Markets blow off messy job numbers
Plus Hong Kong noise, remdesivir greed, FB boycott, and Thiel's surveillance
Thanks for reading another edition of Contention! This will be almost 8 minutes of overnight swapped business news.
In this issue:
Markets blow off messy job numbers
U.S. pretends to protest new Hong Kong security law
Rich countries face COVID profiteering blowback
Facebook’s boycott and the big reallocation
Rapid Round: FB bans some Boogaloo, India blocks TikTok, Thiel’s surveillance rounds, Browder fights the man
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Markets blow off messy job numbers
Markets continued their upward drift during the holiday shortened week, ending in positive territory for the third week in a row: the Dow up 3.3 percent, S&P 500 four percent, and Nasdaq 4.5 percent.
The deeper story: contradictory and incomplete data is obscuring looming market risks, but big money doesn’t seem to care.
The contradiction was most stark on Thursday. The June jobs report claimed an increase of 4.8 million new jobs -- blowing away expectations for 2.9 million -- while new jobless claims missed expectations, with 1.42 million Americans filing for unemployment versus a forecast of 1.38 million.
Another way to report this: the new jobs numbers say 17.8 million people are out of work. The jobless claims found 31.5 million people receiving unemployment benefits.
How does a gap this big happen? The good numbers are extrapolated survey estimates, collected before the latest surge in coronavirus cases. The bad numbers reflect hard data taken in the wake of new shutdowns.
Stocks seem to only be pricing in the outdated upside, while a more obscure indicator -- the overnight index swap yield curve -- reflects a growing risk of policy error in the near future. Congress did extend Paycheck Protection Program application deadlines this week, but new research indicates that the program might not have saved that many jobs.
Enhanced unemployment insurance and other direct payments, on the other hand, have been the linchpin of supporting household income throughout the crisis. This support ends July 31, and Congress will have 11 days to negotiate a replacement later this month. So far their only priority seems to be pushing people back to work, not continuing actually effective policies.
People returning to work during a pandemic would not be a “policy error” for markets. Pushing up the supply of labor while demand continues to drop lowers the price of labor: wages. That means bigger profit margins for employers, and smaller margins for family budgets, forcing record household savings into business pockets.
Instead markets are likely worried that the Fed is already starting to unwind quantitative easing and is slow to move on yield curve control. If the Fed switches gears it’ll be a big win: liquidity and desperation both in abundance, the ideal situation for capital.
That’s what the markets are pricing in, and a bet on mass sacrifice for business benefit almost always pays off.
U.S. pretends to protest new Hong Kong security law
China implemented legislation this week to combat terrorism and sedition in Hong Kong, following more than a year of violent U.S.-backed demonstrations aimed at disrupting the city-state’s “one country, two systems” policy. The United States has seized upon the move as a pretext for further intrigue.
Congress unanimously passed legislation to end Hong Kong’s special trading status with the United States in response to the law, but this is likely to have limited impact.
The United States has a $26 billion trade surplus with the region, larger than with any other trading partner.
Newly restricted technology exports were already “miniscule” and mostly sent to U.S.-based firms in the region.
The iShares MSCI Hong Kong ETF actually ended up 2.6% for the day following this action.
The National Security Law does nothing to change pro-business tax and investment policies in Hong Kong, and business people would face no more political risks in Hong Kong that they currently do in Shenzhen, Shanghai or Beijing.
China’s economic development is the real target here. Just this week Caixin’s New Economy Index -- indicating the performance of high-tech firms -- reached its three-year high while their services PMI hit its highest level since 2010. China’s shift to an advanced, service-oriented economy outside U.S. political control is reaching the point of no return.
The promise of such an alternative to the U.S.-led order prompted a majority of the U.N. Human Rights Council to endorse the new National Security Law this week. The vote breakdown was a stark divide between U.S.-aligned First World economies against China, and all of Africa, Asia and most of Latin America with the People’s Republic.
The United States responded in characteristic fashion, sending a carrier group into the South China Sea to threaten Chinese naval exercises. Not to be outdone, Australia’s right-wing government announced a $185 billion shift in defense spending targeting China, most of that earmarked for U.S. defense firms.
In the meantime U.S. financial sanctions do pose a significant risk to China, but they also accelerate the build out of an alternative to the dollar-dominated world economy.
After decades of monopolizing global power the United States is left with only a choice of “policy errors” -- empty symbolism, self-harm or encouragement for those building a new alternative. Hong Kong intrigues are a leading indicator of that desperation.
Rich countries face COVID profiteering blowback
Nations of the Global South have been demanding fair access to COVID treatments since the pandemic began, but have failed to secure an international action plan for ensuring access to critical medications.
Now rich countries are feeling the pain too: the U.S. government this week purchased the entire world supply of remdesivir, one of the only drugs effective at treating COVID-19.
These countries have to date offloaded the pandemic’s impact onto poor nations. Businesses subsidized by their stimulus packages have withheld payment and demanded discounts from suppliers in export-oriented economies. Now they are getting a taste of their own medicine… or lack thereof.
As world leaders consider their options, they should pay close attention to Kenya, where alternative systems are playing out right now. In May, the World Bank announced a $1 billion loan for the country in response to the pandemic crisis, half earmarked for agricultural inputs to farmers.
To secure the loan Kenya had to agree to finally eliminate all public distribution of such inputs. Instead, farmers will use “e-vouchers” to purchase seeds, fertilizers and other materials from private agribusinesses, all of them tied to multinational importers.
Separately, Kenya’s Court of Appeals ruled last week that the government did not properly negotiate a Chinese loan made as part of the Belt and Road Initiative, threatening its repayment. The $3.2 billion loan paid for the build out of a national railway, the largest infrastructure project since the country’s independence.
If Kenya defaults to the World Bank, Kenyans may not have money to buy agricultural inputs, and if they run afoul of the agribusinesses they could lose access to seeds and fertilizer at any price. Having dismantled their public system for distributing inputs, farmers would have nowhere to go.
If Kenya defaults to China, Kenyans will still have a railroad. The 40 percent of the project costs directed to local suppliers already got paid, and those suppliers likely already invested the profits back into their businesses. Kenya may take a credit hit, but will be in a better position to deal with the consequences than before. With the Western loan, they are worse off.
Rich nations are far from facing these same stakes, but now they are experiencing the hostility their U.S.“ally” has long reserved for its victims. Will they settle for whatever drugs, money, or other necessities the United States leaves behind, or will they build a new system? Stay tuned.
Facebook’s boycott and the big reallocation
Facebook’s stock initially dropped more than eight percent as a boycott led by large U.S. civil rights groups gained steam over the last two weeks. It clawed back most of those losses as the week went forward, but large advertisers including Starbucks and Diageo honored the boycott, some going beyond the demand for a one-month pause in advertising -- instead pulling out indefinitely.
Facebook CEO Mark Zuckerberg initially dismissed the boycott, but has now agreed to meet with the boycott’s organizers.
The indefinite withdrawals and pull outs from platforms beyond Facebook signal something bigger: a qualitative shift in resource allocation.
An effective boycott -- like this one -- focuses on narrow impacts that are relatively easy for boycotters to sustain. Farmworkers got 1960s consumers to boycott just grapes, for example. Permanent, $95 million reallocations of resources don’t reflect a simple endorsement of the campaign, but a recalculation of return-on-investment. The boycott is a catalyst for a decision these companies likely wanted to make anyways.
Major reallocations are happening everywhere right now:
San Francisco rents plummeted 12 percent year-over-year as high income residents flee the city.
The same is happening in other high rent cities as well, with lower cost cities Cleveland, Chattanooga, and Lincoln, Nebraska seeing rises of 15 percent or more.
The shift away from cash payments has led to a coin shortage across much of the country.
Shell is the latest oil major to write down assets, taking up to $22 billion off their books as demand shifts away from petroleum.
The trend towards remote work, non-cash payments, fossil fuel alternatives, and questions about social media advertising value all pre-date the pandemic. But crises crystallize long-standing quantitative shifts -- slow, one-by-one modifications of behavior and resource investment -- into full qualitative changes.
Big companies like those traded on the major stock exchanges are best placed to capture these reallocations. Workers and families vulnerable to layoffs, public service cuts, or their affordable city turning pricey (while the pricey cities are still not affordable) pay the costs. Upward trends for equity prices extend from this reality.
Longer-term, however, rising inequality, political disorder, and climate change make crises more likely. Just like experts failed to anticipate the pandemic, so too are they failing to foresee the emerging reallocation of leadership in the world economy.
Accumulating “policy errors” will get us there. Follow the money and watch it happen in real time.
Rapid Round
Facebook banned more than 400 accounts and pages advocating violence as part of the far-right “Boogaloo” movement, a subculture aiming for a new civil war in the United States. Facebook declined to remove groups or accounts from “the broader Boogaloo movement.”
Following recent border clashes that killed 20 Indian soldiers, India announced a ban on 59 mobile apps based in China, most notably TikTok. India is TikTok’s largest overseas market, and the ban could mean a $6 billion blow to the company’s bottom line. TikTok’s CEO Kevin Mayer said the Chinese government has never asked for data related to the app (which is not available in China), and would not turn it over if asked.
Palantir, a secretive big data and surveillance startup founded by right-wing billionaire Peter Thiel announced a $500 million fundraising round this week, expected to be the last before an IPO later this year. Another Thiel-backed surveillance startup -- Andruil, founded by pro-Trump Silicon Valley exile Palmer Luckey -- finished a $200 million fundraising round this week before signing a five-year contract to build a “virtual border wall” along the U.S.-Mexico border.
DoNotPay, an app ecosystem designed to help consumers fight corporate and state bureaucracy -- including parking tickets, customer service waiting times, and billing disputes -- finished a $12 million Series A round at an $80 million valuation. Thiel was involved in this deal too, but DoNotPay’s founder-CEO Joshua Browder may be more interesting: he’s the grandson of longtime General Secretary of the Communist Party USA, Earl Browder.
Disclaimer:
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