Issue 6: February 8, 2021
Issue 5: Monday, February 8, 2021
Inside this Issue:
· The GameStop Drama: Another Worrying Sign for Markets?
· The Virus: Signs of Both Hope and Despair
· Q4 Earnings: Big Tech Thrills, Elon’s Musings and other Highlights
· Q4 GDP: The Recovery Continues
· The Fed: Loose for the Long Run
· Debate: Bitcoin Yes or No?
· Labor Markets: The Rich Are Getting Richer
· Amazon: More Jobs for Boston
· Housing: More Signs of Strength, Phoenix Rising
· A Look Back: Origins of the Opioid Crisis
Quote of the Week
“I personally believe that technology can unlock progress and opportunity and that the full story of the Internet has not yet been written” -Facebook CEO Mark Zuckerberg
Ultimately, it’s the virus that will shape the path of economic recovery. Well, there’s some very good news. And there’s some very troubling news. Thankfully, U.S. Covid cases are dropping sharply, and so are hospitalizations and deaths. Critically, there’s a new vaccine to fight the virus, courtesy of Johnson & Johnson. Treatments are advancing as well. But dangerously, new variants of the virus are making it a tougher enemy.
To some extent, the U.S. economy is adapting. During the final quarter of 2020, GDP grew at an annual rate of 4%, which builds upon the third quarter’s 33% resurgence. Still, the economy isn’t back to where it was before the crisis. GDP for 2020 was about 3.5% smaller than it was in 2019. There’s certainly no shortage of prospering companies, not least in the technology sector. As this week’s chart shows below, housing is the country’s single largest sector, and it too is thriving. Unfortunately, the country’s next largest sector—state and local government (think of all those health and education jobs)—is hurting. And so of course, are any sectors involving face-to-face contact, from restaurant dining to air travel.
Household incomes weren’t as propped up by government aid in Q4 as they were in Q3. Nevertheless, consumer spending is holding up pretty well, albeit with altered consumption patterns (fewer restaurant meals and airline tickets but more iPhones and hone furnishings). Savings are unusually high, which bodes well for the recovery. In addition, a late-December stimulus worth some $900b is now making its way through the economy. And still, no meaningful signs inflation. So no pressure on the Fed to retighten the monetary screws.
There are, to be sure, concerns about the mayhem on Wall Street. There’s the drama unfolding between chatroom warriors and Wall Street hedge funds (the whole world now knows about an obscure company called GameStop). More general are concerns about irrational exuberance in the stock market—and the bond market, and the commodity market, and the Bitcoin market, and so on). Even if it’s not an overpriced asset market, rising prices trigger other concerns, including their tendency to worsen inequality. In the Markets section below is a stunning set of facts about the current labor market: Employment is up 1% for high-wage workers, down 6% for middle-wage workers and down 25% (!) for low-wage workers. Sounds like that might be a cause of many current social and political dysfunctions.
But again, the dysfunction that matters most right now is what the virus is doing. Can it be stopped? How soon?
This week brings another busy round of earnings. Amazon and Google will surely tell more tales of good fortune. Pfizer might share updates about how well its vaccine fights new strains of Covid. ExxonMobil needs to convince investors it’s prepared for what seems a dawning of the oil age. Ford will surely field questions about that too. Just how busy is UPS delivering all that e-commerce? McKesson and AmerisourceBergen are lesser-known names with massive roles in distributing pharmaceuticals, including vaccines. Solar Winds has a lot to answer about the giant hack it experienced. Ask Match.com about the dating scene. Speaking of which, maybe Hershey will have some ideas.
· Apple: Is there such a thing as too successful? Covid-linked operational challenges notwithstanding, Apple produced mesmerizing financial results in 2020, with record performance across all geographies. During just the final three months of the year, revenues rose 21% y/y to an astounding $111b. Full year revenues were close to $300b, roughly equivalent to the GDP of Chile. Such dominant performance, however, might pump more air into the argument that America’s tech giants are becoming too powerful and influential, to the detriment of competitors, consumers, suppliers and other stakeholders. Washington is already looking askance at an allegedly anticompetitive arrangement Apple has with Google. Epic Games, a video game maker, believes Apple’s App store platform collects monopoly-like fees. Consumers, for their part, are certainly willing to pay premium prices for Apple’s products. And that’s true all over the world—nearly two thirds of the company’s revenue come from outside the U.S. Last quarter, iPhone sales grew 17% as people upgraded to new 5G-equipped models. That’s by far Apple’s best-selling product. But iPads, wearables and Macs all recorded impressive growth as well, likewise boosted by more people working and entertaining themselves at home. Government stimulus money helped too. Increasingly important to Apple’s business are services, which include subscription products like Apple Music, Apple Arcade, Apple Fitness and Apple TV+. But will it build an Apple Car? That’s the burning question as others in Silicon Valley race to participate in the shift to e-vehicles. To mitigate regulator aggression, Apple touts the $350b it’s investing in the U.S. economy. It’s a leading U.S. innovator, with technologies like its new M1 microchips. And it champions the cause of privacy—its business model isn’t built upon collecting people’s personal data like at Google and Facebook. It does face one other potential threat, in this case hinging on geopolitical trends: Apple depends a lot on China, both for sales and production. Dan Wang, an analyst at Gavekal Dragonomics, said on the Odd Lots podcast that the four U.S. companies mostly likely to be targeted by Beijing in a trade war would be Boeing, Cisco, Qualcomm and indeed, Apple. China hasn’t done so yet though and might never—Wang explains how Apple employs more than 1m people in mainland China, directly and indirectly through subsidiaries like Taiwan-based Foxconn.
· Microsoft is another tech giant producing monstrous profits and revenue growth at a time when the overall U.S. and global economies are shrinking. Clearly, what people are not spending on travel and restaurant dining, they’re spending on products like Xbox video game consoles and Surface tablets. But more importantly for Microsoft, companies around the world (big and small) are using its technology to capture the advantages of new digital technologies. That includes cloud computing, for which Microsoft’s Azure commands a number two market position behind Amazon’s AWS. Long gone are the days when Microsoft could rest comfortably on the universality of its Windows operating software. Windows and Office software are still, to be sure, used by legions of people across the globe. But Azure, with revenues rising 30% last quarter, now generates more revenue than Windows. The company also owns LinkedIn, a professional social site with more than 700m users. Advertising revenue on LinkedIn, by the way, is way up. Another offering is Microsoft Teams, with worker collaboration services that compete with rivals like Zoom and Slack. Also on Microsoft’s radar: Yes, the auto market—it just announced a deal to help General Motors develop autonomous cars.
· Facebook: Here again, a tech giant with remarkably strong profits and growth in 2020. Ad spending on its platforms—Facebook itself, WhatsApp and Instagram—flourished as people spent more time on their computers and phones. Something like a third of all human beings on planet earth are regular users of Facebook. That’s 2.7b people, not to mention more than 200m companies, viewing one or more of its apps each day. But Facebook is also one of America’s most controversial companies. Its business model, after all, rests upon knowing extraordinary amounts of personal details about its users. Because it knows you so well, Facebook’s algorithms can greatly influence and accurately predict your behavior, including your buying behavior. That means it can offer extremely targeted ads—an airline, for example, can have its latest fare sale shown to just people living in Denver earning more than 100k a year who’ve travelled internationally in the past year. Most of the big titans of corporate America spend heavily on Facebook advertising—a Pathmatics study from 2018 ranked Procter & Gamble and Walmart as the top spenders. But the company has repeatedly come under fire for not adequately protecting this sensitive data. Users of its platforms, meanwhile, have spread hate speech and instigated violence, with algorithms at times elevating the visibility of toxic posts (they’re often what people read and share). Just how much is Facebook—and social media more generally—influencing politics and society in nefarious ways? New forms of communication do have a way of upending things: cable TV, radio… even back to the printing press, which enabled the Protestant Reformation and centuries of European religious war. The company naturally downplays its influence, though it does see a need for more and better government regulations, including changes to the Section 230 rule that limits a platform’s liability for things posted on its site. The controversies, alas, don’t end there. Antirust officials in Washington is now suing Facebook in hopes of reversing its takeovers of WhatsApp and Instagram. Then there’s an escalating war with Apple, which CEO Mark Zuckerberg increasingly sees as “one of its biggest competitors.” He’s particularly concerned about Apple’s new privacy rules that will require all apps to ask for user consent when deploying advertiser tracking software. Billions of people, of course, use the Facebook app through their iPhones and iPads. Looking beyond the advertising business, Facebook is betting big on virtual reality (VR), having purchased the gaming company Oculus in 2014. It sees applications far beyond gaming, calling VR the “next logical step” after mainframes, then PCs, then browser-based computing and currently mobile. More than 60 third-party Oculus developers are already generating “revenue in the millions.” Separately, Facebook is eager to foster more social commerce, with Instagram in particular becoming a popular shopping site for young people. The company would like to have more exposure to the giant travel sector. Attempts to develop a cryptocurrency have been met with government and public resistance. Top priorities currently are building online communities and improving capabilities for private messaging. Unlike Apple by the way, Facebook isn’t dependent on China—its apps are blocked there. So what next? Government lawsuits, advertiser boycotts and media criticism haven’t dented its profits. This year, however, all of Big Tech might see profits cool as the world returns (at least in some fashion) to its pre-Covid norms.
· Johnson & Johnson is one of the most important companies in the world right now. Last week, it shared encouraging results from the phase-three trial of its Covid-19 vaccine. Assuming final approval, this would give the world another powerful weapon to stop the pandemic. Especially helpful is the fact that J&J’s vaccine can work with just one shot, not two. It’s also easier to distribute than vaccines from Moderna and Pfizer. In the meantime, J&J’s business is going strong, as its latest earnings report makes clear. The company has three major divisions, one selling drugs for various maladies, another selling medical devices and a third selling consumer health products under household brands like Tylenol and Listerine. Its best-selling drug happens to be for blood clots. Medical devices had a tougher time in 2020 as people deferred non-urgent procedures like knee replacements. That activity is starting to revive though. Two other facts about J&J: It’s based in New Jersey, a Silicon Valley of sorts for the pharma sector (Merck and Bristol-Myers Squibb are two other New Jersey-based pharma giants). Finally, one of J&J’s board members is Dr. Jennifer Doudna, who shares a Nobel prize with Dr. Emmanuelle Charpentier for discovering CRISPR/Cas9, a gene-editing technology. That, said the company, is “considered to be one of the most significant breakthroughs in molecular biology in the past decade.”
· Tesla: How inevitable is the shift to electric vehicles? Consider this: Last week General Motors—THE General Motors—said it would phase out all gas and diesel engine cars (if not trucks and heavy SUVs) by 2035. As the leader in electric vehicles, and more broadly a leader in battery technology, Tesla is positioned to be a dominant force in both mobility and energy (two gargantuan industries). To be clear, it’s not one of those Big Tech companies earning monster profits—it eked out just a small profit in 2020, and with help from government subsidies. This big gap between Tesla’s largely unprofitable present and its colossal future potential is the backdrop to a fierce debate about the firm’s stratospheric market value. Is Tesla really the most valuable car company in the world, as its ever-escalating stock price suggests? Doesn’t it matter than rivals produce far more vehicles? Is Tesla not the ultimate “story stock?” During its earnings call, the firm’s iconic CEO Elon Musk took a stab at defending the valuation. He mentioned, for one, the potential for its self-driving cars to serve as robotaxis. It’s also developing new products, including a Cybertruck, a Roadster and freighter trucks. Musk says an electric van will probably follow as well. But a major limitation is access to batteries, which are in high demand. Tesla is both buying from suppliers like Japan’s Panasonic and building its own at a big factory in Nevada. It’s building new car factories, meanwhile, in Berlin and Austin, having just opened one in Shanghai. Its original factory is in California. Tesla certainly has a loyal base of customers. It achieves distribution efficiencies through direct sales rather and a dealer network. It has “green cred” at a time when environmentalism and stemming climate change is top of mind. But its future is hardly assured. Established players like GM are investing tens of billions to compete in the electric vehicle space. And Big Tech wants in too, with Google, Amazon and Microsoft all investing in the space. Apple might follow.
· Lockheed Martin is happy to have exited the commercial airliner business decades ago. While its rival and sometimes-partner Boeing faces deep financial and operational challenges, Lockheed is thriving. Its top customer is the U.S. defense department, for which it builds iconic military tools like the F-16 fighter jet and the Black Hawk helicopter. Its products are also instrumental in conducting U.S. diplomacy: The U.S. agreed to sell F-35 jets to the United Arab Emirates, for example, as an inducement to sign a peace treaty with Israel. Lockheed’s executives spoke about that in their earnings call. They also provided updates on its hypersonic missiles and its space business. The U.S. plans to spend $740b on defense this fiscal year, which means no shortage of money to go around for companies like Lockheed. The challenge is continuously innovating and executing to help the Defense department carry out its strategies.
· Travelers, which reported results two weeks ago, is one of the country’s largest insurance companies. Insurance, make no mistake, is a giant industry. U.S. insurers wrote $1.3 trillion in premiums during 2019 (Insurance Information Institute). Even during the pandemic, even with record high industry property and casualty claims, and even with record low interest rates that hobbled investment returns, Travelers reported strong financial results for 2020. What do people insure? Most importantly their health, their homes, their vehicles, their lives, their retirement income, their liability while driving… maybe their pets or precious valuables. And that’s just individuals. Companies purchase insurance plans for lots of things too, including workers compensation claims and management liability, both big products for Travelers (it claims to be the country’s largest corporate insurer overall). There’s a market for insuring bonds too, protecting against an issuer’s default. The industry involves not just buyers and sellers of insurance plans, but also a large network of middlemen (for lack of a better term). Insurers typically distribute their plans through a network of tens of thousands of agencies and brokers. Those low interest rates definitely hurt, with Travelers allocating 58% of funds to fixed income securities (mostly bonds). It can’t play too fast and loose with its investment given future contingencies. But it does put about a quarter of its investment pool in so-called alternative assets like private equity. It invests in real estate assets as well. Insurance firms are thus key customers for investment firms, including hedge funds.
· Fifth-Third, a big Cincinnati bank, gave some insight into which sectors in the economy are performing well, and which are lagging. Speaking about corporate banking activities during its Q4 earnings call, executives said the industrial, retail, healthcare and financial sectors were improving, while hospitality and energy saw “continued sluggishness.” Like other banks, Fifth-Third is currently processing and distributing Washington’s latest round of forgivable paycheck protection program (PPP) loans to small businesses. It expects to do about $2b in PPP loan originations this year. Some additional data points about the bank’s exposure to commercial real estate, a current area of trouble. It’s about 15% of its total lending. And of that 15%, 28% involves apartments and 14% involves offices. Homebuilder, retail and hotels each account for another tenth or so.
· Finance: Companies raised a “gobsmacking” amount of money in January, reports the Financial Times. How gobsmackingly large? At least $400b. This includes $340b worth of borrowing just through Jan. 22 and another $64b by selling equity. This, says the FT, is some $170b above the average for January. Interest rates are low. There’s lots of stimulus money chasing bonds and stocks, implying lots of demand. And firms in hard-hit sectors like travel need more funds to keep themselves going until Covid recedes.
· Housing: The S&P CoreLogic Case-Shiller index, which gauges movements in U.S. house prices, showed a nearly 10% y/y increase in November. Yes, it’s another sign of a booming housing market, though thankfully (we hope) not out of control like in the mid 2000s. Phoenix, topped the list with a 14% gain. Next came Seattle and San Diego.
· Education: A PBS Newshour report last week, citing USAFacts, said 36% of American households have cancelled plans for higher education during the Covid crisis. Indeed, these are tough times for colleges and universities, which are also losing most of their foreign students while borders remain closed. Affordability is another problem. Still another is the rise of online offerings (sometimes called MOOCs, or massive open online courses). But the NewsHour looks at one area of higher education that’s growing rapidly right now: short-term programs to develop specific skills in high demand. Some are offered by community colleges. Some are backed by companies like Amazon and Google. Typically, credits earned during programs can later be used toward completion of a four-year degree. Gerald Chertavian, founder of the non-profit Year Up, says 5m young adults are out of school and out of work, without more than a high school degree. But in the meantime, companies have millions of unfilled jobs that require certain skills. Will more people forego a full college degree to pursue short-term certificates? It’s yet another potential challenge for established institutions.
· Airlines: 2020 was the worst year ever for the global airline industry. No other year was even close. But America’s major passenger airlines—Delta, American, United, Southwest, Alaska, JetBlue, Hawaiian, Spirit, Frontier, Allegiant and Sun Country—rode out the storm with government aid and highly accessible capital markets. They also cut costs dramatically. And cheap jet fuel helped. But the industry remains in crisis mode—airport traffic last week was still down by about two thirds y/y nationwide (TSA). But if and when Covid does recede, leisure travel should rebound quickly. And business travel might not be too far behind given how well so many U.S. companies are doing. Yes, some might decide to stick with videoconferencing rather than in-person visits. But as United has said: “The first time someone loses a sale to a competitor who showed up in person is the last time they try to make a sales call on Zoom.” There might be another worry though, particularly for the Big Three global carriers (Delta, American and United). Past public health scares remember—SARS, MERS, H1N1, bird flu, Ebola—never really damaged U.S. carriers much. But after Covid, governments might be hyper-cautious at every sign of a potential virus. They might, in other words, be much more ready than in the past to quickly close borders and suspend air travel, just in case. Airlines, therefore, could face a future of more numerous public health disruptions, even the threat winds up being harmless.
· Waste management: How universal is the usefulness of data analytics? Very. It’s even applicable to such mundane activities as picking up the trash. Michael Allegretti is the Chief Strategy Officer of Rubicon, a software company that uses advances in data science to help governments and companies manage their waste. He spoke last week at a Brookings event, highlighting the growing importance of managing waste as consumers and even Wall Street increasingly demand green behavior. Some investment firms, in fact, are starting to include waste management practices in their criteria for judging whether companies meet “ESG” objectives (in other words, acceptable environmental, social and governance practices). It’s no small challenge for big producers of waste (big box retailers, for example) and those responsible for collecting waste (often local governments but in some cases private firms awarded franchises for specific neighborhoods). The U.S., said Allegretti, is “addicted to landfills,” all the more so since China (in 2018) decided to stop importing America’s recyclable materials that didn’t meet its increasingly high standards for purity. This badly hurt the recycling market. In the meantime, more and more governments within the U.S. are banning certain materials from landfills (Styrofoam for one). Adding to the challenge: Landfill owners are financially incentivized to attract more truckloads of trash, not less. Rubicon, for its part, sells software that aims to make local trash pickup more efficient and cost-effective. Sub-optimal routings, Allegretti explains, is the most common inefficiency. Ultimately, the goal is to adopt a “circular economy” approach, whereby everything is reused, and nothing sent to landfills. Here again though, the Covid crisis is a setback, with residential waste reaching record levels. Commercial waste is down, yes, but starting to grow again as businesses reopen. Covid is also forcing government sanitation departments to manage through staffing shortages and budget constraints. The health crisis is causing some new waste management problems too, like the littering of masks in public spaces.
· Stocks: Strange things are happening in stock markets. A relatively obscure video game retailer, once owned by Barnes and Noble, became the talk of the town last week. Its stock oddly spiked to unfathomable levels, driven up by individual traders linked to a chat forum called “Wall Street Bets,” on the website Reddit. Even more strangely, it for a time became the most traded stock in the world. Other typically sleepy stocks like AMC movie theatres and Blackberry exhibited similar behavior. What the heck is going on? Should the Feds investigate? Is it another sign of a stock bubble? Is it a populist revolt against Wall Street? Tracy Alloway of Bloomberg shines the spotlight on the options market, which is playing a central role in this drama. It’s now easy and cheap to purchase options on retail trading platforms like Robin Hood. And sure enough, option trading has grown sharply. People are buying short-term call options on stocks like GameStop, which gives them the right to buy the stock at a future date for some given price, say $50. If the actual price is higher on that future date (say $60), good news: you get to buy it at $50 and then sell at $60. Big profit. Here’s the thing: Firms who sell the options are only trying to earn fees, not win any bets. To protect themselves, they buy a bunch of the stock too, just in case the price does go up beyond the strike price. And all that buying can lead to a big run-up in the price. In September last year, Alloway and her Odd Lots podcast co-host Joe Weisenthal did an episode on exactly this phenomenon. Their guest was Benn Eifert of QVR Advisors, who even then noted a huge increase in small traders buying bullish, very short-term call options on stocks.
· Stocks: Why GameStop? And AMC, Blackberry, etc. Apparently because they were among the most shorted stocks on Wall Street, meaning lots of hedge funds in particular were betting against them. As it happens, many business leaders including Elon Musk have a deep loathing for short traders (after all, they for years have bet against Tesla). Who knows the true motivation of all the retail traders congregating on Reddit message boards? But some clearly relish inflicting losses on traditional Wall Street power brokers. Of course, it’s not just the hedge funds getting hurt, but also the pension funds, university endowments, etc. that invest with them.
· Stocks: A big bubble? Not just the stock market, but the whole “everything rally” sensation? Bitcoin, SPACs, companies rushing to raise debt and equity… The Financial Times presents an alternate view. The fact is, bond yields are so low, and expected to stay low, that investors almost need to stick with stocks even if valuations appear high. At the same time, the world is awash in savings, amplified by massive amounts of central bank money creation. A bullish stock market, the bulls say, is therefore part of a new normal, and it will stay like that for years. Are they right?
· Labor: Kevin J. Lansing of the San Francisco Fed draws a clear conclusion: The negative economic consequences of COVID-19 have fallen disproportionately upon low-wage workers. His studies show that the employment rate for low-wage workers (those making less than $27,000 per year) was down by about 25% y/y in January 2020. That’s painful. In contrast, the employment rate for high-wage workers (those making more than $60,000 per year) has fully recovered and now stands some 1% higher y/y. The employment rate for middle-wage workers (those making between $27,000 and $60,000 per year) is down by about 6%.
· Bullish on Bitcoin: A hedge against inflation? A better way to protect wealth than buying gold? A new currency to replace dollars, euros, yuan, yen, and so on? A way to eliminate bank middlemen from transactions? A tool to protect civil liberties against government power? To fervent supporters, Bitcoin is all of these things. What exactly is it? It’s a cryptocurrency made possible by the invention of blockchains, which are more or less a secure way to record transactions in cyberspace—it allows two people to safely exchange money without any intermediaries. This means commerce with less friction and lower costs. Bitcoin is even better than gold, say its champions, because gold is hard to move around, costs money to store and isn’t easily divisible. The supply of gold is also dependent on mining discoveries, whereas Bitcoin supply is programmed to steadily increase by a little more than 1% each year, with an eventual cap (there will only ever be 21m Bitcoins; there are currently about 19m). Its future utility and value are becoming clearer as more established institutions and investors (i.e., wealth managers) jump in. Indeed, it’s becoming a more mainstream investment asset, hence the extreme price appreciation of late. Less mainstream are fears of social anarchy and hyperinflation. In this dystopian world, Bitcoins would be the only trusted currency. And even well short of such a nightmare, if enough people use it, governments will be forced to accept its reality, much like they’ve been forced to reckon with disruptive and sometimes legally-dubious services like Uber and Airbnb. In many less developed countries, or countries in chaos like Venezuela, Bitcoin is already proving a useful way to overcome hyperinflation, or merely the lack of credit cards or high middlemen fees for cross-border remittance payments.
· Bearish on Bitcoin: Unfortunately, Bitcoin is all too often associated with illegal activity, simply because it’s anonymous and harder to track. That’s one reason why governments would never allow it to flourish, skeptics say. Some voices in Washington certainly share this sentiment. Nor would they want to have their own currencies displaced. Managing a currency, after all, can be helpful in advancing important policy goals like mitigating economic downturns or preventing deflation. For most people, Bitcoin remains hard to buy and sell. There are still no exchange-traded Bitcoin funds that everyday investors can use. Stories about people losing millions of dollars of Bitcoin because they’ve lost their access codes don’t inspire mass acceptance. Add to this the tales of Bitcoin theft. Bitcoin today has few practical applications. Its wild price fluctuations make it ill-suited as a payment tool—who knows what it’s real value will be a day from now. As for its investment value, it doesn’t produce anything; it’s just some software code. Expect the Bitcoin bubble to pop, say the bears, when the Federal Reserve ultimately withdraws its stimulus and hedging against inflation becomes less fashionable.
· Monetary Policy: Last week, the Fed’s open market committee (FOMC) held one of its eight meetings per year. But it wasn’t particularly eventful. Chairman Jerome Powell more or less said policies would remain as they are, in other words, holding its interest rate target to near zero, tolerating 2%-plus inflation for a while and buying lots of government bonds. He firmly rejected the idea of letting up on the easy money gas pedal any time soon. That wouldn’t be smart, he argued, while some 9m people remain unemployed. In percentage terms, the unemployment rate is around 7%. But that understates matters because the labor participation rate is well below pre-pandemic levels. Powell thinks the economy is still a “long way from full recovery.” What’s more, the recovery from springtime lows has lost momentum this winter. So has the labor market. Certain areas of the economy are indeed very strong (housing, technology, manufacturing, home furnishings, etc.). And aggressive monetary stimulus is surely a big reason why, the Fed argues. Ultimately, a full economic recovery depends on defeating the virus, which continues to kill thousands of Americans every day. Powell denied that easy money is fueling dangerous asset price inflation. That’s more the result of vaccine optimism and fiscal policy, he insists. Besides, it would be too narrow for the Fed to focus on just asset prices. Let’s say it did raise interest rates to bring stocks down to more rational levels. Well, what if that interest rate hike simultaneously hurt the broader economy? That would ultimately be worse for financial markets and American savers. But isn’t goods-and-services inflation—always a risk when expanding the money supply—the biggest risk of all? Powell doesn’t sound worried. It would be much harder to manage inflation that’s too low rather than too high. What’s more, disinflationary forces—globalization, aging demographics, advancing technology…—have been a persistent force for a quarter century. Sure, things could change, but they’d likely change gradually, with time to react. Eventually, the Fed will raise interest rates and withdraw stimulus, just as it did after the 2008/09 crisis. Of course, easy money withdrawal can cause big problems, as the infamous 2013 “taper tantrum” attests. In any case, the Fed’s top focus right now, according to Powell, is getting Americans back to work.
· Foreign Policy: The U.S. General Accounting Office (GAO) published a report about the U.S. involvement in Afghanistan. Washington, it concluded, has spent $141b on reconstruction in the country since 2002.
· Boston: Amazon will expand its Boston workforce by another 3,000 people, working mostly on Alexa, AWS (the company’s cloud computing service), Amazon Robotics and Amazon Pharmacy. The jobs will be filled over the next few years. Boston was a tech hub even in the earliest days of computing and information technology. It remains so today, thanks in large part to a high-skilled labor pool fostered by the city’s many world-renown universities, led by Harvard and MIT.
· Hawaii: No state was hit harder by Covid’s assault on tourism than Hawaii. For years, it enjoyed a long uninterrupted boom, welcoming visitors from primary source markets like fast-growing west coast cities (i.e., San Francisco, Los Angeles and Seattle) and overseas markets (most importantly Japan). Even during the 2008/09 recession, tourism to Hawaii held up pretty well. Not this time. Arrivals dropped to near zero in April and stayed that way through September. Only this fall did a few tourists start trickling back, in conjunction with new Covid testing protocols for airline passengers. In 2019, 10m people flew to Hawaii, spending close to $18b in the state. Hotels captured the biggest share of that spending, followed by food and beverage providers. Visits were still down 77% y/y in November, the latest month for which statistics are available. First Hawaiian Bank, in its earnings call last month, did say that arrivals increased meaningfully in the second half of December, coinciding with the holiday season. But that’s since petered out, with only about 4,000 people a day now arriving (compared to about 30,000 a day in a normal year). Though Hawaii is in much better shape than mainland states in terms of its Covid outbreak, its economically vital tourist sector is feeling the impact of the severe outbreak in Los Angeles most notably. As First Hawaiian stated: “It’s likely that arrivals from the West Coast, our largest market, are being negatively impacted by the recent surge in cases there.” The bank did say however, that Hawaii’s housing market was strong, with the median price of a single-family home reaching $870,000. Housing transactions in December were up a stunning 36% y/y. Once Covid recedes, there’s little doubt the tourists will return—think of all that west coast tech money just itching to be spent.
· New York/New Jersey: Nicole Gelinas of the Manhattan Institute, speaking on a Bond Buyer podcast, discussed some of the issues facing the nation’s biggest port authority. The PANYNJ, responsible for transportation infrastructure in New York and New Jersey, is unlike New York City’s subway system, and unlike New Jersey’s rail network, in that it does not depend on tax revenues. It self-finances through the “enormous profit” it earns each year from bridge and tunnel tolls. The airports it manages—JFK, LaGuardia and Newark—also produce profits in normal times (New York happens to be the second busiest airline market in the world after London). These profits enable the organization to fund lossmaking activities like the Port Authority bus terminal near Times Square, the Path rail network and development at the World Trade Center site. The question now is whether air travel will recover post-Covid. Bridge and tunnel traffic, Gelinas believes, is a more likely bet to rebound quickly. The PANYNJ, by the way, did not receive any funding from Washington’s latest stimulus bill. The MTA (running the New York subway) did get money, as did NJ Transit. But it will cover mostly short-term operating needs, not long-term capital investment. Both agencies were mired in difficult financial straits even before the pandemic. MTA, for its part, plans a big fare hike. On a somewhat brighter note, public transit appears to have a new friend in the White House—President Biden famously spent his career commuting between Washington and Wilmington by Amtrak.
· Orlando: It’s not just Mickey Mouse and Goofy they’re coming to see. People are coming to Orlando for high tech jobs. Luminar, a startup betting on Lidar technology to enable self-driving vehicles, finds the Florida city advantageous. So do other companies investing in Lidar. That’s because Orlando happens to be home to the U.S. military’s largest laser and photonics research facility, as the podcast Autoline Daily notes. It’s also home to the giant Central Florida University, noted for its computer science programs. Not too far away, meanwhile, is Florida’s space coast, home to the Kennedy Space Center and many high-tech aerospace jobs. It understandably doesn’t get the same attention as Silicon Valley or Austin or Boston. But Orlando is clearly an up-and-coming tech hub. Nothing goofy about that.
· China: Asia Perspectives, a podcast from The Economist Intelligence Unit, spoke with Lion Rock Institute co-founder Andrew Work last summer about China’s new digital currency. The country is currently trialing the concept, hoping to create the world’s first government-run e-currency. This is not to be confused with everyday digital transactions like making a payment with PayPal, Work explains. That’s just electronically moving regular money from one entity to another. A digital currency is its own form of money, with each unit having a unique identifier (like each paper dollar has a serial number). It’s basically a digital version of cash. Work also warns against confusing China’s digital yuan with a cryptocurrency like Bitcoin. Those run on decentralized blockchain nodes to ensure nobody’s in control. In this case, the People’s Bank of China (PBOC) is very much in control. In fact, greater control and oversight of transactions is a primary goal—to stop money laundering, for example, or regulate shadow banking (or more controversially, to track political dissidents). Also unlike Bitcoin, there’s no artificial supply on how much e-yuan the PBOC can ultimately create. Similarly, Beijing will be able to delete units at will. Will China’s new digital currency reduce U.S. dollar dominance in global trade? Work thinks not, if only because many other governments will refuse to allow their firms to accept it. But it could become a dominant form of transacting business within China. Will the U.S. launch a digital dollar? It’s something the Federal Reserve is studying. But it seems a long way off, complicated by thorny issues like privacy.
· India: It’s the second largest country in the world with more than 1b people. But India only ranked ninth among U.S. trading partners, measured by total exports and imports, in 2019 (Department of Commerce). For most of 2020 (December data isn’t yet available), the ranking fell to 11th. Unsurprisingly, India’s airlines buy lots of Boeing aircraft. But an even bigger export category for U.S. companies is fuel (especially oil). Also larger in export value than aircraft are precious metals. From India, the U.S. imports precious metals too (most notably diamonds) and pharmaceuticals (India happens to be the world leader in vaccine production). India also plays a critical role in providing software engineers to U.S. companies, often via outsourcing. Companies like Wipro, TCS and Infosys, leaders in IT outsourcing services, are among India’s most prominent multinational firms. They (along with giant conglomerates like Reliance Industries) were also key to helping India achieve very high levels of annual GDP growth since 2000, resulting in sharp reductions in poverty. That said, it hasn’t achieved China’s level of global importance in the realm of international commerce. That’s in part because India didn’t urbanize as quickly—it remains heavily agricultural (farmers are now protesting government efforts to boost agricultural productivity). Nor did India ever industrialize quite so extensively as China, or invest so heavily in infrastructure, thereby limiting its role as a manufacturing center for multinationals. Another challenge for India’s economy is that it’s extremely dependent on foreign oil—GDP growth (and the value of India’s rupee) tends to rise when oil is cheap and lag when oil is expensive.
· The opioid crisis: Sam Quinones, in his influential 2015 book “Dreamland,” chronicles the history of America’s opioid crisis, and the economics that fueled it. The story begins to unfold in the 1990s, in the small, impoverished town of Nayarit in Mexico’s pacific state of Xalisco. There, heroin producers pioneered a novel and strikingly effective business model. Fellow townsman already in the U.S. (many had illegally come to the Los Angeles area for work in the 1980s) established small cells in suburban areas throughout the nation. Each cell acted as a franchise, with a manager to coordinate with suppliers back home, a local phone operator fielding calls and taking orders from an apartment, and a team of drivers supplied with housing, food and a weekly wage. Quinones likens the operation to a pizza delivery service, whereby drivers are dispatched to deliver black tar heroin to addicts, typically in some random parking lot. The cells avoided the big cities, where heroin distribution was competitive and often violent. The “Xalisco boys” by contrast, never carried guns (which reduced jail sentences if caught by law enforcement), never battled for turf and often dressed in a clean-cut and inconspicuous manner. They kept a low profile and even carried business cards with a customer service hotline. Few had any desire to stay in the U.S. Their goal was merely to return home with enough money to buy items like Levi’s blue jeans, a status symbol in many villages. The dealers would in fact accept blue jeans as payment if addicts couldn’t pay in cash. Drivers carried balloons full of heroin in their mouths, small enough to quickly swallow if stopped by the police. The target customer was suburban middle-class whites, at first in hard-hit Appalachian regions like Portsmouth, Ohio, the “Dreamland” that Quinones refers to in his title. Perhaps most deviously, the Xalisco boys targeted methadone clinics—no better place to find addicts than outside a treatment center. They even gave free samples to keep people hooked. This, however, is only part of the story? Why were so many Americans addicted to opioids in the first place? Economic and social despair stemming from closed factories and mines across the deindustrialized U.S. heartland is one theory. The rural/suburban opioid epidemic, some argue, is akin to how lost manufacturing jobs in cities contributed to the urban crack cocaine epidemic of the 1980s. But most importantly, medical professionals in the 1990s began taking a more aggressive approach to treating chronic pain, influenced by aggressive marketing by a Connecticut company called Purdue Pharma. Its OxyContin pills, most notably, were erroneously—and fatally—trumpeted as non-addictive. In fact, they were highly addictive. The Xalisco Boys weren’t the only ones offering free opioid samples. So was Purdue Pharma. It was also offering doctors free trips to pain management seminars and other junkets. By 2016, OxyContin had generated more than $30b in revenue. Some less scrupulous doctors opened “pill mills” selling as much as they can. According to a report by the research arm of Congress (CRS), opioid overdose deaths tripled from 1999 to 2014. In 2017, it adds, the age-adjusted rate of opioid overdose deaths in the U.S. was nearly 15 per 100,000 people, up from 2.9 per 100,000 in 1999. More people were dying from drug overdoses than auto accidents. In 2016, more than 2m Americans were diagnosed with opioid use disorder. The CRS divides the crisis into three phases. The first (between roughly 1990 and 2010) most importantly involved prescription overdose deaths. Phase two, starting around 2010, saw more deaths from illegal heroin like the Xalisco Boys provided, this after authorities cracked down on overaggressive marketing and treatment. A dangerous third phase began around 2013, with the advent of potent new man-made opioids, most importantly fentanyl typically originating in China. Fentanyl alone led to more than 37,000 U.S. overdose deaths in 2019, NPR reported last year. Opioid deaths in general are said to have only worsened during the Covid pandemic. So this is not really history—it’s still going on. Purdue Pharma, by the way, filed for bankruptcy in 2019 but remains in business. Many other companies were forced to pay heavy fines for their involvement in the crisis—just last month, Washington sued Walmart for “unlawfully’ distributing opioids though its pharmacies. The consulting giant McKinsey is being held liable too.
· Demographics are density. Or so says the old aphorism. In the U.S., one of the most consequential demographic shifts for businesses is the aging population. Chicago-based Equity LifeStyle Properties, which owns recreational vehicle parks and sells low-cost factory-assembled houses, gave an important fact in its Q4 earnings call. The number of Americans aged 55 and older, it said, is expected to grow 18% from 2020 to 2035. Roughly 10,000 Baby Boomers, it adds, will turn 65 every day through 2030. That’s a big addressable market for companies. But it also poses challenges for the economy. A large senior population inevitably means greater health care needs. Then there’s what BlackRock’s Larry Fink calls the “silent crisis of retirement.” Yes, that sounds a bit self-serving given what he does for a living (i.e., sell retirement plans). But the numbers support his thesis. A recent Federal Reserve study found some 17% of Americans 45 to 59 years old had no retirement savings at all. Many others are putting aside some money but not nearly enough.