SoftBank bets spark market meltdown
Plus the latest on jobs, China's chips, Palantir, TikTok, and World Bank BS
Welcome to another edition of Contention! Hope nobody minded us delaying for “Labor” Day -- here’s about 8 minutes of delta hedged dissident business news to make up for the wait. In this edition:
Mixed up jobs data point to slowing “recovery”
SoftBank bets spark market meltdown
China’s chip plans & the Empire’s blacklist
Rapid Round: More Palantir, less vaccine money, more TikTok, less World Bank data
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Mixed up jobs data point to slowing “recovery”
Volatility sloshed big time before the holiday last week, giving stocks their first down week in months -- the Dow dropped 2.3%, the S&P 500 1.8%, and the Nasdaq 3.7%. The tech-heavy Nasdaq actually dipped into correction territory intraday on Friday -- read below for a look at what drove the decline.
As for Americans who work for a living, news was more subdued but no less worrisome: Thursday’s jobless claims report and Friday’s print on August employment both pointed to a slowing recovery from earlier lows that’s still leaving millions of families behind:
New jobless claims were the lowest they have been for months -- at 881,000 vs. 950,000 expected. But all of this improvement came from changes in how the Department of Labor adjusts new jobless claims to account for typical seasonal variations.
The August jobs report barely beat expectations -- adding 1.37 million jobs vs. 1.32 million expected. This nonetheless represented a significant drop in job growth from July, with temporary Census jobs accounting for a large chunk of the improvement.
The rate of unemployment dropped faster than expected -- from 10.2% to 8.4% -- but the government is still miscategorizing some unemployed workers due to earlier survey errors. Correcting that error brings the rate to 9.1%, historically awful.
Most important is the changing character of joblessness. What began as a wave of “temporary” layoffs in response to the coronavirus outbreak has become a situation of long-term unemployment. Temporary layoffs are now lasting longer than permanent job losses, with 6.5 million Americans now unemployed between 16 and 26 weeks -- last year that number was 831,000.
And this is likely to stay elevated for some time: a second wave of layoffs began in August, representing a “sectoral rotation” from the retail and hospitality losses that followed the initial outbreak into more white-collar, salaried sectors. This means even bigger drops in aggregate income, which depresses demand and output -- only 8.9% of manufacturers in one regional survey last week said they were at full capacity.
This puts the economy at risk of a vicious cycle -- weak demand keeps output low which slows hiring, depressing demand further. The longer it lasts, the more likely producers are to downgrade their capacity or automate their processes, laying the foundation for a permanent reduction in opportunity for U.S. workers.
But as long as the government can play games with the numbers, markets can pretend like things are getting better. For communities going without, however, the reality is undeniable and raw.
SoftBank bets spark market meltdown
The Nasdaq had its worst one-day drop in months on Thursday, losing 5%, and by Friday the tech megacaps had lost 7.4% in two days. The forces behind the moves are complex, but the bottom line is simple: equity markets remain dangerously divorced from the real world.
There are a number of possible reasons why prices reversed, but it now appears that an options hedging feedback loop fueled soaring prices in the first place. Understanding the feedback loop isn’t easy, and it involves obscure trading metrics designated by letters of the Greek alphabet.
Investors can bet on whether stock prices are going to go up or down using options -- “calls” bet on prices going up, “puts” bet on them going down.
Large investment banks like Goldman Sachs or market maker funds like Citadel write the options. They hedge their risk of the bet paying off by buying some of the underlying stocks every time they sell a call.
Options get more or less expensive every time their underlying stock changes price. Traders call this rate of option price change “delta.”
Delta can also accelerate or decelerate as stocks get closer to the “strike price” where the option bet pays out, and this acceleration is called “gamma.”
Markets have recently experienced a “classic gamma melt up.” Major demand for call options on the big tech megacap stocks left market makers exposed. Stock prices rose, increasing delta faster than expected -- market makers were “short gamma” -- forcing the big banks and funds to buy more stocks to hedge. This only drove the prices up more, accelerating delta again, causing a feedback loop.
But this was not a fully organic melt up. For weeks, traders had seen one or more “whales” driving the call buying frenzy, with high frequency traders frontrunning the orders and adding their own chum to the waters.
By the end of the week journalists had identified the whale: Japanese investment giant SoftBank. It appears the company made at least $4 billion off the moves.
It had better cash out quickly, however. Investment guru Mohammed El-Erian notes that if markets switch from a focus on technicals to one on fundamentals -- i.e. from speculation to actual investment -- markets could drop much further. This could be a “Minsky Moment” when gravity finally takes hold, with “choppy” weeks ahead.
Watch out below if markets do return to some sort of reflection of the real economy, but one fact should remain true: capital will find a way to win, even if it has to rig new games to do so.
China’s chip plans & the Empire’s blacklist
Outlines of China’s upcoming 14th five-year plan are coming into focus now, and it is clear that the People’s Republic intends to emerge as a fully developed advanced production economy in this decade.
That’s a threat to U.S. dominance of the global economy, and the Empire isn’t taking the news well.
Specifically, reports last week indicate an even greater strategic emphasis on native Chinese semiconductor development over the next five years. U.S. semiconductor stocks dropped on the news, but China’s focus seems to be on “third generation” semiconductors -- those made with newer materials like silicon carbide and gallium nitride, among other materials. These chips will not replace the integrated circuits ubiquitous in electronic devices, but they are crucial for electric vehicles, renewable energy, and other future-facing technologies.
The United States appears to be responding predictably, with plans to add mainland China’s most important chipmaker -- SMIC -- to its blacklist of companies barred from accepting any inputs made with U.S. technologies. This strategy, however, has already sparked a domestic backlash. The industry’s main lobby group, the U.S. Semiconductor Manufacturing Association, warned in July that U.S. policies threatened a 37% drop in U.S. chipmakers’ revenue, forcing them to slash research and development.
At the same time, the policies are spurring new indigenous development in China, helping them catch up with Western technology. Semiconductor companies outside the U.S. are also shifting their calculations, with Samsung reportedly building out a production line that could satisfy Chinese demands without using any U.S. technology. Some voices in China are actually calling for escalation, such as blocking U.S. access to critical pharmaceutical inputs.
This seems unlikely, but the leverage is very real: the European Commission warned last week that the E.U. is totally dependent upon Chinese raw material flows for its basic technologies. Tesla is likewise seeking greater smartphone recycling to recover materials critical for its batteries.
So the United States controls advanced technologies, but that advantage is slipping; China controls raw materials, but sees decoupling as a “doomed” strategy -- what’s the solution? The most rational would be to opt for the win-win, collaboration between the two countries to advance technology and secure technology access for everyone for the long-term.
U.S. politicians are instead opting for the lose-lose: a new Cold War. This serves a short-term interest, betting on the bellicosity of the U.S. electorate, but it’s obviously short-sighted in the extreme. Thankfully another power is planning for the future, if only they’re allowed to get there.
Rapid Round
Palantir’s high-tech nationalism
More news from Palantir last week, as the CIA-affiliated data integration company moved closer to going public. The company’s leadership filed updated paperwork with the SEC to clarify an additional risk factor: the company’s unique governance structure.
Palantir’s founders -- CEO Alex Karp, Chairman Peter Thiel, and tech leader Stephen Cohen -- all hold special “Class F” shares that give them 49.999999% voting control over the company into perpetuity. Regulators apparently expected more details about why, and the setup reflects Palantir’s mission-driven culture. That mission clarifies why Contention pays so much attention to the company.
“The core mission of our company always was to make the West, especially America, the strongest in the world, the strongest it’s ever been,” Karp said to CNBC earlier this year. One analyst says the company is betting on “the primacy of distinct cultures and distinct nation-states” -- Palantir is a nationalist play.
Its unique hybrid of enterprise software development and embedded engineer consulting streamlines decision-making in large institutions critical for the national success of the United States and its allies. Anybody skeptical of what that success means for humanity needs to keep an eye on Palantir.
Pandemic power games
COVAX, the international effort to fairly allocate COVID-19 vaccines without national hoarding announced last week that it now had 76 wealthy and middle-income nations on board. Not among them: the United States, which is refusing to participate due to World Health Organization (WHO) involvement.
COVAX needs money to get started, at least $2 billion in seed funding, and acknowledges that vaccine deployment will take years. COVAX is not alone in needing money either, as the Global Fund to Fight AIDS, Tuberculosis, and Malaria has run out of funds for its coronavirus response in poor countries, forcing new resource shifts away from its existing priorities. The Fund needs $5 billion, it says.
Meanwhile the United States is taking aggressive action against vaccine deployment in adversary nations, slapping the Russian facility responsible for developing the Sputnik V vaccine with new sanctions. China’s CanSino Biologics is facing its own obstacles: it can’t be tested in China, as there is no longer an active coronavirus outbreak there. China’s government is blocking its deployment to Canada in retaliation for that country’s collaboration with the United States to arrest Huawei executive Meng Wanzhou.
China vs. TikTok vs. Facebook
TikTok’s sale to U.S. companies hit a major roadblock last week as a new technology export ban from China made it unclear if the app would work after being sold. Contention actually reported on this last week, and now TikTok’s parent ByteDance has confirmed that it will “strictly abide” by the controls.
U.S. buyers are left with limited, risky options: going without the algorithm, getting Chinese permission, or licensing the technology. Each seems likely to cross some party in the dispute, either the purchasing companies, the U.S. government, or China.
One party likely to be pleased: Mark Zuckerberg. The Facebook CEO admitted last week that he and Donald Trump did discuss China in a private dinner last year, but he “(didn’t) think TikTok or any of this stuff specifically came up.” Facebook’s flirtation with the far right has nonetheless continued, with the Guardian finding pages in support of Kyle Rittenhouse -- the pro-cop militia member who killed two protesters in Wisconsin in August -- still up despite a putative Facebook ban.
Facebook also said last week that it would examine its role in potentially influencing the 2020 elections… after the vote is done in November.
World Bank irregularities derail “Doing Business”
The World Bank halted its publication of its annual “Doing Business” report last week after the Wall Street Journal exposed the institution for manipulating data in the report to benefit China, Azerbaijan, the United Arab Emirates, and Saudi Arabia. Investors and lenders use the report as a measure of “competitiveness” before putting money into “emerging markets” in particular.
This is not the first time that the Bank has faced allegations of manipulating the report, nor are these the only countries impacted by the moves. The Bank’s previous chief economist resigned over allegations of manipulation in 2018, which the Bank nonetheless denied.
Data measures changed to punish Chile when a socialist government was in power and rewarded it when conservative parties won. Measures used to assess India changed in peculiar ways that seem to benefit the nationalist government of Narendra Modi. The Bank says it will conduct an audit of the irregularities.
Disclaimer
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Photo Credit: Danny Choo