The "Great Disconnect" pauses
Plus PPP questions, U.S. digital tax tantrum, the Jio scheme and Opportunity Zone scams
Welcome to another week of Contention! Enjoy 7ish minutes of profit shifted business news. This week:
The “Great Disconnect” Continues, Markets Pause
The Known Unknown: Will PPP Get the Re-Up?
U.S. Blows Up Digital Taxation Talks
Reliance Jio: A Money Pipeline from India to Wall Street
Rapid Round: China-Africa solidarity, Lebanon’s IMF alternative, BP strands billions of barrels, knocking Opportunity Zones, Hertz saves the suckers from themselves
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The “Great Disconnect” Continues, Markets Pause
Markets largely froze in place this week as economic signals grew more confused. The Dow was up 1 percent, the S&P 500 1.8 percent and the NASDAQ 3.7 percent.
Driving the bad news:
Fed Chairman Jay Powell testified before House and Senate committees this week, calling the economic outlook “extraordinarily uncertain.”
New jobless claims were higher than expected, still lower than previous weeks, but dropping at a decelerating pace.
Millions of the jobs lost are likely victims of a reallocation shock, something that will take years to resolve.
Driving the good news:
Retail activity saw its largest increase in history in May, 17.7 percent -- rocking expectations.
Mortgage applications hit their highest level in 11 years.
Forecasts had the NY Fed Empire State Manufacturing index dropping 30 points; instead it held steady -- a huge beat.
Billionaire market veterans Howard Marks and Ray Dalio are still seeing darkness ahead, but there’s a lot of money out there to fuel near-future market boosts:
The commission overseeing federal CARES Act money reported that the Fed has only exercised $6.7 billion of the $454 billion authorized for asset purchases. This nonetheless opened up the tap for credit markets to big business.
Institutional investors remain skeptical, but they could unleash their pile of cash as soon as they get impatient to get in on the gains.
SIlicon Valley venture capital has not slowed at all.
The big caveat: the bigger the business, the bigger the benefits: -- that’s who got the credit flood after CARES, those are the pent-up stocks institutional investors are most likely to chase, and VC has shifted towards later rounds.
The major driver of future news is, of course, the pandemic. It got worse his week, with new outbreaks in China, possibly from a European strain -- an indication that there is likely no sustained solution until researchers can develop and deliver a vaccine.
In the United States premature reopenings threaten an out-of-control spread of the disease in a number of states, prompting at least Apple to re-close stores it had just reopened. Stocks dropped at this news on Thursday.
Australian short-selling icon John Hempton said that the best short and long answers for what’s going on right now are the same: “I don’t know.” The one thing he might have missed until now: markets have always been “disconnected” from the broad public interest. It’s just that now everyone can see.
The Known Unknown: Will PPP Get the Re-Up?
The other major driver of future good or bad news: the fate of federal fiscal stimulus programs. Powell made it clear that Congress ought to continue these programs in some form, prompting Republican Rep. Patrick McHenry to tell the chairman to “stick to monetary policy.”
It was a perfect display of the political risks that threaten future rounds of assistance for businesses and consumers.
The cornerstone business stimulus effort -- the Paycheck Protection Program (PPP) -- comes to an end on June 30, and businesses which have not already applied are unlikely to get processed in time.
A majority of U.S. businesses have sought support under the program, but like everything important in the United States, it is rigged against those who need it the most:
Banks distribute the loans, and they have favored their larger customers, creating a two-tier distribution system.
Black-owned businesses with weak banking relationships have missed out on most of the stimulus -- 95 percent have been shut out, contributing to the loss of 41 percent of black-owned businesses this year.
States with higher populations and more job losses have gotten less money than states with fewer job losses.
Two-thirds of job losses have been in the service industry sector, but only about 40 percent of PPP funds have gone to service businesses.
The program has run aground, with $130 billion still unspent -- not because there’s no demand, but because banks no longer want to underwrite loans for smaller and smaller businesses. Businesses are also wary of being on the hook for funds used on rent and other critical non-payroll costs. Amounts used to pay workers can be forgiven, but incoherence about that process has slowed uptake too.
Everyone wants the program extended and fixed, and despite its flaws it has undoubtedly kept people in jobs they otherwise would have lost. The problem is that politicians are worried that helping people might boost the other party in November.
If they can’t stick the landing we’ll have a new wave of job losses later this summer -- the kind of thing even this market is unlikely to ignore.
U.S. Blows Up Digital Taxation Talks
The United States escalated problems with Europe’s fiscal stimulus plans this week, blowing up talks on the digital taxes that European nations need to pay back the borrowed funds. The decision’s consequences will likely hit the developing world even harder.
The OECD has been leading the talks since last year when France’s tax on large digital businesses -- disproportionately headquartered in the United States -- prompted threats of a trade war from the Trump Administration. France put its tax on hold pending the negotiations, but the United States nonetheless announced a trade investigation of nine countries and the E.U. earlier this month. They did not wait for the investigation’s results before pulling out of the talks.
France has said they will now start charging the tax this year, calling U.S. actions a “provocation.” The United Kingdom, Spain, and Italy have since passed their own taxes-in-waiting, and the E.U. said they would have a digital tax this year, regardless of what the United States does. Policymakers were trying to avoid this very patchwork of taxation, and now they face the risk of a broad-based trade war with the United States.
Nations of the Global South are disproportionately impacted by “Base Erosion and Profit Shifting” -- or BEPS, the problem the OECD says it wants to solve. Global South advocates have actually criticized the OECD process for favoring U.S. definitions and objectives at the expense of poorer countries -- something the OECD itself acknowledged.
Now things are likely going to be worse for these countries, as they lack even a bad deal to back up their taxation plans. U.S. moves to block appointments and funding for the WTO Appellate Body has the same result: a rigged system giving way to anarchy, leaving the least powerful countries even more exposed to First World bullying.
Global North creditors are already blocking tax reforms in poor countries meant to address the COVID crisis, meanwhile digital giants make billions despite the downturn. They are the only ones that stand to benefit at all, even as their global customer base languishes in a deepening crisis, cut off from the resources they need to protect or stimulate their economies.
Their bet: small and local businesses will fail and open up market share, even if the pie is smaller. The whole thing works even better if you don’t have to pay any taxes.
Reliance Jio: A Money Pipeline from India to Wall Street
The hottest new digital business right now might actually be Reliance Jio, India’s largest mobile network. In just nine weeks the company has raised more than $15 billion, including…
$5.7 billion from Facebook
$1.5 billion from private equity giant KKR
$1.5 billion from Saudi Arabia’s Public Investment Fund
$1.2 billion from Mubadala, Abu Dhabi’s sovereign wealth fund
Far from alleviating the problem of digital cash extraction from poor countries, this sell out is actually making it worse.
Reliance Jio is the mobile telecom arm of Reliance Industries, India’s largest private company, controlled by its richest man -- Mukesh Ambani. A massive conglomerate, Reliant was at one point responsible for eight percent of India’s merchandise exports.
Jio was born when India’s government auctioned off control of its 4G spectrum in 2010. Infotel, up until then a tiny ISP with only a single client, beat out India’s largest telecom players and foreign giants such as Vodafone for access to the spectrum. Infotel won the auction by bidding 5,000 times their net worth, and the very same day Reliant bought them out, later rebranding the company Jio.
The 4G spectrum was not supposed to be used for voice telephone service, but had Reliant entered the auction openly bidders would have anticipated their ambitions, driving up the price. The Indian government switched out Reliant Jio’s license in 2012 for a bargain basement price, allowing full mobile telecom services over their piece of the spectrum -- potentially costing the Indian government up to $2.9 billion in lost revenues.
After that, Jio drove mobile service prices down so far that all but two of their competitors were driven out of business. Now they are focused on vertical integration, bringing entertainment, payments and retail onto their platform -- gunning for Amazon and Walmart.
Reliance Industries’ “high cash, high debt” strategy got the squeeze during the COVID crisis, and between the Jio deals, an oil and gas deal with Aramco, and a fuel retail deal with BP, Ambani has cleared $21 billion of debt in 58 days.
Now the U.S.-based investors want to list Jio on the New York Stock Exchange. If they do, foreign billionaires will get to cash out on Indian public assets swindled from taxpayers, as well as anti-competitive practices targeting the consumers least able to afford monopoly costs.
Oh, and they’ll have preferential access to markets where they can blow off taxes thanks to the maneuvers of the Trump administration. As one Reliance executive recently tweeted: “Never let a crisis go to waste.”
Rapid Round
Fourteen African heads of state, the head of the African Union, and Chinese President Xi Jinping signed a solidarity agreement on COVID-19 relief and future plans to continue China’s Belt and Road Initiative investments in the continent.
China may also offer an alternative to deeply unpopular IMF lending in Lebanon, as Hezbollah suggested the country turn to China for investments in national infrastructure that could benefit the Belt and Road Initiative. Hezbollah leader Hassan Nasrallah: “I say to the Lebanese people, there are alternatives.”
BP wrote down the value of its energy assets by up to $17 billion, a move that will likely leave millions of barrels of oil stranded. One report this week sees demand shifts due to COVID and climate policy leaving 282 billion barrels of oil unproduced.
New research released this week proves that “Opportunity Zones” that use tax incentives to encourage “investment” in low income U.S. communities actually don’t help low income families, but instead inflate real estate values and accelerate gentrification.
Hertz cancelled plans for a new stock sale for shares in its bankrupt company -- supplying recent gambler demand -- after the SEC expressed deep skepticism.
Disclaimer
Our only investment advice: learn how to garden.
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