Oil’s stall and a 10 to 20-year air travel downturn
Plus the stalled stimulus, America’s collapsing trade war, and Indonesia’s unrest
Thank you again for reading Contention! This week we have under eight minutes of infection-free, dissident business news. In this edition:
Markets split with reality, hope for relief
Oil’s uneven boost, air travel’s 10 to 20-year downturn
U.S. trade war on China: ‘total failure’
Rapid Round: COVID surge, Indonesia unrest, Big Tech monopolies, China’s digital currency
There’s a lot going on right now, and following the money can help clarify what really matters. Share this information with someone else who could use the info too:
Markets split with reality, hope for relief
Stocks soared last week, posting their best performance since July with the Dow up 3.3%, the S&P 500 3.8%, and the Nasdaq 4.6%.
Observers don’t agree about why things got so hot, but one thing is for sure -- it had nothing to do with the fortunes of working people. Their suffering continues even in the face of big investor gains.
Markets didn’t even pause in the face of Thursday's miss on jobless claims -- analysts expected 825,000 new layoffs, but 840,000 new workers claimed benefits. Claims have not dipped below 800,000 since March, a level still four times as high as the pre-pandemic average.
Investors were far more interested in news around a new possible fiscal relief package:
As we reported on Wednesday, President Donald Trump frightened markets with his announcement that he’d called off relief negotiations until after the elections.
Trump quickly reversed himself, calling first for stand-alone bills for a new round of $1,200 stimulus checks and then for airline relief and another go at the Paycheck Protection Program.
By Friday, talks between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin were back on, and the White House had increased their offer from $1.6 trillion to $1.8 trillion. Democrats are still demanding $2.2 trillion.
Trump later told radio host Rush Limbaugh that he wanted an even larger bill than the Democrats.
All this movement happened against a backdrop of central bank pressure for a new relief package. Federal Reserve Chairman Jerome Powell told the National Association of Business Economists on Tuesday that too little spending was a bigger threat than too much, and minutes from the most recent Fed meeting released on Wednesday echoed those same concerns.
Fed presidents Eric Rosengren and Robert Kaplan kept the drumbeat going later in the week, with Kaplan saying that “the Fed can ease financial conditions, we can’t replace lost income, though. That’s uniquely suited to fiscal policy.”
Despite all of that pressure, Senate Majority Leader Mitch McConnell thinks the bill is doomed until after the election, and he’s probably right. Pelosi is already moving goalposts to say she couldn’t possibly pass a bill until it includes a plan for “testing, tracing, treatment, isolation, and equitable and ethical distribution of a safe and effective vaccine.”
She knows that regardless of what the polls say her party can’t tolerate too many more happy weeks on Wall Street before the election. Let’s be thankful we only have three more to worry about.
Oil’s uneven boost, airspace’s 10 to 20-year downturn
Stocks were not the only market outperforming last week -- oil also had one of its best weeks in months, with West Texas Intermediate (WTI) crude up 9.5%. It was a rare bright spot for a commodity hammered by the global crisis in production and demand.
One sign of the times: Chevron passed up ExxonMobil last week to become the largest U.S. oil company, unseating the market leader since its days as Standard Oil under John D. Rockefeller. Even more ominous for the industry was the fact that utility generation and renewable energy giant NextEra Energy briefly lapped the two oil majors as well as Saudi Aramco to become the world’s largest energy company.
Despite this writing on the wall, the two U.S. oil majors continue to focus on hydrocarbons, with ExxonMobil exposed just last week for secretly planning a 17% increase in carbon emissions over seven years. Both stocks are down big for the year -- Chevron 39% and ExxonMobil 52%.
Chief among their problems: air travel, with Boeing now predicting an 11% decline in passenger demand over the next decade. The company predicts it will take “10, 20 years” for passenger demand to get back to pre-pandemic growth rates.
Compounding this problem is the uneven, “three-speed” recoveries in auto transportation, ground transport, and air travel. Refineries turn each barrel of crude into a set proportion of gasoline, diesel, and jet fuels, as well as other distillates. Gasoline is no problem for them -- auto transport has largely rebounded, with former transit riders switching to personal automobiles.
But the air travel slump means a glut of jet fuel, which refiners have addressed by blending the fuel into diesel. This has then caused a glut in diesel, hammering refining margins. The “crack spread” between WTI and refined diesel dropped from $25 a barrel a year ago to $8.50 now.
Markets have now priced in long-term problems for the industry, and knock-on effects are reaching out beyond the oil patch. Nonetheless, U.S. political leaders have made it clear that a post-hydrocarbon energy future is not on the table -- why?
Because a global economy dependent on commodity-based energy generation has obvious strategic advantages for the countries that control the energy commodities. Through domestic production, key alliances with OPEC allies, and military and political intervention against intransigent producers, the United States is the dominant power of the hydrocarbon era.
Like the failing oil giants, our political leaders hope against evidence that the era will last just a little longer. If they win, everyone loses.
U.S. trade war on China: ‘total failure’
New U.S. trade deficit numbers released last week underscored the failure of nationalist policies to reverse the long decline in U.S. production. The deficit rose 5.9% in August to $67.1 billion, the highest level in 14 years.
Any talk about trade imbalance always circles back to one country: the People’s Republic of China. And the week was full of new gambits in the ongoing economic struggle between the rival powers.
U.S. exports increased in August, but imports rose faster. China is the number one source of those imports, and its export demand hit a three-year high in September. Even better were China’s service PMI numbers released last week, the fifth month of sector growth, and the biggest gain in three months.
But we shouldn’t let trade figures confuse us about the real source of rivalry between the two powers: U.S. attempts to prevent China from becoming an independent advanced production economy. That contest saw new moves last week as SMIC, mainland China’s largest semiconductor foundry, announced new export controls imposed upon its U.S. suppliers.
The restrictions had immediate consequences for the company, as its stock dropped 7.6% in Hong Kong and S&P Global put the company on a negative credit watch list, one step away from a junk bond downgrade. Longer term, the company says it will be able to produce with stockpiled materials, but beyond that the plan is unclear.
Chinese public media said that the country had no option other than a “Long March” to chip self-reliance, a reference to Mao’s strategic retreat during the Japanese occupation.
Meanwhile, China unveiled new legislation last week for its own entity list, with an explicit proposal to restrict export of rare earth minerals. U.S. President Donald Trump declared a national emergency around the strategic materials earlier this month, invoking the country’s Defense Production Act to command industry to speed up efforts to mine and process the materials in the United States.
But that is likely to be too little, too late. China already boasts “overwhelming dominance” in the rare earth space, and it will be years before the United States can come close to self-reliance.
Humans long ago figured out how to handle a situation where two parties each have something the other wants: trade. It’s not that the United States can’t figure this out -- it doesn’t want to. It wants to blunt China’s rise, but just like its trade war, that effort has been a “total failure.”
Rapid Round
COVID cases spike in U.S., Europe
The United States and its allies continued to suffer from a new surge of the coronavirus last week. In the United States, single-day infection totals were among the worst since the summer’s Sun Belt outbreak, with the seven-day average the highest in nearly two months. New York City, an early epicenter of the virus, reimposed shutdowns in nine zip codes where new clusters have formed.
Germany, Spain, France, and other European countries have all hit new records, exceeding infection rates that prompted shutdowns in the spring. Politicians, however, have been loath to impose new restrictions on business, with British Prime Minister Boris Johnson facing a backlash after new measures to stem the spread of the disease.
Johnson acknowledges that the restrictions could last as long as six months. Billionaire philanthropist Bill Gates said last week that the “best case” for rich countries would be something close to normal in late 2021.
China, on the other hand, celebrated its Golden Week eight-day holiday last week with travel at 79% of the 2019 level -- still a significant decline, but indicative of the country’s recovery. Former Trump FDA head Scott Gottlieb called out the differences between Western countries and Asia. “The entire Pacific Rim has less than 1,000 infections a day,” he said. “Having a raging epidemic is not inevitable.”
Workers, students shut down Indonesia
Protests and violent clashes raged across Indonesia last week as the country fast-tracked passage of a pro-business “omnibus bill” rolling back longstanding labor, environmental, and land protections. Protestors called out the government’s speed in passing the legislation while protections for domestic workers and sexual violence victims have languished for decades.
Indonesian President Joko Widodo made the bill a priority in order to improve Indonesia’s ranking on the World Bank’s Ease of Doing Business index, an annual measure delayed this year because of a data manipulation scandal. Now civil society groups are urging the World Bank to permanently scrap the report, as it encourages anti-worker and anti-peasant reforms like those in Indonesia and India.
The World Bank is not the only international financial institution with data problems impacting countries in the Global South. Critics of the IMF have called out the gap between its warnings of pandemic crises in poor countries and its rosy predictions for emerging market growth. Systematic overestimates for growth can encourage risky borrowing by these countries, to the benefit of Western lenders.
Report details Big Tech monopoly practices
A subcommittee of the House Judiciary Committee issued a 449-page report detailing anti-competitive abuses by Apple, Amazon, Facebook, and Google and recommended legislation to break up their monopolies. The fruit of a 16-month investigation highlighted by testimony in July from the four companies’ CEOs: the report calls for a “Glass-Steagall” for the internet referring to the landmark New Deal law breaking up commercial and investment banking.
Committee Republicans called out the report for going too far, but have expressed interest in “common ground” and support the report’s main findings. Facebook, however, warned last week that any plans to break off its separate business lines such as Instagram or WhatsApp were a “total nonstarter.”
China moving first on digital currency
The People’s Bank of China announced plans to give away 10 million yuan ($1.5 million) in the city of Shenzhen as a test of the country’s new digital currency. The “Digital Currency Electronic Payment” (DC/EP) promises to reduce transaction costs and allow for more precise economic planning and service delivery.
Japan’s top financial diplomat, Kenji Okamura, acknowledged last week that China is close to claiming the “first mover advantage” in digital money. “This advantage is setting the standards of scheme design,” Okamura said, “because it's the first mover (and) the technology platform which would facilitate further wide adoption of that digital currency."
The DC/EP could pose a threat to the dollar’s dominance as the world’s reserve currency, with consequences for U.S. political power. The shift may already be beginning -- last week Iran announced that it was dumping the dollar as its reserve currency, and transitioning its foreign currency holdings to China’s yuan.
Disclaimer
Our only investment advice: Read Morgan Parker.
Contact us with feedback or stories we might have missed.
Photo Credit: Wikimedia