Inside this Issue:
- The Great Texas Freeze: What Exactly Happened?
- Bitcoin: The Surge Continues. So Does the Debate
- Walmart vs. Amazon: Battle of the Titans
- CVS: America’s Fifth Biggest Company. For Real.
- The GameStop Affair: Congress Goes In for the Grill
- Windows on Climate Change: Bill Gates Has a Plan
- Postal Pestilence: How to Fix the Mail
- Drones: Delivering the Goods
- Debate: Will the US Dollar Rise or Fall?
- And This Week’s Featured Place: Philadelphia: Why is the City so Poor?
Quote of the Week
“Walmart US grew net sales by $29b for the year. Now for context, that is similar to the annual revenue of Dollar General and Starbucks.”
–Walmart CEO Doug McMillon
No electricity. No heat. No clean water. A nasty winter freeze left millions of Texans without power, and just as many questions about how to ensure it doesn’t happen again. The peculiarities of the independent Texan electricity grid, the merits of the state’s unique regulatory framework, the role of renewable power sources… all were hot topics of debate and discussion amid the chill last week.
So was climate change. Microsoft founder Bill Gates is making the rounds promoting a new book with ideas on how to address it. Naturally, his 30-year plan calls for changes in how the world uses energy. Innovation, he argues, will be necessary but not sufficient. Smart government policies will be essential. So will private investment. “But this will be hard.”
There’s nothing easy about vaccinating hundreds of millions of Americans, but it’s happening. There are, to be sure, esteemed epidemiologists that worry about another Covid spike in the months ahead. New variants of the virus are more contagious. Governments are relaxing social distancing restrictions. People could be letting their guard down. But for the moment, cases continue their sharp decline, with more Americans getting vaccinated each week. Count on The Economist to say it best: It’s a race between injections and infections.
What about corrections? Will there be one in the bubbly stock market? What to make of rising prices for energy, metals, crops, houses, manufactured goods, shipping containers… is this inflation in the making? Or is much of this temporary?
Here’s one thing that’s not rising: U.S. government bond prices. Instead, it’s yield that’s rising, on longer-term borrowing specifically. But let’s keep things in perspective: Washington can still issue a 30-year bond at roughly 2% interest. And that by extension implies mortgages and car loans that are still extremely cheap, even if rising some.
In the Fed’s mind, the single biggest thing that’s not rising—at least not enough—are low-income employment prospects. Will this change as lower-wage, labor-intensive businesses like restaurants and hotels emerge from the pandemic, greeted perhaps with ravenous pent-up demand? Let’s hope so. Washington’s latest unemployment bonus benefits, remember, expire in March.
March, of course, could bring another big stimulus package. The $1.9t Biden proposal continues to make its way through Congress.
What’s happening in the corporate world? Two retail mammoths—Walmart and CVS—reported strong business trends. Facebook, never mind its battles with Apple and regulators, has a new beef—with Australia. So does Google. Clubhouse is the latest talk of the tech town. Also in tech world, Nvidia’s rivals want Uncle Sam to say no to its ARM deal. Nvidia, as it happens, will report earnings this week. So do home improvement retailers Home Depot and Lowes, along with Berkshire Hathaway, Salesforce, Moderna, Airbnb and many more.
Walmart, America’s largest company by revenue, was for a time one of its most controversial companies. Was it responsible for decimating downtowns and bankrupting family-owned businesses? Was it exploiting workers by paying low wages and not offering health benefits? Did it care enough about the environment? Was it paying its fair share of taxes? Did its immense market power—pressuring suppliers if not consumers—merit antitrust action? Today, Walmart no longer registers so much ill will. That’s in part because of its own efforts to address some of the criticism—just last week it announced a big pay hike for 425,000 of its staff. But it’s also because Walmart no longer exercises the dominance it did in say, the 1990s. Instead, it’s locked in a furious battle with Amazon for retail supremacy. Both companies—this is an understatement—performed well in 2020, overcoming Covid-related costs and operational disruptions with white-hot sales growth. For Walmart, which generated a monstrous $559b in revenues during the 12 months to January (that’s like Sweden’s GDP), the number of transactions in its U.S. stores actually declined 9% y/y last quarter. But spending per transaction jumped 22%, producing 8% growth in total U.S. revenues (total sales including international and other business units grew 7%). Americans bought more food at Walmart. They bought more home-related products, from cleaning supplies to home furnishings. They upped their spending at warehouse stores including Walmart’s Sam’s Club unit. From its earliest days, Walmart consistently outperformed rivals in the key areas of distribution, logistics and supply chain management. It did so with heavy investment in technology, a practice that’s no less true today. In fact, moving goods around with efficiency is now more important than ever with eCommerce on its way to becoming a $100b business for Walmart (and perhaps one day achieving profits). Ecommerce demands investment in home delivery, though customers can also retrieve their online orders at a store too. Indeed, management insists that having a large network of physical stores is a competitive advantage in its battle with Amazon. The sprawling parking lots surrounding the stores, interestingly, provide ample space to expand health care offerings for example, including Covid vaccinations. The Arkansas-based company, meanwhile, is channeling Amazon in building its own online marketplace for third-party sellers and offering a roughly Amazon Prime-like membership service called Walmart+. Walmart wants a piece of the giant health care and finance markets—it launched a new fintech venture last month. It aims to monetize the vast quantity of customer data it collects. Its online advertising revenues are growing rapidly. It’s exploring applications for drones, robotics, autonomous vehicles and artificial intelligence. And, of course, it has a large international presence, with plans to expand in India and Mexico while scaling back in the U.K., Japan, Brazil and Argentina. Then there’s its critical relationship with China, both a source for many of the products it sells and a key market for its stores (it also owns a stake in China’s online retail firm JD.com, not to mention a controlling stake in India’s Flipkart). The larger point? Walmart is becoming a more diversified company in terms of its revenue and profit streams, and more generally a “faster, more creative and less risk-averse company.” As for 2021, the latest federal stimulus boosted sales in January, with more momentum on the way pending more spending. Keep in mind, lower-income Americans, in particular, spend a significant part of their total disposable income shopping at Walmart.
CVS has a greater physical presence across the U.S. than even Walmart. It’s true. Some 70% of all Americans live within just three miles of a CVS pharmacy. And roughly 100m are customers. No wonder why the Rhode Island-based company needs 300,000 employees producing more than $250b in annual revenues. Last year, the total rose 5% to hit $269b, probably enough to preserve its 2019 status as America’s fifth-biggest company by revenues (only Walmart, Amazon, ExxonMobil and Apple were bigger). But is CVS profitable? Yes, if not very. Its 2020 operating margin excluding one-off accounting items was a modest 6%, matching 2019’s figure (Walmart’s was lower, playing more of a volume game). CVS is naturally on the front lines of the Covid crisis, administering both testing and vaccinations (initially on-site at nursing facilities, though now within its retail stores as well). To adapt to the virus, CVS established home drug delivery and contactless payments, reduced its office space and delivered virtual care. Even if patients do need to see a medical professional in person, the nearest CVS store MinuteClinic is often more convenient than going to a doctor’s office or hospital. Covid, for sure, did take a toll on the company’s Aetna unit, a big health insurance company CVS purchased in 2018. But management sees no significant companywide Covid impact on 2021 earnings. Its retail stores and insurance plans aside, the top source of revenue for CVS is its business of managing drug benefits for companies, governments, unions and other health insurance companies. This includes the task of negotiating drug prices with pharma companies. As you can see, there are lots of health care actors beyond just doctors and patients. And damagingly, the complexities and costs of treating, medicating, insuring, staffing, complying with regulations, developing new drugs, etc. are slowly suffocating the U.S. economy. CVS hopes to be a part of the solution with its influence in many areas. It’s of course focused on maximizing profits too (not least with Amazon getting into the pharmacy space). And with this in mind, it thinks vaccinations are a good opportunity to win more business. “Our customers, after they get the vaccine, have to wait 15 minutes as we observe them to make sure they don’t have an adverse reaction,” explained chief operating officer Jon Roberts during last week’s earnings call. “So we’re going to give them a series of value-adds to encourage them to engage further.” That means promotions to encourage more shopping in the store, MinuteClinic education and getting people to sign up for CarePass membership (which gives perks like free prescription delivery for a monthly fee). As for digital investments in areas like service via mobile apps, CVS is a big believer. But in health care, CEO Karen Lynch once explained, digital can’t substitute for actual human contact.
Palantir made it clear in its Q4 earnings call that it’s not a Silicon Valley company. It was born in the Valley, yes. But its recent move to Denver reflects a strident criticism of other tech companies and their values. Without mentioning Facebook and Google by name, Palantir trashed talked business models that depend on monetizing—through advertising—people’s thoughts, inclinations, behaviors and browsing habits. It also takes issue with the aversion of some tech companies to work with the U.S. military and intelligence agencies. Palantir is proud to help America defend itself against threats and is now using its software to help private-sector clients as well. These include oil companies, airlines and pharmaceutical firms. It’s also working with organizations on the front lines of fighting Covid, like the FDA and Britain’s NHS. Revenues grew nearly 50% last year, to top $1b (more than half of revenues still came from government work). It’s not profitable yet, however, at least not when fully accounting for the stock it awards employees. But its underlying results are impressive. It expects revenue to grow another 30% this year. Palantir insists that good software is no longer a luxury for organizations but a determinant of success. It’s true for a company. It’s true for the most sensitive military and intelligence assignments. One of Palantir’s co-founders, by the way, is Peter Thiel, an early Facebook investor and a member of the so-called “mafia” (along with Elon Musk) that built PayPal.
AutoNation CEO Mike Jackson, during the company’s latest earnings call, shared his thoughts on electric vehicles. “We’ve definitely passed an inflection point on the journey to electrification,” he said. “And there is no turning back.” However, he cautions that the transition will be gradual. By 2030, perhaps a fifth of all vehicles sold will be fully electric. But it’s not like going “from the flip phone to the smartphone, where you throw away all the flip phones.” On the contrary, internal combustion engine vehicles have lifespans of 20-to 25 years, so even in 2030, just 6% of cars on U.S. roads will be electric. Auto Nation by the way, had perhaps its best quarter ever to close out 2020, with demand for pre-owned cars strong, all the more so with new car supply constrained.
Zoetis is a New Jersey-based health care company. But for animals. It provides services for both pets and livestock, ranging from vaccinations to developing monoclonal antibodies for osteoarthritis pain in dogs and cats. Impressively, the company was able to meet its 2020 financial targets set just before the Covid crisis began. And it continued its record of producing strong and steadily increasing operating margins. Pet ownership, Zoetis said, increased during the pandemic. And people spent more time with their pets while confined to their homes.
Tweet of the Week
“Now only a minority of U.S.-listed companies (with market cap > $250 million) are making money; last year’s weakness was obviously driven by pandemic, but declining trend has been in place since post-GFC [global financial crisis].”
-Liz Ann Sonders, Chief Investment Strategist of Charles Schwab & Co, citing corporate earnings data from Bloomberg
Energy: An extreme cold spell hitting Texas and other areas of mid-America left millions without power. Absent any backup generator, that means no heat, no electronic appliances and no cell phones after the battery runs out. Due to frozen pipes, some homes don’t have running water either. The Houston Chronicle explains that the Texas energy grid is largely powered by wind and natural gas, which does a good job meeting needs when demand surges—they happen quite often when air conditioner use spikes during summer heat waves. But this time, it wasn’t just a demand shock. It was also a supply shock as wind turbines, gas lines and transmission lines froze. Frozen equipment affected even one of the state’s nuclear reactors. All told, more than a third of the state’s power generating capacity was knocked offline. Electricity prices, unsurprisingly, jumped. But oil prices rose as well as the bad weather disrupted output. As a report by the Congressional Research Service explains, the U.S. has three main electric power transmission systems: The Eastern and Western Interconnections, and the grid run by Texas. And because the Texas grid is independent and thus not engaged in interstate commerce, it’s not subject to federal regulations. There’s another thing unique about the Texas power grid: It does not pay power generators to stand by in case of emergency, which means cheaper energy for Texans but also the risk of what happened last week. The grid, by the way, is run by a non-profit corporation called ERCOT.
News Media: CBS News Digital chief Christy Tanner spoke with Digiday about trends in the media business. People are for sure viewing more news through their phones these days, and developing different patterns of news-watching there. CBS News is even establishing a presence on TikTok, the mobile social media site especially popular with younger generations. That said, more than 80% of the minutes streamed by CBS News Digital today are still coming through television sets. A particularly valuable customer is the “news omnivore,” describing people who turn the news on in the morning and leave it on all day. Others tune in periodically throughout the day. How do people access CBS News streams via television? Popular connected TV platforms include Roku, Amazon Fire and Apple TV. You can watch via Sling or even the video game platform PS5. Tanner did say it’s becoming more challenging to strike deals with these platforms, as everyone fights for better terms. In the meantime, CBS parent company Viacom will soon debut a Disney+-like streaming package called Paramount+. Viacom still sells movies and other content to rival platforms like Netflix, however, which provides valuable cash to use, for example, on bidding for rights to broadcast big sporting events. A final word from Tanner: She’s convinced that younger viewers don’t need the news to be dumbed down. They want good quality reporting like anyone else.
Video Games: Johanna Faries, an Activision Blizzard executive and an eSports commissioner, appeared on the Entrepreneur Network podcast to talk about the hit game “Call of Duty,” It never ceases to stun non-gamers just how enormous the gaming industry has become. Call of Duty alone, the podcast said, has generated more revenue since 2003 than the entire Marvel cinematic universe—and double that earned by all Star Wars box office receipts. Faries says video games like Call of Duty are essentially social networks, in which players from around the world form bonds with one another. You can see one reason why the market is so big: Anyone on earth with an internet connection can play, unimpeded by language differences.
Auto Retailing: The outlook for U.S. car dealerships should be pretty stable over the coming decade, and maybe even “rosy,” says industry consultant Glenn Mercer, on the Automotive News Daily Drive podcast. That’s despite the “four horsemen of the car-pocalypse,” referring to the challenges of autonomous vehicles, electric vehicles, connected vehicles and mobility services like Uber. One big tailwind for dealers, he thinks, is the ongoing growth of suburbs, where cars are a necessity and free parking is plentiful. He adds that ownership will likely consolidate to some degree. But the actual number of physical dealerships won’t change much.
Finance: Here’s a number you don’t see every day: $2 quadrillion. That’s the value of transactions processed by the DTTC in 2019. What’s the DTTC? It’s the Depository Trust & Clearing Corporation in New York, which provides much of the financial plumbing and infrastructure required to make financial markets work. Tasks include centralized trade processing, clearing and settlement. It’s a cooperative owned by those who use its service.
Bitcoin: If there’s anyone renown for Bitcoin bearishness, it’s the economist Nouriel Roubini. Appearing on the Bloomberg Surveillance show last week, he left little doubt about his feelings: Bitcoin is a bubble, he insists, its price manipulated by all sorts of schemes and scammers. The cryptocurrency, he adds, it not a stable unit of account, not a stable store of value and not a scalable means of payment—not even Bitcoin-themed conferences will accept it as payment. The technology can only currently handle five transactions per second, compared to 24,000 per second for the Visa network. With so many shortcomings, Bitcoin is only being used now for speculation, buying other cryptocurrencies or illegal activities. As for the latter, no country will allow that. What about the libertarian argument that it’s a decentralized system? Nonsense, Roubini argues. Roughly 70% of Bitcoin mining (the means by which transactions are verified) happens in China, Russia and Belarus. Along with the mining, exchange operators and developers are a concentrated group, often working to manipulate the system for their own gain. (He and others including JPMorgan have mentioned Tether tokens used for many cryptocurrency exchange transactions as a potentially destabilizing force). Roubini remembers when Bitcoin prices crashed in 2018, which he thinks will likely happen again whenever investors become more risk averse. He doesn’t think the current price spike reflects fear of inflation—if that were the case, assets like gold and inflation-protected Treasury bonds would be up much more. Is Bitcoin a substitute for gold? No, because at least gold has industrial use and is valued as jewelry. And Bitcoin certainty doesn’t deliver anything of value, like stocks which pay dividends, bonds that pay interest, real estate which pays rents and land which produces food. Roubini jokes: Even the shells used by the Flintstones were a better currency.
Municipal Debt: When state and local governments need money, they can raise taxes. They can also borrow from investors by issuing municipal bonds. Goldman Sachs gave an update on the state of the $4 trillion “muni” market, concluding that it “largely weathered the storm” in 2020. But not before a big scare when Covid first hit in the spring. Since then, Congress helped ease fiscal pressures with some relief. In addition, state and local tax receipts have recovered faster than expected in many areas of the U.S., boosted by rising property prices and a rebound in commerce. Longterm, Goldman notes, the health of the Muni market is highly correlated with national GDP growth. One unique feature of muni bonds is that investors don’t have to pay federal tax on the interest they earn, if the money is being raised for IRS-designated purposes (funding a non-profit hospital yes, covering pension shortfalls no). Due to changes in the 2017 tax law passed by Congress, issuance of taxable muni bonds is currently growing faster (they can be used for certain things that tax-exempt bonds now cannot, like refinancing earlier loans to take advantage of lower interest rates). Trends could change if President Biden gets Congress to raise federal taxes, which would make munis—the tax-exempt ones anyway—more attractive. Goldman also thinks muni bonds could play an important funding role if Washington passes an infrastructure bill.
The US dollar will strengthen: Since the start of the global pandemic last March, the U.S. dollar has steadily lost value against other major currencies like the euro, pound, yen, yuan, Swiss franc and Canadian dollar. But trends will change in 2021, dollar bulls argue. The U.S. economy is already outperforming many of its international peers, with GDP likely to get a further boost with another round of fiscal stimulus. JPMorgan, for one, expects the U.S. recovery to be stronger than even China’s. Bank of America’s currency forecasters also see the U.S. outpacing others in terms of growth this year. But even so, global investors could become more risk averse as asset prices reach uncomfortable heights. And a risk-off sentiment tends to favor safe-haven currencies like the dollar. The Fed, meanwhile, is doing more than other central banks to support the economy. With longterm interest rates now rising in the U.S., holding dollars is more attractive. What’s more, say the bulls, there’s little threat of inflation eating away at the dollar’s value.
The US dollar will weaken: Worsening U.S. trade balances with other countries is one reason why Goldman Sachs, for example, expects dollar depreciation this year. It also sees bullish GDP growth globally outweighing the impact of America’s recovery. With the Fed wedded to an easy money policy, the risks of dollar devaluation are growing, others argue. The extreme version of this argument is that the dollar is headed for a complete collapse amid hyperinflation, losing its status as the world’s reserve currency. Invest in hard money instead (like gold) or virtual money with supply limits (like Bitcoin). In the meantime, rising commodity prices typically correlate with a weakening dollar—this was the case for much of the early 2000s.
Securities Regulation: On Capitol Hill (virtually, anyway), the House Financial Services Committee held its much-anticipated hearings on the GameStop affair. The star witness was Robinhood CEO Vlad Tenev, who defended his controversial decision to at one point limit trading in GameStop. The hearings raised awareness of how exactly stock trades are executed, and which companies are doing the executing. Trades, incidentally, don’t settle in real-time. They take two days. Citadel Securities chief Ken Griffin, also a witness, explained his company’s role as a market maker, ensuring that there’s always a buyer and seller for every trade at all times. It makes money through volume, paying Robinhood and others to send it their trades. That’s how Robinhood is able to offer its users no-fee trading. What’s the impact of this arrangement on retail investors? Are new regulations merited? More broadly, Congress, investors and the finance industry are debating how much of a role the government should have in protecting non-professional investors. Clearly, some protection is warranted (against practices like insider trading, for example). But what about internet chat room hype? How about the gamification of stock trading on platforms like Robinhood?
Postal Service: “The nation’s mail service is slower and more erratic than it’s been in generations.” So writes the Washington Post, describing the impact of Covid disruptions on staffing, unusually rough winter weather, historically high demand and aggressive cost-cutting efforts. The topic generates lots of political debate, particularly after former President Trump told Fox News in August that he wanted to deny emergency pandemic funding to the post office to prevent mail-in voting. But Postmaster General Louis DeJoy says the cuts were necessary to address the organization’s shaky finances. “Like nearly every organization in this country,” DeJoy said last month, “the pandemic has strained our operations and caused us to fall short of our service standards. However, the fact is that we have not met our service standards for the past eight years and we have not covered our costs for even longer.” He also sees a big need for investment in new equipment, software and vehicles. Soon, he’ll unveil new restructuring efforts, likely to include another hike in postal rates. It might, the Post reports, include some reduction in service offerings as well. According to a GAO report in May, the post office’s financial troubles stem chiefly from a sharp decrease in first-class mail volumes (down 44% from 2006), increased employee compensation and benefit costs, and increased unfunded liabilities and debt. But reform won’t come easy. As the Post describes it, the post office is seen by many as a “tentpole of the middle class,” offering stable wages and benefits to its 644,000-member workforce. It’s also a low-cost shipping option for hundreds of thousands of businesses. It might, in other words, be worth it for the economy as a whole to keep subsidizing its losses.
Fiscal and Monetary Policy: On the latest Macro Musings podcast, economist Ricardo Reis discusses the only four ways that a government can repay debt: 1) issue more debt, 2) default, 3) run budget surpluses, or 4) inflate the debt away. The first way is painless until it becomes unsustainable—in other words, until there are no more willing lenders. The latter three are painful in different ways. With number four, Reis conducted studies that show the amount of inflation required to repay debts always winds up being very large, and therefore economically destabilizing. Separately, he reviews the four main theories on what drives inflation: 1) interest rate movements, 2) the quantity of money, 3) the Phillip’s curve (measuring how much slack an economy has) and 4) fiscal balances (how much debt a government has). At the moment, Reis says, it’s plausible to argue both the bullish and bearish cases for inflation under all four theories. With money quantity, for example, inflation will depend on whether you expect today’s large amount of bank reserves to ultimately wind up becoming currency freely spent by households.
Philadelphia, at the time of the American Revolution, was arguably North America’s most important city. It became, after all, the first capital of the new United States. It quickly thereafter became the young country’s most important manufacturing center. The population almost doubled from 1820 to 1840, boosted by arrivals from the surrounding hinterland, alongside immigrants from places like Ireland and Germany. Black Americans were about a tenth of the city’s people, according to Alasdair Roberts in his book “America’s First Great Depression.” New York became the largest U.S. city by total population around 1810, pushing Philadelphia to the number two spot. But the latter would remain number two until Chicago passed it in 1900. Throughout the 20th century, the City of Brotherly Love remained a place of great influence, with lots of people and lots of commerce. But the era of deindustrialization that began around the 1970s hasn’t been kind. Today, Philadelphia ranks just eighth among U.S. metro areas, with just over 6m people (it ranked fifth as recently as 2010). It might soon fall to ninth as Atlanta adds people at a faster clip. More importantly and regrettably, the city of Philadelphia itself has one of the highest poverty rates of any big U.S. city. Pew Research, last April, marked the poverty rate at nearly 25%, the highest among the country’s ten largest cities. Pew also shows the city ranking below the national average for small businesses per capita, college graduates per capita, median incomes, rates of preschool enrollment and labor participation rates. Just 14% of the city’s people are foreign-born, compared to Houston’s 28%, Boston’s 27% or Chicago’s 20%. One shortcoming is that it doesn’t have quite the same appeal to millennials and tourists as other northeastern cities like New York, Boston and Washington. One manifestation of this: Just four non-North American airlines flew to Philadelphia in 2019 (British Airways, its Irish subsidiary Aer Lingus, Germany’s Lufthansa and Qatar Airways). More than 20 flew to Boston. The city continues to have fiscal pressures as well, long after nearly filing for bankruptcy in the early 1990s. Former mayor Michael Nutter, speaking with Wharton Business Daily last week, said 65% of the city’s budget is for personnel, implying difficulties containing costs without job cuts, wage cuts, or cuts to health and pension benefits. In December, the city’s budget office, grappling with the Covid crisis, wrote: “Budget balancing actions, like revenue increases and spending reductions, are highly likely to be necessary in [fiscal year 2022] and beyond.” A spike in violent crime isn’t helping. A bleak picture? The city’s problems are challenging for sure. But things do look brighter when considering the entire metro area, where key indicators like wealth, poverty and education compare favorably to national averages. The city itself has many bright spots too, including world-class education and health facilities, with all the high-paying jobs those sectors bring. Pew’s Larry Eichel says 12 of the city’s top 15 employers are either education or medical related. The other three are Comcast (the big cable company that also owns NBCUniversal), Texas-based American Airlines (which operates a large hub at Philadelphia airport) and Allied Universal (a provider of security guards). Other notable Philadelphia firms include the food service giant Aramark and can manufacturer Crown Holdings. In the wealthy western suburbs are corporate titans like AmerisourceBergen (pharma distribution) and Vanguard (financial services).
Pennsylvania: One other note from the Keystone State: Its transportation department wants to impose tolls on nine bridges, a politically sensitive move. But it’s necessary, backers say, because of falling revenues from gas taxes. In the short-term gas tax revenue is down because of less driving during the pandemic. Longterm, the situation threatens to turn worse with the adoption of electric cars—the gas tax doesn’t help there. It’s a dilemma officials face nationwide: How to fund infrastructure maintenance and expansion in the face of declining gas tax revenue. At the federal level, it’s been more than a quarter century since Congress raised its excise tax on gasoline and diesel fuel, the primary source of revenue for Washington’s highway trust fund. Roughly speaking, states account for about three-quarters of highway and road spending in the U.S., according to the Urban Institute. The other quarter is federal.
Chart of the Week: Percentage of Americans Living Below the Poverty Line in 2019
Nationwide, 12% of Americans live below the Census Bureau’s poverty line measure
Source: US Census
|1||New Hampshire||7.3%||Some of its highest unemployment figures in towns near White Mountains dependent on tourism; part of state within Boston metro|
|2||Utah||8.9%||Hill Air Force base among the state’s largest employers|
|3||Maryland||9.0%||Home to Defense Department’s Cyber Command, based at Fort George Meade south of Baltimore|
|4||Minnesota||9.0%||Home to many corporate giants: United Health, Target, BestBuy, 3M, General Mills, CHS|
|5||New Jersey||9.2%||State trying to lure developers/businesses to blighted capital Trenton; trumpeting its history|
|6||Colorado||9.3%||Energy a key sector for the state’s economy|
|7||Hawaii||9.3%||Only Nevada generates more tourism dollars per capita (2018, S&P, Census)|
|8||Massachusetts||9.4%||Why did so many Irish immigrants choose Boston in the early 1800s? It was closest major U.S. city by sea|
|9||Washington||9.8%||Seattle Kraken, a new hockey team, will begin play next season|
|10||Nebraska||9.9%||Says its “abundant and low-cost utilities” attractive to data centers|
|11||Virginia||9.9%||Has more residents in the military than any state except California and Texas|
|12||Connecticut||10.0%||Recent PBS Newshour report looks at state’s land use rules and their impact on affordable housing|
|13||Alaska||10.1%||State a major destination for cruise operators, with many ships departing from Seattle|
|14||Wyoming||10.1%||Produces more coal than any other state, a lot more than even West Virginia (EIA)|
|15||Vermont||10.2%||Hotel taxes, and tourism more generally, critical to state budget; ski season hit hard|
|16||Wisconsin||10.4%||Country’s largest producer of cheese; California number two|
|17||North Dakota||10.6%||Number two in U.S. oil production behind Texas in 2019; with 12% of national output (EIA)|
|18||Rhode Island||10.8%||Has sizeable Portuguese-speaking community from Portugal, Cape Verde Islands, Brazil|
|19||Maine||10.9%||From 2008-18 compound annual economic growth was just 0.6% vs. 1.8% nationally (MDECD)|
|20||Idaho||11.2%||State’s two largest employers are Albertson’s grocery and Micron Technology (Build Idaho)|
|21||Iowa||11.2%||Kansas City Fed: Farm income, agricultural credit conditions rebounded sharply in Q4|
|22||Delaware||11.3%||Gov. Carney’s budget includes six-year plan to spend $4.5b upgrading roads and bridges|
|23||Kansas||11.4%||State’s two top sources of tax revenue are personal income taxes and retail sales taxes|
|24||Oregon||11.4%||Fact to impress at next cocktail party: Oregon produces more hazelnuts than any other state|
|25||Illinois||11.5%||State’s Chamber of Commerce dates back to 1837|
|26||California||11.8%||Governor Newsom backing proposal for statewide minimum wage of $14 per hour|
|27||Indiana||11.9%||Benjamin Harrison the only U.S. president to hail from Indiana|
|28||South Dakota||11.9%||Ellsworth Air Force base in Rapid City home to 17k active duty personnel, dependents, retirees|
|29||Pennsylvania||12.0%||Milk is state’s top agricultural product by value (Penn State)|
|30||Nevada||12.5%||No state more dependent on tourism, based on per capita tourist receipts (2018, S&P, Census)|
|31||Montana||12.6%||Billings a major health care hub for region (Steve Arveschoug, Big Sky Econ. Dvlp)|
|32||Florida||12.7%||State hurt by hit to tourism but buoyed by strong housing market|
|33||Missouri||12.9%||St. Louis business leaders working to make city a hub for geospatial technology (KSDK)|
|34||Michigan||13.0%||Gov. Whitmer asking legislature to permanently extend unemployment benefits from 20 weeks to 26|
|35||New York||13.0%||New York City to elect new mayor in Nov.; party primaries in June; Andrew Yang currently leading polls|
|36||Ohio||13.1%||Cleveland city gov’t giving Detroit-based Quicken/Rocket Mortgage $1m to help with job creation|
|37||Georgia||13.3%||Atlanta home to many corporate giants: Coca-Cola, CNN, Delta, Home Depot, UPS, etc.|
|38||Arizona||13.5%||Flagstaff, which depends on tourism, saw a 17% y/y drop in employment in Nov. (BLS)|
|39||District of Colombia||13.5%||Some developers looking to convert empty downtown office space to apartments (Biznow)|
|40||North Carolina||13.6%||Ranks 7th in terms of tech sector job growth since 2014 (NC State of Technology Industry Report)|
|41||Texas||13.6%||State accounted for 41% of all U.S. oil production in 2019 (EIA)|
|42||South Carolina||13.8%||United Community Bank building new HQ in Greenville; will be state’s largest bank (Greenville News)|
|43||Tennessee||13.9%||Biggest private employer in Nashville area is Japan’s Nissan (Nashville Chamber)|
|44||Oklahoma||15.2%||Covid crisis, falling oil prices, mean state’s general revenue fund expected to fall $1.4b short of plan|
|45||Alabama||15.5%||Huntsville in north of state a major aerospace and defense sector hub|
|46||West Virginia||16.0%||No state saw its population grow less in the past 100 years|
|47||Arkansas||16.2%||States least dependent on tourism: Arkansas, Alabama, West Virginia, Iowa (2018, S&P, Census)|
|48||Kentucky||16.3%||Kentucky Derby horse race scheduled for May 1 this year; plans to sell just 40% to 50% of seat capacity|
|49||New Mexico||18.2%||Number three state in U.S. oil production in 2019, with 7% of total national output (EIA)|
|50||Louisiana||19.0%||Number two state for chemical exports after Texas; has large petrochemical industry (Statista)|
|51||Mississippi||19.6%||Southwest Airlines returning to Jackson for first time since 2014; flights recommence in June|
|52||Puerto Rico||43.5%||Economy once a pharma manufacturing base but much of that lost since tax breaks expired|
London’s loss appears to be Amsterdam’s gain. The Dutch city now has a busier stock market, based on share volumes traded during the month of January. As Bloomberg reports, the British capital is also losing other financial activities like euro swap trading. Britain officially exited the European Union at the beginning of last year but only after a one-year transition did it actually leave Europe’s single market. The financial sector is immensely important to the U.K. economy, which makes these latest shifts to Amsterdam and elsewhere in Europe extremely worrying. As for the Netherlands, its history is deeply intertwined with that of England, and its economy deeply rooted in international trade. Royal Dutch Shell and Unilever are symbols of Anglo-Dutch closeness. Other big Dutch companies include Phillips, Heineken and ING bank. The Netherlands also has Europe’s busiest container port in Rotterdam and its third busiest airport in Amsterdam.
It’s a newsworthy time for American companies operating abroad. Google and Facebook are locked in a dispute with Australia about content rights. Uber suffered a big legal blow to its business in Britain. The payments company Stripe made news a few months ago with its purchase of Nigerian startup Paystack. America’s manufacturers, not to mention its military, are watching warily as China considers an export ban on rare earth metals vital to making things like smartphones and fighter jets.
One quick note about international trade during the pandemic: In 2020, China became the European Union’s largest trading partner, displacing the U.S. That’s mostly because of the growing quantity and value of goods the E.U. is importing from China. The E.U. still exports more of its own goods to the U.S. But you can see the geopolitical implications—should Europe get closer to China, even if that upsets the U.S.?
Treucaller, an app that attempts to block spam calls, estimates that as many as 56m Americans have been victimized by phone scams, collectively losing perhaps $20b. The FBI says losses reported in 2019 alone reached $3.5b. New York Times journalist Yudhijit Bhattacharjee headed to India, where he interviewed a young man working for an illegal scam operation. One common tactic is targeting elderly or lonely Americans, posing as the IRS, the Social Security Administration or tech support. All they need to execute their thievery is for the victim to sign into their bank account. Bhattacharjee’s report features good guys too, namely a U.K. software engineer who uses the pseudonym Jim Browning. Using software, he works to identify perpetrators and notify victims before it’s too late. Better yet, he records the scam attempts he finds and features them on YouTube.
Bryan Burrough is best known for “Barbarians at the Gate,” the 1990 book he co-authored about the debt-heavy takeover of RJR Nabisco. But he also wrote a 2009 book about the Texas oil industry, always a subject filled with colorful characters. “The Big Rich” traces the careers and often flamboyant spending habits of four pioneering oilmen and their descendants: Hugh Roy Cullen, Clint Murchison, Sid Richardson and H.L. Hunt. Their extraordinary wealth would become a major force in national politics, funding conservative ideas and causes that are still influential today. They and other Texas oilmen were particularly resentful of Washington’s influence in commercial affairs, railing against the New Deal in the 1930s. As the book describes, the state’s independent oil fortunes were mostly made between the 1920s and the 1950s. By the 1960s, most big oil wells in Texas had already been found, and drilling costs had risen beyond what a solo operator could afford. Also by this time, Texas oil had to compete with Middle Eastern oil, which was much cheaper to extract—Saudi Arabian crude was roughly half the price. Texas itself was trying to control prices through its railroad commission, forcing operators to cut output. The state, Burrough writes, was in the meantime increasingly turning its attention to space following the 1958 establishment of NASA in Houston. For a deeper history of the oil industry, the go-to book is Daniel Yergin’s “The Prize.” His subsequent two books on the sector (“The Quest” and “The New Map”) provide more recent commentary.
Climate Change: He made his money writing (software). He now spends that money fighting (infectious diseases and other global maladies). Now, Microsoft founder Bill Gates is turning his attention to climate change. His new book, “How to Avoid a Climate Disaster,” warns that “this will be hard,” and that “the world has never done anything quite this big.” Avoiding the catastrophic effects of climate change means going from 51b tons of greenhouse gasses—that’s the amount humans pump into the atmosphere every year—to zero. Unfortunately, innovation and technological change when it comes to energy is a lot slower than it is for software or even medicine. Also complicating the quest to zero: ongoing global population growth, which will increase demand for energy (The world will be building the equivalent of another New York City every month for the next 40 years). What’s more, burning fossil fuels—one of the primary contributors to climate change—is simply so super-efficient and cost-effective that substituting alternatives inevitably entails a “green premium.” For example, there are indeed biofuel substitutes for oil-based jet fuel. But they’re many times more expensive. Helpfully, the green premium for cars is getting pretty low, thanks to battery innovation and companies like Tesla. Solar-powered electricity generation is now cost-competitive with fossil fuels too but less so when considering storage needs for times when the sun’s not shining. “Innovation alone,” Gates writes, “isn’t going to do the job here.” Not with the green premium still very high for products like steel, cement or animal meats. Getting to zero starts with recognizing the five key activities that generate emissions: 1) how we get electricity, 2) how we make things (manufacturing), 3) how we grow things (agriculture), 4) how we get around (transportation) and 5) how we keep warm and cool (heating and air conditioning). Private-sector innovation will absolutely play a role—Gates himself is investing in next-generation nuclear power. Governments, for their part, need to invest where the private sector won’t, just as they did with research that led to the smaller and faster microprocessors essential to Microsoft’s success. Also important: Raising the cost of fossil fuels with a carbon tax. Policy, markets and technology, he says, are all essential to reducing the green premiums and getting to zero emissions. By when? Gates says to aim for 2050—anything much sooner would be unrealistic and possibly even counterproductive.
The Distributed Economy: Matt Mullenweg helped launch WordPress, the free and open-source tool powering 40% of all websites worldwide (including www.econweekly.biz). He now runs Automattic, whose self-described mission is to use WordPress and other tools to democratize publishing and commerce on the web. He’s also an evangelist for the concept of “distributed work,” which is the opposite of having workers congregate at a single location, all at the same time. Interviewed on the “Invest Like the Best” podcast, Mullenweg spoke of a “fifth level of distributed autonomy,” the highest achieving state of remote and asynchronous (non-time specific) work. The idea is that companies with distributed work practices will ultimately outperform in-person organizations. Mullenweg expects this to open opportunities for every qualified person across the world, no matter where they are.
Drones: “Back in 2012,” writes Morning Brew, “the FAA anticipated 30,000 drones operating by 2020.” Well, according to government data, “there are at least 1,746,248 registered drones in the U.S., and likely many more unregistered ones.” Simply put, a drone is an aircraft without a pilot. Early on, they captured attention for their use in U.S. military campaigns. They’re now fast becoming an essential tool for a range of commercial activities, from monitoring farmland to selling real estate. But a big one that everyone’s watching is delivery—will Amazon and FedEx and UPS be using drones to deliver packages? Morning Brew mentions LEK Consulting’s forecast that by 2040, drones could be handling 30% of same-day package deliveries. Of course, there are risks with any and all new technologies. Stratfor, which tracks geopolitical threats, sees drones as a destabilizing force in the Middle East, citing numerous recent drone attacks on Saudi Arabia by Iranian-backed rebels in Yemen. Closer to home, the FAA must ensure that drones don’t interrupt commercial airline flights or pose other safety risks.
Bitcoin gets the most attention. But it’s just one of many applications for blockchain technology. Ethereum is another. It’s not primarily a digital currency like Bitcoin but more importantly a platform for digital or “smart” contracts. Developers can use it to create Bitcoin-like currencies for sure, including “stablecoins” pegged to the U.S. dollar. But they can create other applications too, not unlike developers create applications for Apple’s App Store. Currently, the top Ethereum-powered “decentralized apps” (DApps) are mostly cryptocurrency exchanges or engaged in some sort of financial activity, hoping to decentralize the industry. “DeFi,” or decentralized finance, is in fact a popular term among blockchain enthusiasts. But gaming and gambling DApps are also popular. (To get a DApp you need to purchase some Ether money and then set up a digital wallet). To be clear, we’re a long way from blockchain-based apps taking meaningful market share from established financial institutions. But some see it coming. Smart contracts based on blockchain technology do seem well-suited to one day serve as financial documents (i.e., mortgages, securities, land titles, etc.).