Wall Street loves job losses, Colombian repression
Plus Biden’s vax flip, Elon’s SNL flop, and Colonial’s pipeline hack
Hello and welcome to another edition of Contention! This week we have eight minutes of negative rate dissident business news. This week we cover:
Wall Street loves bad job news, Fed magic
Colombia rises up to fight pro-business violence
Rapid Round: U.S. backs vax change, hackers crack East Coast pipeline, Musk crushes doge on SNL
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Wall Street loves bad job news, Fed magic
U.S. stock market indexes closed mostly higher last week, with the Dow gaining 2.7% and the S&P 500 1.2%, while the Nasdaq lost 1.5%. The Dow and S&P both ended Friday at record highs, but the Nasdaq dropped for the third week straight.
Bizarre market moves defined the week, underscoring the story we’ve seen for over a year now: capital does best when everyone else does worse.
Specifically, markets gained on news Friday that the April jobs report badly missed expectations. An allegedly booming economy was supposed to produce at least 1 million jobs, according to analyst estimates. Instead, only 226,000 came in during April. Following the news, the Dow and S&P 500 each gained 0.7% for the day with the Nasdaq adding 0.9%.
Investors celebrated the fact that a weak labor market means more runway before the Federal Reserve reaches its targets for tightening monetary policy. As long as Americans are struggling to find jobs, the Fed has an excuse to keep propping up bond markets, driving down interest rates. Interest rates are the price tags on capital, and the Fed’s clearance sale means investors have no reason to hold back from wild speculation: prices of even the weakest of “altcoin” cryptocurrencies went parabolic last week (before a crash Saturday night, see below).
Markets seem to be blowing off any possible blowback from this set up, even as the deep inner workings of the global financial system show signs of distress. For weeks now, the “repo” market has flirted with negative rates -- something nobody had really anticipated ever before.
Repo markets are -- as we explained here -- where banks, hedge funds, and other financial institutions borrow cash “overnight” to complete all their transactions. They put up Treasury bonds as collateral before paying back the cash plus a small interest rate. That way the institutions don’t have to hold as much cash (which returns 0%) while money market lenders make small, secure returns for big investors.
But all of the Fed’s market manipulation and fiscal largesse from the federal government have created a glut of cash in the financial system -- more than ever before. Oversupply means plummeting prices, with lenders now actually paying borrowers to take the money off their hands.
Markets have landed on a familiar solution to this problem: more Fed market manipulation.
Two weeks ago, demand for the Fed’s reverse repo facility -- instead of lending cash in return for Treasury bonds, they are giving away Treasury bonds in return for cash -- was “surging” with $101 billion in transactions in one day. The next day, they were up to $142 billion. Last week, the bank loosened requirements to access the program and it hit $173 billion on Thursday.
At this point, the Fed is the repo market. Market dissidents have long predicted that internal contradictions in the system as a whole would give rise to increasing levels of state intervention and central planning. The only question was whose benefit would guide the planning, and market glee at slumping employment makes it clear that working families are not the priority now.
Belief in the power of the Fed to mend all the places where the market is broken has reached absurd proportions. On Tuesday, U.S. Treasury Secretary Janet Yellen briefly startled markets by suggesting that inflationary pressures from an “overheating” economy could prompt the Fed to raise rates. She walked the comments back almost immediately, saying she doesn’t believe inflation will be a problem, and if so the Fed has “the tools to address it.”
But inflation is a problem. April’s Manufacturing PMI missed expectations in part due to manufacturer prices at a 13-year high, while the Services PMI saw all 18 sectors report rising prices. What tools does the Fed possess to increase the supply of lumber? What tool would it use to make copper appear? There are record job openings alongside elevated unemployment -- what spell can the Fed cast to instantaneously re-skill workers to match the jobs that need them?
Either our leaders are leading us on, hoping we will stay calm while they try and figure out what the hell is happening to the economy or they truly believe the fantasies they are peddling. Markets seem to believe they’ll end up making money no matter what, but the more gimmicks they need to survive, the bigger the risk for everybody. Last week reminds us that workers will pay the price first.
Colombia rises up to fight pro-business violence
Police in Colombia killed at least two dozen protesters and wounded 98 with gunfire last week in a revolt triggered by a regressive tax reform law. Colombian Pres. Iván Duque announced he would scrap the bill and Finance Minister Alberto Carrasquilla resigned, but protests continued, inflamed by anger at the police.
The revolt is not just a conflict between the people and the Colombian state over a single bill, but a consequence of enforced Global South austerity, pointing to more political turmoil to come.
Colombia’s unemployment rate reached 14.2% in March and the percentage of Colombians living in poverty numbered 42.5% of the population, with 15% living in extreme poverty -- wiping out a decade of improvement. More than 72,000 Colombians have died from COVID, currently experiencing its third wave in the country. In 2020, the economy contracted by 6.8%, the worst downturnsince the Great Depression.
This has coincided with worsening political repression by successive right-wing governments and death squads directly linked to both the drug trade and former Pres. Álvaro Uribe, a recipient of the U.S. Presidential Medal of Freedom. More than 170 protesters have gone missing since unrest began on April 28.
Enter the tax reform law. The “Sustainable Solidarity Law,” a reworked proposal first put forward by the International Monetary Fund and the World Bank in 2018. The bill would have reduced taxes on corporate income and profits while increasing value-added taxes on necessities, including food staples and utilities by 16% to 19%. The IMF and World Bank habitually push similar policies on debtor nations.
The law would have also placed a 1% tax on net assets above $1.3 million and 2% on wealth above $4 million, but what appears to be a progressive move is actually a “marginal rate trick.” These wealthy Colombians would have been able to deduct the wealth tax from their paltry income taxes, a shell game that actually reinforces the tax code’s regressiveness.
Colombia has one of the lowest ratios of total tax revenue to GDP in the OECD at 19.7%. Bogotá picks up the slack with high tariffs and the proceeds from oil exports, which plunged in 2020 and brought the state budget down with it. The decline in oil revenue halted exploration and cut investment in Colombia’s oil industry by half. The Colombian Petroleum Association expects oil to recover in 2021, but still below pre-pandemic levels.
Colombia’s central bank estimates the economy to grow at 3% in 2021, one of the lowest in Latin America. Meanwhile, the budget deficit has tripled and a credit downgrade looms, which will increase the country’s borrowing costs -- an urgent driver for creditor-friendly policies pushed by the IMF and World Bank. Annual inflation accelerated to 1.95% in April, faster than analysts’ estimates and driven by rising food prices and utility bills.
Lastly, there’s U.S. aid which grew to $448 million last year, half of it going to the Colombian military. This financial support has fueled a killing apparatus that human rights observers say has resulted in thousands of extrajudicial executions. Colombian army units have forced peasants off their land into areas formerly controlled by the Revolutionary Armed Forces of Colombia, killed them, and then passed the dead off as rebels to collect bounties.
Displacement of rural populations in Colombia by war -- second only to Syria -- has contributed to overcrowding in cities too. That in turn has allowed for consolidation of 80% of the country’s agricultural land into large-scale plantations, including 129,000 acres owned by Minnesota food corporation Cargill which operates in Colombia through 36 shell companies (.pdf).
The workers displaced to the cities have typically ended up in the low-wage informal economy, which comprises a majority of the labor force. It was then only a matter of time before an economic calamity threatened the state’s finances, which provoked the government to react the only way it knew how: further squeezing the poor majority to maintain credibility with investors.
Now this exploitation has provoked an uprising, and for the first time in decades, the state’s brutality was insufficient to put it down. The investors who’ve profited off of this misery to date have reacted by pricing Colombia’s dollar bonds as if they were already junk. They only get paid if the people lose, and that isn’t a very smart bet any more.
U.S. backs vaccine rights too late for India
Pharmaceutical shares dipped last week as U.S. Pres. Joseph Biden endorsed a WTO resolution to waive intellectual property rights on COVID-19 vaccines. This would allow poor countries to potentially manufacture their own vaccines currently produced by Pfizer, AstraZeneca, and Johnson & Johnson.
India and South Africa have demanded the policy change since last October, with the United States leading opposition to the move until last week. In the meantime, hundreds of thousands of Indians have died from a new wave of the disease.
The impetus for the move? Probably not Indian deaths, but rather Russian and Chinese efforts to supply vaccines that will inoculate much of the world’s population. China has already supplied 114 million doses of Sinovac and Sinopharm jabs and expects to produce 2.6 billion doses this year. Russia has promised another 1.2 billion doses of its Sputnik V vaccine to more than 50 countries.
The Biden administration also pledged to make raw materials for Covishield vaccines available to India shortly after New Delhi approved Sputnik V. Pharma stocks meanwhile recovered from their weekly lows after German Chancellor Angela Merkel opposed Biden’s proposal citing the need to maintain profit incentives. Pfizer’s vaccine is produced in collaboration with German company BioNTech.
Ransomware plugs East Coast pipeline
A ransomware attack targeting a 5,500-mile-long pipeline carrying gasoline and jet fuel up the U.S. East Coast forced its operator, Colonial Pipeline, to halt operations on Friday. The stoppage cut 45% of the East Coast’s fuel supplies -- adding to worries of further inflation at the pump.
The shockwave on prices will depend on how long the outage lasts, but it amounts to the most serious cyber breach affecting U.S. infrastructure to date. The White House says the culprits are likely non-state hackers from the Darkside collective who gained access to Colonial’s business-side computer systems. If the hackers did make it further -- into the pipeline’s industrial control systems -- the outage could last much longer.
The cyberattack is the latest in a series of intrusions and infrastructure calamities with national and global knock-on effects. Last year saw the worst “supply chain” hack ever for the United States when hackers breached the National Nuclear Security Administration, the U.S. military and Fortune 500 companies.
Musk SNL flop drops dogecoin
Dogecoin fell by more than 37% after Elon Musk called it a “hustle” during an appearance on Saturday Night Live over the weekend. Maye Musk, the Tesla CEO’s mother, also joked that she hoped her Mother’s Day gift was “not dogecoin.”
The volatile, speculative cryptocurrency which started as a joke made up half its post-SNL losses on Sunday. This is after a 14,000% climb since January sparked by Musk pumping the coin from his Twitter account, which rocketed the asset to a market cap bigger than Ford Motor Company.
Helping fuel the partial rebound: SpaceX announced on Sunday that it will accept dogecoin as payment for the lunar module of a scheduled 2022 moon mission. Rumors also churned over a mysterious “whale” holding $22 billion worth of dogecoin, enough to manipulate its market. One clue: the mystery speculator has made transactions in increments matching Musk’s birthday.
Our only investment advice: Remember when SNL was… funny.
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