Protests in the streets, American cities literally on fire and more than 40 million people unemployed.
Meanwhile, the “reality” gap between Main Street and Wall Street is as large as it has ever been.
The tech-heavy Nasdaq Composite Index is back near all-time highs, while the benchmark S&P 500 Index and the Dow Jones Industrial Average have each rebounded 40% from their March lows.
In the same week that a U.S. president threatened to invoke the 213-year-old Insurrection Act, which has typically been used during civil unrest stemming from racial and labor conflicts and frustration of the poor.
Most recently, the act was used to help quell the 1992 Los Angeles riots and to stop looting in the U.S. Virgin Islands after Hurricane Hugo in 1989.
It was the same story in the 1960s after Martin Luther King Jr.’s assassination.
We can’t go back and rewrite history, of course. All the things that have led to where we are as a country today have already happened, for better or worse.
The only thing we can do now is live in the present and prepare accordingly for the future while maybe learning a bit from the past.
As students of history and human nature, we know the story that’s being written about America today is one as old as the Bible itself.
If you study American history, you’ll see that Debt Jubilees occur only in a unique type of extreme political environment.
After all, a Jubilee is a radical measure.
The government essentially steals money from one group and hands it to another. In order for this to occur, four elements must be in place:
- The wealth gap must be getting dramatically bigger.
- There must be cultural threats from those with different values or from outsiders (in other words, minority populations and immigrants).
- The government must be ineffective at providing solutions.
- And there must be growing anger toward the “elites.“
Sounds familiar, doesn’t it?
The concept of a Jubilee comes from the Bible (The Old Testament), the Book of Leviticus, Chapter 25.
A Jubilee in the Jewish tradition was said to occur roughly every 50 years. It was a time for total forgiveness of debt and the freeing of slaves.
Pope Boniface VIII proclaimed the first Christian Jubilee in 1300. And rulers throughout history have occasionally used a Jubilee to reset the financial system – especially when the poorest citizens are threatening revolt.
And there are, of course, consequences for everyone when one of these events happens.
Now, nobody could have imagined largely disorganized and massive “stay at home” orders and an expensive economic shutdown in response to a dangerous pandemic as the catalysts today.
But much like the COVID-19 outbreak has accelerated trends that were already in place, it has also exposed existing problems and an underlying movement that has been happening for years.
When you’ve heard ideas from Democratic presidential candidates like Bernie Sanders and Elizabeth Warren about “Medicare for All,” free college, and universal basic income, this was all part of their message.
When COVID-19 hit our shores, not only were those with lower incomes the most likely to lose their jobs (40% of those making $40,000 or less lost a job in March), they were also infected with the actual virus most frequently.
When Congress decided to send stimulus checks directly to these and other Americans, and the Federal Reserve printed trillions of dollars to pay for it and other bailout programs that may or may not have reached “Main Street,” it was part of their story.
Today, when you combine everyday Americans’ glaring economic stress – most don’t have a few hundred dollars in savings – with COVID-19 anxiety and the flash point of racially charged police brutality and the potential resurrection of the Insurrection Act, you have a familiar American socioeconomic story that has reached a breaking point once again.
These movements happen “every 30 to 40 years.”
There’s actually a name for this type of political and social phenomenon. It’s called “Populism.”
This happened in the 1930s..
Just like today, back then, the wealthy acquired a much higher share of the nation’s wealth.
In addition, the foreign-born percentage of the population was higher than normal, creating animosity among the “common man.”
In order to deal with mounting debts and print money to pay for dozens of new social programs, President Franklin D. Roosevelt made two extraordinary changes to the financial system.
First, he closed banks for four days and forced Americans to turn in each ounce of gold they owned for $20.67 in paper money. Then, the government raised the price of gold, wiping out 69% of the savings of anyone who followed these rules.
The government essentially reneged on commitments to investors in government bonds, to the tune of an estimated $700 million a year, to wipe its own debts clean.
It was a short-term Band-Aid. The stock market boomed, but then soon fell 50% in a single year.
It happened again in the 1960s
If you’re old enough to remember, think about the anger and resentment of the 1960s.
The Black Panthers’ slogan was: “Power to the People.” The idols of the day were people like Latin-American guerrilla leader Che Guevara, Malcolm X, and Muhammad Ali. All over the country, there was one clash after another.
Small farmers fought banks and railroads, union workers battled their bosses and federal judges. On college campuses, students fought anyone with authority. Election rallies routinely ended in violence.
Things were so bad, Lyndon Johnson decided not to run for re-election. Martin Luther King Jr. and Robert Kennedy were assassinated.
In Baltimore, the National Guard and Maryland State Police were called into the city in 1968 to quell violence and looting. And at the same time, a major financial crisis was brewing.
The government had borrowed extraordinary sums, and were having a hard time repaying creditors.
That’s because at the time, every dollar was required to be backed by gold. The government couldn’t print unlimited amounts of money out of thin air.
The government was scared again. It knew there was only one way out, another Debt Jubilee. First, we eliminated the gold backing of every dollar. Then, in 1971, President Nixon completely defaulted on our promise to pay gold for dollars to our foreign creditors.
Once again, the government simply wiped the slate clean.
Today, the United States is not in great shape. We have societal and economic upheaval happening at the same time.
The rich get richer and the poorest citizens, like broke and debt-saddled millennials, are again calling for a radical solution.
Millennials are the country’s largest generation of voters for the first time this year. They largely blame capitalism for the world’s problems and could usher in a new era of socialist policies, including a Jubilee.
But this Jubilee will be different from the ones in 1933 and 1971.
This time, the Federal Reserve has “unlimited QE” at its disposal and has said several times that it will print digital dollars until its computers break to take care of every stakeholder of the financial system. But the only way that private debt of everyday Americans can be resolved is if it’s paid, defaulted, or forgiven.
And you can bet politicians, no matter the affiliation, will never allow tens of millions of our poorest citizens to go bankrupt. One round of government paychecks has already arrived in direct deposit accounts and another round of stimulus payments might be on the way.
President Donald Trump floated the idea of “back to work” bonuses or “vacation” incentives for workers, all in the name of keeping the economy afloat, for this year at least, and likely for years to come.
But throughout history, almost on a schedule, times of 0% interest rates, seemingly endless money-printing, and populist pushes for change have eventually had unintended second-order economic consequences.
It’s just that today, like back then, most people either didn’t think or know about them. Or if they were in a position to understand the possibilities, they didn’t admit what they thought the knock-on effects would be.
Great Case Study for Insider Selling
We’re specifically talking about Moderna’s value right now. First, some background. Consider that the company started working on its vaccine in January. And Moderna shares, even after a pullback in July, are up about 240% year to date, a surge that really started in earnest after the company released vague positive Phase I trial data.
Not long after, several Moderna executives sold thousands of shares for millions of dollars at different points this summer. It’s gratuitous profit-taking in its most obvious form. But now, let’s take it a step further;
Why specifically were they selling?
Because “they” know what most people don’t. Moderna is already tremendously overvalued given the price the company has said it wants to sell a COVID-19 vaccine for.
Moderna seems to want to price a vaccine at around $35. Given that they’re in a competitive environment, given that there’s GlaxoSmithKline and everybody else who also wants a piece, Moderna’s not going to have pricing control over the entire world.
If Moderna sold the vaccine to everyone in the U.S., they would never ever, ever make their market cap. They’ve massively outgrown what they could possibly return to investors. So that’s why they sold. That’s what the CFO and CMO know that retail investors don’t.
The China Threat
Over the past year, the U.S. Departments of State, Defense, Commerce, and Justice acknowledged that Huawei Technologies Co. was and is not primarily a business enterprise in the conventional sense. It is a strategic weapon, subsidized by Beijing with a mission to install 4G and 5G telecommunications systems around the world. Its platforms deliver dramatically more bandwidth in order to deliver more data, faster. Very quickly these 5G networks will become the digital spine within a hyper-automated world filled with trillions of devices. In the race to the digital future, Huawei had, until recently, left rivals behind.
As recently as a year ago, an estimated two-thirds of the world’s nations were in the process of adopting some or all of Huawei’s networking technologies. This, along with China’s $1-trillion Belt and Road Initiative, represents a multi-pronged existential threat to the economies and democracies of the world.
Importantly Huawei’s rise was not part of a conventional mercantilist strategy. It was the lynchpin of a clearly “martial strategy.” Its 5G operating system is closed to competitors (like China’s military dictatorship is closed to political opposition), and its top- down architecture is designed to provide a plug-and- play framework tailor-made for autocrats to surveil, propagandize, and control societies. Huawei coupled with the Belt and Road Initiative is the 21st Century’s version of Homer’s Trojan Horse.
In 2017, the U.S. government finally took action and targeted Huawei, along with China itself, for transgressions including unfair trade practices, data theft, and intellectual property theft. This counterattack has escalated and, more recently, Washington has barred Huawei from its marketplace and pressured others to do the same, while forcing the sell-off of Chinese platforms like TikTok, and blocking Chinese access to U.S. technology. Faced with such onslaughts, Beijing and Huawei argue that these measures are unfair and motivated strictly by economic competition.
Unfortunately, the United Nations and the World Trade Organization have been ineffective in bridling China, due to its heavy influence. And the Chinese have also attempted to politicize the international standards organizations that govern the Internet itself in an effort to award itself advantages; without success, so far.
Up to this point, the tussle between the superpowers themselves is center stage. But the collateral damage continues, involving corporations as well as nation-states. For instance, Huawei was founded by a former military officer, Ren Zhengfei, and one of its first targets was to acquire the advanced technology developed by Nortel, a Canadian company that had 20 years ago become a worldwide pioneer in network design. The story of how this company’s technology disappeared into Huawei was described in a Bloomberg investigative piece earlier this year.
In 2018, Zhengfei’s daughter Meng Wanzhou, who is Huawei’s chief financial officer and deputy chairwoman was charged by American officials with fraud and sanctions violations. That December, she was arrested on an American extradition warrant by Canadian officials while changing planes in Vancouver and has been under house arrest and a series of extradition hearings was held in Canadian courts.
But China retaliated immediately after the arrest by jailing two Canadian businessmen. They are hostages and for nearly two years have not been charged or given access to their families or lawyers. China demanded that Canada ignore its extradition obligation and, because it has not, it has also retaliated harshly by abrogating billions in agriculture contracts with Canada.
Clearly, this has become a battle within a wider war. Huawei is an instrument of the Chinese government and hostages were taken in anticipation of a prisoner swap for Zhengfei’s daughter.
Caught in the crossfire, the world’s Democratic nations are collaborating in order to provide an alternative to Huawei and Beijing. Ironically, the 5G delays triggered by China’s own COVID19 virus have provided western competitors the window of opportunity to catch up. Discussions are underway, initiated by an anti-China push-back from the so-called Quad nations which includes the United States, Japan, India, and Australia. Their objective is to counteract China’s drive toward data dictatorship. There is also ongoing collaboration among the Five Eyes security coalition, which includes the United States, the UK, Australia, Canada, and New Zealand—as well as the European Union. Ideally, this coalition of technologically advanced, democratic nations and businesses will create an alternative open, transparent 5G system for the world that will shut out China’s closed model.
Without an alternative, most countries will be bullied, co-opted, or stranded. Rajeev Chandrasekar, a tech entrepreneur and Member of Parliament in India, was involved with Nortel before it was attacked by Huawei. “This is not just about technology, but about trade and economics. The biggest driver for economies in the future is technology. This is a challenge to all free people and open economies of the world,” he said at a recent Hudson Institute conference entitled the Geo Tech Wars. Since the People’s Republic of China’s military escalation in India’s Galwan Valley, the Government of India has taken bold actions, recently booting out Huawei and shutting down TikTok along with 28 other Chinese apps. He believes that only a new construct between the governments and private sectors of free nations’ will impede China’s “Grand Strategy”.
Another conference participant, Australia security advisor John Lee, emphasized the need for a global digital economic co-operation system to hold patents, control laws, police data, and equipment imports and exports—and to impose rules and regulations that would ensure secure cross-border data and information transmissions.
He added that China has not “won” the Tech War yet. “There is time,” he said. “China is still a net importer of technology and know-how. They can be preempted if denied access to capital, markets, and technology. But the issue of technology leakage from Europe needs to be addressed and the U.S. is on that path now. The Quad nations and the Five Eyes are natural coalitions to advance this. The Five Eyes is now starting to discuss geo-technology and geo-economic issues with the Quad nations, the G10, the G7, South Korea, and the European Union.”
Summarizing…
First, the Technological Iron Curtain will continue to strengthen regardless of U.S. political gyrations. Abroad bipartisan consensus recognizes that cyberspace is the most critical theater of any potential 21st-century conflict. The COVID19 lockdowns have given the Quad Countries and the Five Eyes the time needed to select non-Chinese networking alternatives. The key is continuing to enforce the restrictions on Chinese access to U.S. chip technology, which are currently in place. With bans on sales of its network systems to all key western countries and no ability to purchase the most advanced chips, Hua- wei is effectively “dead.”
Second, the exodus of foreign companies from China will continue, but the rate is unclear. In the three decades leading up to 2017, U. S. administrations were encouraged to “look the other way” by American businesses who believed that they would eventually get a “serious shot” at the huge Chinese consumer market while producing their products for export at very low cost. Today, most of those companies see that most “mass markets” are still reserved for State-Owned Enterprises and Chinese manufacturing costs are no longer “cheap” when compared to other Asian countries not known for stealing intellectual property. So, even if tariffs are reduced, countries like Bangladesh, Vietnam, and the Philippines will still look more attractive. And,
Third, the Chinese Communist Party has burnt its diplomatic bridges with the western world and those won’t easily be repaired. Suppression of dissent in Hong Kong, genocide among the Uighurs, reckless mishandling of the COVID19 pandemic, and worldwide espionage prosecutions are turning China into a “pariah state.” At this point, it’s unclear exactly how the United States and its allies will handle the relationship. But relations are not likely to get appreciably better. The best hope for the CCP is that the U.S. administration will focus on internal matters, near-term.
We have Seen this Picture Before
The current QE directly fueling a sharp rise in asset prices. The problem is prices are surging at a time when both corporate profits and earnings growth remain weak.
The last time we saw asset prices surge by 20%, or more, in a month, particularly in companies with no revenue, unfavorable valuations, and poor business models, was in 1999. The chart of Qualcomm (QCOM) in late 1999 is a good example.
Unfortunately, for investors in QCOM, by the end of 2000, that 95% gain turned into a 10% loss. But QCOM was not alone. The only difference is that the vast majority of the other companies like Global Crossing, Enron, Worldcom, Lucent Technologies, Sun Micro, and many others no longer exist in the original forms today, if at all.
Here is another excellent example, if you had bought CSCO at the turn of the century, you would still be down by 10% on your position 20-years later.
Over the last 5-years, AAPL has barely grown revenue, yet its stock price has gone parabolic. I love the company, but they will never grow revenue to justify the current price.
The same for Disney.
Today, we see the same chase in companies that exhibit similar characteristics to what we saw in 1999:
- Flawed business models with little, or no, “protective moat.”
- Little or no earnings
- Excessively high or negative valuations
- Prices are rising on “hope” these companies will mature into their valuations in the future.
Sure, companies from Tesla (TSLA) to Zoom Video (ZM) might be the next Amazon (AMZN) of the “dot.com” mania to survive and prosper. However, the odds are highly stacked against that being the case.
Here are a few examples of why it looks like investors are once again “Partying Like It’s 1999.”
These are but just a few examples. The market is replete with many companies whose price far exceeds any rational grasp of the underlying fundamentals.
But such is always the case when individuals throw out “fundamentals” to chase “price.”
In today’s market, the majority of investors are simply chasing performance.
All content is the opinion of Brian J. Decker
