War, austerity, and stocks all win big

Plus SOE defaults, Perdue’s plea, and Saudi-Israeli intrigues

Nov 30, 2020

We’re back! Thank you for reading another edition of Contention: seven minutes of windward dissident business news. This week we cover…

Dow hits 30,000 as jobless claims rise
Biden cabinet picks profit from war, austerity
China SOE defaults may be part of ‘battle’ plan
Rapid Round: Perdue cops, Palantir pops, Saudi-Israel deal flops

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Dow hits 30,000 as jobless claims rise

Markets performed well across the holiday-shortened week with the Dow up 2.2%, the S&P 500 up 2.3%, and the Nasdaq up 3%. The Dow closed above 30,000 for the first time, marking a staggering 61.5% rally since late-March’s crisis low.

It was a busy week for other economic indicators too, and they all told the same familiar tale: surging returns for the wealthy have fueled a strong recovery, but near-term risks for working families threaten its survival.

Tuesday and Wednesday were jam packed with data:

New jobless claims were worse than expected -- 778,000 new filings versus 733,000 expected -- and rose for the second week in a row, a clear warning sign for the labor market recovery.
October’s core capital goods purchases beat expectations, but experienced their weakest performance since May.
Durable goods purchases -- outlays for products meant to last at least three years, large and small -- were up significantly at 1.3%, but without defense industry purchases they experienced nearly no growth.
Personal income and disposable income both dropped, undercut by the end of stimulus support for working and unemployed families.
New home purchases were up 41.5% year-over-year, at their highest October level since 2005.

This is an economy characterized by historic returns for capital and extraordinary displacement for labor. Aggressive central bank action has spurred record market performance, and minutes from the Federal Reserve’s November meeting released last week indicate that they will accelerate their support “fairly soon.”

Businesses are spending this new capital on core, durable purchases, while wealthy families staked in equity markets spend on lifestyle upgrades and new homes. Relief efforts have also worked: CARES Act stimulus programs created the largest increase in personal income ever, and forbearance programs are freeing up billions of dollars a month otherwise paid to landlords or lenders.

But now the CARES Act, forbearance programs, and eviction moratoria all end on Jan. 1, with 5.8 million people facing eviction that month. If working families can hang on long enough for the incoming administration and Congress to pass something new, then the recovery could plod along until COVID vaccines bring us “back to normal” -- maybe.

The deciding factor: will policymakers give central bankers and wealthy investors credit for the recovery, or will they recognize the benefits of social support for working families? We will know soon if they are willing to sacrifice recent gains to avoid setting a dangerous precedent for working people’s expectations.

Biden cabinet picks profit from war, austerity

U.S. President-elect Joseph Biden began rolling out his cabinet nominations over the last two weeks, and his most prominent picks all have one thing in common: deeply concerning business connections. These past commitments and ongoing relationships bode poorly for any meaningful change from the incoming administration.

The two highest profile Biden picks so far: Antony Blinken for Secretary of State and Janet Yellen for Secretary of the Treasury. Blinken worked as Biden’s Foreign Relations Committee staff director during the leadup to the Iraq War, which Blinken helped launch. He also worked in the Obama administration during the wars on Libya and Syria.

Blinken is a founding partner of WestExec Advisors, named for the West Executive Avenue that connects the White House to the “Situation Room.” Like other consulting firms, WestExec doesn’t have to report its clients because it technically doesn't “lobby,” but the firm boasts its work connecting high-tech ventures to the U.S. warmaking apparatus.

WestExec’s one confirmed client: Windward, an artificial intelligence play founded by two veterans of Israeli naval intelligence. Windward sells its maritime data platform to shipping insurance companies -- like the ones blocking food shipments to Venezuela -- and governments enforcing economic sanctions. Blinken’s recent partners and clients will benefit from any new or expanded U.S. sanctions on his watch.

As for Yellen, pundits have made much of her past comments about inequality during her time as Federal Reserve Chair, but she also has a history of worrying that unemployment is “too low.” This reflects Yellen’s ongoing belief in the “Phillips Curve,” the empirically discredited hypothesis that inflation and unemployment are inversely related.

Yellen’s anti-labor orthodoxy landed her a seat on the board of the Committee for a Responsible Federal Budget, a pillar of Washington’s “austerity class,” and in 2018 she expressed a “magic wand” wish for higher taxes and slashed retirement spending. Yellen was also a founding member of the Climate Leadership Council, a carbon tax advocacy organization set up by major oil companies and automakers as a trojan horse for eliminating liability and Clean Air Act regulations on carbon.

Blinken and Yellen could collaborate on some limited moves away from recent policy: IMF observers hope that the Biden team will back “special drawing rights” blocked by President Donald Trump, and a new report from Biden-connected experts second-guessed some U.S. attacks on Huawei 5G technology.

But even these moves would represent changing details in an otherwise identical framework, the bipartisan consensus that puts business interests and dollar power over human lives. Blinken and Yellen have distinguished careers serving -- and profiting from -- this system, careers now at their apex of power.

China SOE defaults may be part of ‘battle’ plan

A wave of debt defaults by state-owned enterprises (SOEs) rattled Chinese bond markets in November, sending yields on 10-year sovereign notes to an 18-month high. The trend has investors in the world’s largest economy worried, but a closer look indicates that this may be a conscious strategy in China’s latest “critical battle.”

In recent weeks, four SOEs have missed payment deadlines:

Yongcheng Coal and Electricity Holding Group Co., a coal miner, failed to pay a Y1 Billion ($151 million) note on Nov. 10.
Brilliance Auto, BMW’s joint venture partner in China, missed its own Y1 Billion payment at the end of October.
Tsinghua Unigroup, a semiconductor venture owned by Tsinghua University, missed a Y1.3 billion ($198 million) payment on Nov. 16.
A logistics subsidiary of Jizhong Energy Group missed a Y500 million ($76 million) payment last Monday, but avoided default by paying on Thursday.

Defaults from SOEs are not common: the first SOE default in two decades came in December. Bondholders traditionally expected the government to bail out its own businesses, especially in critical sectors like automaking and semiconductors. Now ratings agencies anticipate the wave continuing well into 2021.

This change should not have surprised investors. As far back as 2018, Chinese President Xi Jinping called reducing financial risk one of three “critical battles” alongside poverty reduction and pollution control. Observers predicted possible SOE defaults at that time.

The U.S. trade war and the coronavirus delayed those plans, but Xi’s “dual circulation” economic strategy cannot succeed at present dismal levels of factor productivity. The defaults force sluggish enterprises to improve operations while giving a haircut to creditors who assumed that the state would absorb all their risk. Already Yongcheng’s bondholders agreed to take half their money now and half in nine months, and Brilliance is undergoing a restructure.

There is little downside for these enterprises or their government owners. None of the businesses will close operations, and each made strategic asset transfers just prior to their missed payments. Chinese regulators are investigating, with promises of “zero tolerance” and punishment for unspecified wrongdoing, but it isn’t hard to believe that government enterprises moved high-performing assets to other SOEs under state direction.

If that’s the case, then China is actively shifting risk onto private investors while concentrating state leadership over its most productive enterprises, the mirror image of the dominant Western economic model. This “battle” is definitely a tightrope walk for China’s leadership, but if it is as successful as their battles against poverty and pollution they have reason for optimism about their financial future too.

RAPID ROUND

Perdue guilty of killing thousands

OxyContin manufacturer Purdue Pharma pleaded guilty on Nov. 24 to three criminal charges stemming from its role in the opioid epidemic. The deal with federal prosecutors includes $8.3 billion in fines and criminal forfeiture penalties, the largest ever fine for a pharmaceutical company. The plea deal will also dissolve the bankrupt pharma giant into a trust-owned “public benefit company” with future earnings directed to pay off the fine.

More than 400,000 Americans have died in the past 20 years from opioid overdoses, a number that is likely an undercount. Purdue -- owned by the billionaire Sackler family -- admitted to paying doctors to prescribe OxyContin and misleading the Drug Enforcement Administration about efforts to keep the drugs out of the black market.

Purdue was not alone. Documents released in federal bankruptcy court show that consulting giant McKinsey & Company advised Purdue to give the company’s distributors a rebate for every OxyContin overdose attributable to pills they sold. The company outlined the possibility of 2,484 overdoses among CVS customers, prompting $36.8 million in annual rebates to the pharmacy.

Palantir surges despite uncertain fortunes

Palantir, the CIA-affiliated big data firm, saw its stock gain 50% last week. The company, which also serves corporate clients and the Pentagon, saw a brief plunge on Friday but is still up 200% for the month. This follows its first earnings report showing a 52% quarterly increase in revenue.

One of the most important questions is Palantir’s future under a Biden administration, considering that one of its owners -- Peter Thiel -- is a prominent Republican donor. Biden may have quelled this concern for good by appointing Avril Haines, a consultant with Palantir, as his new director of national intelligence.

Citron Research nonetheless warned the firm’s price is "no longer a stock but a full casino" and it "does not take a ball of crystal to know this will fall back to Arda,” a reference The Lord of the Rings -- Palantir’s name is a reference to magical seeing-stones from the fantasy franchise.

Israel-Saudi deal flops

Outgoing U.S. Secretary of State Mike Pompeo convened a previously secret meeting between Israeli Prime Minister Benjamin Netanyahu and Saudi Crown Prince Mohammed bin Salman last week. The meeting aimed to normalize relations between Tel Aviv and Riyadh -- similar to the “Abraham Accords” which normalized relations between Israel and the United Arab Emirates in August.

Experts believe that Israel and Saudi Arabia already share extensive but shadowy informal relations. Growing economic linkages make the secrecy awkward: Alphabet subsidiary Google is preparing a $400 million fiber-optic cable network connecting India to Europe and passing through Israel, Saudi Arabia, Jordan and Oman. The goal is to increase network capacity and reduce dependence on connectivity bottlenecks in Egypt.

The meetings were not a success: the Saudi leader reportedly backed out of the deal at the last minute. But this potential blow to regional stability was overshadowed by the assassination of Mohsen Fakhrizadeh, Iran’s top nuclear scientist, east of Tehran on Nov. 27. Iran vowed revenge for the assassination and accused Israel of perpetrating it, alleging that Tel Aviv seeks to spark a “full-blown war” in the Middle East.

Disclaimer

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Photo Credit: U.S. State Department

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