Issue 9: Monday, March 1, 2021
Issue 9: Monday, March 1, 2021
*Please view econweekly.biz for a video presentation on the U.S. economy in 2020
Inside this Issue:
o Bonds Away: The Roar of Rising Rates
o Stocks Knocked: And the Techs Decked
o Covid: Half a Million Americans Dead
o Buffett’s Brain: Letter from a Leader
o Yellen and Powell: The Enemy Now: Unemployment, not Inflation
o Coinbase: Google of the Cryptoeconomy?
o The Battle of Birmingham: Amazon Fights the Union
o Ghosts in the Kitchen: The Restaurant Sector’s Hottest Trend
o Looking Back: How Little Google Became Big Google
o Debate: Trade More with China? Or Less?
o And This Week’s Featured Place: North Dakota, Oil Boom and Bust
Quote of the Week
“The cryptoeconomy is just getting started. It is not intended to replace the traditional economy, but instead be a complement to it, much like email was to paper mail.”
– Coinbase CEO Brian Armstrong
Are you a bond trader? Take a deep breath. It was a wild week on Wall Street, headlined by another movement upward in interest rates. Investors, apparently, aren’t satisfied with lending to Uncle Sam at the rock-bottom rates prevailing at the end of 2020. Since the start of the year, they’ve been bidding the rates up. The Treasury, meanwhile, is increasing its borrowing to finance Covid relief measures—Congress is now close to passing another $1.9 trillion in spending. The labor market needs more help, spending advocates say. And as long as the human resources of the country are grossly underutilized, there won’t be inflation.
Maybe, but inflation—or perhaps it’s growing skepticism about the Fed’s commitment to easy money—does concern those buyers of bonds. On Thursday, their waning demand forced the Treasury to sell ten-years (the most popular kind), offering a yield of 1.54%. At the start of this year, it could get away with offering just 0.93%. A year ago, when Covid first hit, yields fell to 0.54%. Will rising Treasury rates, now rippling into the mortgage market, cool demand for housing? There’s no sector of the economy more important.
The housing market remains robust for now, as does the stock market. But the frenzied run-up in stocks since last spring shows some signs of cooling. Stock prices dropped last week. Tech stocks dropped even more. Still, the stock market’s total value remains near record highs. And while it’s loaded with companies losing money, many of America’s largest and most influential firms enjoyed record revenues and earnings during 2020.
But 2021? If people revive their spending on travel and dining out and attending live events, will they reduce their spending on the boom products of 2020, i.e., computers, home furnishings, video games, etc.? That will probably be the case, at least to some extent. But as the latest January data for personal incomes and consumer spending make clear, the $900b December stimulus is turbocharging demand. The looming $1.9 trillion encore presages further gains.
As the housing sector contemplates the impact of rising mortgage rates, the energy sector is debating the proper response to what happened in Texas. In the auto sector, a shortage of semiconductors is turning into an SUV-sized problem, prompting Biden administration action on securing future supplies of economically vital inputs. Don’t forget about all the batteries we’ll need for electric vehicles, says the carmaker Ford among others. The retailer Costco is raising wages. The retailer Amazon faces an Alabama unionization drive. Debt-heavy AT&T has a new plan for its video business. All companies are evaluating the future of remote work. Several are merging. Some like Coinbase are laying the groundwork for a cryptoeconomy. Others have yet to report earnings—the retailers Costco, Target, Kroger, Dollar Tree and Ross all go this week.
So does Maryland-based Novavax, which appears to have yet another effective vaccine to stop Covid. Johnson & Johnson’s one-shot vaccine is now authorized for use. But the war isn’t yet won. On Friday, Feb. 26th, roughly 2,000 Americans died of Covid. That’s better than the 4,000 that died on Jan. 26th but still too high to restore normality. Total U.S. deaths now exceed 510,000.
· Home Depot: It’s a time when the home is at the center of everyone’s lives. No surprise then, that it’s a good time for a retailer with the word “home” right in its name. Atlanta-based Home Depot, sure enough, is seeing an incredible surge in sales. For its fiscal quarter that covered November, December and January, sales rose an astonishing 25% y/y, to $32b. For the 12 months through January, sales growth was 20%, reaching $132b. Lowe’s a Charlotte-based rival, saw similar trends (its revenue for the 12 months through January was about $90b). Both companies benefitted from a strong housing market, rising disposable incomes, a huge jump in online ordering and the shift of many activities into the home. As Lowe’s explained, the home became four things during the pandemic: a residence, a school, an office and the primary location for recreation and entertainment. But how much does this change when the pandemic subsides? As people start spending their money on travel and outdoor dining again, will they reduce their home improvement spending? For now, both Home Depot and Lowe’s say demand remains strong, boosted in early 2021 by Washington’s $900b stimulus passed in December. If Congress crosses the line on adding another $1.9 trillion, home improvement spending could get another lift, coinciding with the busy spring home-buying season. Prices are rising too, however, for home materials like lumber. Both Home Depot and Lowe’s cater to two distinct sets of customers: professionals and non-professionals, the latter including contractors, property managers, plumbers, electricians and the like.
· Berkshire Hathaway: The oracle of Omaha has spoken. As he’s done every February since 1977, Warren Buffet penned his letter to the shareholders of Berkshire Hathaway, America’s sixth-largest company by revenues. It was hardly a banner year for Berkshire. In 2020, it produced investment returns of just 2%, compared to 18% for the broader stock market (as measured by the S&P 500 index). Still, it posted a $43b accounting profit and retains its record as one of the most successful companies in American history. It’s an unusual company. At its heart is property and casualty insurance, including the Geico brand made famous by that little green lizard. Buffett’s original brainstorm so to speak, was the notion of taking people’s insurance premiums—cost-free money like a bank collects deposits—and using this “float” to invest in other companies. There’s risk in insurance of course, but Berkshire is a master of the craft. In the meantime, all that insurance premium money has made Berkshire a 12% owner of Bank of America, a 19% owner of American Express, a 9% owner of Coca-Cola… those are just a few examples. Most importantly though, in terms of value, are three businesses aside from its insurance activity: 1) the railway BNSF, America’s largest by freight volume, 2) Berkshire Hathaway Energy (BHE) and 3) Apple. In Apple’s case, it only owns a 5% stake. But it’s a valuable stake. It has 100% control of BNSF and BHE. In his letter, Buffett admitted a mistake in buying Precision Castparts in 2016—turned out he paid too much. Unmentioned was a retreat from the airline industry after Covid decimated the sector. Last year, Berkshire used a lot of its money to buy back its own stock; it didn’t execute any major takeovers. It certainly didn’t buy any Bitcoin, which Buffett considers a speculative asset. His youthful colleague Charlie Munger added skepticism about SPACs: “The investment banking profession will sell shit as long as shit can be sold.” Buffett, though, is always an optimist when it comes to the U.S. economy and its potential to grow. This potential, he adds, isn’t confident to just coastal cities; his letter notes of the “many miracles occurring in Middle America.” To be clear though, he likes stocks, not bonds, the chief investment of other insurance companies. He points to the bleakness of bond investing as interest rates continuously fall. What’s next for Berkshire? The next generation of leadership lies in waiting, though they might be waiting a while: Buffett is only 90, and Munger just 96.
· Union Pacific is America’s largest publicly traded railroad, with nearly $20b in revenue last year. As it happens, all U.S. railroads were strongly profitable in 2020, as they were in 2019—Union Pacific’s operating margin was 40%. Revenues did shrink by a tenth, however, due to pandemic-related disruptions, most notably around April. In the U.S., trucks carry 82% of all freight revenue, according to Union Pacific’s rival CSX. Trains just carry 8%. But that understates their importance to the economy, even today. For much of American history, starting around the 1840s, railroads dominated interstate commerce, with a revolutionary impact on the movement of agricultural goods, consumer goods, natural resources, information and people. They gave rise to many of the country’s largest cities, including Chicago and Atlanta. Railroads themselves were among the country’s largest corporations—the Philadelphia-based Pennsylvania Railroad was for many years America’s largest corporation. Automobiles and later airplanes would eventually reduce the importance of trains, leading to railway bankruptcies and consolidation. But today, five major U.S. rail companies, competing with two major lines from Canada, earn strong profits carrying things like farm products, oil, chemicals, plastics, steel and cement. One product that Union Pacific said was booming last quarter: lumber from the Pacific Northwest, owing to the housing boom. On the other hand, shipments of coal are on a structurally downward trend as the country adopts cleaner forms of energy. Shipments of autos and auto parts, which Union Pacific classifies as “premium” freight, are momentarily affected by the semiconductor shortage. Also considered premium are intermodal shipments in which railways carry containers transferred from ships and trucks. As a railroad covering the western half of the U.S., Union Pacific’s largest intermodal terminals are in Los Angeles, San Francisco, Salt Lake City and Chicago. For non-intermodal freight, Texas is one of its largest markets. The company is based in Warren Buffet’s hometown of Omaha.
· Nvidia is less of a household name than Google, Apple or Facebook. But it’s likewise an influential Silicon Valley tech company that earned big profits in 2020. With roughly $11b in annual revenues, Nvidia is much smaller than its more recognizable Valley neighbors. But its influence is large and growing. The company began life making computer chips for video game graphics. And even today, the fast-growing gaming sector generates half of its revenues. But its computer processing technology is now involved with everything from artificial intelligence (AI) to cloud computing to Bitcoin mining to precision agriculture to autonomous driving. In a major strategic move, Nvidia last fall agreed to buy Britain’s ARM, the leading producer of mobile computing processors. The deal, executives say, will create the premier computing company for the age of AI. But it needs regulatory approval, something several key rivals—Google, Microsoft and Qualcomm among them—vehemently oppose. Nvidia sees the age of AI defined by trillions of devices connected to the internet. It won’t just be an internet of people anymore, but an internet of things.
· Sturm, Ruger, and Co., a gun manufacturer, saw revenues grow 39% in 2020, to reach their highest total since the Obama administration. America’s firearms industry, including manufacturers and retailers, had a busy year, with gun sales nationwide rising 40%, according to USA Today. Another statistic, courtesy of The Oregonian: The U.S. conducted 40m gun background checks in 2020, compared to 23m in 2015. The social unrest prevalent throughout 2020 clearly had something to do with the spike.
Tweet of the Week
“Over the last 3 decades, the #FAMGA tech giants — Facebook, Amazon, Microsoft, Google, and Apple — have gobbled up more than 800 cos.”
-CB Insights, on the penchant for acquisitions among the tech giants of Silicon Valley and Seattle
· Finance: At the start of 2021, the U.S. had 5,001 banks, according to the FDIC. That’s down from 5,177 in 2019 and 7,658 in 2010. Go back to the mid-1990s and the number was around 13,000. You see the trend: bank consolidation. And it’s not stopping. Last week, Buffalo-based M&T Bank said it’s buying People’s United of Connecticut for nearly $8b. Scale matters in banking. And in this case, M&T gets a larger footprint in New England. Commercial and industrial loans (C&I) account for about 38% of People’s lending; it does commercial real estate, housing and consumer loans as well. And it’s notable for its expertise in financing commercial equipment. Impressively, the newly-enlarged M&T, assuming the deal is finalized, will have more branches in the wealthy northeast than even JPMorgan Chase—only Bank of America will have more. How did M&T get so big? By completing 24 other acquisitions in the past 35 years. The M and the T, by the way, stand for “Manufacturers and Traders.” (See chart below for a ranking of America’s largest banks).
· Tires: Here’s another merger announced last week: Goodyear is buying Cooper, creating a company with combined 2019 revenues of $17.5b. The deal gives Goodyear greater scale in the global tire industry while fortifying its presence in China and increasing its exposure to highly profitable light truck and SUV tire sales. The new company will remain the world’s third-largest tire company after Japan’s Bridgestone and France’s Michelin. Fortunately for tire makers, electric vehicles need rubber ties just like gasoline-fueled vehicles. So companies like Goodyear aren’t as strategically challenged by the shift as some other members of the auto supplier ecosystem. That said, it’s investing in new technologies like “intelligent tires,” notably for use by ride-sharing companies like Uber. In case you’re wondering, Goodyear gets about half of its rubber from natural sources on the world market. It manufactures the other half synthetically at plants it owns near Houston.
· News Media: One more takeover to discuss: Last week saw Alden Global Capital, a hedge fund, agree to take full control of Tribune Publishing. It previously owned a 32% stake. Alden is a controversial company, to say the least, renowned for slashing jobs and costs at the newspapers it buys. Its assets include the Denver Post, the Boston Herald and the San Jose Mercury News. Buying Tribune gives it the Chicago Tribune, the New York Daily News, the Orlando Sentinel and others. But Alden did agree to divest a few Tribune papers, including the Baltimore Sun. The Sun’s buyer is a Baltimore business magnate, following a pattern established by Amazon’s Jeff Bezos and his 2013 takeover of the Washington Post. For most print newspapers across the U.S., the last two decades have been a disaster. Americans now get much of their news via internet giants like Google and Facebook. And it’s those companies that get the advertising dollars once captured by local newspapers selling classified ads. The trend, unfortunately, has some worrisome implications for American democracy, as a recent article in Charleston’s Post and Courier makes clear. Corruption in local politics is a lot easier to pull off when there aren’t any journalists around watching.
· Agriculture: The US Department of Agriculture (USDA) held its annual Agricultural Outlook Forum, this time virtually. A key takeaway was that farm income will likely drop this year despite the rise in many commodity prices. Why? Because government payments will drop sharply. Last year, money from Washington doubled to $46b, much of that in the form of temporary Covid relief. In 2021, payments will likely drop 45%, estimates USDA economist Carrie Litkowski. Farm businesses are also likely to see costs rise this year. Debt, meanwhile, is growing faster than assets, though not to a point that threatens the sector’s still-healthy balance sheets. There are regional differences of course. The “heartland” region including Iowa and Illinois, which produces almost a quarter of the nation’s farm output by value, could see incomes increase 9% this year. That’s thanks to rising prices for corn, soybeans and hogs—China is a big buyer of all three. But the market is subject to some unknown factors like exactly how much China decides to import and the value of the U.S. dollar (a weak dollar is good for farm exports since it makes them less expensive for foreign buyers). On the other hand, prices for fruits, nuts, vegetables, dairy and eggs are forecasted to decline. Big income drops, in fact, are expected in the USDA’s “Fruitful Rim” region that includes Florida and much of the west coast. In recent years, by the way, the largest number of farm bankruptcies have come from the dairy sector.
· Semiconductors: What’s the outlook for the strategically critical semiconductor industry? Dale Ford of the Electronic Components Industry Association, speaking at a recent online event hosted by the Semiconductor Industry Association, highlights three key drivers of future demand: 1) Ongoing adoption of cloud computing, 2) the rollout of 5G mobile networks and 3) the Internet of Things (IOT). The latter involves putting chips into everything, from cars to refrigerators. With cars, unfortunately, there’s a major semiconductor shortage right now, after auto firms were caught by surprise when demand rebounded quickly from last spring’s initial Covid shock. In hindsight, they canceled chip orders they should have kept. And now factories in Asia (most importantly Taiwan and Korea) are scrambling to catch up. Ford says the semiconductor industry is now approaching $500b in value and would hit $1 trillion in 2036 if the current 5% annual growth trends persist. It was worth only $4b in 1978. One future driver of demand growth could be the commercialization of space. Chips are currently used to make computers, of course, and consumer and industrial electronics more broadly. There’s also widely used in the aerospace, defense, medical and telecom sectors. Ford also stresses the importance of demand from small businesses, noting that three-quarters of all U.S. manufacturing firms have fewer than 20 employees. C.J. Muse of Evercore, among others, sees semiconductor prices rising in 2021, all the more so with another round of federal stimulus to lift demand. U.S.-China tensions are a risk though, especially as they pertain to Taiwan, a semiconductor powerhouse that Beijing considers part of its territory.
· Restaurants: It was a trend before Covid. Now, the concept of “ghost kitchens” is gaining steam. Kristen Hawley, the industry expert behind the newsletter Expedite, explains how restaurants—both newcomers and established players—are building delivery-only brands, using only online ordering. She gives the theoretical example of a restaurant that happens to have extra fryer space and perhaps some underutilized kitchen staff. So it develops a fried chicken brand that makes use of that space, separate from the normal restaurant operation. That’s more profitable, many are concluding, than simply adding more dishes to their regular menu. Usually, they outsource the ordering and delivery to companies with the requisite technology, namely UberEats, Grubhub or DoorDash, which themselves leverage their abundant data to help restaurants identify demand trends. Owners of big chain restaurants have mixed feelings about virtual brands. Darden, which owns Olive Garden, seems wary. Brinker on the other hand, which owns Chili’s, is diving in with virtual brands like “It’s Just Wings,” run out of its own kitchens and available on the DoorDash app. One virtual brand getting a lot of attention is MrBeast Burgers. MrBeast—real name Jimmy Donaldson—happens to be YouTube’s second-highest-paid celebrity. And now he’s teamed up with a company called Virtual Dining Concepts, which creates virtual brands and connects them to available kitchen space across the country. They’re now offering delivery-only burgers at some 300 locations across the U.S. MrBeast uses partner restaurants like Bravo and Brio, normally Italian restaurants. Hawley notes both the opportunities and risks to restaurants essentially renting out their kitchens to virtual brands. It can certainly provide incremental revenue, badly needed with Covid-related dining restrictions still in place. On the other hand, restaurants are providing kitchen space to a brand they don’t control. “Think about what would happen if a celebrity involved in a ghost kitchen concept did something awful, and the brand shut down, leaving partner restaurants out in the cold.” She also cites the growing awareness of diners “starting to get wise to these businesses,” wanting both the marketing companies and the restaurants to be forthright about where the food is coming from.
· Venture capital: Y-Combinator is a Silicon Valley incubator, or startup accelerator. It basically gives promising startup tech companies some “seed funding” to get them off the ground. In exchange, they take an ownership stake. Speaking on the Wharton Fintech podcast, Y-Combinator’s Michael Seibel and Dalton Caldwell said 15% of companies it’s currently funding are in the fintech space (financial technology). In the roughly 15 years since launching, the group has seeded some major success stories, none bigger than Airbnb. Others include DoorDash, Stripe, Dropbox, Reddit and Coinbase, the latter getting a lot of attention as the largest U.S.-based exchange for cryptocurrencies (see Looking Ahead section below).
· Labor: On a Morgan Stanley podcast last month, the company’s chief economic advisor Reza Moghadam discussed the concept of labor “scarring.” This is when a recession leaves lasting marks on the economy by diminishing the skills capacity of the U.S. workforce. An example might be an airline pilot out of work for so long that he or she needs lots of retraining before returning. More alarming, perhaps, is the impact of high school and college graduates who can’t find a job, and therefore unable to establish experience and skills that enable them to earn higher salaries later in their career. As Moghadam describes, it’s not just unemployment that can scar an economy. There’s such a thing as capital scars too, when a recession causes investment to drop. He also mentions technological scars, when lower economic activity delays innovation.
· Labor: A new U.S. Census report shows that 32% of Americans 25 years or older have at least a bachelor’s degree. That’s up from about 28% on average between 2005 and 2009. The figures vary by geography, with the northeast having the highest percentage of college-educated adults and the south having the lowest. There are differences along racial and ethnic lines too, with only 22% of Black Americans holding college degrees. The number for Hispanic Americans is just 16%. Lifting higher education rates among communities of color is a key policy goal of the Biden Administration, viewing it as a lever to reduce income and wealth inequality.
· Engage with China: There’s no disputing that China has become a geopolitical rival to the U.S., with an ever-increasing ability to influence global affairs. But limiting trade through tariffs and other means hurts us more than it hurts them. During the Trump-era tariff wars, entire sectors across America suffered. Chinese demand is critical for American farmers. Boeing, America’s biggest exporter, generates roughly a fifth of its Dreamliner orders from China. Many U.S. colleges depend on turion revenue from Chinese students. American consumers are paying more for the wide array of goods imported from China, which naturally reacted to U.S. tariffs with levies of their own. American communities are denied Chinese investment and the jobs it creates. If trade tensions worsen, it could jeopardize a critical market for carmakers and chipmakers, two vital U.S. industries. China’s recent willingness to open its financial markets to U.S. companies should be welcome. The U.S., more generally, needs export markets to grow high-paying jobs, and there’s no export market with more potential than China. Sure, it’s reasonable to diversify supply chains away from China to the extent possible. But there’s no substitute for what China can do for U.S. companies—its scale, its workforce, its stability, its experience, its infrastructure, its reliable electricity… Apple, for one, is not the same company without its Chinese manufacturing base, never mind the billions in sales it generates there. If all of that fails to convince, be mindful of the real risk of military conflict with China, a risk that escalates with trade tensions. Adam Posen, president of the Peterson Institute, speaks of a “new red scare” in which the U.S. is paranoid about China’s technological development. As he explained at a 2019 event, corporate power, and by extension national power, comes not through access to a specific technology but rather through brands, marketing, services, business practices, expertise and design. These factors explain why Apple’s products are so coveted worldwide; it’s not any secret technology it employs. On war risk, Posen reminds that Germany and Japan adopted imperialism in the 20th century in part because they expected to be cut off from vital food and energy supplies—in other words, blocked from world trade, as the U.S. is trying to do to China today.
· Decouple from China: The U.S. economy is too dependent on China, an increasingly powerful rival with sharply opposing views on governance, human rights and democracy. It’s pouring huge sums of money into its military, and more worryingly, into technological research and development with military applications. National security must be considered when crafting economic policies. It’s all well and good for a U.S. city to save money by procuring telecom equipment from China’s Huawei. But what if that equipment can be weaponized as a tool of espionage or infrastructure sabotage? The U.S.-China trading relationship is characterized by Chinese cybertheft, intellectual property theft, violation of WTO rules, state subsidies to most major companies and major exporters complicit in repression of the Uighur population. China demands U.S. companies and institutions bow to its demands—airlines must show Taiwan as part of China on their route maps, the NBA can’t support democracy protestors in Hong Kong, and so on. Besides, China has little choice but to buy American goods like Boeing aircraft and soybeans and advanced microchips—it needs them. When it comes to U.S. tech companies like Google and Facebook, however, China bans them, yet gets upset when Washington bans Huawei. Beijing, meanwhile, forces many U.S. companies to form joint ventures with local partners with the intent of taking their technology. Restricting trade with China won’t just slow the development of America’s number one geopolitical rival. It will also help American workers by incentivizing companies to bring lots of their manufacturing home. This would help low-wage workers most. Senator Mark Warner of Virginia, chair of the Senate’s intelligence committee, is a leading voice when it comes to warning about the threat of China. He calls for several initiatives that would downgrade the U.S.-China economic relationship, including strengthening U.S. export controls and limiting U.S. investment in Chinese companies.
· Fiscal Policy: Treasury secretary Janet Yellen continues to sell the need for more stimulus. Speaking with the New York Times last week, the former Fed chief spoke of the 15m people unemployed, a similar number behind on their rent payments and 24m adults that say they don’t have enough to eat. Not spending enough to address this carries its own fiscal risks, highlighted by the failure to spend enough during the last crisis (GDP recovered slowly amid fiscal contraction). The decision is all the more obvious given how low interest rates are. Today, despite all the spending to address both the 2008 housing crisis and the 2020 Covid crisis, interest as a percentage of U.S. GDP is no higher than it was in 2007. Should stimulus payments be more targeted to Americans in need? Yes, as they are with unemployment insurance, food assistance and rental aid. But the universal $1,400 checks she supports ensures that “all pockets of misery” get covered. (According to the University of Illinois economist Eliza Forsythe, nearly three-quarters of jobless workers are not receiving unemployment benefits, often because they incorrectly think they’re not eligible). Yellen says President Biden is prepared to raise corporate taxes, though not to levels prevailing before the 2017 tax cut. An end to fossil fuel subsidies is another target for raising revenues. Changes to tax policies regarding capital gains, estate transfers and carried interest are a possibility. But Biden, she said, is not in favor of the wealth tax idea championed by Senators Elizabeth Warren and Bernie Sanders, among others. Implementation of such a tax, she believes, would be difficult. Yellen repeated her suspicions about Bitcoin but doesn’t dismiss the possibility of a digital dollar, pending satisfactory answers to questions about how to prohibit illicit finance and how it would affect financial institutions and households. One separate comment about banks: Yellen says the U.S. learned lessons from the Japanese asset bubble in the 1990s. For one, it’s critical to quickly recapitalize banks after a recession, so they can play a part in supporting the economy’s recovery. The U.S. did just that after the housing bubble, and U.S. banks today are healthy and ready to lend.
· Monetary Policy: The Fed does more than just monetary policy. It supervises banks, for example. And it runs the financial plumbing necessary to move money between banks, nonbank firms, governments and households. Worryingly, that plumbing briefly stopped working last week—here again, a reason to worry that America isn’t investing enough in its infrastructure, both physical and digital. But the Fed was soon back in the spotlight for more conventional reasons, namely Jerome Powell’s latest update to Congress. The Fed chair stuck to his dovish message on interest rates, emphasizing the labor market’s struggles and the forces keeping inflation restrained. Some lawmakers pushed back with concerns about rising asset prices, with Senator Pat Toomey of Pennsylvania for one noting how the last two economic downturns were precipitated by popping asset bubbles (first the Dot.com bust, then the housing crash). Staying in his lane, Powell refused to take a position on fiscal policies. But he did acknowledge concerns about rising inequality expressed by Senator Elizabeth Warren of Massachusetts. She said the top 1% of U.S. families measured by earnings now account for a fifth of all national income and a third of all national wealth.
· State and Local Governments: Whew! Most states and localities are finding their fiscal situations to be much better than initially feared when Covid first hit. Governments relying on revenues from tourism and energy are taking a hit for sure. But property taxes, the chief source of revenue for most local governments, are up thanks to the housing boom. Aid from Congress is helping too, with more on the way if the $1.9t stimulus bill passes. At the same time, state and local governments have been able to borrow funds at lower interest rates via the municipal bond market. For better or for worse, they’ve also cut labor costs sharply, in the education sector especially. According to the Federal Reserve, state and local governments have cut payroll by an unprecedented 6.5% in the past year. Public-sector employment is down significantly in nearly all states. A Cato Institute report shows that state and local tax revenue actually increased 1% in 2020, with income tax revenue up 3% and property tax revenue up 4%, offsetting a 2% decline in sales taxes. California, the nation’s largest state, is seeing a capital gains tax windfall from the booming stock market. New Jersey, which earlier borrowed $4b to address looming shortfalls, now has more than it expected, with $6b in new funds potentially coming from Washington’s new stimulus bill. California and New Jersey are both high-tax states. But as the latter’s governor Phil Murphy likes to say, you get what you pay for in terms of good jobs, good schools and good health care (the state indeed has an abundance of all three). Cato, incidentally, names Hawaii and Wyoming as two states in a more precarious fiscal position given their dependence on tourism and energy, respectively.
· North Dakota: For much of America, the last recession before Covid came in 2008 and 2009, when housing prices collapsed nationwide. Not so for North Dakota, which exhibited its own unique economic trajectory during the 2010s. During the first half of the decade, it was among the fastest-growing economies—in the world. With oil prices topping $100 per barrel for three straight years, western parts of the state enjoying the horizontal drilling boom—the town of Williston, for example—couldn’t build homes, roads, hotels, eateries and medical facilities fast enough. Americans with little education could land oil jobs at companies like Haliburton, paying six-figure salaries. In 2012, the number of airline seats departing Williston airport jumped by 42%, according to Cirium. The next year, seats doubled. The boom led North Dakota’s economy to grow a stunning 25% in 2012, followed by 4% growth in 2013 and 9% growth in 2014, St. Louis Fed statistics show. Wow. But it all came crashing down when oil prices collapsed in late 2014. Boom became bust. Just as growth in the national economy was picking up, North Dakota’s GDP contracted 6% and then 8% in 2015 and 2016, respectively. State GDP remains smaller today than it was at its 2014 peak. And that was true in 2019 as well, before Covid started. In 2016, Williston’s airline capacity plummeted nearly 40%. The western North Dakota oil roller coaster, however, masks a much sunnier situation to the east. There, unemployment stands at just 3% today, according to Jeremy Jackson of North Dakota State University. In Williams County, by contrast, where Williston is located, the unemployment rate is 10%. Agriculture is one important sector for the state, with farms growing products like corn, wheat, soy, barley and sugar beets. Prices for many of these crops are helpfully rising in 2021. In the tech space, Microsoft has one of its largest campuses in Fargo, the state’s largest metro area. Ag tech—applying new technologies to farming—is a hot area. So is drone research around Grand Forks and its air force base, with its empty airspace and open land. Last week, Jackson’s Center for Public Choice and Private Enterprise published its latest monthly update on the state’s economy, noting a growing labor force, rising wages and higher tax collections. The report also shows that “North Dakota’s current economic path is relatively independent of trends in the price of crude oil.” That said, times are still tough in places like Williston—its latest blow was the cancellation of the Keystone Pipeline, which would have brought crude from North Dakota’s Bakken region to Gulf refineries in Texas and Louisiana. That said, Bakken crude is already flowing through the Dakota Access pipeline.
· Alabama is suddenly a major battleground in the U.S. labor movement. Just last April, Amazon opened a giant warehouse near Birmingham, a city once upon a time buzzing with steel production and mining. The facility’s created nearly 6,000 new jobs but also a desire among some workers to form a union, something Amazon is campaigning hard to prevent. In fact, the company is a vocal supporter of a $15 federal minimum wage, in part to win support from labor (and in part to pressure financially weaker rivals). The Alabama staff is currently voting whether to join the Retail, Wholesale and Department Store Union, with results expected in April. If they vote yes, it would be the first unionized warehouse for Amazon, and perhaps encouragement for unionization elsewhere across the company. Amazon’s rival Walmart has for years successfully fought against unionization drives. NPR Indicator, a podcast, looked back at unionization campaigns at big auto plants throughout the south, none of them successful. “Do you want Tuscaloosa to be the next Detroit?” was a campaign message by those opposed to unionizing an Alabama Mercedes Benz plant. Unions also failed at Nissan and Volkswagen plants in Tennessee. But they might have better luck this time, with Amazon growing so fast, giving workers more leverage. Also, Alabama, though its unionization rate is low, has the highest rate among southern states. Workers at the Birmingham plant meanwhile, predominantly Black, are evoking the Civil Rights campaigns of the 1960s. That’s a movement that resonates strongly.
America's Largest Banks
U.S. chartered commercial banks insured by the FDIC, ranked by consolidated assets
source: Federal Reserve
Assets, Dec. 31, 2020
Run by the venerable Jamie Dimon, America's most powerful banker
Bank of America
Much more of a domestic bank than its NY rivals JPMorgan and Citi
Still hurting from big fee scandal last decade
Has 154 branches outside the U.S., far more than any other U.S. bank
Had about 3,000 branches in 2015; now about 2,700 with more to close
Product of merger between BB&T (of Winston-Salem) and SunTrust (Atlanta)
McClean (Wash DC)
CEO Fairbank says "sweeping digital change continues to transform banking"
Thinks lots of unused industrial capacity will keep inflation low
Cherry Hill a New Jersey suburb of Philadelphia; parent is based in Toronto
Bank of New York Mellon
Country's largest "custodian bank" holding assets owned by others
Country's second-largest "custodian bank;" big rival is BONY Mellon
Like Goldman Sachs, it's mostly an investment bank rather than lender
Much more of an investment bank than a lending bank
M&T (including People's)
People's deal, announced last week, amplifies presence between Boston, Wash
Says 10% of its loans/leases to industries highly impacted by Covid (i.e. hotels)
Subsidiary of London and Hong Kong-based bank of the same name
Once a subsidiary of the Royal Bank of Scotland (RBS)
Once the finance arm of General Motors; car finance still its specialty
Among the banks planning to present at RBC virtual conference on March 10
Enjoyed a big Q4 boost from fees for helping clients raise new equity/debt
Bank of Montreal subsidiary
Average deposits grew 17% last year as people saved their stimulus checks
Besides banking, its big business is asset management
Main Business is credit card lending; has key partnership with Delta Air Lines
Mitsubishi UFG Union Bank
Subsidiary of Japan's MUFG
About 5% of its loan portfolio is financing RVs and boats
Silicon Valley Bank
Naturally big into funding startups given its location
Like Amex, its main business is credit cards; originally launched by Sears
Subsidiary of Spain's BBVA
Bank of the West
Subsidiary of France's BNP Paribas
· Tourism is an enormous worldwide industry, perhaps even the world’s largest measured by impact on GDP. For some smaller countries—in the Caribbean, for example—it’s the dominant industry. It’s also critical because of how many jobs it creates, and how many of these jobs don’t require any special skills or education. Covid’s devastating impact on tourism, therefore, was a hammer blow for many economies around the world. The U.S. is actually the world’s largest inbound tourism market measured by revenue, based on 2019 data published by the UNWTO. U.S. tourism receipts that year were $214b. Spain was next at $80b, followed by France at $64b. Next on the list? Thailand, the U.K., Italy, Japan, Australia and Germany. Within the U.S., no city welcomes more tourism in normal times than New York City—65m people visited in 2018, 14m of them from abroad.
· Foreign oil: The Biden administration will update its policy on Saudi Arabia this week, following last week’s intelligence report implicating the country’s de facto ruler in the murder of a prominent journalist working for the Washington Post. The U.S.-Saudi relationship is always top of mind for Washington given its importance to American energy security. But that importance is dwindling. Bloomberg’s Javier Blas points out that American imports of Saudi crude are currently at their lowest levels since October 1983. The horizontal drilling revolution, also known as fracking, was a game-changer in terms of reducing America’s dependence on foreign oil. At the same time, the U.S. economy is much more energy-efficient than it was in decades past. It still uses lots of oil though, and likely will for many years before alternative energy sources become dominant in areas like transportation.
· Google: Land of the Giants is a podcast series that looks back at the rise of America’s west coast tech giants. Its latest subject is Google, launched by two Stanford University doctoral students in 1998. The company’s rise to dominating internet search was anything but inevitable. In Google’s early days, Microsoft commanded the gates to the internet—almost everyone accessed it via their Windows-operated personal computers. Bill Gates and company had famously crushed the young startup Netscape and got away with it in court. This left Microsoft’s Internet Explorer (IE) as the dominant web browser at the start of the 2000s. Enter Sundar Pichai. Today, he’s Google’s CEO. Then, he was a young executive establishing an internal team to build a web browser called Chrome. It was so good that by 2012, to Google’s own surprise, Chrome became the most popular browser on the web, surpassing IE. Chrome, the podcast asserts, “turned out to be the Dragon Slayer.” Microsoft assumed that everyone would use IP because everyone used Windows. And that everyone that used IP would naturally use Bing (its competing search engine). It was wrong. But that’s hardly the end of the story. “One of the great inflection points in the history of the internet” came with the shift from desktop computing to mobile. Google understood early that it needed to have a commanding presence on the mobile web. So it quietly bought a tiny startup called Android for about $50m in 2005. Why quietly? Because Google was close partners with Apple, which was working on the iPhone at the time. Google’s then CEO Eric Schmidt was in fact an Apple board member, appearing onstage alongside Steve Jobs at the famous iPhone launch event in 2007. Jobs was furious when he found out about Google’s Android development. But Google took a different approach with Android. It didn’t want to build the actual phones like Apple. Instead, it licensed the Android software to other device builders like Samsung. The story takes another twist after Steve Jobs passed away in 2011. His successor Tim Cook decided to re-friend Google, forming a lucrative relationship in which Google today pays Apple between $8b and $12b annually to make Google the default search engine on all Apple devices. Thanks to that arrangement, nearly 50% of all Google search queries are now made on Apple devices. But Washington’s not happy about this arrangement. It’s now suing Google and Apple on antitrust grounds, just as it sued Microsoft in the late 1990s. As for Microsoft today, it largely missed the mobile web revolution after losing the browser wars. But not to worry: It remained a profit powerhouse by becoming a king of the cloud.
· The Bond Market: The podcast Planet Money looks back at a fundamental shift in the U.S. government bond market, one that profoundly changed the way Congress reacted to the Covid crisis. In the 1990s, a growing U.S. budget deficit, resulting in ever-growing national debt, rang alarm bells for economists. If bond investors became worried about Washington’s ability to repay without resorting to inflation, they would demand higher interest rates. And that would be bad for the economy—businesses wouldn’t invest as much if borrowing costs rose. People would buy fewer houses and cars. So Presidents Bush (the elder) and Clinton raised taxes and cut spending. Sure enough, by the end of Clinton’s term in 2000, the federal deficit had fallen to zero. It began rising again under Bush the younger, and even higher still as President Obama enacted emergency relief during the housing crisis. But he quickly thereafter refocused on deficit and debt reduction (remember the Bowles-Simpson negotiations?). But one bond investor wasn’t convinced. Bill Gross, head of the world’s largest bond fund at the time, decided to sell his entire portfolio of Treasury bonds in early 2011. All of them. Surely, he thought, interest rates would rise, depressing the value of the old bonds he held (when rates rise, bonds with the old lower rates naturally get devalued). Economists worried too that interest rates were poised to rise given the swelling federal debt. And guess what? Nothing happened. Interest rates continued to fall. Gross publicly admitted his mistake and started buying Treasuries again in 2012. Why did rates continue to fall? Economists aren’t really sure. But deficits and debt—and those bond investor “vigilantes”—no longer looked so scary. When the next emergency came in March 2020, Congress was ready to spend big—first $2.2 trillion that month, then another $900b in December. Now, it’s ready to add $1.9 trillion more. But this time with more pushback. Some say higher interest rates remain a threat. The bond market, interestingly enough, is perhaps hitting in recent weeks that it agrees.
· Cryptoeconomy: So you want to buy some Bitcoin? Where to start? A popular place is Coinbase, the largest U.S.-based exchange for cryptocurrency transactions. Last week, Coinbase announced its intention to go public with its shares, enticing investors with bullish talk about the cryptoeconomy’s potential to be as revolutionary as the internet. By its own admission, crypto assets are not yet ready for prime time—cryptocurrencies for example are still “much too difficult to use for the average person.” But Coinbase aims to change that. The company launched in 2012, four years after the advent of Bitcoin, the first and still largest cryptocurrency. In 2020, Coinbase generated nearly $1.3b in revenue, almost all of it from transaction fees earned when customers (both retail and institutional) buy and sell cryptocurrencies on its exchange. It made a $322m net profit as well, as more and more investors became attracted to cryptocurrencies. How could they not be with Bitcoin’s price soaring from $7,000 at the start of 2020 to $29,000 by year end. Currently, Coinbase estimates the value of all exchange-traded crypto assets to be somewhere close to $800b. With the extreme price volatility exhibited by Bitcoin, of course, that number swings sharply up and down. To its supporters, the cryptoeconomy is far more than just investors speculating on Bitcoin’s value. Certainly not lacking in grandiose visions, Coinbase CEO Brian Armstrong sees the cryptoeconomy, underpinned by blockchain technology, as a common set of standards that can’t be manipulated by any government or company, thus making the world “a more fair and free place.” The way he sees it, Coinbase is to crypto today what Google was to the internet in its early days, making the technology accessible and easy to use for anyone with an internet connection. People are currently buying, selling, storing, saving, spending and using their cryptocurrencies on the Coinbase platform. In time, the company plans to introduce more products and services, with the ultimate goal of de-intermediating finance (in other ways, removing banks and other middlemen from the equation). The financial system today, Armstrong asserts, is “rife with high fees, delays, unequal access and barriers to innovation.” In some countries, people don’t even have access to sound money or credit or basic property rights. Blockchain technology could change this by enabling the secure digitization of money (both established currencies and new ones), transaction records, contracts, documents (including legal documents), identity, rights, securities, titles and so on. People are digitizing goods purchased within video games. They’re even digitizing artwork using non-fungible tokens (NFTs). The NBA, with its Top Shot business, is digitizing collectible video highlights, also with NFTs. Coinbase, importantly, is working with established financial players too, including Visa. But how many people are holding or using crypto assets today? Armstrong estimates about 60m to 70m people globally, and about 10% of Americans. He mentioned those figures last month, in a podcast interview with economist Tyler Cowen.
· In thinking about Ethereum and other blockchain-based smart contracts—and their potential to decentralize finance—Bloomberg’s Tracy Alloway remembers the cautionary tale of peer-to-peer lending. It too was supposed to cut out the financial middlemen. New startups were creating platforms to connect borrowers with lenders, stripping out banks from the equation. Ultimately, however, banks and other instructional investors wound up buying the loans (which often came with higher yields). Wall Street then packaged these loans with others to create new securities. “An industry which sought to disrupt traditional finance,” Alloway writes, “ended up joining forces with it instead.” The economist Cowen, incidentally, raises the same possibility with crypto assets—that they’ll eventually become dominated by established players.
· What does the MIT Technology Review think will be the biggest breakthroughs of 2021? Its editors devised a list of their top ten, starting with messenger RNA vaccines. The others are: GPT-3 language models that attempt to talk and write like humans, TikTok recommendation algorithms that help make users famous, Quantum-Scape’s lithium-metal batteries designed to replace lithium-ion versions in electric vehicles, data trusts to safely manage people’s personal data, green hydrogen as an energy source, digital contract tracing to help fight future epidemics, hyper-accurate positioning to improve on GPS, the concept of “remote everything” including education and health care, and multi-skilled artificial intelligence systems. Last year’s list, by the way, included anti-aging drugs and digital money.
· What are the biggest digital investment areas for companies as they look ahead? Goldman Sachs software analyst Kash Rangan, speaking on the company’s Exchanges podcast, says the public cloud is clearly the biggest topic in technology. Companies in all sectors, in other words, are outsourcing computing services to cloud providers like Amazon, Microsoft or Google. Other big investment areas include business intelligence and analytics, and security and compliance.