By Michael Every of Rabobank
Big, Bigger,...East India Company
Q2 US GDP was a shocker at just 6.5% q/q annualised vs. 8.5% expected. That was little changed from 6.2% in Q1, when the US hadn’t yet ‘beaten Covid’, and so was a jab to markets expecting jabs to have delivered more. The details can be sliced and diced this way and that and will be revised endlessly, more so given the extraordinary times and that some of the data was probably literally phoned in. Nonetheless, the picture is that without the huge fiscal transfer from the public to the private sector, allowing for personal consumption to be up 11.8% q/q annualized like Q1’s 11.4% print before it, the US economy would have been even weaker. It certainly was not a GDP report that showed any sign of private investment rebounding: not in a V-shape “Roaring 20’s” fashion --remember that idiotic meme, if taken without any historic irony, from all of 6-7 months ago?-- nor even to a “rubbish pre-Covid New Normal” – and remember that meme? The last four quarters’ figures for real private sector fixed investment are, starting in Q3 2020, now: 27.5%, 17.7%, 13.0%, and just 3.0%. Where next?
On which note, it appears we are no closer to any fiscal stimulus – or at least that’s the market’s view given 10-year US yields are this morning at 1.27%. Indeed, ‘all of a sudden’ the US debt ceiling looms as a possible fiscal cliff, the complete opposite of the reflation story that pushed up yields in Q1. Further, a White House press conference yesterday left the rhetorical door open to renewed lockdowns if the science (i.e., the CDC) demands it, which is obviously not good for business confidence. Moreover, largely unheralded by the financial media because this kind of thing only happens to other people, the eviction moratorium ends at the end of this month – and a Supreme Court ruling means only action from Congress, not an executive order, will extended it further. Millions of people could be about to lose their homes: do the math on what that means for the economy and, more importantly, for an already bitterly-polarised US society.
While reiterating that this is not an equity Daily, also a shocker to markets --says Bloomberg-- were earnings at Amazon, its stock falling 6% as a result, the equivalent of an entire fleet of priapic rocket-ships. That is the headline this morning in Asia, not the hours ticking down to mass US evictions,…unless the two are conflated, and disappointing sales projections for Q3 are due to the fact that lots of customers will not be able to get stuff delivered to “Skid Row”. Please don’t mistake the tone here for flippancy - it should be taken as urgency.
Regular readers know this Daily has never been short on comment about how failing and flailing our global systemic architecture is, despite the rictus smiles we get from the top of it. When even the corporate behemoths our system creates are perhaps being dragged down by its internal contradiction of a lack of final demand, that criticism might become a little more obvious. Full Marx to those who spotted it in advance. But what am I saying? There can always be more QE, right? And QE will obviously stabilize everything,…right? Would you want to bet against the broader market mirroring these thoughts?
On which note, I want to embark on a little voyage with you. First to Europe, where ECB executive board member Panetta has stated: “cinema-lovers, from now on when inflation falls below 2% our monetary policy should take inspiration from ‘Pirates of the Caribbean’, even if some would prefer ‘Sleeping Beauty’.” Was the ECB implying it would act like a drunken pirate with more luck than knowledge? Presuming he meant the first movie, maybe he was referring to a cursed gold standard – but that would imply less QE as well as no fiscal stimulus. So perhaps the message was just “Welcome to Caribbean, love!” – which markets happily echo…until there is no more rum. But on we sail, me hearties, as rum we have a-plenty. For the Americas, with a fair wind at our backs!
The first Pirates film featured the East India Company (EIC), a monopolistic, mercantilist body set up in 1600 to loot and colonize Asia for the British, and which ruled India from 1757-1858, when Queen Victoria decided to do it as Empress. (NB They are the baddies.) Branko Milanovic recently wrote an article asking if Norway is the new EIC. I want to ask a simpler question: how much bigger can big US firms get before they end up stumbling into roles that replicate the EIC experience? I am serious even if *not* talking about colonization or selling opium at gunpoint.
Assume Generic Big Tech Firm (GBTF) keeps growing market cap at 11.2% a year, and the US economy grows 4% in nominal terms (2% real GDP, 2% CPI) to keep the math simple. In that scenario, GBTF doubles its market cap relative to GDP by 2031; again by 2041; and again by 2051. Wall Street/Tech Bro eyes turn green, because who doesn’t like an exponential? Amazon’s market cap is $1.8 trillion, which is 8% of the US. Project that at 16%; 32%; 64%, etc. By 2061, the selection of the CEO of GBTF would be a political event to eclipse that of US president. Or could we see the government merge, in neoliberal fashion – which is how the EIC operated? Here’s another historical snippet: in 1915, diplomat Kurt Riezler proposed to Chancellor Bethmann-Hollweg to make the German Empire into a joint-stock company in which Prussia would hold a majority stake.
Meanwhile, we sail for China. After this week’s hoo-ha over regulatory crackdowns, the Wall Street Journal reports the message to state banks from Beijing is now: “That thing about destroying swathes of the private sector, and stopping US IPOs, and massive political risk? So we didn’t mean it.” Which is reassuring to some. Others are post hoc ergo propter hoc arguing that if you read Xi Jinping’s speeches, he made clear years ago that such crackdowns were inevitable: to which one may ask “What else has been said in said speeches?” Clearly, however, Beijing can project forward using the Rule of 72 and recognize what it means about who rules. Perhaps the US can too, via the July anti-trust executive order? That remains to be seen, mateys. And even more than fleets of priapic rocket-ships are at stake.
Allow me to conclude this week and this month by noting that in his piece, Milanovic quotes a gem from Adam Smith I have also used before, talking specifically about the EIC: “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.” But boy, looking around us globally, is there some tough market competition.