Markets beat forecasts, workers into submission

Plus China accelerates monopoly crackdown, Berlin renters lose, Peru left wins, SPACs stumble

It’s Monday, that means another edition of Contention. This week we have seven minutes of hedonically adjusted dissident business news. We cover:

  1. Markets beat forecasts, workers into submission

  2. China shows Alibaba, big tech who’s boss

  3. Rapid Round: Berlin loses on rent law, Peru leftist wings first round, SPAC balance sheets get screwed

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Markets beat forecasts, workers into submission

Markets continued their recent climb last week with the Dow and S&P 500 both hitting record highs on signs that the U.S. economy is growing at a long-unseen pace. The Dow finished the week up 1.2%, the S&P 500 up 1.4% and the Nasdaq 1.1%.

But rosy stats still hide significant pressures on working families with policymakers facing a looming dilemma: can they avoid a new wave of popular discontent while still protecting big business profits?

The week’s biggest data: record-breaking retail sales. March spending went up a full 9.8% month-over-month, blowing away even the wildly optimistic 6.1% forecast. Stimulus checks and improving weather reversed February’s 2.7% decline, raising the sales numbers a whopping 17.1% over pre-pandemic levels. 

Last week was also the beginning of “earnings season” -- the multi-week period when most public companies report their quarterly performance. Major banks always lead the way, and their data was eye-popping too:

Not all of the week’s data beat expectations. Notably, industrial production numbers came in below expectations -- only 1.4% growth vs. 2.7% expected. This did not even make up February’s 2.6% drop, and the figures reinforced qualitative reports in the Federal Reserve’s “Beige Book” noting both rising demand and ongoing supply chain bottlenecks

That should mean inflation, and Tuesday’s highly-anticipated consumer price index (CPI) numbers did come in slightly higher than expected -- 0.6% for the month and 2.6% for the year vs. 0.5% and 2.5% expected, respectively. 

That sounds modest, but we know that the government manipulates inflation stats to hide real losses in quality of life for working U.S. families. Housing costs are the biggest component of the CPI, and the Bureau of Labor Statistics says they have gone up only 2% for the year. The Case-Shiller Housing Index has in fact soared 11.2% since March 2020. If official CPI used these real housing costs, inflation would be up 5.1%

Even that's conservative. Without this gimmick, “hedonic adjustments,” and other manipulations introduced in the 1990s, Shadow Stats estimates March annual inflation to have hit 10.4%, up from 9.4% the month before. Working people are rapidly losing ground.

Which brings us to the shortage most pressing for producers: labor. The April National Federation of Independent Businesses (NFIB) survey found 42% of employers had open positions they'd been unable to fill -- a record.  

How is it possible for a labor market still down 8.4 million jobs to have labor shortages? Employers blame enhanced unemployment benefits making it too attractive to stay off the job. They could, of course, raise wages to draw these workers back, but this would mean the kind of inflation politicians actually worry about -- wage inflation. 

Businesses seem much less willing to acknowledge the role of the COVID-19 reallocation shock. Workers that got laid off from a shuttered department store can’t jump onto a semiconductor production line. Retraining and relocating workers is a much more difficult -- and expensive -- solution than a new round of austerity. Markets are already pricing in the end of fiscal stimulus support, but there is no indication that this will solve labor shortages. 

This stimulus accounted for all wealth growth for 50% of the population in 2020. They are going to lose it even while prices keep going up, squeezing them while headlines celebrate the "recovery."

The last time we saw a recovery that left almost everybody out we got a decade of volatile populist politics. The question now is whether policymakers and business have learned their lesson or if they are ready for history to repeat itself. 

China shows Alibaba, big tech who’s boss

China’s State Administration for Market Regulation (SAMR) last week issued the largest fine ever levied against any corporation worldwide, a $2.8 billion penalty against online retail giant Alibaba. The charge came in response to anti-competitive conduct from the company, and amounts to 4% of its 2019 domestic revenue. 

The move turned out to be just the first act in a dramatic week of state and market moves reflecting the Communist Party of China’s focus on “the disorderly expansion of capital.” Altogether they indicate China’s radical departure from the economic priorities of its global rivals. 

The fine was just the beginning. On Monday, Alibaba CEO Daniel Zhang announced a sweeping set of cost and policy reforms meant to help independent merchants previously squeezed by the company's monopoly practices.

Most notorious: Alibaba’s “choose one of two” policy, which punished small businesses who wanted to also sell on rival platforms such as Tencent or That rule is gone now, and the company is streamlining the process for setting up merchant shops, waiving and refunding deposits and fees it charged for optimization tools, improving back-end efficiencies, and providing no-cost one-to-one customer support for merchants. 

The cost of all the reforms will come out of profits, not increased prices for customers. 

Monday also saw the announcement that Alibaba’s fintech arm Ant Group would overhaul its business model from a loosely-regulated payment and online lending platform to a holding company essentially regulated like a bank. Chinese regulators led by the People’s Bank of China summoned Ant executives to Beijing and imposed the “comprehensive, viable rectification plan” on the firm in order to reduce the company’s financial risk. 

The next day, SAMR and other regulators brought together 34 of China’s largest tech platforms -- including Tencent,, grocery seller Pinduoduo, TikTok owner Bytedance, and gaming platform Netease -- to warn them that they all had one month to self-assess whether they were in compliance with all anti-monopoly, consumer protection, and tax laws, and to rectify any problems before facing “severe consequences.” 

By the end of the week, all 34 had issued public pledges to help regulators “maintain market order.” 

Beijing adopted its anti-monopoly law in 2007, but as the party pursued rapid economic expansion, innovators were given a long leash with weak enforcement. Now that reining in financial risk has become a higher priority, the SAMR has issued new regulations to clarify enforcement

The shift dovetails with other market interventions intended to cool credit expansion and “deleverage” from shaky debt structures. The new policy regime has weighed on Chinese stocks, and while the country last week reported a record 18.3% annual growth rate, this figure came in under forecasts. What’s remarkable, however, is how unthinkable any of this would be in the United States.

Any fine like Alibaba’s would give rise to lawsuits and public disavowals of responsibility. A meeting like Tuesday’s would end with industry lobbyists re-writing the rules. Regulators would never even think to impose a restructure on a company as significant as Ant Group. Politicians would assess “deleveraging” as a much bigger election risk than just letting the economy blow up. 

The material difference between the two: in the United States the state is explicitly set up to serve business interests; in China the state is subordinate to the Communist Party. 

For years, Western observers assumed that wealthy members like Alibaba founder Jack Ma secretly controlled the party. If that’s the case, unilaterally imposing profit-squeezing consumer protections, forcing public abegnations by executives, devaluing major companies through mandatory overhauls, and executing the most recalcitrant of them all seem like funny ways of serving these secret masters. 

Different rulers = different priorities = different outcomes. Last week China reaffirmed that it won’t tolerate risk or growth at any cost, something U.S. rulers can’t seem to believe. 

Rapid Round

Berlin strikes down radical rent control

Germany’s top court declared Berlin’s rent freeze null and void on Thursday. The law went into effect last November and halted further rises in rent in Germany’s capital city for five years after three decades of breakneck price increases, the fastest in Europe. 

For a moment, it was a victory for the “rent madness” social movement which helped power a “red-red-green” -- Social Democrats, Greens, and the Left Party -- government into the Berlin Senate. The freeze then met opposition from a conservative federal government, construction companies, and developers.

Berlin is Germany’s startup hub and a major cultural center, contributing to rapid population growth, while annual income at €19,719 is relatively low for German cities. Housing activists targeted major developers for exploiting a “rent gap” -- allowing rental properties to fall apart because maintaining them became less profitable than gentrifying the structures. The rent freeze also froze this phenomenon.

Related: Brexit fallout has led to some young Britons emigrating to Berlin, then applying for permanent residency. Berkshire Hathaway commented that Britain’s withdrawal from the economic bloc would help Berlin “prove very exciting for property investments.” Housing campaigners are now taking a different strategy, organizing to renationalize 200,000 flats, many owned by property company Deutsche Wohnen.

Peru leftist leads, Ecuador’s loses

The first round of Peru’s presidential election came with a surprise, as schoolteacher and trade unionist Pedro Castillo of the left-wing Free Peru party led the first round to take on right-wing candidate Keiko Fujimori, the daughter of imprisoned former dictator Alberto Fujimori. Castillo’s platform: boost social spending, regulate markets and renationalize Peru’s mining, gas, oil and telecommunications industries.

Peru has been one of the countries hardest hit by the pandemic, with cases still rising. The country’s GDP fell 11.1% in 2020, prompted by an initial collapse in commodity values. Castillo’s plans could help the country harness subsequent surges in copper and other export prices. The second round of election is scheduled for June 6.

Meanwhile in Ecuador, right-wing banker Guillermo Lasso of the Creating Opportunities party prevailed in the second round of that country’s presidential election over Andres Arauz, the protege of socialist former president Rafael Correa. Alejandro Werner, the International Monetary Fund’s regional director, stressed there is an “important understanding” with Lasso, who has pledged to bring Ecuador into the Pacific Alliance free trade bloc.

SPACs cool off amid regulatory scrutiny

The U.S. Securities and Exchange Commission warned that some special-purpose acquisition companies, or SPACs, may have failed to properly account for warrants sold to investors. Warrants are a popular vehicle allowing investors to buy more shares of a SPAC at today’s price in the future, helping them raise money before merging with a company to take it public. 

This is enticing to investors given the potential windfall, but the SEC claims warrants should be counted as liabilities, not equity as some SPACs have done. The move increases liabilities on SPAC balance sheets, undermining their value. The announcement came during a record year for SPACs with more than 550 filing to go public year-to-date, some with sensational celebrity endorsements including Shaquille O’Neal and Colin Kaepernick.

But many investors have also lost money if they bought in recently. SPACs are down off their February highs, with one of the losers being “SPAC king” Chamath Palihapitiya who helped spearhead interest in the companies on Twitter. His six SPACs have fallen more than the broader market.


Our only investment advice: Listen to more Jayy Grams.

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