Grisly Financials, India “News Monsoon”, U.S. Tech Falters and News of the Week
Grisly Financials, India “News Monsoon”, U.S. Tech Falters and News of the Week
Happy Friday y’all! Remember to tune into the latest episode of the Perch Pod – Mexican political analyst Stephanie Henaro had some eye-opening and pessimistic insights into Mexico’s short-to-medium-term future. Stay safe, wear your masks, and keep in touch.
Lessons from the Q2 carnage. Three major economies reported grisly Q2 economic data: the U.S., Germany, and China. The U.S. recorded a 32.9 percent year-on-year decrease in real gross domestic product (GDP). Germany reported its GDP (adjusted for price, season, and calendar) declined 10.1 percent, the largest quarterly decline since Germany started quarterly GDP calculations in 1970. Saudi Arabia posted a $29 billion budget deficit in Q2 and an almost-50 percent drop in total revenues (led by a 45 percent year-on-year decline in oil revenues).
What it means: Different strokes for different folks!
For the U.S., it is not the GDP figures, but the COVID-19 statistics and the lackluster jobs data that is concerning. The seven-day rolling average of new COVID-19 cases in the U.S. has surpassed 200 new cases per million per day (a useful thread on why that number is important is here). Meanwhile, the Labor Department’s most recent figures on unemployment benefits indicated that for a second consecutive week, the number of workers applying for initial unemployment benefits rose after four months of decreases. Add in the fact that the current Republican Party proposal for a COVID-19 stimulus package includes $30 billion of defense spending and you can forget about a V or W-shaped recovery – a sustainable recovery has not really even begun yet, and may not begin in earnest until a vaccine. Also, shout-out to David McWilliams for describing this situation as a “Pandession” – it’s a perfect way to describe what’s happening.
For Germany, long critiqued for an over-reliance on exports, the story is not the steepness of its economic decline but its resilience. Germany has done so well that The Wall Street Journal is declaring a V-shaped recovery and “green shoots” emerging amidst the economic carnage. Not bad for the sick man of the euro! Germany’s unemployment rate has increased from 3.8 percent to 4.2 percent – a 10 percent increase overall, but paling in comparison with the surge in unemployment in the U.S. Yes, the ratio of Germany’s exports of goods and services to overall GDP is relatively high – 47 percent in 2019, to be exact – but one statistical indicator is hardly a good basis upon which to judge the German economy. More important has been Germany’s effectiveness in controlling COVID-19 and efficiently channeling government spending to maximum effect. Germany’s stinginess (relative to other EU-member states) in terms of debt-spending in the last decade, meanwhile, means it has more flexibility than most, the benefits of which are now on full display.
And lastly Saudi Arabia. The statistics here are a mixed bag. The roughly 13 percent decline in Saudi Arabia’s foreign reserves – from $514 billion to ~$450 billion – is a cause for concern, though at least some of the decline is due to transfers to Saudi Arabia’s Public Investment Fund in order to take advantage of high-upside opportunities in global equity markets. Saudi Arabia can afford its deficit. The bigger issues that concern us are the fact that Saudi Arabia’s main export, oil, is and will be oversupplied in global markets for years to come. In addition, the Saudi government has reportedly removed state employees’ cost-of-living allowance and triple its value-added tax to enhance state revenues. And all of this while 84-year-old King Salman bin Abdulaziz is convalescing from gallbladder removal surgery last week, setting up an uncertain and dangerous period for Crown Prince Mohammed bin Salman and the Kingdom’s short-term political stability.
India’s self-reliance (“Atmanirbhar Bharat Abhiyan”). Get ready for a monsoon of India developments:
- India is deploying an additional 35,000 troops to its disputed Himalayan border with China.
- Five Rafale fighter jets on order from France arrived and India’s Air Force said they were “game changers.”
- India announced that 371 categories of products, including everything from toys to telecoms gear, would be subject to a new mandatory Indian Standards regime in March.
- Huawei cut its 2020 revenue target for the Indian market by half and will lay off between 60-70 percent of its staff.
- Chinese users of WeChat in India who signed up with an Indian number reported their service had been blocked; India banned an additional 47 Chinese mobile apps from the country.
- A long-rumored India-U.S. free trade deal is beginning to take shape, but according to Indian media it will only cover 15 percent of trade to start.
What it means: Where to begin? We confess we have never seen a country or a national media so thoroughly exaggerate the significance of a few fighter jets than India has in playing up the acquisition of five Rafale jets. Then again, coming from a country where banning Chinese apps inspired this kind of coverage perhaps we shouldn’t be so surprised. We definitely don’t know what “hit” us, Arnab!
Far more significant is India’s sudden escalation of its border-spat with China, which comes just days after China said a fifth-round of commander-level talks were supposed to take place to “resolve outstanding issues on the ground” between the two countries. So much for that – and for de-escalation in general.
Equally significant is the announcement on mandatory standards for imports affecting 371 categories of goods. These have been under consideration (at least publicly) since January, but the Sino-Indian border spat and the Modi government’s sudden emphasis on “self-reliance” accelerated India’s timeline. Almost 15 percent of all Indian imports come from China and a bulk of the products affected come from China. India, like many other countries, is embracing selective protectionist policies – not because it wants to hive itself off from the world, but because it would rather attract investment and technology than rely on imports.
If India can pull that off, someone will probably have to peel Arnab Goswami off the ceiling.
Intel, Qualcomm, and Industry/Geopolitics 4.0. First of all, if you missed our Tuesday newsletter, consider going back and reading it real fast. We think the concept of a “Fourth Geopolitical Revolution” occurring alongside Industry 4.0 developments is a really useful frame for understanding why it is such a big deal that Taiwanese media reported early this week that Taiwan Semiconductor Manufacturing Company (TSMC) has agreed to mass-produce processors and graphics chips for Intel. Neither Intel nor TSMC has confirmed the reports, though Intel did report last week that it was at least 12 months behind internal targets on seven-nanometer chip technology and executed a major management reshuffle as a result. In separate but related news, Qualcomm said Huawei had agreed to a $1.8 billion lump sum payment to end a licensing dispute between the two tech companies.
What it means: Intel’s emphasis over the last decade on retaining its own semiconductor manufacturing capabilities should have paid off in the current geopolitical environment. Intel didn’t really need to think about reshoring because relative to other American chipmakers it never “out-shored.” Instead, Intel’s inability to keep pace with cutting edge semiconductor developments effectively means that the U.S., which practically invented the integrated circuit and in so doing powered the Digital Revolution and the advent of precision-guided munitions, is no longer a leader in semiconductor manufacturing. The Trump Administration’s pressure to get TSMC to open a fab in Arizona (even if it will be obsolete by the time it opens in 2024 – if it even opens in 2024) suddenly makes more sense.
The U.S. government is now promising vast amounts of capital for companies “with a demonstrated ability to construct, expand, or modernize a facility relating to the fabrication, assembly, testing, advanced packaging, or advanced research and development of semiconductors.” Maybe Kodak will start making chips, too! Jokes aside, Intel is still in a position to soak up a good deal of that federal support, but the bigger story here is that the U.S., whose entire economic system is supposed to enable the kind of innovation impossible in a state-controlled, authoritarian regime like China, has fallen behind in one of the most important segments of high-tech manufacturing. The tech cold war – and American dependence on foreign sources of semiconductor fab capacity – just got a lot more serious.
What does Qualcomm’s deal with Huawei have to do with this? We think China is trying to blunt the stringent export controls and Huawei-aimed restrictions the U.S. passed in May and June in any way that it can. How else to explain the sudden settlement with Qualcomm, or Chinese ambassador Cui Tiankai’s op-ed on Thursday insisting that China is still willing to grow China-U.S. relations with goodwill and sincerity.” Long-term, China’s experience with the Trump administration has only cemented its view that it needs to build self-sufficiency in key tech sectors, but in the meantime, the more China can tame the more aggressive hawks in the Trump administration with record agricultural purchase, lump-sum payments, or nice sounding words, it will do so. China is playing the long game. The U.S. is still playing whack-a-mole.
Airbus will amend loan agreements with the French and Spanish governments to increase interest rates to the level stipulated by the World Trade Organization (WTO); Airbus said it had now “fully complied with all WTO requirements” and in so doing had removed “any justification for U.S. tariffs.”
The Israel Defense Forces engaged Hezbollah fighters on the border with Lebanon; at least one media report said that Hezbollah fired anti-tank missiles at Israeli troops, which was followed by retaliatory Israeli artillery fire.
The U.S. International Development Finance Corporation revised its rules so that it can support nuclear energy projects both at home and abroad.
German newspaper Die Welt reported that the U.S. had directly threatened at least two German and European contractors with sanctions if they continued participating in the Nordstream 2 pipeline project
A new South Korean statue that features a Japanese man meant to represent Japanese Prime Minister Shinzo Abe bowing in front of a Korean girl representing Korean women forced to have sex with Japanese soldiers during World War II debuted in Pyeongchang; Japan’s Chief Cabinet Secretary Yoshihide Suga said he had not confirmed the statute’s existence but that if it was true, “it will have a decisive impact on Japan-South Korea relations.”
The President of the United States tweeted that the U.S. should delay the upcoming November presidential election because universal mail-in voting would lead to an inaccurate and fraudulent result. To be clear, the President does not have this power – but that does not make a blatantly anti-democratic suggestion like this coming from America’s highest political office any less disturbing.
Vietnam reported its first local cases of COVID-19 in over 100 days.
Turkish President Tayyip Erdogan ordered a pause in Turkey’s energy exploration in the Eastern Mediterranean to pursue talks with Greece.
In partnership with Telefónica, Huawei announced it opened a permanent testing site for 5G technology in Brazil; meanwhile, the U.S. ambassador to Brazil, Todd Chapman, said that unless Brazil turns its back on Huawei, “there will be consequences for Brazil.”
The new uniform for female high-speed train attendants in China’s Inner Mongolia Autonomous Region is “embellished with elements of Mongolian patterns and horseshoe buckles. They are not only a perfect combination of color and style, but also highlight the gentle and elegant temperament of the female attendants.” #yikes