Powell promises to pretend he’s doing his job
Plus China cracks down on bad vibes, Afghanistan goes broke, Palantir hordes gold
Welcome to another edition of Contention -- we’re back from our summer break! This week we have eight minutes of news and analysis for you. We cover:
Powell promises to pretend he’s doing his job
China hits apps, orders positive energy
Rapid round: Afghanistan has no money, Palantir bets on black swans
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Powell promises to pretend he’s doing his job
Markets gained across the board last week, with the S&P 500 and Nasdaq indexes both hitting all-time highs. Stocks celebrated the latest promises of market support from the world’s most powerful central bankers -- the Dow added 1%, the S&P 1.5% and the Nasdaq surged 2.8%
But real businesses -- and their workers -- showed new signs of distress as they deal with the consequences of past manipulations. The clearest indication of all: the new sovereigns of the world economy are just making it up as they go along.
The promises issued forth from Jackson Hole, Wyoming, or rather would have if the annual central bank confab had not been shifted to a digital format for the second year running. Federal Reserve Chairman Jerome Powell confirmed that the bank will only slowly “normalize” its monetary policies in the months to come.
Powell’s statement on Friday confirmed what minutes from the Federal Open Market Committee’s July meeting had already spelled out: the Fed will begin tapering purchases of Treasury bonds and mortgage-backed securities sometime this year, but has no plans anytime soon for raising short-term interest rates. The decision reflects the bank’s assessment that the economy has made “substantial further progress” when it comes to price growth, but only “clear progress” with regard to employment.
“Substantial further progress” was the goal Powell and Co. set last year for deciding when to walk back $1.4 trillion in annual asset purchases and near-zero short-term interest rates, extraordinary accommodations that have translated into the fastest growth in financial asset values since World War II. Tech megacaps alone have seen their values increase by $780 million an hour since the policy began.
The Fed’s cue for pulling away this punchbowl is intentionally subjective and vague, and Powell milked that haziness in his statement with no details for how quickly the Fed will taper purchases or by how much, with numerous caveats laced throughout.
Powell even went so far as to say that current inflation wasn’t broadly distributed throughout the economy, but is isolated to just “a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy.” This is, of course, like saying that a shooting victim’s death was caused by a relatively small hole in the middle of his brain -- technically true, but neglectful of the full range of consequences flowing from the breach.
Such obvious dishonesty makes it clear that the Fed is hunting for excuses to blow off its legal mandates. By any rational measure, an economy characterized by unprecedented labor shortages and multi-decade inflation highs is one where the Fed’s “dual mandate” for maximum employment and price stability would dictate aggressive tightening. The asset tapering pays lip service to that obligation, but leaves plenty of room to keep the party going.
Other news on the week reinforced the reality of price instability and labor market excess demand. New data released the same day as Powell’s speech showed personal consumption expenditure (PCE) inflation up for the fifth month in a row in July. Both overall PCE inflation and “core” inflation -- stripping out food and fuel costs to reduce volatility -- were at their highest rates in 30 years.
Workers and businesses both felt the squeeze.
The inflation jump wiped out all income gains for the month, leaving real incomes 1.4% lower -- real consumer spending hasn’t budged since the last stimulus checks went out in March.
Durable goods orders from business dipped to 0.1%, falling from a 0.8% jump in June.
Business investment fell to a five-month low, part of a three-month slide.
Flash composite PMI -- the preliminary look at survey data from purchasing managers across the economy -- fell from 59.9 in July to 55.4 in August, well below analyst expectations for 59.4.
Labor shortages came up again and again as culprits for the underperformance, the very sort of thing the Fed is supposed to address by raising rates and selling assets. Higher costs of capital slow investment down, reducing demand for labor and increasing its supply through layoffs. But populist political surprises following the last bout of austerity have made such moves untenable. The Fed instead has no idea what “maximum employment” even means anymore.
It is true that tighter monetary policy won’t do anything to solve the supply chain problems immediately responsible for most of the inflation right now. But it’s been our hypothesis that these disruptions are only incidentally responsible for inflation, just as inflation in the 1970s was only incidentally a function of price-wage spirals. In both cases these immediate causes are symptoms of a deeper condition, the rotation of global economic regimes.
In the 1970s, it was the dawn of the neoliberal age, now it is the end of that age. Nobody knew in 1971 what the future would look like, and we don’t know either. But we can identify some of the most important questions to answer:
Will political or economic pressures finally push central banks into normalizing policy, and what happens when they do?
How will they respond to the inevitable dislocations that result from that move? Will these responses work to mitigate the problems? What happens if they don’t?
If they don’t try to normalize policy -- and Powell’s speech makes it clear they are trying not to -- which systems built on the old regime start to misfire and how?
For last week, however, there was no doubt about the Fed’s ability to accomplish its most important short-term goal: assuring the world’s wealthiest institutions that their power and wealth is safe and sound, at least for now.
China hits apps, orders positive energy
The Cyberspace Administration of China (CAC), the country’s top internet oversight agency, published a set of draft regulations last week for recommendation algorithms on digital apps. It didn’t take long for observers to notice the implications under this anodyne procedure -- if implemented and enforced, China will soon have the most advanced data protection legislation anywhere in the world.
A quick look at some of the details indicates how far the CAC is willing to go to “carry forward the socialist core value view,” as the agency puts it. Internet companies must not use algorithms to create differential transaction prices based on consumer preferences, nor set up models to scrape their users for the purposes of “addiction or high-value consumption.” The same restrictions apply to companies marketing to minors in ways that profile them and then encourage internet addiction.
For transparency, companies must provide users with a convenient way to see and delete keywords that algorithms are using to profile them -- and they must also allow users to be informed and given the option to opt out of algorithms. The regulations will also restrict what kinds of keywords algorithms can collect.
Lastly, the CAC wants to crack down on algorithms negatively influencing public opinion by running amok and spreading... bad vibes. Therefore, algorithms should “vigorously disseminate positive energy, and advance the use of algorithms upwards and in the direction of good.”
The maximum fine for violations is only around $5,000. But China data policy analysts believe this is to make it possible for small developers to afford the fines. If the CAC determines that developers and tech companies have engaged in outright criminal acts according to a separate Personal Information Protection Law, then the consequences could be severe.
“As far as I'm concerned, this policy marks the moment that China's tech regulation is not simply keeping pace with data regulations in the E.U., but has gone beyond them,” tweeted Kendra Schaefer of internet research firm Trivium China.
It was a busy week for China’s regulators in a widening campaign on bad practices in tech. On Thursday, the Supreme People’s Court and Ministry of Human Resources and Social Security issued a joint statement detailing 10 cases of labor law violations -- including one involving an unnamed company fined for firing an employee who refused to work a “996” schedule. The excessive schedule, 9:00 a.m. to 9:00 p.m., six days per week, is common in the tech industry. That’s a 72-hour workweek, even though Chinese law officially allows only up to 44 hours per week before overtime kicks in.
This new regulatory environment is emerging as the Communist Party of China is calling on internet companies to share their wealth in a bid for “common prosperity.” Last week, tech giant Tencent pledged $15.4 billion to fund projects including scientific research, education, and clean energy -- with half earmarked to a fund directed at improving the livelihoods of low-income earners.
Pinduoduo, a farm-to-market app company, pledged $1.55 billion to expand agriculture and the rural economy. That follows internet retailer Alibaba’s announcement earlier in August to invest all incremental profit this year to support programs for merchants to lower their operating costs. Pinduoduo founder Colin Huang and ByteDance chief Zhang Yiming have also pledged to donate much of their personal wealth to charitable foundations.
Outside the tech sector, the luxury goods business in China is feeling pressure. LVMH, Burberry, Kering and other companies selling high-end fashion and jewelry in China have seen 10% of their collective market value wiped out since Beijing’s prosperity push.
One London-based luxury consultant told the Financial Times that brands should “consider toning down the marketing campaigns” out of fear that the government will restrict advertising for them, or impose higher taxes on them or high-income earners. The possibility appears to have persuaded some affluent Chinese to tone down wearing clothes that conspicuously flaunt their wealth.
As Jing Daily, a publication covering the Chinese luxury business put it, “calls for wealth redistribution are never great for the affluent.” But the Chinese government doesn’t define common prosperity as “uniform egalitarianism,” it’s just not the “prosperity of a few people,” Pres. Xi Jinping said at an Aug. 17 finance meeting. Whether those policies succeed in enlarging the Chinese middle class will define the global economy for years to come.
U.S., IMF plunder Afghan reserves
Two weeks since the Taliban drove unopposed into Kabul, the new government has yet to regain one of Afghanistan’s most important assets: around $7 billion of the central bank’s $9 billion in foreign reserves held at the Fed in New York. The U.S. government has blocked Afghanistan from accessing the money.
Then last week, the International Monetary Fund moved to undermine the new government by blocking access to $460 million held in emergency reserves. Afghanistan has around $1.3 billion in international accounts concentrated in European banks, but mostly out of reach. “We can say the accessible funds to the Taliban are perhaps 0.1-0.2% of Afghanistan’s total international reserves,” Afghanistan’s former central bank governor Ajmal Ahmady said. “Not much.”
The stoppage has already hit working people’s living standards. The country’s banks remain closed because they’ve run out of cash. On Aug. 23, a working group organized by the country’s commercial banks circulated a memo warning that the banking sector is facing an “existential flash point.” Without access to financing, “we fear the entire Afghan economy and banking sector will fail and liquidation of assets will be ordered,” the memo warned. “Public frustration and possible violence will soon result as the public [will] not be able to buy food and major services."
Palantir NHS profits revealed, prepares for ‘black swan’
A.I. company Palantir reportedly made a $30 million profit from deals with Britain’s National Health Service to manage COVID-related data -- although the British government redacted exactly what data the firm would process. Experts warned that the contracts with the company could involve an unprecedented transfer of patients’ health information to the secretive company whose founders and clients include the CIA.
Meanwhile, a purported glitch in Palantir’s software used by the FBI allowed unauthorized personnel to access private data for more than a year. The breach came out in court filings in the prosecution of accused hacker Virgil Griffith, who the U.S. government alleges provided the Democratic People’s Republic of Korea information on evading sanctions with cryptocurrencies.
Palantir is also buying gold to hedge against random, unpredictable “black swan events,” or just possibly as a long-term inflation hedge. In August, the company bought more than $50 million in gold bars. The investment “reflects more of a worldview,” Palantir chief operating officer Shyam Sankar said.
Our only investment advice: No.
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