Issue 7: Feb. 15, 2021
Issue 7: Monday, February 15, 2021
*Please view econweekly.biz for a video presentation on the U.S. economy in 2020
Inside this Issue:
Bubble Trouble? Stock Markets Rise Yet Again
The Crypt Script Flipped: Digital Currencies Inching Toward Mainstream
General Motors: Billions for Batteries
Disney: With Theme Parks Dark, Profits Frozen
Startup Nation: Americans Opening New Businesses in Record Numbers
Toys and Boats: Why Can’t Every Year Be Like 2020?
Free Trade: Good or Bad?
World-Changing Technologies: ARK Gives its Picks
Remembering Bad Times: The Panic of 1837
And This Week’s Featured Place: Silicon Valley, How it Came to Be
Quote of the Week
“Extended periods of unemployment can inflict persistent damage on lives and livelihoods while also eroding the productive capacity of the economy. And we know from the previous expansion that it can take many years to reverse the damage.”
–Federal Reserve chair Jerome Powell
Bubble Trouble? Stock prices rose again last week. So did oil prices. Bitcoin jumped again. Housing prices are way up. Does this portend a coming bust? It’s the question everyone is asking.
Ironically, the most-widely followed measure of price movements—the Department of Labor’s index of consumer prices (CPI)—once again showed almost no signs of sustained increase. One of the items it measures—energy—did show a January spike. But the cost of food, cars, clothing and health care showed no meaningful increase. The reading even showed negligible inflation for housing, mostly because of the outsized influence of falling rents (the index typically captures rising house prices over longer periods). In any case, the theme is clear: Prices for everyday household purchases are stable. Prices for financial assets are off to the moon.
How about wages? Are they rising? Certainly not for the millions of people still unemployed, nor in many cases for lower-income Americans still working. A still-frail job market, indeed, is front and center in the mind of Fed chair Jerome Powell, who stressed again last week that inflation concerns are overblown. His counterparts on Capitol Hill, meanwhile, with President Biden’s backing, are moving closer to enacting another round of fiscal stimulus. They too, worry less about inflation than they do the job market. Keep in mind though, Congress has already injected the economy with roughly $4 trillion worth of fiscal support, in parallel with the Fed’s $3 trillion-plus increase in asset purchases.
Speaking of injections, roughly a tenth of all Americans have now received at least one shot of a Covid vaccine. Some states like West Virginia and Connecticut are winning praise for their efforts. Others are having a harder time. But everywhere, the pace of vaccinations is picking up. And thankfully, case counts, hospitalizations and deaths continue to drop. The big risk, of course, are those troublesome mutant versions of the virus. But for the moment, it does seem like the worst might be over.
Fourth quarter earnings season isn’t quite over. This week brings some heavy hitters like Walmart, CVS and AIG, the latter a leading actor of the 2008/09 downturn. In last week’s earnings news, General Motors played down concerns about the industry’s shortage of semiconductors. Even with the help of Baby Yoda, Disney won’t be back to normal until its theme parks fully reopen. Twitter saw its ad-based business model flourish in 2020. Money-losing Uber, by contrast, saw much of its core ride-hailing business disappear in 2020, partially offset by a boom in food deliveries.
Will batteries deliver on their potential to transform the economy? Will cryptocurrencies? They’re creeping closer to the mainstream as big institutions eye a piece of the action. Never mind Elon Musk. Now, even BNY Mellon, founded by Alexander Hamilton, feels sufficiently young, scrappy and hungry to get involved.
Tweet of the Week
“In prepositioning myself to be sold to a SPAC I am considering purchasing billions in Bitcoin, investing in EVs, launching rockets to Venus and developing the next generation of on-line payment processing simultaneously - while buying substantial out of the money call options.”
-Financial Insyghts president Peter Atwater
· General Motors, in its illustrious past, has been both titan and basket case. It was arguably the most important American company at the height of America’s industrial age in the 1950s and 1960s. By the 2000s, it was a symbol of decay, bankrupted by years of labor tensions, foreign competition and unsustainable cost bloat. But it managed to emerge from bankruptcy with a much leaner cost structure, leading to solid profits in recent years. When gas prices crashed in the latter half of the 2010s, its large sport-utility vehicles once again became an engine of profitability. GM today, however, understands that the age of gas-powered cars is coming to a close. And so it’s ploughing a massive $27b into developing electric and autonomous vehicles, with plans to introduce 30 new EVs by 2025. It’s thankfully making the transition from a position of financial strength, having earned more than $6b in profits last year. The year of course was a difficult one with Covid, disrupting supply chains and initially causing a big sales dip. But by year’s end, demand was again strong. During December, it said, retail auto sales rose 19% y/y. To further improve profits, GM is adopting Microsoft’s cloud computing technology, exploring applications for hydrogen fuel cells, supplying clients like FedEx with electric delivery vans and developing subscription products like roadside assistance and enhanced cruise control. Most importantly for its EV transition though, are its efforts to drive down battery costs while ensuring sufficient supply. GM says it’s engaged with the Biden/Harris administration on fostering federal policies that support the big shift. It’s also engaged with dealers and unions to allay their insecurities about the shift. It’s most definitely communicating its EV vision with consumers, as its big Super Bowl ad made clear (the company insists it has nothing against Norway ). A more immediate concern is the industry’s semiconductor shortage. But CEO Mary Barra insisted this wouldn’t slow the company’s growth plans. Another headwind: rising commodity prices, notably for steel and platinum. Oh, and in case you’re wondering: GM has no plans to buy any Bitcoin, never mind Mr. Musk’s maneuvers. In sum, GM CFO Paul Jacobsen said the company is transitioning from “an old-school industrial-type mindset… to a real technologically savvy, growth-oriented company that’s really going into a lot of new markets.”
· Disney managed a thin profit in the final quarter of the year. But emphasis on the word thin: Net earnings were just $18m, compared to $2.1b in the comparable period a year earlier. Disney’s biggest headache has been the closure of its theme parks in Orlando, Anaheim, Paris, Tokyo, Shanghai and Hong Kong (its cruise business is shut down too). Collectively, these are strong earnings contributors in normal times. Even Disney+, an immensely popular streaming video service with close to 100m subscribers, is at this stage still a money loser. Other direct-to-consumer channels like ESPN+ and Hulu also saw strong subscriber growth. But profits mostly came from the company’s “linear networks” which include offerings delivered through cable TV, like the Disney Channel and standard ESPN. Disney also owns the ABC television network, as well as some of its own ABC stations—those benefited from a jump in political advertising around the presidential campaign. In a sign of the times, Disneyland in California is now serving as a vaccine center. Disneyworld in Florida is open at limited capacity, though, and seeing solid gains in visitors of late. Management is confident that theme parks will quickly recover lost demand when the crisis subsides. In fact, it continues to build new attractions. Back on the programming side, Disney is undertaking a companywide pivot to a direct-to-consumer business model, understanding all too well that many people are cutting their cable cords. There’s certainly no shortage of new content to promote. Among its upcoming offerings: A Black Panther movie sequel and more from the Mandalorian series.
· Uber is still a money-losing company. But the pioneering ride-hailing service, says it’s on track to reach break even this year, excluding depreciation and amortization, anyway. Uber, together with Airbnb, are prime examples of the “sharing economy” that’s proved so disruptive to taxis and hotels, respectively. Uber’s rise, to put it mildly, hasn’t been without controversy, from the behavior of its founder to its practice of treating drivers as subcontractors rather than employees. But its usefulness is indisputable, made clear by the huge number of people that use it all over the world. And huge numbers of customers mean lots of valuable data to mine and monetize. Bookings for rides did drop sharply last year—by 47% y/y last quarter. But its food delivery service saw extremely rapid growth. And in January, ride bookings started showing y/y growth again. Taiwan, Brazil and Australia are three markets where ride business has recovered strongly. Everywhere though, airport rides are naturally down a lot. Uber is now expanding into other delivery businesses, including instant on-demand local commerce from partners like Walmart and leading grocery chains. It continues to make both acquisitions and divestitures—it recently monetized its autonomous driving and flying taxi businesses. It’s pushing new membership passes customers can use for repeat business. It owns 15% of Didi in China, 16% of Grab in southeast Asia, 35% of Yandex in Russia, 10% of Zomato in India and 23% of Lime Scooters. One worry is having enough drivers as demand returns. But that notwithstanding, Uber says “in 2021, we will help the world move again.”
· Twitter, based in San Francisco, generates 85% of its revenue by showing ads to people on its social media platform. Well, online advertising, as Facebook and Google both showed, was a booming business in late 2020. Twitter’s total Q4 revenues jumped 28 y/y, and keep in mind that Q4 is typically the peak period for ad spending. What makes these platforms so appealing to advertisers, of course, is the precise targeting they enable, underpinned by large amounts of data about their users—in Twitter’s case 192m monetizable daily active users. It’s a lot smaller than Facebook, for sure; revenues are not in the same league as the biggest tech giants. For comparison, Facebook generated $86b in revenues last year. Twitter generated $4b. The latter also lost money last year on a net basis, while producing a mere 1% operating margin. The company is hoping to monetize its user base in other ways, buying a subscription newsletter platform for example, to compete with the increasingly popular Substack. It will say more about its strategy at an analyst day event planned for later this month. It did already say though, that it plans to grow headcount by more than 20% this year, to fortify its engineering, product design and research teams. Some of its biggest and most uncomfortable challenges involve the criticism it gets for giving voice to misinformation, toxic conspiracy theories and perpetrators of online abuse and harassment. Like the printing press, radio and television before it, social media is a new form of communication with a profound social impact both good and bad. Today, platforms like Twitter make the best and most valuable information more abundant and accessible than ever. But it also does the same for the worst and most harmful information. Should Twitter be responsible for what’s expressed on its platform? Current laws say no. But the company nevertheless felt compelled to ban the former President of the United States—for life.
· Aramark, based in Philadelphia, is most definitely not one of the pandemic’s winners. The company’s core business is operating cafeterias and food stands for schools, sports stadiums, hospitals, prisons, national parks and corporate offices. Obviously, many of these institutions and facilities have closed during the Covid crisis, with many others operating at just partial capacity. Aramark’s revenues in calendar Q4 declined 36% y/y. Business conditions are improving as more schools including universities reopen. The company benefitted as NFL football stadiums allowed some fans to attend games this fall. Aramark, meanwhile, is expanding services like curbside delivery and home delivery. There are, to be sure, some stable parts of the business, like prisons and hospitals. A division that sells uniforms benefitted from demand for safety and protective gear. Aid from the federal Cares Act helped stabilize finances. A few other points about Aramark: It purchases much of its food through the distributor Sysco, a key partner. Rivals include Compass, Delaware North, Sodexo and Cintas. And to be sure, running dining facilities is labor intensive work—Aramark employees roughly 150,000 people.
· Allegiant is no exception. Like every other passenger airline on earth, it lost money in 2020. But it’s perhaps the best positioned airline to recover once the plague subsides. Allegiant is what the industry calls an ultra-low-cost carrier, suppressing unit costs through techniques like dense seating configurations and direct-only distribution. In 2019, it charged an average one-way fare of just $62 but captured another $56 per passenger by selling ancillary services (seat selection, bag handling, etc.). Hotels and other travel companies, particularly in Florida and its home city Las Vegas, use Allegiant’s website as a distribution platform. Most unusually, the carrier shuns the old Southwest Airlines dictum of keeping planes in the air as much as possible. Instead, Allegiant flies only at peak times when there’s demand. It flies a lot more on Sundays, in other words, than it does on Tuesdays. But why does it feel so well positioned? For starters, it was the most profitable U.S. airline by margin before the crisis, a testament to its business model. It also lost less money in 2020 than its rivals. It caters exclusively to domestic leisure travelers who are itching to travel again (some already are). Its finances are helped by future tax offsets for last year’s losses. It never had to issue any equity to get through the crisis, unlike most airlines. As rivals sharply cut capacity, Allegiant says it’s “time to step on the gas,” with plans to add back workers and acquire suddenly-very-cheap planes. Last week it announced no fewer than 34 new routes. Are there risks? There always are in the shock-prone airline industry. Fuel prices are rising again. And new competition is coming from high profile startup carriers, notably Breeze (launched by JetBlue’s founder) and Avelo (launched by Allegiant’s former president). Sun Country, run by another ex-Allegiant executive, also plans to grow with a cargo contract from Amazon and money it plans to raise through an IPO.
· Malibu Boats: What do you think? Is it a good time to sell recreational boats? It most definitely is, based on the “astronomical” sales performance of Tennessee-based Malibu Boats. Never mind that boat shows are cancelled this winter. Said CEO Jack Springer: “Due to the strong retail environment and the extremely successful year-end sales event for Malibu and Axis (a subsidiary), we see no impact to us in garnering orders for 2021.”
· Mattel: How about toys? Let’s just say Barbie can afford another Dream Jet. Mattel, Barbie’s maker, again recorded double-digit sales growth last quarter, implying lots of happy kids (and investors). “This was a banner quarter for the company with our best performance in years,” the company said. Hasbro, a rival, also saw big gains in certain categories, notably board games like Monopoly. The toy industry, in the most general sense, works like this: Companies like Mattel and Hasbro design them and market them. China makes them. And retailers like Walmart, Amazon and Target sell them. Come to think of it, that describes most consumer products these days.
· Energy: “The Battery is Ready to Power the World.” So read a Wall Street Journal headline earlier this month, heralding what could be a monumental shift in both the energy and mobility sectors. That, no doubt, would be a development of grand historical importance, ending the age of hydrocarbons and putting the planet on a more sustainable path. The rechargeable lithium-ion battery was first used in camcorders in 1991. Then came laptops. Then smart phones in the 2000s. Then, electric cars. Now, they’re being used to store energy generated by renewable sources like solar and wind. Costs, the Journal explains, have dropped so far and so fast that a tipping point appears near. One of the biggest hurdles to electric car adoption is the simple fact that old-school cars are simply cheaper to build. But thanks to battery advances, most experts think cost parity can be achieved in the next five years. Batteries “are right on the precipice of being highly disruptive,” Chris McKissack told the Journal; He’s the chief executive of GlidePath Power Solutions LLC, an Illinois-based company that builds renewable energy generation. One concern for the U.S. though: Currently, 65% of lithium-ion batteries come from China. No single country, by contrast, currently controls more than 20% of oil output.
· Housing: Earlier this month, the National Association of Business Economists (NABE) hosted an online discussion of the U.S. housing market with several industry economists. Lending Tree’s Tendayi Kapfidze sees 2021 shaping up to be another robust year, with even some signs of people returning to big cities like New York as they become more affordable. Mortgage rates are rising a bit this year though, in tandem with rising Treasury rates. He also worries that income growth, despite government support, isn’t keeping pace with housing price inflation. First American’s Odeta Kushi stressed the importance of millennials, a large demographic that’s more educated than previous generations, which should mean higher average incomes. They also save a lot, scarred by the last recession. And they were migrating to suburban sun and tech jobs even before the pandemic. Like Kapfidze, however, she does worry that housing affordability is getting worse in most places. Freddie Mac’s Sam Khater talked about the rental market for single-family homes, which is also holding up well during the Covid crisis. Overall, the housing market has seen surprisingly few defaults and delinquencies given the circumstances (federal stimulus efforts have certainly helped). Interestingly, Khater explained how mortgage refinancing puts more money into people’s pockets, which is itself economically stimulative. Still, while demand for housing is a bright spot, insufficient housing supply is the root cause of the unaffordability problem. In the economically robust years preceding the Covid crisis, America built fewer homes than even during past recessions. The country is underbuilt by about 2.8m homes, he estimates. Khater highlights the giant state of California, which currently has a similar number of new housing permits as just the Houston metro area. This inevitably means more young people living with their parents. And more renters. Why aren’t builders building more? Some have bad memories of the late 2000s housing bubble. Restrictive land use (zoning) laws are certainly a problem in places like California. But more simply, there’s a lot about housing you can’t outsource or automate, like carpentry and electrical work, or purchasing wood and cement. So cost inflation becomes a growth barrier. It’s not like building televisions or computers, where consistent productivity gains are more achievable.
· Housing: There is one potential headwind for housing demand, as the Wall Street Journal reports. Many Americans will soon see their mortgage forbearance programs expire. Citing data from Black Knight Inc., more than half of the 2.7m active forbearance plans—in which lenders pause collection on payments—will expire between March and June. The Biden administration says it plans to announce new relief measures soon.
· Finance: Just as technology is changing the energy and mobility sectors, it’s bringing “deep structural changes” to financial markets as well. The Economist describes the evolution of stock markets, once dominated by a narrow clique of institutional investors. Things started to change with discount brokerages in the 1970s. Later came index funds, exchange-traded funds, robo-advisors and so on, all lowering the cost of entry for retail (non-institutional) investors. In 2015, Robinhood became the first platform to charge no fees at all. Four years later, retail investors accounted for a tenth of total stock market trading by value. Last year, with people stuck at home and enriched by stimulus checks, the figure grew to 25%. But this evolution has not yet occurred in other asset markets—the bond market for example, or real estate. For one, these assets are much harder to standardize. They’re also characterized by low transaction volumes. But things are changing. The Economist writes: “The same forces that pushed down trading costs and drove up liquidity in the stock market are poised to disrupt all manner of assets, from corporate bonds to property, and even Picassos and classic cars.” Today, firms like BlackRock offer fixed income ETFs that hold a large and diversified basket of bonds. Owners of other assets including property are beginning to offer similar funds, assisted by advances in machine learning and deregulation. Just last month, the asset manager Hamilton Lane began offering a fund with private equity and private debt without the normal step of raising funds from institutional investors first. Typically, it’s only institutions like university endowment funds and sovereign wealth funds that invest in such assets. The Economist again: “Retail investors may one day be able to stuff their cash into a portfolio of low-fee funds in everything from stocks and bonds to art and property. It is this, rather than gyrations in GameStop stock, that will give retail investors more power over Wall Street.”
· Technologies: Rami Reyes, a venture capitalist, tweeted and interesting question last week: What was the greatest tech acquisition of all time? Replies included Facebook’s takeover of Instagram, Priceline buying Booking, eBay-PaPal, Google-YouTube and Apple-Next (and with it Steve Jobs).
· Advertising: Did you watch the Super Bowl ads? Amazon ran a spot. There was no shortage of ads hawking beer, snacks and cars. Well, here’s something interesting, courtesy of Jon Erlichman of Bloomberg News: When Tom Brady won his first Super Bowl in 2002, advertisers included AOL, Blockbuster, Radio Shack, Circuit City, CompUSA, Sears, HotJobs, Yahoo and Gateway Computers. Going back to 1992, advertisers included Reebok, Magnavox, Paine Webber and US Air. Feeling nostalgic?
· Stocks: By now you know that stock markets are on fire. But just a quick note from JPMorgan: “Heading into Friday, the S&P 500, NASDAQ 100, MSCI World and MSCI Emerging Markets equity indices were all at all-time highs.” The bank also listed some of the most common questions it’s getting from clients, including: 1) Could the next stimulus bill overheat the economy and cause inflation? And 2) Should I buy stocks now with valuations so high?
· Oil: The international Energy Agency (IEA) expects global oil demand to grow by 5.4 million barrels per day (mbd) in 2021, to reach 96.4 mbd. That would be far from a full recovery from the sharp drop in 2020. On the contrary, IEA’s estimate would see the world recovering just 60% of the demand lost during the pandemic. In the meantime, the Anglo-Dutch oil giant Shell, with U.S. headquarters in Houston, presented an aggressive plan to transition away from fossil fuels.
· Corn: At more than $5 per bushel, corn prices neared an eight-year high last week, the Financial Times reports. That’s in part thanks to record purchase volumes by China, a third of whose imports come from the U.S. But corn is hardly alone among commodities becoming more expensive recently. It’s true of most commodities in fact. The foreign exchange market might have something to do with that. Typically, when the U.S. dollar is weak relative to other major currencies, commodity prices rise. Last February, one U.S. dollar would have bought you 92 euro cents. Now it will buy you just 88.
· Labor: One group of workers unique in this crisis? Americans who leave their jobs because of health concerns. Think of a person with a lung disorder or a compromised immune system. For jobs involving lots of person-to-person contact (i.e., at a grocery store), going to work could be deadly. These people do not qualify for unemployment benefits because their job loss is considered voluntary.
· Labor: In 2020, Americans started more new businesses than ever, Bloomberg reports, citing University of Maryland economist John Haltiwanger. Of course, many businesses closed last year too, especially restaurants. But IRS data show that 4.3m entrepreneurs applied for new Employer Identification Numbers (EINs) in 2020, a 24% increase over 2019. This was not the case during the last recession. As it turns out, about a third of the increase comes from those launching online and other “non-store” retailers, with the help of companies like Amazon, Shopify, Squarespace and Printful.
· Free trade is good for the U.S. economy: Economic principles like comparative advantage are hard to rebut. The more a country trades, the richer everyone becomes. Think about how much more consumers would have to pay for everyday goods were it not for overseas imports. Think about how much smaller and thinly staffed corporate giants like Boeing, Apple and General Motors would be today if not allowed to sell their goods abroad. America’s farmers depend on overseas exports. So do sectors like pharmaceuticals, finance and media. The whole economy today runs on globalized supply chains that depend on open trade—trying to untangle that would lead to tremendous wealth destruction. Besides, if protectionism were the answer, countries like Brazil and Argentina would be superpowers. Free trade pacts, meanwhile, often accomplish important diplomatic and national security goals. Conversely, withdrawing from the transpacific trade deal positioned China to cement deeper economic ties to Asian neighbors, ultimately giving it greater clout on the rules and terms of global trade. As for concerns about foreign trade’s impact on low-skilled workers, technology and automation deserve far more blame. If Apple were forced to produce iPhones in the U.S. rather than in much lower-cost China, would there even be an iPhone? If so, they’d be a lot more expensive. Imagine how bad the quality of U.S. cars would be today if Washington had blocked Japanese imports in the 1970s and 1980s. Foreign competition makes American companies more efficient and more competitive.
· Free trade is bad for the U.S. economy: If free and open trade were so good for the economy, why was protectionism a central tenet of U.S. economic development policy throughout the 1800s? Tariffs on foreign imports enabled domestic industries to blossom, rather than getting crushed in the cradle by dominant British producers. Today, tariffs and other barriers to imports are necessary for many reasons. We don’t allow foreign airlines to compete on domestic routes, lest we create industry-killing oversupply. We’re blocking Chinese companies like Huawei on national security grounds. According to the White House, the U.S. charges a tariff on fully half of all industrial imports entering the U.S., and for good reason. Tariffs are a lifeblood for communities across America dependent on older industries like steel. They’re also critical to nurturing newer industries like solar power. They’re an important tool to address foreign currency manipulation (artificially suppressing the value of your currency to make your products cheaper to foreigners). To anti-free traders, China’s 2001 accession to the World Trade Organization was a major milestone. It destroyed legions of U.S. factories and depressed American wages across industries. NAFTA, the trade agreement involving Canada and Mexico, similarly pushed U.S. companies to outsource labor-intensive work offshore. It becomes a race to the bottom: Go where labor is cheapest, environmental standards most lax and regulations least burdensome. Finally, even if you accept the wisdom of openly trading goods across borders, free trade in financial services can lead countries down a dark and dangerous path. To use the Argentina example, it enthusiastically embraced open financial markets in the 1990s. China, by contrast, is very protective of its financial markets. (Note: some of the above arguments were gleaned from a 2017 debate between Professors Michael Hudson and Farhad Rasshekh at the Austin institute for the Study of Family and Culture).
· Monetary Policy: Once again, Fed chairman Jerome Powell gave a dovish take on inflation, this time while speaking virtually to the Economic Club of New York. Stop worrying so much about inflation, was the general sense of his message. Instead, worry more about addressing the other pole in the Fed’s dual mandate: full employment. Yes, many sectors are counterintuitively booming during the Covid crisis—technology, housing, manufacturing and so on. And yes, stock and other asset prices are skyrocketing, lifting the wealth of many Americans. But the labor market is a “long way” from strength, with 10m fewer Americans employed now than just before the crisis. Some 5m people are not currently searching for work for virus-related reasons—parents having to stay home with children, for example, or people with certain health conditions unable to risk close contact with others. Though January’s unemployment rate was officially 6%, Powell believes the true figure is closer to 10%. Even more worryingly, job losses and pay cuts are overwhelmingly affecting lower-income Americans and minority groups. For higher-wage workers, the recession has been much less severe. As Powell plots the course ahead, he’s mindful of the five-year period from 2015 to 2020, when wages rose rather rapidly for low-income and minority workers. At the same time, prime-age labor force participation increased, reversing earlier declines. And all this with no inflation. The Fed, in other words, learned that it can run the economy hot for an extended period without worrying about rising consumer prices, that old scourge from the 1970s. Put another way, while asset prices are inflating wildly, prices for everyday consumer goods and services are not, and haven’t for years. Beyond the moral imperatives, why is alleviating low-income joblessness so important? Because the last thing America’s demographically challenged economy needs is a large group of prime-age people not contributing their labor, all the while losing their skills. Over time, this is sure to erode the productive capacity of the economy, Powell states. The Fed, of course, is wary of weighing in on fiscal policy. But Powell did evoke Congress’s 1946 Employment Act that aimed to “use all practicable means . . . to promote maximum employment.” The fiscal stimulus measures passed last year, he added, have been essential to the recovery so far. Asked about what he would do if he were a Congressperson, in other words, if he were on the fiscal side, Powell expressed a longing for more research and development, more investment in education and a concerted national economic policy more broadly.
· Monetary Policy: On last week’s Macro Musings podcast, Dallas Fed president Robert Kaplan shared his thoughts on interest rates, inflation, the labor market and the impact of the pandemic. Interest rates should drift up as the economy improves, he said, but an aging population and slow-growing workforce will restrain the increase. The Fed, he adds, has learned in recent years that it can “run the economy hot” for a time without causing inflation, which is helpful to boosting employment. Negative interest rates? Kaplan isn’t a fan, given the distress it would cause to banks and other financial intermediaries. One of his biggest concerns about the labor market is a skills gap, in which there are lots of jobs to fill but not enough people with the right qualifications to fill them. Technology is making workers with a college education or greater more productive, which is great for the economy. But productivity gains among lower-skilled workers are fewer. In fact, many are seeing their jobs outsourced, often to robots or other forms of technology. Kaplan further explains how the pandemic has accelerated technology adoption and changed behaviors. Online shopping, videoconferencing and remote classrooms are some prime examples. Kaplan spoke separately with Bloomberg’s Michael McKee about what people in his district want to see from a new round of fiscal stimulus. Among their wish list items: more money for vaccinations, reopening schools, childcare and extended unemployment benefits. Longer term, to sustain GDP growth in the face of those demographic headwinds, Kaplan would like to see more investment in things like Wi-Fi access and early childhood literacy. On the topic of tapering, he does believe that the Fed’s extraordinary stimulus measures create some risks in the non-bank financial sector. When safe to do so, that stimulus needs to be gradually withdrawn.
· Silicon Valley: In northern California, on a peninsula abutting the Pacific Ocean, you’ll find towns like Palo Alto, Menlo Park, Mountainview, Santa Clara and Cupertino. Together, sandwiched between San Francisco to the north and San Jose to the south, they form what’s come to be called Silicon Valley, one of the richest places on earth. It’s also of course, synonymous with the tech economy, and home to giants like Google, Apple, Facebook, Netflix, Intel and Tesla. How did this area of northern California become the epicenter of so many world-changing companies? Margaret O’Mara offers some answers in her 2019 book “The Code: Silicon Valley and the Remaking of America.” Prior to World War II, Palo Alto was a sleepy railway village perhaps best known for the surrounding valley’s prune farming. There was Stanford University, named after railroad magnate Leland Stanford. There was also Hewlett-Packard, an electronics company founded in 1939. The world war, and the cold war that followed, saw a massive jump in government spending on technologies relevant to national defense and space exploration. That meant lots of money for universities like Stanford and companies like Lockheed, an aerospace giant in southern California, which moved parts of its operation to the Valley. The real breakthrough, however, came in the 1960s with the advent of silicon transistors from AT&T’s Bell Labs in New Jersey. As O’Mara writes, these would become for electronics what oil had become for automobiles. All sorts of new applications emerged, including, eventually, personal computers. Boston’s “Route 128” was an early leader in developing applications for these silicon chips. But Silicon Valley had cheap hydro-energy from government-built damns, lots of real estate to develop industrial parks and visionary leadership at Stanford. In 1965, President Johnson signed the Hart-Celler immigration act, which O’Mara calls “one of the most consequential economic policies of the latter half of the 20th century.” By the 1980s, a third of the Valley’s new companies had founders from either India or China. The fall of the Soviet Union would usher in another wave of talent in the 1990s. Also critical to the story are the venture capitalists who clustered in the area. In addition, the tech sector became a darling of Washington, winning favorable tax treatment for things like stock options and capital gains. It was also lightly regulated. A young Steve Jobs, growing up in an area full of engineers, launched Apple from his garage in Los Altos. The personal computer revolution led to the internet revolution and e-commerce. The hot product became software, not hardware. Jobs, in a second act, revolutionized mobile phones. Then came the rise of Google (internet search) and Facebook (social media). Tesla, from its perch in Palo Alto, hopes to drag the world into an age of electric cars. For years now, cities across America have been asking: How do we become a tech hub like Silicon Valley? Good things, however, don’t often last forever. Though the Valley’s tech champions have grown even more wealthy and influential during the pandemic, Washington’s attitude toward the sector is quickly souring. Immigration became more restrictive during the Trump years. Tech firms are increasingly criticized for non-inclusive hiring practices. Some like Oracle are leaving for lower-tax places. Housing is so expensive that public servants like teachers and police officers can barely afford to live there. In fact, Silicon Valley doesn’t even produce silicon chips anymore—that’s been outsourced to other places, from Arizona to Asia. As it says on the back of every iPhone: “Designed by Apple in California. Assembled in China.”
· Oklahoma: Planet Money, an NPR podcast, talks to an Oklahoma man named Michael Taylor just released from prison after a decades-long sentence. But in one sense, he’s still not free. Because he owes at least $13,000 in court fees. This is hardly just an Oklahoma story. The piece mentions California and North Carolina too. Other states do it as well. So do many local governments. They levy all sorts of fees on released prisoners to fund their court systems, covering everything from maintaining the court’s website to funding prison medical care. There are law library fees, district attorney fees, fees to fund child abuse centers… There were fees in Louisiana that funded a judge’s full-time chef. Ryan Gentzler of the Oklahoma Policy Institute described a trauma center that needed funding to stay open, so officials added a “trauma center” fee to every traffic ticket, felony and misdemeanor. Defenders of such fees say those who use the justice system should pay for it. On the other hand, such fees have become what Clemson University’s Michael Makowski calls a regressive tax that falls disproportionately on the poor. In Oklahoma’s case, a 1992 state law prohibited any tax increases without a 75% majority vote in both state houses. This has led to severe budget pressures and underfunded government services—and an incentive to squeeze people like Michael Taylor for more money. Harvard professor Walter Johnson discussed the practice in his 2020 book on St. Louis. The racial tensions in Fergusson, Missouri, he concludes, had much to do with pressures on local police to raise money through aggressive law enforcement. Such pressures are greatest, unsurprisingly, in poorer areas with a weak local tax base. Johnson goes a step farther in calling it “for-profit policing,” part of a “last round of extraction” by governments looking for any way possible to generate money from their poorest people and neighborhoods. Other such practices include payday loans, corporate tax breaks for companies in blighted neighborhoods and mass incarceration. As for people like Michael Taylor, he stands to be re-arrested if he fails to pay his fees. Or, in some cases, subjects can pay off their fees with extra time behind bars. Never mind that it costs a lot more to keep someone in jail. The larger picture though, is that crime often does pay. For governments.
· Sarasota: As you might expect, most U.S. airports are a lot quieter now than they were this time two years ago. But not Sarasota. According to airline schedule data published by Cirium, its airport features 55% more flights this quarter than it did in Q1 of 2019. That’s because airlines are flocking even more than usual to Florida, where tourism has held up relatively well. Punta Gorda, Key West, Panama City and Destin are some other Florida airports that have become busier since the pandemic started. This is also true of some western mountain destinations like Jackson Hole, Wyoming and Montrose, Colorado. Of America’s 50 busiest airports, Salt Lake City and Dallas-Fort Worth have seen the fewest flight cuts in percentage terms. Airports in New York, Washington, Boston and San Francisco (all very international cities) have seen the most.
America's Top Exports and Imports
Ranked by value in 2020
*Aircraft, oil and auto categories saw sharp declines in both exports and imports
*Exports of semiconductors, soybeans up big
*Notably import gains in pharma, computers, clothing
source: Census Bureau, Bureau of Economic Analysis
2020 (in $m)
2020 (in $m)
Passenger cars, new and used
Cell phones and other household goods
Other parts and accessories of vehicles
Passenger cars, new and used
Other parts and accessories of vehicles
Apparel, textiles, nonwool or cotton
Finished metal shapes
Toys, games, and sporting goods
Furniture, household goods, etc.
Other industrial supplies
Trucks, buses, and special purpose vehicles
Cell phones and other household goods,
Apparel, household goods - cotton
Measuring, testing, control instruments
Meat, poultry, etc.
Engines and engine parts
Precious metals, other
Finished metal shapes
Photo, service industry machinery
Trucks, buses, and special purpose vehicles
Televisions and video equipment
Engines and engine parts
Fish and shellfish
Natural gas liquids
Fruits, frozen juices
Other precious metals
Measuring, testing, control instruments
Toiletries and cosmetics
Laboratory testing instruments
Materials handling equipment
Materials handling equipment
Other consumer nondurables
Toiletries and cosmetics
Artwork, antiques, stamps, etc.
Toys, games, and sporting goods
Fruits, frozen juices
Iron and steel mill products
Photo, service industry machinery
Cookware, cutlery, tools
Pulpwood and woodpulp
· Foreign trade: The U.S. trade deficit widened to $679b last year, according to data from the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. In 2019, the trade gap was $577b. You can divide foreign trade into two categories: Goods, of which America imports a lot more than it exports, and services, where America has a surplus. But the goods market is much larger. Covid-related supply disruptions at factories were certainly responsible for reduced exports last year. In addition, overseas demand for aircraft naturally cratered (hurting Boeing and General Electric most importantly). The country also exported fewer cars and less oil. The report mentioned less jewelry and artwork as well. For the service category, the U.S. surplus shrank because of the collapse in foreign tourism. Every time a visitor from abroad buys an airline ticket or a hotel room or a restaurant meal, that’s considered a service export. As for imports, they declined too—Americans bought fewer foreign cars and planes, and less foreign oil. But the export decline was larger than the import decline, hence the bigger deficit. The larger point here is that foreign trade in general contracted in 2020. Is that a longterm trend?
· Foreign Trade: Which foreign countries bought the most American goods and services last year? Canada ($255b) was number one, buying more than all of the European Union ($232b). Add the U.K. though ($59b), and greater Europe was higher. Mexico was a big buyer ($213b). China was next ($125b).
· Foreign Trade: How about imports? Americans bought more goods and services from China than anywhere else last year ($325b worth). A lot of that was consumer goods (i.e., things you’ll find in Walmart or Target). Next on the list are Mexico ($325b), Canada ($270b), Japan ($120b) and Germany ($115b). For all four of these countries, autos are a big import item.
· The Panic of 1837: Most Americans know about the Great Depression of the 1930s. But there was one in the 1830s too. In fact, the crisis of 1837 was the country’s first very large economic shock. They called them panics at the time. But don’t dwell much on the label. During the first half of the 1800s, the U.S. still depended on Britain for capital. It was true even after the American-British war of 1812. Money poured in to finance new textile factories, railroads, canal projects and so on. Britain was also buying American cotton, produced in growing quantities as Virginians, South Carolinians and others moved—with their slaves—onto fertile lands in Mississippi and Alabama. President Andrew Jackson secured these lands for white settlers by defeating the British at New Orleans, invading Florida and exiling or killing the region’s Native Americans. Jackson separately repaid the entire federal debt, which inevitably meant lots of money left the country—a lot of the debt was owned to Britain. Most famously, Jackson closed the country’s national bank, giving the Treasury’s funds to state banks instead. East coast banks were left with less funds overall and therefore had to curtail lending. State banks elsewhere, on the contrary, went on a lending spree, often issuing near-worthless paper currency. Between 1832 and 1837, the number of banks doubled, boosted by high cotton prices, incoming European investment, silver imported from Mexican mines and the redistribution of funds formerly held by the Bank of the US. Many of the borrowers were land speculators, driving up land price inflation. To address the growing problem, Jackson issued his “specie circular” in 1836: If you wanted to buy land, you now had to pay in hard currency (gold or silver). Credit markets quickly contracted. On top of this, Britain suffered a recession, reducing demand for southern cotton and forcing banks there to greatly reduce lending. Naturally, cotton prices and land prices tanked. So did the value of slaves, crushing southern banks which defaulted on loans from Britain (a reason Britain was reluctant to help the South in the Civil War a few decades later). If all of this weren’t bad enough, a bad wheat harvest hurt northern farmers. All of this happened just as Jackson was succeed by his ally Martin Van Buren. Banks collapsed. So did many factories, mills and mines. Unemployment spiked. Civil unrest spread. Alasdair Roberts recounts the difficult period in his 2013 book: “America’s First Depression.” It goes on to explain how the depression ultimately ended: With war. In 1846, the U.S. invaded Mexico and took much of its territory including California. Just after, gold was discovered there, triggering a boom in economic activity. Agricultural prices began rising at the time too. There was a non-economic silver lining to the war as well: Severe discrimination against Irish and German Americans eased, because so many served as soldiers in the war.
· Brett Winton is head of research at ARK, the immensely successful and popular fund manager run by Cathie Wood, herself fast becoming an investment world celebrity. Winton tells Bloomberg’s Odd Lots podcast of “five fundamental technology platforms” he’s watching closely: 1) gene sequencing and editing, 2) artificial intelligence (more specifically neural networks), 3) robots (and their ability to collaborate with workers), 4) energy storage (led by advances in battery technology) and 5) blockchains (notably for enabling cryptocurrencies like Bitcoin). More generally, he believes in the idea that the three hallmarks of a transformative technology are 1) it generates cost declines, 2) it’s applicable to many sectors and 3) the technology itself is a platform upon which others can innovate. Winton and ARK are especially bullish on the prospect of autonomous driving technology (enabled by artificial intelligence) creating a worldwide fleet of robo-taxis. This will underpin an industry he thinks could one day be bigger than the entire energy sector. Tesla currently appears best positioned to sit atop that platform, much like Google today dominates search, Facebook social media, Apple mobile applications and Amazon shopping. But Tesla has lots of competition, from both Silicon Valley and Detroit.