecasts this week, but at best this is a partial bounce in the “reverse radical.” Fed asset purchases can’t stimulate producers to sell to people hoarding cash in anticipation of a “slow slog.” At best it can keep corporate lines of credit flowing to stave off insolvency. 

Can they fund that for two years or more? We’ll see 

The one thing that we can see right now: bankers cheering Volcker Rule changes and grumbling about Fed stress tests are demanding immediate satisfaction at the cost of long-term stability. These are the people in charge of our decision-making right now, and if the system is under stress, they are the source. 

Climate options narrow, markets may not care 

On Saturday, June 20, the Siberian town of Verkhoyansk, which lies above the Arctic Circle, hit temperatures over 100 degrees. This is the hottest temperature ever recorded in the Arctic.

Equity markets did not care, of course. Companies are not appropriately accounting for climate risk in their finances, according to major British investors. Valuations are premised on a future where everything works out fine. 

Attempts to weigh this risk on the investor side received a blow this week as the Department of Labor announced rules targeted at Environmental, Social, and Governance (ESG) investment funds. A whistleblower in the Department of Justice also disclosed that the government targeted automakers with antitrust investigations for making joint climate pledges. 

But they can’t suppress financial realities forever. Occidental Petroleum became the latest oil major to write down assets this week, to the tune of $9 billion. An emerging “Atlantic divide” on renewable investments likewise threatens to block U.S. firms from foreign investment, even as “atrocious governance” at energy companies scares off domestic inflows. 

Calculations based on buying our way out of the problem are off-base too: 

  • Norway concluded that their carbon capture and storage plan is financially unfeasible

  • A study published Monday found that Chilean companies spent more than $400 million and increased planted trees by 100 percent with only a two-percent reduction in atmospheric carbon.

  • A new game theory analysis suggests that geoengineering might be a viable intermediate option, but this just shifts risk calculations into the Snowpiercer universe. 

Companies, such as Ford this week, still feel compelled to make climate pledges, and this is leading to some new investments, like Amazon’s $2 billion climate venture fund. But major institutional investors poured ten times that amount into a single fossil fuel deal in the Middle East this week, and the IEA is pushing to keep carbon-intense natural gas and nuclear power in Europe’s energy future. 

The emerging game plan: level off and eliminate carbon emissions, but at a rate that won’t avoid catastrophe. The wealthy can buy their way to security, and the military and police can deal with any fallout. That’s already priced in -- the victims, the Verkhoyansks and Chongqings of the world have never been valued by this system anyways. 

Rapid Round

Civil rights groups leveraged recent gains to pressure major advertisers including Verizon, Coca-Cola, Honda, and more than 100 others into boycotting Facebook advertising in July. Unilever went further, announcing a full withdrawal from all Facebook and Twitter advertising. Facebook’s strategy of “shifting away from societal good to individual value” has eroded their value for advertisers.

Unilever was likely moving to shift attention away from another racial controversy this week: employee pressure to drop their skin-lightening products, marketed under the “Fair and Lovely” brand in India. The products make $560 million for Unilever annually. The German conglomerate is now trying to settle for changing the product’s name next year. 

German payments giant Wirecard filed for insolvency this week and its CEO turned himself in for fraud after admitting that a €2 billion hole in its books was the result of fake revenues. Auditor EY scrambled to claim they were duped too, and European officials announced a probe into German financial regulators after they shielded the company from short sellers and journalists who detected the fraud in 2018. 

The state of Minnesota and the District of Columbia announced multi-billion dollar suits against major oil companies for deceiving consumers about the risks of climate change. Bayer also announced a $10 billion+ settlement for deaths and illness caused by Roundup -- a toxic herbicide sold by Monsanto before being acquired by Bayer in 2018. The implication: oil companies could be facing 12-figure levels of liability for funding climate denial. 

Huawei secured two important deals this week: an agreement with Shanghai Microelectronics that could fill the gap in chip fabrication machinery caused by U.S. trade manipulation, and with the U.K. city of Cambridgeshire to build a £1 billion R&D development -- defying the country’s Conservative government.  


Our only investment advice: FTP. 

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