Inside this Issue:
- Biden the Builder: A Big Infrastructure Proposal, but Will Congress Pass It?
- Less Distress Says the BLS: Labor Department Unveils Solid Job Growth
- The Latest Wall Street Whirlwind: The Archegos Affair
- Hop ’til You Pop: How to Detect a Financial Bubble?
- Drug Store Story: The Latest from Walgreens
- Southwest Airlines: Growing with Boeing
- Elon’s Elan: Tesla, Says Expert, Years Ahead of the Competition
- A Tuition Situation: Fewer Foreign Students at U.S. Colleges
- Ocean Commotion: U.S. Concerned About Conflicts Over Fishing
- Vaccination Sensation: Viruses Beware
- What the Hell is Bitcoin Mining? A practitioner explains.
- A Class on the Past: The Origins of American Manufacturing
- Debate: High-Speed Rail, Worth the Investment or Not?
- And This Week’s Featured Place: Denver, Flying High in the Mile High
Quote of the Week
“Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy.”
-Timothy R. Fiore, Chair of the Institute for Supply Management
More stimulus money. Soaring household incomes. Rising home prices. Strong demand in many sectors. Constrained supply. New zero-commission trading platforms. Don’t forget about TINA and FOMO. No, not your aunt and uncle on the Jersey Shore. TINA, as in “There is no alternative” to stocks with bond returns so low, and FOMO as in “fear of missing out” as asset prices continue their upward glide. All such factors helped stock markets rise again in the now-completed first quarter of 2021. The gains weren’t quite so spectacular as in late 2020—the S&P 500 returned about 6% last quarter. In addition, bullish tech stocks lost some steam as investors turned to companies more readily poised to benefit from the impending defeat of the Covid virus (energy and travel firms, for example).
The stock market, no doubt, had its fair share of drama during the quarter, from the GameStop run-up to the Archegos meltdown. Look past the turbulence though, and underpinning equity markets was a solid record of profits and sales for Corporate America. By now you know the winning sectors: finance, tech, big-box retail, etc. There’s no mistaking the boom in manufacturing, not after an ISM report showed a bullishness not seen since 1983. Most importantly, there’s good news about everything in the universe of housing—home sales, home furnishings, home repairs and so on.
What else shaped the economy during Q1? Fast-rising longer-term borrowing rates, for sure, but from extremely low levels and without any detectible impact (yet) on rate-sensitive markets like housing. The U.S. dollar gained strength, lifted in part by the higher interest rates, but arguably more so by expectations for the U.S. economy to lead the world in growth. These expectations, in turn, stem from aggressive federal spending, healthy household and banking sector balance sheets and strong progress on vaccinations. That said, Covid worries persist, with cases once again on the rise.
But sectors most devastated by the virus are on the rise too. The latest monthly jobs report, published last week, shows leisure and hospitality leading the way in job creation during March. It still has a long way to go before full recovery though. Across the entire economy, official unemployment fell to 6%, only 2.5 points above where it was just before the pandemic began last March. But as the Fed is always quick to remind, official unemployment doesn’t tell the whole story. The latest figures for long-term joblessness and labor participation failed to show much progress.
It’s this persistent weakness in the job market—for lower-paying jobs most importantly—that underpins the bearish case for inflation, a much-discussed topic last quarter. The inflation bulls, meanwhile, point to the expansionary fiscal and monetary policies, along with supply shortages already leading to price spikes in everything from houses to used cars to commodities like oil, lumber and copper. Don’t forget about shipping rates, swelling further in the aftermath of the Suez shipping fiasco. There’s the semiconductor shortage, particularly frustrating for automakers. But all of this, the inflation bears retort, will prove just temporary and soon forgotten.
Don’t forget about infrastructure, says President Biden, using an expansive definition of the term. His plan, partially unveiled last week, aims to boost the economy’s potential to produce. But will it ever see the light of day? Many in Congress think Washington has already spent too much. Others don’t like the corporate tax hikes Biden proposes. Still others think the president’s plans are not audacious enough.
Watching closely are companies like Southwest Airlines, which expressed its hope for better days with a big Boeing order last week (see Companies section below). Microsoft, quietly building muscle in augmented reality technology, won a $21b AR headset contract from the U.S. Army. PayPal, Visa and Goldman Sachs are lending more mainstream credibility to the cryptoeconomy. Amazon awaits a fateful union vote in Alabama.
New numbers looking back at Q4 show U.S. GDP grew 4.3% in the period. South Dakota led the way with 10% growth. Texas, a much larger state, ranked second at almost 8%. Michigan’s sub-2% growth, conversely, placed it last among 50. Only slightly better was Washington, despite the all-star Seattle economy (blame Boeing).
Later this month (April 29th), the Bureau of Economic Analysis will publish initial GDP estimates for Q1. And next week: The start of Q1 earnings season, led by America’s Big Banks.
Tweet of the Week
“Worst sale ever candidate: Goldman sold its position in Alibaba in 2004 for $22m. That stake would be worth $200b now. Goldman’s current market cap is $110b.
– Trung Phan, The Hustle
- Walgreens, based near Chicago, managed more than $1b in net profits in just the December-to-February quarter. That was on close to $33b in revenue, up 5% from the same quarter a year earlier. It’s a strong performance in management’s eyes, especially in light of the ongoing Covid disruptions the company still faces. Many of its retail stores were closed, notably in overseas European markets. And practices like social distancing and mask-wearing meant an unsually low incidence of colds, coughs and flus, causing over-the-counter medicine sales to drop sharply. People are also visiting doctors less frequently during the pandemic, leading to lower drug prescriptions. Retail transactions overall last quarter sank by double digits y/y, but revenue declines were milder as people purchased more items per transaction. On the other hand, the company raised its future financial guidance amid improving pharmacy margins, cost-cutting, anticipated improvements at its Boots subsidiary in the U.K. and compensation for administering Covid tests and Covid vaccines. Unlike its larger rival CVS, Walgreens (more formally Walgreens Boots Alliance) doesn’t own a giant insurance company. But both operate a network of physical retail stores seemingly on every other street corner across America. And both are adopting many of the latest practices and strategies emerging in the retail sector, including omnichannel selling, curbside pickup, mobile app investment, home delivery, data mining, personalized marketing and loyalty programs. Of course, pharmacies are doing so in the peculiar world of U.S. health care in which insurance companies and governments are typically footing the bill. Peculiar yes, but not immune from mounting attacks by Amazon, Walmart, Target and other retail behemoths. Walgreens itself plans to offer some financial services starting later this year. It wants to offer more primary health care services too. And it wants to use robots and other technologies to free its pharmacists to spend more time consulting with customers. Its retail and pharmacy customers are indeed the focus, having sold most of its Europe-centric pharmaceutical wholesale/distribution business in January for almost $7b. The buyer? AmerisourceBergen, of which Walgreens is the largest shareholder. Recall that Walgreens expanded its retail footprint with the 2017 purchase of rival Rite Aid. At the moment, Walgreens is on the frontlines in the battle against Covid, vaccinating and testing. New CEO Rosalind Brewer, currently the only African American female CEO of a Fortune 500 company, previously served as president of Starbucks, and before that ran Walmart’s Sam’s Club division. A final fact to share: In 2019, Walgreens had the same amount of revenue as General Motors, a testament to health care’s outsized role in the 21st century U.S. economy.
- Southwest Airlines: Boeing scored a much-needed victory by securing an order for at least 100 planes from America’s largest domestic airline. The total could go as high as 255 if all options are exercised. Southwest is buying more B737s, the plane it’s relied on since its first flight in 1971. More specifically, its buying B737 MAXs, Boeing’s latest version of the plane, now back in the skies after two fatal accidents. Even more specifically, it’s buying the MAX-7 series, a smaller version of the plane. It’s already flying the large MAX-8 but thus far refrained from buying larger -9s or -10s. By 2031, assuming it exercises all options, Southwest would have a fleet of 628 MAXs. It began 2021 with 718 planes, 41 of the MAXs and the rest previous-generation B737s. Airbus was hoping to sell Southwest its A220 product, which competes with MAX 7. But alas, Southwest will remain an all-Boeing customer. Last year, by the way, saw Southwest record its first annual loss, breaking a spectacular 47-year profit streak. Yes, it made money during the 2008-09 recession. It even made money after the 9/11 attacks. Will it make money in 2021? Not likely, unless domestic business travel improves quickly and sharply. But leisure demand is picking up rapidly, and Southwest doesn’t have the overseas exposure weighing on its rivals Delta, American and United.
- Riot Blockchain, a Nasdaq-listed company engaged in Bitcoin mining, is still a small, money-losing company in a very new industry. Total 2020 revenues were just $12m while operating losses were $19m. But of course, the cryptoeconomy is generating lots of excitement, no more clearly evident than in Bitcoin’s astounding run-up in price during the past year. Just in the past quarter, in fact, the price went from roughly $30,000 to flirting with $60,000. But there’s also a high level of uncertainty in Bitcoin’s future value, utility and legality. Maximalists see it as a guarantor of libertarian freedoms. Haters think it little more than a tool for crooks and scammers. But back to Riot Blockchain and its business of mining Bitcoins. What does that even mean? Well, a central principle behind the concept of blockchains is that the information they hold doesn’t need to be verified or overseen by a third party—two people trading Bitcoins can do so on the blockchain without having to trust one another. No need for a bank in between. It works partly through advanced cryptography—the science of secure communications. But there’s also the process of verifying each transaction, handled by competing “mining” companies including Riot, using heavy-duty computing power to solve complex math problems. Whoever solves a block gets a reward: Bitcoin. And naturally, with Bitcoin becoming so valuable of late, miners have engaged in an arms race to upgrade their computers and improve their processing speed (known as their hash rate). But mining is not for the faint-hearted. It involves enormous amounts of computing power which expends enormous amounts of energy. Riot, based near Denver, recently moved its mining operations from Oklahoma City, known for its low energy costs, to an area of upstate New York where energy is even cheaper. The future legal and tax status of Bitcoin is another uncertainty. In addition, a Chinese company called Bitmain Technologies is the dominant supplier of the semiconductor chips used for blockchain mining. What’s more, mining has become so competitive and so capital and energy-intensive that companies including Riot have found it necessary to pool their resources, which of course means they have to share any rewards. Finally, when Riot does earn Bitcoin rewards for solving a block, it needs to make the difficult decision of whether to sell it—that’s how it earns a profit—or hold it on its balance sheet—that’s how it stays solvent.
- Automobiles: Tesla is five to ten years ahead of everyone else in electric vehicle technology. So says Michigan-based consultant Sandy Munro, who spoke last week with Automotive News. In 2019, Munro traveled the world delivering his message that by 2030, sales of electric vehicles (EVs, including hybrid EVs) will have overtaken sales of vehicles with internal combustion engines (ICEs). It made incumbent car companies uncomfortable, to say the least. But now he thinks that the crossover date will be even earlier: closer to 2028. And the incumbents have come to accept that reality—GM and others have woken up and pledged to go all-electric. Why are EVs the future? Policy incentives and environmental concerns, certainly. But also changing consumer preferences. Tech-savvy 12-year-olds today won’t want to drive a gas-powered car five years from now, Munro said. And everyone likes the fact that EVs don’t require any maintenance. Well, everyone except the many dealers and mechanics earning high margins servicing ICEs. Electric cars, by the way, aren’t new. In 1908, 50% of all cars sold were EVs, Munro said. But ICEs won out after the invention of the electric starter. When World War I came in the 1910s, the nation’s e-vehicles were all melted down to make “bullets and bombs” for the military. Back to Tesla… why is it so far ahead? Munro points to superior electronics, wiring, battery technology, electric motor technology, etc. And the company makes its own advanced semiconductor chips. GM, he said, is investing in somewhat older battery technology—it made a mistake by abandoning its promising EV1 investment in 2003. That would have left it far ahead today. More generally, Munro thinks incumbent U.S. manufacturers will lag in the EV race, with China leading the way, followed by other Asian countries like Korea and Japan, and perhaps some European countries like Norway. Chinese companies like BYD, Geely and Beijing Automotive are way ahead, positioning them to invade the U.S. market just like Japanese automakers did with their cars in the 1970s and 1980s. Battery technology, importantly, is advancing most promisingly in China and elsewhere in Asia. It’s a battery shortage, incidentally, that concerns Munro much more than the current semiconductor shortage. He also warns about the perils of too much outsourcing and an over-emphasis on cost-cutting: “Cheap always loses.” He does think other niche players, including Faraday in the luxury market, could join Tesla among U.S. success stories. He’s also bullish on the emergence of a market for three-wheel vehicles.
- Education: Colleges and universities have not been among the pandemic’s winners. Now, even as the economy reopens, they face big uncertainties about their foreign students, often a vital source of tuition revenue. Last year, according to the Department of Homeland Security’s Student and Exchange Visitor Program (SEVP), the number of foreign students in the U.S. declined by 18% in 2020. The drop was 72% for students not previously enrolled the year before. In total 1.3m foreigners studied at U.S. schools last year. Four schools (Northeastern University, New York University, Columbia University and the University of Southern California) enrolled more than 15,000 each. California had the highest percentage of foreign enrollment of any state (18% of all students). The most common foreign student majors were computer and business-related, with foreign language and engineering studies also popular. And from where did they come? China and India together accounted for almost half of the total. Next in the ranking were South Korea, Saudi Arabia, Canada, Brazil, Vietnam, Taiwan, Japan and Mexico. Keep in mind: When foreigners study at a U.S. school, GDP statistics consider it an export. Will the U.S. continue to allow Chinese students to come amid increasingly tense relations? Economically, they’re valuable, hugely so to universities. But it also means transferring knowledge to what some consider a rival economy, especially if the students aren’t allowed to stay in the U.S. after graduation.
- Distribution and Wholesale: It’s a massive part of the economy that doesn’t get much attention. But the wholesale or distribution trade is both a major employer and a big contributor to GDP. What is it? Wholesalers buy products from manufacturers and sell them not to end-consumers but to some business in between; it’s a B-to-B entity, in other words. MDM, a media site that covers the sector, publishes rankings of its largest players in just the industrial, construction and commercial space. None are household names. Virginia-based Fergusson Enterprises, for one, has an estimated 27,000 employees, producing nearly $20b in revenue selling plumbing supplies to construction companies, both residential and commercial. Others sell roofing materials, electronics, gasses, plastics, chemicals, pipes, valves, etc. for building homes, offices and factories. But construction is just one sub-segment of the wholesale industry. There are wholesalers that specialize in auto parts (Atlanta’s GPC and Chicago’s LKQ are big ones). McClane, a Berkshire Hathaway subsidiary, distributes goods and other items you see in retail and convenience stores. Core-Mark’s specialty is frozen foods. AMCON does tobacco products. Global Partners does energy products like heating oil. And don’t forget goliath pharmaceutical distributors like McKesson and AmerisourceBergen. Be careful about the terminology though. Wholesaling can also refer to retailers like Costco which do sell directly to the public.
- Stocks: More drama in the stock market last week. This time the central character was Archegos Capital, essentially a hedge fund but investing for a single family. It recklessly bet large amounts of borrowed money on stocks including ViacomCBS, Discovery and Shopify, using a Wall Street product called “total return swaps.” They’re a tool—offered by investment banks—for betting on a stock with lots of leverage but little disclosure. When Archegos Capital’s favored stocks started falling in value, the banks demanded more and more collateral. The fund didn’t have enough funds to meet those demands. So the banks, which were holding the shares on its behalf, sold them in bulk. Which banks? Goldman Sachs and Morgan Stanley were among those involved. So were Credit Suisse, Deutsche Bank and Japan’s Nomura. The forced selloff was large enough to evoke uneasy memories of the hedge fund LTCM, whose 1998 collapse left many of its bank creditors with huge losses and risk of financial system collapse—it took a Federal Reserve rescue to calm the situation. So far, nothing so menacing yet with Archegos. But it did leave Wall Street and Washington wondering if there’s more hidden hedge fund debt floating around. Why, by the way, would a company like Goldman Sachs have so much credit exposure to an investor with so much leverage? Well, it didn’t know that Archegos was borrowing so heavily from other banks too. Again, the swaps it was buying didn’t need to be disclosed. We’ll see if they’ll now be more tightly regulated.
- Labor: A Wall Street Journal analysis of the job market reveals Amazon’s outsized importance in job creation during the pandemic. It added an incredible 500,000 jobs around the world in 2020, 400,000 in the U.S. FedEx was another big job creator, adding 50,000 new positions. Tesla added almost 23,000.
- Stocks: Are we currently witnessing a stock market bubble? Some historical perspective is useful. Financial historians William Quinn and John D. Turner provide just that in their 2020 book: “Boom and Bust: A Global History of Financial Bubbles.” As Quinn explained on a New Books Network podcast, a central thesis is that all bubbles have three things in common: They’re preceded by an increase in 1) marketability, 2) easy money and 3) speculation. With marketability, the authors are talking about some financial innovation that makes an asset much easier to buy and sell, like mortgage-backed securities in the 2000s. This could also result from legal changes, like when assets once illegal to trade suddenly become legal (stock trading was banned for many years in 17th century Europe). Next is easy money, the fuel for the fire. It could be the consequence of abundant savings, low-interest rates that encourage excessive borrowing, relaxed lending standards or a sudden surge in money repatriated from abroad. Finally, speculation is when investors increasingly buy assets only because they expect their prices to jump, with little regard for the cash flows the asset produces (i.e., dividends, interest or rents) or the underlying business model of the company in the case of stocks. What sets off a bubble? Two common sparks, the authors say, are 1) some exciting new technology, from railroads to the internet and 2) a political or policy change (deregulation that encourages risky mortgage lending, for example). But bubbles aren’t all bad. Sometimes they have positive social benefits long after they pop, like when all that speculative 1990s capital helped developed the infrastructure to deliver high-speed internet. Investors got burned but society benefitted. Did the subprime housing bubble of the 2000s have any lasting benefits? No, Quinn said, housing bubbles tend to be the most damaging sort because they typically don’t involve new technology, and because banks leave the scene badly damaged. What do the authors consider the biggest bubble of all time? The Japanese bubble of the 1980s, which was really a double bubble: both land and stock. And today? Is there a bubble right now? Nobody knows for sure. But if there is a bubble, Quinn suggests, electric vehicle stocks might fit the bill.
- Stocks: Bubbles are likewise the focus of research conducted by Peter Oppenheimer of Goldman Sachs. Does he think there’s a stock market bubble currently underway? Easy credit certainly exists. Stock prices have high valuations relative to earnings. Wall Street is awash in new narratives about emerging technologies. Mergers, acquisitions, IPOs, SPACs… they’re everywhere. There’s clearly been a massive inflow of money into equities. FOMO sentiment—fear of missing out—seems palpable. But not so fast. Oppenheimer tempers concerns by calling attention to strong household balance sheets and strong bank balance sheets. High stock prices, furthermore, are partly the result of ultra-low interest rates—during the internet bubble of the late 1990s, 10-year treasury yields exceeded 6%, so bonds were more attractive relative to stocks than they are today. Put another way, stocks are more attractive than bonds today. It’s also not late in the economic cycle, he adds. In addition, stock price appreciation isn’t as sharp or widespread as it was during the internet bubble. Besides, some of the biggest gains have been in powerful, fast-growing and highly profitable tech giants that are hardly speculative bets. Finally, Oppenheimer asserts that during the past decade, many investors were actually net sellers of stocks, i.e., pension funds, insurance companies and households. Only the corporate sector, fond of repurchasing their own stock, were net buyers.
Debate: High-Speed Rail, Worth the Investment?
- Yes: If there’s any single symbol of America’s sub-standard infrastructure, it’s the country’s embarrassing lack of high-speed passenger railways. Japan debuted its high-speed network in 1964, France in 1981 and Germany in 1991. China didn’t get started until the 2000s but today, it has the largest high-speed rail network in the world. And the U.S.? Even if all goes to plan, it won’t see its first truly high-speed train network until around 2030. But even that network—linking California’s major cities—is way behind schedule and over budget. What about the Amtrak’s Acela trains connecting New York with Washington? Nobody can rightfully call that a high-speed train—average speeds are less than 70 miles per hour. The point is: America needs to get serious about funding and building what in other developed economies is a critical tool for productivity and wealth generation. The potential benefits are enormous, starting with the environmental gains obtainable by shifting people from cars and planes to trains. This will also ease congestion on highways and the airways, implying savings on maintenance, expansion, and upgrades of roads, airports, air traffic control systems and so on. Most travelers prefer train travel over air travel—it’s more comfortable, and train stations are located in city centers. You can work and sleep on trains too. With high-speed rail access, of course, you grow economic opportunities and foster development. Real estate projects near train stations, for example, will help ease the nation’s affordable housing shortage. Consider a city like Philadelphia if it had faster rail links to New York. Suddenly, people would be able to commute to work between the two (all the more so if working remotely in part). It would mean a whole new wealth of jobs open to Philadelphia residents, without surrendering the benefits of Philadelphia’s lower housing costs. St. Louis and Detroit would hugely benefit from fast trains to Chicago. Think about what an intra-Florida high-speed rail network would do for the state’s vital tourism sector. Developing high-speed rail projects, meanwhile, creates lots of good jobs and lots of potential for technological spillovers to other industries. As China shows, it also creates a giant new export sector—when Saudi Arabia announced a high-speed rail project, who did they hire to help build it? Chinese and French firms.
- No: The late Herb Kelleher, legendary leader of Southwest Airlines, was once asked about high-speed rail. His answer, paraphrased? Just give me the billions required and I’ll fly around everyone for free. His quip speaks to how expensive high-speed rail can be. Washington is chronically funding Amtrak’s operating losses, not to mention its heavy maintenance obligations. California’s troubled HSR project, even using the original cost projections, will cost more than $50b, akin to the entire gross domestic product of Montana. But that’s before the delays and cost overruns—the project was delayed another two years just last week, due in part to difficulties obtaining land. When it does open, it will at first connect just Merced and Bakersfield. Wooo. The far more meaningful San Francisco-Los Angeles link won’t come until the 2030s if ever. In the densely populated northeast, some Amtrak upgrades might be merited—new tunnels under the Hudson River for example. But billion-dollar bullet trains? A waste. Almost everywhere else in the U.S., meanwhile, low population density doesn’t support rail travel. Everyone likes the flexibility and freedom of having their own car. And besides, the environmental arguments supporting rail travel will soon become outdated as people adopt electric cars. There’s the prospect of hyperloop technology too, which could quickly make billion-dollar trains obsolete. Washington actually did allocate grant money for HSR projects after the last recession. But some states like Florida rejected it, concluding HSR wasn’t worth it.
- Infrastructure: As expected, President Biden outlined a detailed plan to invest in U.S. infrastructure, taking a broad and expansive definition of the term. His American Jobs Act, if Congress passes it (a big if), would spend more than $2 trillion over eight years. Roughly $620b of that would go to transportation infrastructure, i.e., roads, bridges, ports and public transit systems. The figure also includes $174b to accelerate the shift to electric vehicle adoption. Going way beyond transport investment, however, the plan calls for higher spending on research and development, fighting climate change, upgrading water systems, promoting greater access to broadband internet, upgrading power grids, strengthening manufacturing supply chains and improving access to quality health care, education, childcare and housing. The idea, more generally, is to use broadly defined infrastructure investment as a vehicle to increase the potential growth rate of the U.S. economy while also achieving social objectives like reducing income inequality and boosting opportunities for disadvantaged groups. Foreign policy objectives are top of mind as well, specifically the need to compete technologically and economically with a rising China. Expensive? The Biden team points to the cost of doing nothing. For example, the U.S. last year suffered 22 separate weather and climate disasters costing the country $95b. Biden also asserts that better airports, fast trains, a more educated workforce and healthier citizens are a sure bet to boost output. He plans to “pay for” the investments with higher taxes (apologies to modern monetary theorists who reject the idea of Washington having to “pay” for spending like a household would). In any case, the new taxes on corporations, upper-income Americans and investors would raise more than $2 trillion over 15 years. Higher spending, alongside higher taxes? Does this represent a break with a half-century of pressures to reduce the economic role of the federal government, returning instead to the FDR/LBJ era of big government? Bloomberg columnist Noah Smith thinks this might be the case, recalling Washington’s past efforts to extend the electrical grid, create the interstate highway system, build the suburbs, upgrade and expand universities and spend heavily on research. But again, the American Jobs Act is still just a proposal. House Speaker Nancy Pelosi, who represents San Francisco, hopes to get it passed in some form by Independence Day. But it won’t be easy.
- Health: Is Medicare, “junk coverage.” That’s how Michael Cannon describes it. He’s the director of health policy studies at the Cato Institute and an expert on Washington’s health insurance program for low-income Americans. He looks at the latest report issued by Medpac, an independent agency of experts tasked with advising Congress on Medicare matters. In it are nine key challenges the program faces, one of them being a provision that pays doctors more for doing a procedure in a hospital than in an office. So doctors simply affiliate with a hospital, which lets them collect the higher payments regardless of where they practice. Another shortcoming is the program’s tendency to underpay doctors providing primary care and overpay for specialty care, contributing to a shortage of primary care doctors. Cannon says Medicare is set up to serve providers rather than patients. And he rejects the argument that its administrative costs are lower than those of private insurance plans. This faulty conclusion, he says, fails to take into account the $100b in taxpayer funds the program spends each year, not to mention notoriously large amounts of fraud and wasteful spending.
- Denver: The Covid catastrophe hit every city in America last year. No exceptions. But on a shortlist of places that held up surprisingly well, Denver ranks high. A mile high. Like many of America’s western cities, people first came west to Denver for natural resources, in this case gold just before the Civil War. It evolved from more than just a mining encampment with big help from the railroads. It eventually was chosen as capital of Colorado, which became a state in 1876. Another boost came during World War II and the Cold War that followed, when the federal government chose to place many of its strategic bases, labs and other facilities in the hard-to-reach mountains, far from the coasts (much like Russia placed much of their strategic aerospace facilities as far away from Germany as possible). Nevertheless, Denver remained a natural-resource-dependent economy as late as the 1980s. It was oil and gas that dominated then. But the ’80s energy bust was a wake-up call. Like Houston, Denver entered the 1990s with economic diversification a top priority. Its efforts by any measure worked, leading to today’s multi-industry success. To be sure, natural resources remain critical. Weld County, a large expanse of land north of metro Denver, produces energy, yes, but is also an agricultural powerhouse, specializing in livestock. Naturally, as the state capital, Denver counts government as an important sector. But not just state government. Denver also has one of the highest concentrations of federal government jobs outside of Washington. Uncle Sam’s presence includes big offices of agencies like the Department of the Interior. Federal labs conduct research in areas like renewable energy. Then there’s the military, including the U.S. Air Force Academy in nearby Colorado Springs, technically a separate metro area from Denver but with plenty of close ties. As with most thriving cities at the dawn of the 2020s, “eds and meds” provide a backbone of well-paid employment. Boulder is home to the University of Colorado. And while Denver isn’t as heavy on medical jobs as say, Nashville or Philadelphia, institutions like the Centura hospital network certainly have a big role in the labor market. DaVita, which operates a nationwide network of kidney dialysis centers, is a notable private-sector health giant (it generated $11b in revenues during 2019). But we’re only just scratching the surface. Denver has long been a center of the cable television industry (see the item on John Malone and TCI in the Looking Back section below). It’s home to many aerospace firms, including some working on a new generation of supersonic planes. It’s also home to many breweries, from mom-and-pop craft operations to Molson Coors, America’s second-largest brewer after Anheuser Busch. And Anheuser isn’t even headquartered in America anymore (it’s owned by a Belgian firm). Then again, Molson Coors isn’t headquartered in Denver anymore—it moved to Chicago—but it retains a large Mile High presence. Enough about beer. There’s also Arrow Electronics, Dish Networks, Western Union, Liberty Media, VF Apparel… all are Fortune 500 companies headquartered in Denver. That said, it’s not quite in the big leagues when it comes to corporate headquarters. It’s no Dallas-Fort Worth, for example, let alone New York City, Chicago or the San Francisco Bay Area. But Denver remains a much smaller metro area, ranking just 19th in the country with its roughly 2m people. For sure though, companies based in places like the San Francisco Bay Area are adding jobs in Denver, sometimes employing more there than at headquarters. Salesforce and Strava are two Bay Area firms with a big Denver presence. Palantir, which uses Big Data to help clients like the Pentagon, did in fact move its HQ from Silicon Valley to Denver. It’s not just a California exodus thing, however. People and companies are coming from both east and west, often attracted by the outdoors/mountain lifestyle. Firms undoubtedly like Denver’s large pool of college-educated workers, including many software engineers. J.J. Ament, who runs the privately funded Metro Denver Economic Development Corporation, clearly has a lot to work with as he tries to lure employers to the area—the lifestyle, the education, the skills, the sunny weather, expanding public transport, a vibrant downtown… And one more powerful appeal: The city’s airport. This quarter, Denver has more scheduled domestic airline seats than any other U.S. airport except Atlanta. It’s a rare airport with not one, not two, but three airline hubs—United, Southwest and Frontier Airlines all connect traffic there. With long driving distances from most other cities, Denver has always punched above its weight in terms of air traffic. Its stature only grew during the pandemic, when airlines cut nonstop flights and funneled more of their traffic through mid-continent hubs. It was an awful 2020 for sure, with traffic falling 51% from the year prior. But most other hubs saw much bigger declines. One reason for Denver’s relative success: Its appeal to tourists and remote workers looking for outdoor open spaces. Ament, interestingly, says it was already first in the nation for remote working before the pandemic. Make no mistake, the hit to Denver’s large tourism sector was severe; Ament estimates that about half of current Denver-area unemployment is tied to tourism and hospitality. Even as tourism and convention business returns, the Mile High City will still face familiar problems like increasingly expensive housing prices—better than California for sure, but not as cheap as Texas. It doesn’t yet pack the global punch of a mega-city; the airport’s menu of intercontinental nonstops includes just a few flights to Europe and Japan. The Covid crisis, furthermore, did slow what had been rapid population growth. But never mind the setbacks. As economies go, Denver has reached the mountaintop.
Job Markets: Best and Worst
January unemployment rates for selected metro area
source: Bureau of Labor Statistics
- Of the 389 metro areas ranked, Logan, Utah, had lowest jobless rate (2.5%); El Centro, Calif. had highest (16.5%)
- Lowest ranked metros tend to those with heavy exposure to international trade and/or tourism
|Salt Lake City||3.5%|
- The Fish Wars are coming. Uh oh. That sounds ominous. The Angry Planet podcast speaks to U.S. Coast Guard Captain Kate Higgins-Bloom about growing tensions over international fishing. It’s often overlooked but more than 3b people (almost half the world’s population) rely on eating fish for 20% of their animal protein. For many countries, the sea is a primary source of both food and jobs, she adds. But depletion and overfishing are major concerns as demand grows with a rising global middle class. It’s actually not just more people eating seafood but also the growing beef and pork industries using grounded-up fish meal. As local waters become depleted, many fishermen are losing their livelihoods, in some cases turning to illegal alternatives like piracy and drug trafficking. Others feel forced to move, contributing to the worldwide migrant crisis. And the problem will only get worse with climate change. The fishing crisis also involves geopolitics, with China increasingly fishing in distant waters. The South China Sea, in fact, is a flashpoint for future conflict in part because of fishing rights. The U.S. also worries that Chinese fishing fleets, escorted by naval vessels, could dominate the seas around a South American or Caribbean country. Illegal and unreported fishing is a problem more generally, with a third of all purchased seafood caught illegally, estimates Higgins-Bloom. The fish Americans buy at supermarkets, furthermore, are often mislabeled; haddock marketed as cod, for example. According to the National Oceanic and Atmospheric Administration, U.S. fisheries supported 1.7m jobs in 2016, generating $212m billion in sales. Lobster is the highest-value product, followed by crab, salmon, scallops and shrimp. The busiest U.S. fishing port is Ditch Harbor on Alaska’s Aleutian Islands. The largest by value? New Bedford in Massachusetts.
- Economist Harold James tells Princeton University’s Policy Punchline podcast (hosted by student Tiger Goh) about his 2020 account of U.K. financial history entitled “Making a Modern Central Bank: The Bank of England 1979-2003.” The BOE was founded in 1694, to help finance England’s many wars with France, whose less astute financial management meant its borrowing costs were much higher. This often proved more important than the sizeable advantage France had in terms of population. But that was long ago. James starts his story with the prime ministership of Margaret Thatcher, who assumed power after the inflation-heavy decade of the 1970s. Economists at the time wrestled with the question of how to properly define money in an effort to manage if not control its supply. Paul Volcker’s steep interest rate hikes across the Atlantic were naturally a big influence. But more importantly, the BOE in the 1980s was conducting policy with the goal of stable exchange rates with other E.U. countries—many then still hoped Britain would join the euro currency zone. But it proved too difficult to maintain the value of the pound against Germany’s mark, especially after one of the most famous trades of all time: George Soros betting heavily against the pound by shorting it. That was in 1992. Later that decade, the BOE adopted inflation targeting policies pioneered in New Zealand. Ultimately, the U.K. won an opt-out exemption from the E.U., allowing it to abstain from joining the euro. Much later of course, in 2016, the U.K. left the E.U. altogether, in line with a 2016 referendum.
- Some quick facts about the European Union, from The Economist: On the eve of the pandemic, it writes, the E.U.’s GDP was only 12% above its 2007 level; U.S. output was 22% higher. In 2000, the E.U.’s economy was roughly the same size as America’s, measured in purchasing parity terms. It’s now 7% smaller, after contracting nearly 8% last year—U.S. GDP contracted more like 4%. This year, the E.U. expects roughly 4% growth. The U.S. expects more like 6% to 7%. What’s holding Europe back? The Economist mentions the continent’s aging and slow-growth population, its slower productivity growth, its underdeveloped macroeconomic institutions, its overly hawkish monetary policy after the global financial crisis and its overly tight fiscal policy. The E.U. today, as it manages the Covid crisis, is taking a much more expansionary stance with respect to monetary and fiscal policy.
- The latest episode of Liz Covart’s Ben Franklin’s World, a history podcast produced by the Omohundro Institute of Early American History and Culture, zeros in on the origins of American manufacturing. On the eve of the American Revolution in the 1770s, explains author and professor Lindsay Schakenbach Regele, New England had a sizable shipbuilding industry. The colonies more generally were engaged in producing furniture, tools, cloth, leather, alcohol and small firearms. But it was mostly small-scale. Colonists were expected to buy most of their goods from Britain, the mother country. This naturally caused problems during the war for independence, with colonial soldiers experiencing chronic shortages of two goods in particular: clothing and guns. It’s why George Washington, as the first U.S. president, enacted policies to promote textile and firearm production. For example, he established two federal armories, one in Harpers Ferry (in what’s today West Virginia) and the other in Springfield (Massachusetts). The U.S. also relied on private contractors, the most famous being Eli Whitney, the person most associated with the invention of the cotton gin. It was the latter technology, incidentally, that greatly increased production of cotton in southern states, which in turn underpinned the growth of textile mills in New England towns located along rivers. New York became a center of early textile production too. By the War of 1812, the U.S. became self-sufficient in firearms. And by the 1850s, it was producing some of the best guns in the world, aided by the innovation of using interchangeable parts. All the while, the federal government supported the rise of arms and textile manufacturers with ample capital and tariffs on imports (the first major tariff law was in 1816). Frequent wars helped too. Capital also came from wealthy Americans looking to diversify their portfolio of assets by investing in early factories. As for labor, early New England textile mills relied on young females, replaced over time by Irish immigrants as they arrived in large numbers in the 1840s.
- Cable Cowboy is a 2005 book about John Malone and the rise of the cable television industry. Malone took an obscure Denver-based company called Tele-Communications Inc., or TCI, and turned it into what at one point was the nation’s largest cable company. Doing so involved complicated financial deals, navigating heavy government regulation, battling incumbent broadcasters and competing with—and sometimes cooperating with—legendary media magnates like Rupert Murdoch and Ted Turner. In the late 1990s, cable companies—and tech titans like Bill Gates of Microsoft—began to realize that cable wires connected to people’s homes could serve as the transmission lines for this new thing called the internet. With this in mind, AT&T, in 1999, purchased TCI, thereafter renamed AT&T Broadband. It was later merged with Comcast. AT&T itself would in 2005 get purchased by SBC Communications, which kept the AT&T name. The cable industry has since seen a host of new challenges, from satellite TV to digital ads to video streaming services convincing many Americans to “cut the cord” and cancel their cable. Still, 78m American households still get their internet via cable companies, according to the NCTA. And Malone? After selling the company, he developed his firm Liberty Global which today owns European assets like Virgin Media. He also controls QVC and other home shopping networks selling things like housewares, beauty supplies and clothing via television and the web.
- Vaccines: If there’s one silver lining to the pandemic, it’s the big leap in vaccine technology during the past year. Nobody was really sure that mRNA could really work until Moderna, Pfizer and BioNTech proved it by effectively stopping Covid-19. But that might just be the start. Researchers are now hard at work applying mRNA to fighting other ailments including some forms of cancer. Andrew Hessel is particularly optimistic. The geneticist and microbiologist told NPR’s Marketplace Tech that mRNA appears well positioned to eradicate the common flu, for one. He describes how a new age of vaccines has arrived, in which people’s bodies can now be used as a pharmaceutical plant, programmed to destroy whatever germs it sees. Hessel imagines a world where we all own vaccine printers in our home, downloading updates on new threats just as we download software updates on our computers. He calls such a vision “real-time virus protection.” And he’s not talking about computer viruses. In the meantime, investors are pouring capital into companies experimenting with mRNA. John Cumbers, the founder of SynBioBeta, explains to NPR how the technology “approaches the body and natural systems as programmable platforms like computers.” He separately recalls Steve Jobs foretelling the intersection of technology and biology, and how it would change the world.
- Non-fungible tokens, or NFTs, are all the rage. You know, tokens that represent an ownership stake in some digital file, be it a piece of digital art, virtual video game weapons, an image of a cartoon cat or a video of Stephen Curry shooting a 3-pointer. But how do you actually make one? Well, complete beginners to the Crypto space will first need a cryptowallet, a prerequisite to transacting in cryptocurrencies. Metamask is one popular wallet option. Coinbase wallet is another. There you can buy some Ether tokens, the currency you’ll need to transact on the Ethereum blockchain—it’s currently the most widely used platform for NFTs, though not the only one. Next, you’ll need an application that allows you to mint the token you want to create, representing the file you want to sell. Two popular NFT marketplaces are OpenSea.io and Rarible.com. Others are designed specifically for showcasing aspiring artists. You’re now ready to mint your masterpiece. But warning: there are fees. The marketplaces typically charge a minting fee. If you want to showcase your NFT in an online gallery (where collectors and investors hunt for the next Picasso), you might pay another fee. In addition, all transactions on the Ethereum blockchain incur a fee for the energy expended—this is called the gas price, which fluctuates over time. And finally, if you do sell your NFT, and want to convert the Ether tokens you receive into dollars or other real-world currencies, doing so via a marketplace will incur fees.