V-Shaped Recovery, we hardly knew ye...
Plus the hot new vice, the unrest feedback loop, energy slumps, Eswin's state-sponsored Series B
Thanks for enjoying another edition of Contention. We’ve got about 6 minutes of deeply discounted dystopian business news. This week:
V-Shaped dreams come to an end, BLS stats get a second look
Stocks: the hot new vice
Corporate capitulations and the unrest feedback loop
Energy markets slump, climate goals still not close
Rapid Round: Oxy exits Oman, BP lays off 10K, Eswin’s state-sponsored Series B, the U.K. kicks coal, can we?
Like it? Send it to 3 friends. Follow us on Twitter and Facebook. Got it sent to you? Subscribe here.
V-Shaped dreams come to an end, BLS stats get a second look
Stocks had their worst week since March, with the S&P 500 dropping 4.8 percent, the Dow Jones 5.5 percent, and Nasdaq 2.3 percent. The market declined sharply on Thursday after Fed Chairman Jerome Powell threw cold water on recent exuberance. A modest rally on Friday trimmed some of the losses.
The upshot to Powell’s announcement: there will be no “V-shaped” economic recovery. The Fed plans to keep interest rates near zero until at least the end of 2022. That indicates a low to no-growth scenario (despite a five percent growth prediction for 2021).
The bank also quietly dialed back its quantitative easing programs from effectively unlimited levels at present to a mere $120 billion a month. They did leave the door open for Yield Curve Control.
Markets are waking up to the fact that recovering from an “epic blow to demand” cannot possibly happen in short order:
Already more businesses have died than in the entire Great Recession.
An estimated 20,000 - 25,000 stores will shutter this year.
Local commerce has dropped by 12.8 percent year-over-year.
Cities and states are cutting jobs by the hundreds of thousands.
But what about the surprise “good news” jobs report from the Bureau of Labor Statistics last week?
The report shaved three points off the unemployment rate by classifying “absent from work” furloughed workers as still employed.
They removed nine million workers not looking for a job because of the pandemic from the workforce. This means BLS does not count them as unemployed.
Household survey response rates dropped from 82 percent before the pandemic to 67 percent in May, resulting in the lowest number of respondents ever.
The report said “only” 21 million Americans were out of work while 30 million people were receiving unemployment benefits.
The structure of data collection and reporting makes political manipulation unlikely, but officials are failing to make policy changes to correct the errors.
The fact is that every downturn has rallies within it, and the global economy isn’t just struggling, it’s permanently scarred. Economists are still predicting bounce backs in short order, but this raises an important question: how many of them predicted last year that we’d be testing Great Depression-era records for unemployment today?
Stocks: the hot new vice
Stocks were soaring before Thursday’s drop, with the Nasdaq breaking 10,000 for the first time and the S&P making up all of its losses for the year. Driving the rally: a massive influx of individual retail investors, especially gamblers looking for thrills in the absence of major sports.
Their behavior has hastened the breakdown of basic capitalist norms, with some bizarre results:
American Airlines, despite a 90 percent decline in its industry, saw its stock more than double in less than two weeks.
Nikola, a company that plans to make electric trucks but currently has zero revenue, briefly had a market cap larger than Ford.
Hertz, who just went into bankruptcy, saw its stock price go from 85 cents to nearly six dollars.
Hertz even received authorization to issue new stock to meet day trader demand. This is like getting a special dispensation from the city council to not scoop up after your dog because his shit has become a collectors’ item.
Other firms are benefitting too -- used car sales app Vroom’s IPO blew past analyst expectations this week, and AirBnB is looking at reviving its IPO plans despite the present travel industry crater. Tesla surged past $1,000 a share this week, despite a new COVID outbreak at the plant it opened against stay-at-home guidelines.
This influx of hot-tip gamblers is exposing three big cracks in the market right now:The disconnects involved in this situation are significant:
The cracks within the market: even before Thursday’s drop 71 percent of stocks had lost ground for the year. A small number of firms -- notably FAANGM -- are riding the gambler wave, driving economic concentration and long-term output depression.
The crack between short-term and long-term shareholders: bonds are not buying the market rally, low volatility stocks are missing out too. The market is booming at the expense of middle class and value investors.
The crack between corporate management and equity holders: issuing stock in a bankrupt enterprise is an open move by executives to take advantage of the very people to whom they are supposed to have a fiduciary responsibility.
Dissidents have long argued that the connection between market performance and social benefit is a fiction. Now the marriage between “investing” and vice has been consummated for all to see.
Corporate capitulations and the unrest feedback loop
Companies continued scrambling to satisfy demands for action against black oppression this week, but underlying risk factors got worse too, making unrest more likely in the near-term.
This week:
Adidas committed to investing $20 million in black communities, funding dozens of university scholarships for black students, and reserving at least 30 percent of all new hires at the company for black and Latinx candidates after employees pushed back on their lack of real action.
IBM ended its investments in facial recognition software following long accusations of racial bias, while Amazon will pause collaboration with police on its technology for one year (they should be cool by then).
CrossFit fired their founding CEO after he made a series of racist comments, including “I do not mourn George Floyd.”
HBO Max pulled Gone With the Wind until they produce a new intro discussing the film’s racism. Paramount Network cancelled the long-running TV show COPS, and A&E cancelled its program Live PD.
And yet the very same jobs report that shocked observers by showing a gain in new hires showed black workers still losing ground. The National Bureau of Economic Research found that 41 percent of bBlack-owned businesses have failed just since March.
Pressure building from the COVID pandemic has broken out where the social cracks are deepest -- along racial lines. COVID cases are now rising again, but government officials say they will not pursue quarantines regardless of loss of life. The pressures and the loss of legitimacy for the system are likely to get worse.
It’s in this context that the federal government decided this week not to extend eviction protections for 25 percent of U.S. renters in federally subsidized properties, and Labor Secretary Eugene Scalia said he opposes extending enhanced unemployment benefits past July 31. The communities hit hardest will take new blows at the hottest point of the summer.
The risk now is a feedback loop: failures to protect distressed populations leads to a loss of legitimacy, leading to unrest which actually spreads the disease further, a spread the state again fails to address. Can the system pull back before crossing thresholds that underpin its survival? Lebanon is showing what distressed populations facing austerity do -- so is Seattle.
The dollar is already in decline, but only because capital is betting on risk. If things continue on the present trajectory, they might get more than they wagered for.
Energy markets slump, climate goals still not close
The other factor weighing on markets this week: the oil slump. Things began on a high note as OPEC+ agreed to continued output cuts, but by Friday West Texas Intermediate had declined 7.8 percent and energy stocks were the loss leaders in the S&P, dropping 13.4 percent. The bigger picture outlook is even worse -- not for prices, but for the world at large.
The slip began with news that three Gulf producers -- Saudi Arabia, Kuwait, and the UAE -- would not extend their supplementary output cuts. Mexico had already indicated that it would ramp production back up, and compliance in the last round was only 89 percent -- Nigeria and Iraq would be expected to cut even deeper this time to make up for their failures.
Depressed demand was still the main problem for the market, especially as prices already reflected the anticipated cuts. This is especially bad for shale oil production in the U.S.:
Fracking pioneer Chesapeake is planning for Chapter 11
Frack sand company Vista Proppants already filed this week
Shale output declines were 24 percent steeper than U.S. EIA forecasts
The Dallas Fed indicated that prices were below the level necessary to develop new wells, and potentially too low to continue operation of existing wells
At least this is good news for the climate, right? Not really, various new studies indicate:
Even the “greenest” of past recoveries would not mean actual reductions in carbon output
Renewable investments are already far short of what is needed to meet the Paris goals
Development of tech necessary to get there is overwhelmingly “off track” according to the IEA
Carbon capture is also necessary, but will only work with extensive global cooperation, unlikely in a world of advancing protectionism.
All of this sets up a worst-of-both-worlds scenario, where near-term slumps cause capex cuts (already $123 billion this year) and climate concerns suppress new investments upstream, leading to price shocks later in the decade. One number buried in a J.P. Morgan analysis from March: $190 a barrel by 2025.
It bears noting that such a shock happened in 2008, and the then-worst economic crisis in history followed. Instability in oil prices means instability in prices overall, shifting investment away from risks and destabilizing the financial order -- yet another “exogenous shock” to the system caused by the system after all.
Rapid Round
Occidental Petroleum also began planning to exit its Oman holdings while BP announced plans to lay off 10,000 employees worldwide.
The Fed amped up the moral hazard quotient in the economy with the launch of its new Main Street Lending Facility. Banks get to decide which of their customers get bailout money and then lay off almost all of the risk to taxpayers and the central bank. Socialized risk, privatized reward.
China made new moves to relieve U.S. aggression against its semiconductor industry this week with a $283 million Series B round for chipmaking startup Eswin. Eswin largely produces for BOE, a display maker backed by Chinese local governments. State-backed actors led the round, an example of China’s planned market economy -- privatized risk, socialized reward.
Rare good news: the U.K. has been coal-free in its electricity generation for two full months, the longest period since the Industrial Revolution began. A majority of its utility power now comes from renewable sources. The US could get to 90 percent by 2035 and save 13 percent over current costs. The only question is if we’ll make them do it.
Disclaimer
Our only investment advice: drink 8 glasses of water a day.
Contact us with feedback or stories we might have missed.