Massive Asia-Pacific trade deal shifts global power
Plus vaccine rotations, TikTok’s latest reprieve, Peru, Palantir, and PDBs
Welcome to another edition of Contention! This week we have about seven minutes of subzero dissident business news. This week:
Stocks ‘rotate’ on vaccine promises
Asia-Pacific trade deal reboots global power
Clock stops again on TikTok shutdown
Rapid Round: PDB summit, Peru’s coup, Palantir’s quarterly boom
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Stocks ‘rotate’ on vaccine promises
Last week was a wild one for U.S. equity markets, with the Dow up 4.1%, the S&P 500 up 2.1% and the Nasdaq down 0.6%.
Pfizer’s Monday announcement that their COVID vaccine candidate appears to be 90% effective made “rotation” the watchword of the week. But the consequences of long-standing flaws in our way of life might make this optimism premature at best.
Pfizer’s vaccine appears to be far more effective than what scientists had been anticipating. Markets responded with a major shift in investment strategies, moving assets from so-called “growth” stocks to “value” plays.
These investment “factors” refer to different relationships between stock prices and underlying business fundamentals. Value stocks are classic “buy low, sell high” opportunities, priced below what their balance sheets say they should go for. Growth or “momentum” stock investors chase recent price gains -- “buy high, sell higher” -- as stronger equity positions promise to underwrite long-term business expansions.
Investors hope that Pfizer’s news means an impending “return to normal,” and plowed money into underpriced companies in response. Monday was the single biggest day for value stocks since 1980, while momentum stocks plummeted at record rates.
By later in the week, things had de-rotated a bit. Stock prices for Zoom -- the ultimate “work from home” play -- tell the week’s story well:
Zoom’s stock price dropped 17.4% on Monday and another 9% on Tuesday.
On Wednesday, it gained 9.9% and then 3.7% on Thursday.
Friday it dropped another 6.6%, ending down 20% on the week.
Why the reversal? Because the vaccine’s effectiveness has to be discounted by its extreme logistical challenges. Distribution chains will have to keep the vaccine at temperatures below -100 degrees Fahrenheit. This makes it very unlikely to be available not only in poor countries -- i.e. for most of the world’s population -- but potentially even in non-urban parts of rich countries.
Pharmaceutical companies are also refusing to budge on intellectual property restrictions, with “opaque and burdensome” licensing agreements protecting profits while keeping billions of people from accessing the vaccine. This is a bad idea: the recent mutant virus outbreak in Danish minks could happen again with any of the 400 animal species susceptible to the virus. When that happens, the West’s only strategy for controlling the pandemic fails.
Bottom line: there’s no way out of the crisis until the virus is controlled, and profit-seeking threatens to make the crisis terminal. Markets will struggle to find a way to rotate out of that one.
Asia-Pacific trade deal reboots global power
Fifteen Asian-Pacific countries signed the world’s largest free trade agreement on Sunday, the Regional Comprehensive Economic Partnership (RCEP). The deal not only promises to boost the bottom line for businesses and governments across the region, it marks an epochal shift in global power.
The RCEP now includes China, Japan, South Korea, the 10 Association of Southeastern Asian Nations (ASEAN) countries, Australia and New Zealand -- 2.2 billion people and $26 trillion in annual GDP, about a third of the global economy. India backed out of negotiations earlier this year, but the final agreement leaves the door open for them to join at any time. The deal came together over eight years, with China leading the way throughout the process. The RCEP is China’s first ever multilateral trade deal and its first trade agreement ever with Japan and South Korea -- two of its largest trading partners.
Talks accelerated after the United States pulled out of the Trans-Pacific Partnership in 2017, and while the RCEP may be somewhat shallower than that agreement -- lacking full environmental and labor guidelines -- observers say it is broader, touching on e-commerce, investment, trade, telecommunications, and intellectual property.
These differences may reflect a more balanced approach to the interests of all parties to the agreement, not just its leading economies. The TPP -- and its successor Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPATPP) -- would have eliminated 99% of tariffs between member nations, but the RCEP only reduces by 90%, allowing some ongoing protections for agricultural exporters. Reductions are also phased in over 20 years.
This still represents major relief from trade barriers, as Asian countries paid billions in tariffs -- even with bilateral trade agreements -- when their products contained significant inputs from third countries. Now the 15 RCEP nations will have incentives to continue investing in region-wide supply chains. The deal also envisions connecting these supply chains to e-commerce infrastructure buildout in the area’s poorest countries.
The agreement nonetheless has major flaws. Civil society groups have called out its lack of labor, land, and environmental protections, though similar measures in U.S.-led agreements have failed to stem human rights abuses in poor countries. Like all trade deals, the RCEP threatens to open the floodgates to cheap agricultural imports, displacing peasants and subsistence farmers. Fairer tariff regimes are unlikely to prevent that damage altogether.
But undermining U.S. dominance over the economic fortunes of Asian countries sets the stage for different development models which may mean different outcomes for poor countries. Only time will tell, but the chance for something new has officially begun.
Clock stops again on TikTok shutdown
The struggle over the Chinese-owned TikTok viral video platform reawakened last week as yet another government deadline for the company’s shutdown came and went with no change. The episode only reiterated the hypocrisy and incompetence of the U.S. government crystalized by the scandal to date.
To recap developments so far:
In August, U.S. President Donald Trump issued two executive orders intended to shut down TikTok -- one to block app stores from hosting it, another blocking U.S. companies from engaging in any transactions with it.
At the same time, the federal Committee on Foreign Investment in the United States (CFIUS) ordered TikTok to divest from its U.S. operations by Nov. 12 -- the same deadline as Trump’s transaction executive order.
A federal judge blocked the app store ban at the end of September, just before it was set to go into effect.
Oracle and Walmart announced a deal at that same time to buy stakes in TikTok and bring its data under U.S. control. This deal is still not final, as the parties immediately announced competing visions of the subsequent company’s equity structure.
A different federal judge blocked Trump’s transaction executive order at the end of October as part of a free speech lawsuit brought by three prominent TIkTok content creators.
This brings us to last week, when TikTok filed a motion in the D.C. Court of Appeals regarding the CFIUS divestiture order. The order made allowance for a 30-day extension past Thursday’s deadline, which TikTok had requested only to get no reply from the government. TikTok’s lawyers told the court the company had also shared an extensive new data privacy and security framework with CFIUS, and again heard nothing.
It isn’t clear why the government dropped the ball, but the legal action nudged the Commerce Department into announcing an extension on the divestiture order to Nov. 27. The court, however, gave both sides until mid-to-late December to file documents in the case, making the new deadline likely moot as well.
Despite its ridiculous surface, the TikTok debacle raises some deeply important questions: if the U.S. government can’t even take over a single app used to share silly videos, how can it possibly defeat the coronavirus or any other actual threat? And if it is this powerless, how much longer can it expect to dictate terms to the world economy?
U.S. leaders will probably never answer these questions, and their desperate attacks on global rivals can’t stave them off much longer.
Dev bank summit commits to nothing
For the first time ever all 450 of the world’s public development banks (PDBs) came together in the virtual “Finance in Common” conference last week. The banks -- including major PDBs such as the World Bank, Asia Development Bank (ADB), and Asian Infrastructure Investment Bank (AIIB) -- collectively control $11.2 trillion in assets, roughly 10% of global investment.
With no representation for civil society groups or communities impacted by PDB investments, the conference ended with no concrete commitments on climate change or human rights. The final communique did make non-specific references to ending coal investments by next year’s COP26 climate conference in Scotland, but the ADB and AIIB refused to join that commitment.
Audrey Rojkoff, the summit’s secretary general, said that coronavirus costs plus existing investment shortfalls would mean a $4 trillion gap in funding needed to meet United Nations Sustainable Development Goals this year alone. What investment has been committed has come under fire from advocates for the environment and the world’s poor -- only 2% of climate finance goes to small farmers, responsible for producing 80% of the Global South’s food.
PDBs and their private investor allies have instead put most of their money into large infrastructure projects with significant impacts on indigenous and peasant communities. These communities -- often labeled “anti-development” for opposing the projects -- have in turn been subject to widespread human rights abuses, including mass murder.
Peru’s business, legislative coup
The largest demonstrations in 20 years rocked Peru last week following the ouster of popular centrist President Martin Vizcarra. Protesters characterized the impeachment as a legislative coup which brought little-known right-wing politician Manuel Merino to power.
By the weekend, even Merino’s congressional allies were calling for his resignation following at least three deaths in Lima’s protests. Merino capitulated last night, ending his presidency after five days in power.
Merino’s resignation and the power vacuum he leaves behind only deepen Peru’s crisis. The country has had one of the world’s highest mortality rates from the coronavirus, with at least 1 in 1,000 Peruvians dying from the disease so far. More than 70% of the population works in the informal sector, making shutdowns nearly impossible. The IMF predicts a 14% decline in GDP this year.
Vizcarra’s popularity stemmed from an aggressive anti-corruption agenda, notably targeting Keiko Fujimori, leader of what was previously the country’s largest opposition party and daughter of former dictator Alberto Fujimori. Keiko Fujimori was implicated in taking bribes from the Brazilian construction giant Odebrecht in a scandal touching several South American governments. Anti-corruption leaders believe Merino and his government are backed by organized crime.
Vizcarra’s impeachment came with no investigation of the charges against him, from a Congress with a majority of its members under investigation. Despite this, the IMF extended an $11 billion credit facility to Peru earlier this year, praising the country’s “fiscal responsibility and transparency framework in place since 1999” -- under the rule of the dictator Fujimori.
Palantir’s first public quarter booms
Palantir released its first ever quarterly earnings report as a public company last week, and it was good news for the company’s investors. The CIA-financed data management firm brought in $289.4 million in revenue for the quarter, up 52% year-over-year, beating previous guidance that predicted $278-280 million.
The company is still not turning a profit, but reported declining customer concentration -- a major concern for analysts when the company went public at the end of September. Still, a majority of the company’s revenue -- $163 million -- came from government contracts, up 68% from the year before.
Among the most important contracts reported by the company:
A $91.2 million deal with the U.S. Army Research Laboratory to guide development of artificial intelligence and machine learning capabilities
A contract with the National Institutes of Health to streamline data access for the National COVID Cohort Collaborative -- the largest collection of COVID data in the world
Its biggest ever commercial contract, a $300 million aerospace company deal, presumably engaged in military contracting as well
A partnership with “one of the largest energy companies in the world” that used Palantir’s technology to identify nearly $400 million in cash savings
Palantir’s stock is now up nearly 60% since its September debut. Its technology aims to help the United States government, its allies, and strategic corporate partners streamline information organization and decision-making.
Our only investment advice: Dig the new KOKOROKO.
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