Political failure chokes off recovery

Plus TikTok’s reprieve, Huawei’s plans, India’s “reforms,” Nikola and Tesla

Hey everyone welcome to another edition of Contention! Take less than eight minutes to catch up on some dissident business news. In this issue:

  1. Political failure chokes off recovery

  2. Court halts ban on TikTok, for now

  3. U.S. war on Huawei bounces back

  4. Rapid round: suspicious banking, red line crossing, India rising, EV hedging

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Political failure chokes off recovery

Tech stocks pulled back from the brink on Friday, but broader market indexes were still down for the fourth straight week -- the Nasdaq actually gained 1.1%, while the S&P 500 lost 0.6% and the Dow 1.8%.

The major contradiction roiling the economy: a struggling recovery held back by ongoing political failure.

Nothing specific drove market declines last week, but more observers are beginning to suspect that the bubble inflated after March’s COVID shutdown has finally burst. Last week saw the largest outflows from equities since that time.

New jobless claims did miss expectations -- 870,000 actual versus 850,000 predicted -- but the level stayed roughly where it has been for seven weeks now. Continuing claims actually saw a notable decline of 3.7 million. 

But even this potentially good news is difficult to interpret, as overwhelmed state employment agencies contribute to significant data chaos. California alone reported that they are facing a backlog of 1.6 million cases that either need to be processed or amended. Fitch Ratings is now cooking up its own state-by-state unemployment estimates to try and see through the fog. 

Beyond just employment, however, things are clearly grim. Citi’s Real Activity Indicator is “weak” with improvement now stalled, and research from Harvard economists found that the worst impacts are coming in more affluent areas. The service businesses frequented by those with the luxury of staying home, ordering in, and switching to Peloton are struggling, along with their hourly workers. 

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steve Mnuchin both pitched Congress last week on the same solution they’ve been urging for months: new fiscal stimulus. House Democrats did begin moving on a new $2.4 trillion package, but they know it won’t pass -- especially as Supreme Court hearings consume the Senate through the elections. 

Goldman Sachs joined others in assessing the prospects of any relief bill as doomed, and cut their growth forecasts in half for the rest of the year. Even that may end up looking optimistic. 

So we don’t know why markets are struggling, we don’t know how many people are out of work, we do know something that might help, but the people that have the power to do it have other priorities -- sandbagging the economy and hoping that everyone blames the other side. 

The fact that any recovery has happened at all is something of a surprise -- chances are the surprises to come will be much less happy. 

Court halts ban on TikTok, for now

Sunday evening U.S. District Court Judge Carl Nichols granted TikTok a preliminary injunction blocking the government’s ban of the popular video platform. Had Nichols not done so, the app would have been unavailable in Apple and Google’s app stores as of 11:59 p.m. last night. 

How we ended up here after the coast looked clear last week is a story about a hamfisted attempt at forced technology transfer gone wrong. 

To recap: 20% of TikTok was supposed to be sold to Oracle and Walmart with Oracle serving as a “trusted technology partner” to protect consumer data. A new government-approved board with military industry representation would oversee “TikTok Global.”

The deal was not fully baked, however, and President Donald Trump’s preliminary announcement created a chaotic situation with both parties to the agreement contradicting one another by Monday. ByteDance -- the Beijing-based company that created the app -- said that they would still control 80% of the new company. Oracle claimed that the 80% stake would be distributed directly to ByteDance’s investors, about 40% of whom are Americans, giving U.S. interests majority control of the new TikTok.

ByteDance’s plan obviously ran contrary to Trump’s intention to force the company into U.S. hands, and he rescinded his blessing of the deal on Monday. TikTok responded with the injunction request granted by Nichols last night. 

And this was just the beginning: China’s leadership also expressed hostility to the deal. Chinese public media called the sale a “robbery,” saying in the Global Times that Trump “can ruin TikTok’s U.S. business, if U.S. users do not object, but you can’t rob it and turn it into a U.S. baby.” 

TikTok needs an export license to transfer the app’s algorithm to its new U.S. entity -- whatever that may be -- and filed for it last week. If Trump gets his way and the app is forcibly transferred to his political allies, China is very unlikely to play along. 

And why should they? Key U.S. leaders acknowledge that the legacy superpower has gotten “lazy” about investing in its technological dominance. Instead it is relying upon a bloated “national security” apparatus to force innovators in a more dynamic economy to transfer their work, feeding crony capitalism by directing it to politically-connected companies

China knows better than to play along with that game. Trump, on the other hand, keeps racking up Ls. We’ll see what changes the next week might bring. 

U.S. war on Huawei bounces back

The United States humbled itself on another, far more strategic front last week, granting both Intel and AMD licences to continue selling technology to Huawei despite government claims that the Chinese company’s tech poses a threat to U.S. security. 

The balance of power is much less clear in the semiconductor space, as we’ve reported before, but the same big picture emerges -- U.S. aggression pitted against Chinese innovation.

Selling Intel and AMD chips to China is not a bad deal for the United States: keeping Huawei dependent on external suppliers could reduce their incentives to develop their own chips, and it satisfies semiconductor industry lobbyists concerned about the loss of their biggest market.

Huawei Chair Guo Ping reinforced the latter interest in particular last week, saying that the company would like to keep working with all of its U.S. suppliers. He specifically called out Qualcomm as another U.S.-based company with chips Huawei would like to buy. In the meantime, Guo indicated that the company had enough chips stockpiled for current needs.

The stockpile appears especially robust for Huawei’s B-to-B segments, but for its consumer products the company could face shortages much sooner. Patriotic consumers have flocked to the company following U.S. attacks, even in spite of price increases. Every one of these sales buys up one of their remaining chips. 

Against this backdrop, the Chinese government is also weighing a retaliation in kind to the U.S. restrictions by issuing its own “unreliable entity” list. The country’s leaders are apparently divided on targeting U.S. businesses before or after the upcoming elections. Whenever they do, it could mean losses in the billions for the entities named. 

This is because of an epochal shift in relations between China and the United States. Previously China served as a low-wage export-oriented workshop for U.S. businesses to sell cheap to Western consumers. But now China is becoming a consumer society in its own right, and its next Five Year Plan is expected to focus on the “dual circulation” import substitution strategy launched by the Communist Party’s Politburo earlier this year. 

U.S. leaders have reacted in desperation, and U.S. businesses have started to lose. Now with reports that Chinese chipmaker SMIC may have taken another engineering leap with no need for U.S. controlled technologies, the tables might be turned soon as to who is granting permission, and who is hoping to share in the other’s real prosperity. 

Rapid Round

Leaked bank reports detail trillions in crime

A new series of reports published by Buzzfeed and the International Consortium of Investigative Journalists (ICIJ) last week found endemic collaboration in international financial crimes on the part of major U.S. and European banks. Leaked “Suspicious Activity Reports” from the institutions showed at least $2 trillion in questionable transactions involving organized crime, fraud, terrorism, and corruption. 

The central role of the U.S. dollar in settling global transactions routes millions of these exchanges through the banks, but the institutions are only liable for reporting the activity -- not preventing it. The U.S. government agencies responsible for investigating the activities are overwhelmed -- an office of 270 people is responsible for more than 2 million transactions each year. In many cases enforcement staff relied upon Google searches to determine that parties were known criminals. 

The ICIJ’s investigation covered only a fraction of the reports generated, and found that the median time between a bank’s report and a subsequent investigation was 166 days -- long after the money had been spent or secured. Banks pocketed fees on each transaction nonetheless. 

Evergrande overshoots the Three Red Lines

China’s second largest property developer, Evergrande, saw its stocks and bonds plunge in value last week after a letter allegedly sent by the company asking provincial officials to help it avoid a looming cash crunch leaked. Evergrande denies the letter’s validity and reported the defamation to police, but the damage extended nonetheless -- S&P Global downgraded the company’s debt to “distressed.”

Evergrande’s woes have significant impact on the Chinese economy -- the company owes $122 billion in debt to 128 different Chinese banks and 122 other institutions. It was one of 12 firms facing debt market restrictions for overshooting the “Three Red Lines” Chinese regulators have instituted to prevent this kind of exposure: limiting liability-to-asset and debt-to-equity ratios and requiring cash to cover short-term debts.

To date the “Three Red Lines” have worked to reduce risk in the country’s heated real estate sector while focusing obligations on the supply side and on problem firms. 

India reforms prompt major protests

Nationwide protests rocked India last week after the country passed new laws on labor rights and agricultural supports in line with Prime Minister Narendra Modi’s “Ease of Doing Business” priorities. Farmers blocked major roadways and train lines, and opponents criticize the extraordinary mechanisms used to force the bills through the country’s parliament. 

The laws would make it easier to lay off workers while requiring a 60-day notice before any strikes. The agricultural laws would remove hard-won agricultural price supports for millions of farmers, forcing them into private markets with monopsony buyers likely to drive them into export-oriented cash crops. 

“The peasants, in short, are being thrown, as under colonialism, to the mercies of a market where price fluctuations have a notoriously high amplitude,” Indian economist Prabhat Patnaik said. “They are rightly putting up a fight against their descent into debt and destitution.”

Contention reported earlier this month that the World Bank was holding off on publishing its official “Doing Business” report because of data manipulations. Modi has made the score a key part of his agenda, previously using the scores to determine where to send COVID-related economic aid, punishing states with more rigorous land and labor protections. 

Nikola ousts Milton, Musk downplays Battery Day

Just about the time we reported on Nikola’s ongoing fraud allegations last week, the company’s founder and chairman Trevor Milton resigned. Indications are that he was forced out of the company to stem the damage his actions -- outlined by short seller Hindenburg Research -- had caused the company. 

It may have been too late: the company got its first “sell” rating by one of the three Wall Street analysts covering its stock. Nikola CFO Kim Brady said that the company’s partners -- most notably GM -- are “100% supportive and behind them.”

Heightened scrutiny in the electric vehicle sector may have prompted Tesla CEO Elon Musk to downplay the previously anticipated “Battery Day” on Tuesday. The billionaire guru made it clear that nothing unveiled would be ready at scale until at least 2022. Analysts agreed, seeing the event as long on vision with little concrete to invest in. The company’s stock was down nearly 6% on the day


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