Our best rapid dissent business news so far
Stocks, gold, oil, TikTok, semiconductors and all our hits
Welcome to a special “best of” edition of Contention! We’re taking the week off for Tina Turner’s birthday and thought that this would be the perfect time to highlight some of our favorite and most impactful posts from the last few months.
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Our best columns so far
When will the COVID crisis begin? (October 29)
We are still in the earliest days of the COVID crisis. At this point in the Great Depression, Americans hadn’t experienced the first round of bank failures. At this point in the “War on Terror,” the Iraq invasion was still almost a year away. Whatever this crisis will come to mean to us in the future probably hasn’t happened yet.
When will it really start? Nobody can say for sure, but exploring some of the key tensions playing out now can help us anticipate the likely trajectories for global investment. Even a sober look raises extraordinary questions about the future of the world order as we know it…
No really, why are stocks still rising? (August 27)
But let’s elaborate the reasons for this disconnect yet again, because new explanations emerge all the time. Multiple phenomena are causing this contradiction, all part of the same basic force: state manipulation of markets to protect concentrated wealth.
First, let’s be clear: “markets” are not up in every sense. The major indexes are up: the S&P 500 and Nasdaq are already back at record levels and the Dow is not far off its all-time-high. But this is a reflection of the exceptional performance of very few components in each index, not broad-based gains…
Gold and oil: a tale of two commodities (July 28)
Since 1971, however, the world money system has not relied upon a representative commodity. Instead it has relied upon the United States to use political and military means to keep commodity prices stable. The easiest way to keep prices steady: pin them down. Prices and profits serve as the signal for action: higher commodity prices = higher input costs = squeezed margins.
Politicians don’t have to worry about the monetary system, they just have to think about corporate earnings…
Did Facebook trade fascism for a TikTok ban? August 31
The other big claim on business headlines last week: ongoing intrigue over TikTok’s future. Nobody, however, seems to be connecting the turmoil in and around the company to broader chaos in U.S. streets.
At least three major developments arose as TikTok scrambled to survive an impending ban in the United States:
The company’s CEO, Kevin Mayer, hired only three months ago, abruptly resigned.
The company sued the Trump administration over the ban, claiming there is no “bona fide national security risk” at stake.
Walmart publicly joined in on Microsoft’s bid to buy the platform.
The last piece of news reflects an established alliance between the two corporate giants against their common competitor, Amazon. Walmart lags Amazon in ecommerce, Microsoft in cloud hosting -- its Azure platform competes with Amazon Web Services. TikTok would give each company data and marketing advantages over Amazon.
But another competitive gambit might be even more significant: the Wall Street Journal reported last weekend that Facebook CEO Mark Zuckerberg made attacks on TikTok a feature of a 2019 trip to Washington D.C. He raised alarms with U.S. senators who soon after called for inquiries into the company, and may have raised the issue in a private dinner with President Donald Trump.
This dovetails with what an anonymous “former high-ranking Facebook employee” told Buzzfeed in November of last year: “Facebook is so pissed that TikTok is the one thing they can’t beat that they’ve turned to geopolitical arguments and lawmakers in Washington to fight their fight.”
Facebook stands to gain if TikTok can’t get sold. A deal looks imminent, but last week China issued new restrictions on data technology export that could bar any U.S. buyer from using algorithms crucial to the platform’s success. TikTok’s parent company ByteDance is now preparing for a no-sale scenario.
If Zuckerberg’s efforts did make TikTok a priority issue in the U.S.-China rivalry, Donald Trump likely didn’t help out for free. Now reports about the rising dominance of right-wing influencers on Facebook, the company’s special treatment of far-right pages, its explicit commitment to algorithmic racial bias, and its suppression of internal dissent all make sense.
Zuckerberg’s company has thrown in with the right, and the right’s standard-bearer has targeted a key Facebook competitor. Last week Zuckerberg characterized its tolerance of pro-police militia organizing on its platform as an “operational mistake,” only banning the group after one of its partisans murdered two protestors in Kenosha, Wisconsin.
Maybe there’s an agreement, maybe it’s a coincidence, but one thing is certain: the rank hypocrisy of leaders claiming to defend Americans from the very dystopian corruption they project onto the People’s Republic of China.
IMF/World Bank “war” plan: more austerity October 19
Annual meetings for the International Monetary Fund (IMF) and World Bank kicked off last week and the gatherings’ major themes were predictable: big talk about the need for development and a relentless push for austerity to make real gains for the poor impossible.
The IMF made headlines by improving global economic forecasts, a 4.4% reduction in global output as opposed to a previous estimate of 5.2% -- still the worst since the Great Depression. But virtually all of the improvement comes from China’s rapid recovery, the only major economy expected to grow this year. Poor countries, especially those in the Middle East, North Africa and Latin America, are seeing worsening conditions: they are expected to shrink 5.7% versus 5.0% previously anticipated.
World Bank top economist Carmen Reinhart likewise expressed fears that the extraordinary efforts taken in the aftermath of the health crisis could prompt a financial crisis.
“This is a war,” Reinhart said, “During wars governments finance their war expenditures however they can and right now there are dire needs. The scenario we are in is not a sustainable one.”
Chief among the looming crises: external debt default by the world’s poorest countries. World Bank President David Malpass chaired a meeting of G20 officials to discuss the group’s Debt Service Suspension Initiative (DSSI), but the group could not settle on any plans for absolute debt reduction. They could only agree to extend debt service deferral for another six months.
The DSSI already represents the “bare minimum” creditors can do for debtor nations struggling to respond to the pandemic, covering less than 1% of developing country external debt. Most eligible countries have declined to participate, as most of their debt is now held by private institutions. Even asking about deferrals can mean credit downgrades.
Furthermore, the DSSI operates with the same “structural adjustment” policies that have ruined health and quality of life outcomes in poor countries for decades. Participating countries must commit to “fiscal consolidation” and fully 84% of COVID-related IMF loans have austerity requirements attached.
IMF President Kristalina Georgieva admits that austerity failed after the last crisis, so why is her institution pushing it again this time around? Because their true stakeholders aren’t the poor people struggling in desperate countries, they are the financial institutions profiting from their debt. These investors are happy as long as their interest gets paid, and if paying it leaves the countries desperate to sell their exports cheaply while taking on new debt down the line, all the better.
It’s a cycle the IMF and World Bank are very familiar with in their multi-generation war against the world’s poor.
Microchip boost launches scramble for market share November 2
U.S. chipmaker AMD announced a $35 billion acquisition of rival Xilinx last week, while Bermuda-based Marvell bought Inphi Corp for $10 billion -- the latest moves in a $100 billion wave of consolidations in the global semiconductor industry.
Despite headlines focused on higher-profile issues, the rapidly changing shape of the semiconductor sector may be the most important topic in the global economy today.
Already a booming industry, the rapid shift to remote work has driven new demand for chip-powered computers and data centers, with North American semiconductor sales up 40% year-over-year in September. Chip companies have in turn seen soaring stock prices -- AMD has gained 126% in the last year -- providing rich collateral for leveraged acquisitions.
Strong equity performance also makes all-stock deals -- like the AMD-Xilinx purchase -- attractive to shareholders on both sides of the transaction.
Both deals come as cloud computing has focused attention on data center power, with AMD’s purchase accelerating their competition with industry titan Intel. Intel’s stock fell earlier in the month as its enterprise and government server sales fell 47%, taking the segment down to $5.9 billion. AMD’s equivalent business only generates $1.13 billion, but is up 116% for the year.
Intel has now fallen behind much hotter rivals Nvidia and Taiwan Semiconductor Manufacturing Company (TSMC) in terms of market cap. The latter is especially significant, as markets have treated the two major chip fabricators as zero-sum competitors. And this is where the business rivalry turns geopolitical.
Before this year, China’s Huawei was TSMC’s second-largest customer (after Apple), but U.S. export licensing restrictions have rocked that relationship. New reports last week indicate that the U.S. is likely to allow the Taiwanese fabricator to still sell 4G mobile and PC chipsets to Huawei, but will block the chips needed for 5G stations and the latest generation of data centers.
Huawei is now scrambling to develop a “not-made-in-the-USA” supply chain before they run out of stockpiled chips. Not helping things: an opportunistic rush into the sector by unprepared firms prompted by extraordinary Chinese state investments, leading to a number of debacles. Beijing responded in October by warning of consequences for companies trying to get into the sector despite having “no experience, no technology, and no talent.”
Last week we said that the future of global investment hinges on whether or not the United States and its allies can hold back rising Chinese leadership. If China is dependent upon U.S. chip technology, the legacy superpowers win. How each country’s semiconductor industry adapts to a changing economy will decide that struggle. Stay tuned as Contention follows developments to come.
Tesla signals something worse than a bubble July 27
Tesla stock dropped 6.7% for the week despite a successful earnings report. This isn’t a big deal for a stock that’s gained over 280% this year. It does, however, highlight growing concerns about a potential market bubble. What’s actually happening might be worse.
Tesla turned a profit, but markets disliked the fact that the company would have lost money without selling emissions credits to other automakers. Those razor-thin profits support the bubble theory -- the idea that investment is chasing rising prices for their own sake as opposed to any underlying performance.
Tesla has an annualized price-to-earnings ratio over 800, far more than market averages, a classic bubble symptom. That symptom extends to the market at large:
Forward-looking P/E ratios for the whole Nasdaq are well above historic averages.
SentimenTrader’s Nasdaq Optimism Index, which uses derivative trades to measure market exuberance, is at its highest point since 2000, just before the last tech bubble burst.
Ned Davis Research has created a unique measure -- a Bubble Composite, combining the very similar chart shapes of key historic market bubbles. Right now the tech megacaps driving the market track it almost perfectly.
Mark Cuban, the most iconic winner of the last tech bubble, notes one major distinction for this one: Fed policies boosting market growth.
The risk everyone fears is that the bubble will burst whenever the Fed stops trading out bonds for bank balances, but this begs a simple question: why would they stop? If anything, they look like they are about to accelerate their actions.
The problem is that debt means pulling future earnings into the present. If your debt exceeds your future growth, you drain away that capital -- i.e. potential production -- to service the debt, sending it backwards in time. In the meantime, all that liquidity swells the oligopoly, empowering them to do things like force technology transfers from smaller potential competitors -- journalists exposed Amazon and Google for doing just that last week. Monopoly also means higher markups, which means everyone pays higher costs for the same or lower output.
So this isn’t a bubble -- it’s a tumor. It’s a swelling growth that consumes more and more healthy output, choking off the host economy at ever accelerating rates until eventually it dies in “a blow-up event that causes a sudden loss of confidence.”
That’s bad news. The good news, however, is that if you know the diagnosis the treatment is pretty clear: excise the institutions feeding the disease, and return those resources to the public they drained them from.
What do you think of Contention so far? Is there anything we cover that you want to hear more about? Anything we don’t talk about that you think we should? Let us know, and thank you so much for reading!
Disclaimer
Our only investment advice: Please stay home this week.
Photo Credit: Timothy G. Lumley/Flickr