More jobs, new risks from Fed tricks

Plus China’s fight against 'disorderly' capital, Haiti’s assassination mystery, movie biz changes

It’s Monday, time for another edition of Contention! This week you’ll get just about eight minutes of dissident business news. We cover:

  1. July adds jobs, new risks from Fed tricks

  2. China fines Meituan, fights capital’s “disorder”

  3. Rapid Round: Haitian mogul denies assassination role, movie business outraged by change

Programming note: we are taking two weeks off for a summer vacation. We may have some columns out during that time, but we won’t be doing the weekly newsletter again until August 30. 

In the meantime, share Contention with friends, and we’ll see you at the end of the month!

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July adds jobs, new risks from Fed tricks

All major indexes advanced last week, with the Dow up 0.8%, the S&P 500 0.9% and the Nasdaq 1.1%. Friday’s close marked an all-time high for the Dow and S&P.

Markets reflected steady confidence in a growing economy, even as pandemic risks raise new questions. Most concerning for anybody taking a closer look: swelling dislocations caused by the pro-business state planning now necessary to hold the system together. 

The week’s biggest news: July employment numbers, released on Friday. The U.S. economy added 943,000 jobs for the month, substantially more than the 870,000 economists expected. This was the best month for labor market growth since August 2020, but still leaves the economy down 5.7 million jobs since the pandemic began.

The pandemic is itself a big asterisk on the job figures, as the reference week for July’s report came before the recent delta variant surge took hold. High-frequency data from LinkedIn indicates that hiring has dropped 5.8% already, while Bank of America reports that debit and credit card use has “decelerated meaningfully.”

JPMorgan Chase’s data tracker is now forecasting only 53,000 new jobs for August -- a huge drop. The upside: vaccinated people seem to have very low risks from the variant, with hospitalization and fatality rates a fraction of that caused by automobiles, commensurate with other routine illnesses. The wave has prompted a new surge in vaccinations, and models predict that the wave will peak within a month.  

These contending forces all whipped interest rates back and forth over the course of the week, with yields on the benchmark 10-Year Treasury bond hitting a low of 1.13% on Tuesday on delta wave fears and jumping to 1.28% after Friday’s jobs report. 

Stocks followed the shifting fortunes, with tech names liking the low capital prices on Monday and Tuesday, but dipping slightly on Friday’s rate bump. Markets are also wary that good economic news like Friday’s jobs print means less free money from the Federal Reserve in the quarters to come. Observers now expect the Fed to begin tapering its purchases of bonds and mortgage-backed securities later this year. 

To repeat: investors aren’t sure if a growing, more prosperous economy is a good thing because it might mean less central bank market intervention. That implies that the only reason we have growth in the first place is because of Fed manipulations, with profit rates so low that any risk-free interest rate over zero will drain all growth away. 

The Fed has bought 76.4% of all federal debt issued during the pandemic, a huge support for bond prices and weight on yields. 

Now the scheme’s unintended consequences are mounting. First, housing and rent prices have soared this year, with the Case-Shiller housing index -- which lags a few months, May’s data came out last week -- up 16.6% for the year, the most ever, crushing April’s 14.8% record. Apartment rents are up 14.6% over the last year, another high-water mark. 

Lower interest rates inflate the value of all capital assets, including real estate, but they are especially tied to the “cap rates” used to value rental properties. The lower the cap rate, the more value added to the property by every dollar of increased rent. The Fed’s policies are a boon to property owners and a huge incentive for landlords to raise rents.

Second, the Fed’s maneuvers have distorted one market in particular: repo markets, short-term secured lending markets for major financial institutions and money market mutual funds (MMMFs). We’ve discussed this dynamic before, but the bank’s overnight reverse repo facility finally hit $1 trillion in uptake at the end of July, with the looming debt ceiling forcing the Treasury to draw down its general account, flooding already glutted markets with even more cash. 

Nobody knows what the consequences of this might be. The foremost experts on the arcane, opaque market warn of “unexpected volatility in unusual places,” but nobody has ever anticipated any of this, so nobody knows what to expect. 

What we do know: repo markets are “foundational to the functioning of financial markets,” and the Fed’s active underwriting of this market makes MMMFs more systematically important than ever. The Fed is borrowing roughly $1 trillion a day from these funds, and printing $500 million a year in interest for “shadow banks” implicated as one of the most significant stability risks in the entire financial order. 

What makes them so dangerous? Their customers treat the funds like cash, enjoying high liquidity while still eking out returns in commercial paper, short-term Treasury bonds, municipal debt, and other assets. When a crisis hits, the customers rush to actually cash out, forcing the funds to sell off all those assets, blowing up borrowing costs and amplifying liquidity crunches across the economy. 

Businesses and governments issue those assets to pay their day-to-day expenses. When they can’t sell them, they collapse. MMMFs have accelerated market meltdowns in 2008 and 2020, and now the Fed has moved them closer to the heart of the economy, all in an attempt to patch up the distortions caused by its extraordinary interventions. 

Maybe it will all work out, but more likely is another “unprecedented” eruption somewhere else in the market, and another bespoke response leading to more cascading interventions down the line. Until then, renters and savers will pay the price for Wall Street profits, yet again. 

China fines Meituan, fights capital’s “disorder”

China’s food-delivery giant Meituan fell into the sights of the country’s top antitrust regulator last week on news of a pending $1 billion fine. The penalty would also require the firm to end its “choose one out of two” practice that unfairly pressures smaller retailers from selling goods on rival marketplaces.

It’s all part of an expanding campaign by China’s government to reign in Big Tech and reach beyond to other sectors of the economy. Just last month, the Chinese government liquidated profit-making in the $70 billion after-school tutoring industry to reduce families’ education expenses. The move also includes new plans to reduce excessive homework that has buried kids in the books -- inefficient in comparison to doing their homework in a “scientific manner,” a former education ministry spokesman said.

The potential Meituan fine -- following new regulations announced in July -- is meanwhile part of halting what the Communist Party of China calls the “disorderly expansion of capital,” i.e. the tendency by large firms to form monopolies and choke off competition. Market analysts expect this to lead to increased pay for Meituan’s workers, commonly seen zipping food deliveries around on motorbikes in China’s cities. That in turn has caused analysts to cut forecasts of the company’s profit growth.

Last week was busy with this kind of regulatory news. In Wuhan, the local government proposed a “home ticket” system for the red-hot housing market. This is a method for screening out real-estate speculators from buying property, and borrows from the liangpiao system of ration coupons from the planned-economy era of the 1950s, used at the time to regulate sales of food, fuel and bicycles when supply fell short of demand. 

A lack of supply is not so much the problem with Wuhan’s housing today, but a need to match supply to real demand, not speculative demand.

Another problem identified by the Communist Party: video games becoming “spiritual opium” and “electronic drugs” as described by the Economic Information Daily, a publicly-owned newspaper which also called for strict regulation of the sector. That was enough to shock video game publisher Tencent’s stocks as the company promised to regulate playtime for underage users

Why is the Chinese government doing this? China appears to be planning where it wants the economy to go in the 2020s, a new “development phase” emphasizing common prosperity, social stability, and key industries such as high-tech manufacturing. This means a rotation away from the “platform” companies targeted by state regulators. 

These companies can have high operational leverage and be highly profitable -- extracting money from digital monopoly rents without producing much value -- but they employ relatively few people and generate little benefit for society as a whole. China’s regulators appear to have concluded that their power ought to be reined in. 

The platform companies can also poach talent needed elsewhere. The Chinese government is now plowing research and development into semiconductor manufacturing -- a strategic industry with large fixed-capital costs, and one where Chinese companies still lag behind their competitors in other economies. The strategy: real economy before platforms.

“It must be recognized that the real economy is the foundation, and the various manufacturing industries cannot be abandoned,” Chinese Pres. Xi Jinping said in 2020.

Prioritizing “Made in China” goods is part of the same program. In May, the government issued new guidelines that require state-owned buyers of various items to buy up to 100% Chinese-made products. This includes state-owned companies but also hospitals which must start buying Chinese-made magnetic resonance imagers and optical equipment, among other items. This is also a response to declining exports to the United States, which slapped tariffs on Chinese-made medical devices.

But it’s also about a different system favoring long-term investment in fixed capital with the added bonus of maintaining employment for millions of people. The opposite is the case on the other side of the Pacific, with different results.

Rapid Round

Haitian bigwig: I didn’t do it

Investor and businessman Reginald Boulos, one of Haiti's richest men, is denying that he had anything to do with the July 7 assassination of Pres. Jovenel Moïse. "I had nothing, absolutely nothing, to do with Jovenel’s death," Boulos said last week. “Nobody could have imagined this would happen except the people who planned it, financed it and did it.”

Boulous, who has aspired to the presidency and was on a business trip to the United States at the time of Moïse's killing by a squad of Colombian hitmen, has not returned to Haiti. Many Haitians suspect Boulous had something to do with the plot, including Moïse's widow, Martine Moïse -- who was wounded but survived the attack. She has not directly accused Boulos of involvement in the plot, but said he'd have something to gain from her husband's death. 

The Haitian government has since frozen Boulos' personal bank account.

One bizarre detail: the arrest of an obscure doctor and pastor, 63-year-old Christian Emmanuel Sanon, alleged to have financed the plot. However, Sanon declared bankruptcy in 2013 and it's not clear where he got the money to organize and pay two-dozen mercenaries to fly to Haiti and kill a president. 

Boulos has not been charged, but claims the suspicion around him is part of a plot to set him up. One legal clerk who witnessed the detained assassins’ initial interrogations said he was threatened by unknown people who demanded he add Boulos' name to the list of suspects. “Clerk, you can expect a bullet in your head," stated one threat. “We ordered you to do something, and you're doing jack all.”

Theater chains, ScarJo fight back

Movie-theater chains began reporting quarterly earnings last week, and the results were mixed. Cinemark reported $294.7 million in revenue, 17% higher than Wall Street estimates but still 69% lower than the same quarter in 2019 -- before the pandemic. IMAX was also down by half of its pre-pandemic comparison.

AMC reports Monday afternoon and analysts expect similar results. Now the delta variant is threatening theaters with the possibility of new restrictions and mask mandates. The National Association of Theatre Owners (NATO), the industry’s main lobby group, is also upset at Hollywood studios for releasing movies online to stream simultaneously, blaming them for “cannibalizing” ticket revenues. 

We’re losing a lot of business,” NATO chief John Fithian said.

Scarlett Johansson also lost a lot of money. She sued Disney for breach of contract last month after the studio giant released Black Widow on Disney Plus, which her lawyers say cost her tens of millions of dollars in ticket sales.

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