Tesla signals a problem worse than a bubble

Plus congressional failure, Chinese innovation, Intel, vaccines, and racist robots

Jul 27, 2020

It’s Monday, it’s time for seven minutes of bubbly business news from a dissident perspective! This week:

Markets and families struggle, Congress fails to act
Tesla signals something worse than a bubble
China-U.S. row doesn’t slow big innovations
Rapid Round: Intel punts, vaccines plod, Chevron pillages, Goldman pays, GPT-3 prattles

Have you shared Contention with anybody yet? You can use the button below. You can also forward it to people you think might like it -- do that right now!

Got it forwarded to you? Subscribe here!

Share CONTENTION

Markets and families struggle, Congress fails to act

Equity markets had their first across-the-board decline in weeks as the Dow dropped 0.7%, the S&P 500 0.2%, and the Nasdaq 1.3%. Chief among the forces depressing values: deepening U.S. political failure.

This failure reflected most clearly in a worse than expected jobless report: the first increase in the number of new unemployment claims in 15 weeks, and the 18th straight week in which claims exceeded one million. Bottom line, things are very bad for working families:

Pandemic-specific relief programs have grown 15-fold since April, and continue to swell: workers are staying unemployed for longer periods of time.
The Census Bureau reported 4.1 million lost jobs in the first two weeks of July.
Around 20% of the U.S. workforce is on some sort of unemployment benefit.

The cascade effect is taking its toll on small businesses -- Yelp reports that 55% of the nearly 133,000 business closures since the start of the pandemic are permanent. Retail sale declines are accelerating, and unconventional data continues to point to worsening conditions.

Summarizing all of this is the New York Fed National Activity Index, whose shape is a perfect example of the “reverse radical” recovery we’ve described before.

The one thing keeping things afloat: direct income support from the federal government. Household incomes have actually risen 3.5% over the course of the crisis thanks to these direct subsidies, without them income would have dropped 6% -- the worst since the Great Depression.

Now those supports have come to an end, and Congress failed to put forward a replacement this week due to infighting among Republicans. Even if they had arrived at a solution, they have moved too slowly to prevent significant delays in payments thanks to failing state-level implementation systems. Now 12 million families could face eviction. Congress had months to anticipate this crisis and failed to respond.

The infighting is of an existential nature -- should relief exist at all? Should it entail a payroll tax cut that could further imperil the existence of Social Security? Most significant: Congress wants to make sure recipients are pressured back to work, despite evidence proving that current programs are NOT keeping people out of the workforce.

Now this bipartisan resentment against working families has put the entire economy at risk, and even friendly observers are starting to warn about the long-run consequences of this toxic U.S. commitment to inequality.

For now it’s the workers, their families, and the small enterprises that serve them that face an immediate threat, though markets might now care, at last.

Tesla signals something worse than a bubble

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.

China-U.S. row doesn’t slow big innovations

Tensions between the United States and China deteriorated on two fronts last week:

U.S. officials ordered the quick closure of China’s consulate in Houston, calling it a “spy hub.” China responded by ordering the United States to close its Chengdu consulate, a “listening post.”
ByteDance, owner of the TikTok social media platform, reportedly began exploring a sale of the popular app as a potential U.S. ban looms. TikTok also abandoned plans for a new global headquarters in the United Kingdom.

The United States also charged two Chinese citizens with alleged corporate espionage, making the common thread clear: aggressive action to counteract a rapidly disintegrating U.S. tech investment advantage over the People’s Republic.

U.S. Secretary of State Mike Pompeo left no doubt about the stakes Thursday in a bellicose speech at the Nixon Presidential Library in California. Pompeo invoked solidarity with the Chinese people despite overwhelming and growing support in China for their government.

This support is a reflection of “real changes in their material well-being,” as China successfully shifts from an emerging market into something different. Just this week reports reflected this shift:

Japan’s government announced subsidies for 87 companies moving low-wage production tasks out of China, where real wage growth is among the highest in the world.
BlackRock and others made moves to reap profits from China’s successful COVID recovery to invest in emerging markets at a more nascent stage of recovery.

Now China is on the verge of hosting what may be the largest IPO ever -- Ant Financial Group, the fintech arm of Alibaba, the world’s largest retailer and China’s largest company. The IPO will stay in China, in Hong Kong and Shanghai, but the company has shrewdly shifted most of the underwriting to U.S. firms Goldman Sachs and Morgan Stanley, providing potentially valuable political cover.

U.S. investors worried about missing out on the party might not have much to fear -- all of China’s tech giants are experimenting in fintech, with the government last week announcing a Shanghai-based “regulatory sandbox” where eight fintech enterprises can experiment while protecting the larger financial system from any unwanted risk.

Meanwhile 18 U.S. states set single-day records for COVID cases last week, and even Caribbean countries don’t want American tourists. If China is more stable, more responsive, and more innovative than the United States, then the legacy superpower has a clear choice: collaborate and grow together, or stick with stagnation and fight.

The choice they’ve made is clear, but the opportunity for something different provides real grounds for future hope.

Rapid Round

The Dow’s drop was helped along by a 16% loss in Intel’s value on Friday as the world’s largest semiconductor company announced a six-month production delay of their 7nm chips. This would push release into 2022 or 2023 when competitor TSMC expects to be producing the next generation 3nm chips. Intel announced that it might outsource chip production, a decision that would mark the end of significant semiconductor fabrication in the United States.

The Oxford University/AstraZeneca COVID-19 vaccine trial released its results last Monday, with 1,077 participants and a “strong” neutralizing antibody and t-cell response promising potential protection against the virus. However, new voices raised concerns about the overwhelming faith officials and investors are putting into vaccines that have not yet proven effective, especially as the United States in particular shows no backup plan if the vaccines do not work. Asset management giant Vanguard downgraded future economic forecasts, shading its predictions more towards an ineffective vaccine, though the company still believes an effective vaccine in 2021 is the most likely outcome

Chevron acquired Noble Energy in an all-stock $5 billion deal, adding significant proved resources to the oil giant’s portfolio. The “crown jewel” of the assets -- gas fields in Israel, some of which “pillage” Palestinian resources according to a 2017 report by Dutch human rights group SOMO. Noble also benefits from no-go areas around their facilities bordering Gaza, where the Israeli military has fired upon fishermen and seized their boats to protect Noble’s -- now Chevron’s -- assets.

Goldman Sachs agreed to a $3.9 billion criminal settlement in Malaysia last week, discharging their responsibility in the 1MDB scandal. The scandal centers on the sale of bogus bonds associated with the 1Malaysia Development Berhad, a sovereign investment fund that served to funnel hundreds of millions of dollars into the pockets of former Prime Minister Najib Razak. Goldman Sachs did not admit to any wrongdoing, but agreed to pay a $2.5 billion settlement and to return $1.4 billion in assets associated with the bonds.

OpenAI offered early developer access to their new language model GPT-3, which they expect to release later this year. The model has already shown the ability to write some essays, poems, songs, and to render natural language descriptions into computer code. The model also displays deep bias, randomly generating sentiments such as “A holocaust would make so much environmental sense, if we could get people to agree it was moral.” OpenAI has not disclosed whether GPT-3 will be deployed to Portland any time soon.

Disclaimer

Our only investment advice: listen to more CRJ.

Photo credit: Flickr