Daily Comment (July 1, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] It’s global PMI day!  We have recorded the overseas numbers below.  Overall, Europe came in strong, while Asia was mostly neutral to negative.  Although the European numbers were positive, they may be dampened post-Brexit.

After BOE Governor Carney promised further monetary accommodation yesterday, financial markets rose strongly, showing that, even after eight years of easy global monetary policy, central bankers talking about policy support still has an impact.  We note that the U.S. 10-year T-note is challenging 1.40% this morning.  In fact, we are seeing the most curious of trading patterns—gold and Treasuries are rallying with equities.  It’s almost as if investors are engaging in a barbell approach, simultaneously acquiring equities and safety instruments.  We maintain that the key indicator will remain in the forex markets.  Currency depreciation will likely be the unspoken tool of choice to stimulate economic growth, which means, of course, that the best way to grow is by absorbing the aggregate demand of other nations.  So far, the currency markets are mostly steady as all the central banks continue to maintain policy accommodation.  We have achieved a balance of sorts, although the GBP’s weakness could eventually trigger instability.

In Europe, we continue to monitor the situation in Britain; today, there is nothing significant to report but there was a surprising development in Austria.  In May, the Green Party presidential candidate fended off a challenge from the far-right Freedom Party, winning by a narrow vote.  For the first time since 1945, Austrian courts have ruled that there were enough voting irregularities to require another runoff election.  Thus, in September or October, another round of elections will be held.  According to reports, Norbert Hofer, the Freedom Party candidate, was winning by a small margin before postal ballots were counted.  The postal votes swung the election but the Freedom Party charged that there were questionable practices in certifying these ballots.  The courts agreed.  Under normal circumstances, this news wouldn’t be that important.  However, in the currently charged atmosphere in Europe, the possibility of a far-right government in a significant European nation raises concerns.  The fact that a re-vote is necessary in a modern economy raises serious questions.  This vote may occur nearly simultaneous to the Italian government restructuring referendum, which may turn out to be a proxy vote on EU and Eurozone membership.

Finally, we are watching with great interest comments from Sen. Warren (D-MA), who seems to be turning her populist aim toward the tech giants.  In a recent speech, she raised the question about industry concentration in the tech sector, arguing that the tech giants seem to be preventing small firms from threatening the large ones with creative destruction.  This condition has been noted by others; a recent book[1] discussed how the technology industry’s business model is based on monopoly and market domination.  The so-called “unicorns” have little value to investors unless they can completely dominate their industries and thus have the potential to earn monopoly profits.

In some respects, it’s remarkable to us that this hasn’t attracted attention sooner.  The technology giants have sometimes acted in manners that would make a trust operator of the late 19th century blush.  However, unlike the monopolists of old, these tech dominators do not use their vast market power to raise prices, for the most part.  Instead, they seem to use their market power to depress wages.  The usual way that monopoly power catches the attention of regulators is by high and steadily rising prices; these new monopolies maintain profit margins by keeping labor power depressed.

The fact that Warren is turning her sights on this industry is something that we will be watching in the coming months.  If this trend continues, it will suggest a significant new turn in populism, away from the relatively easy target of banks to a more complicated target of technology.

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[1] Rushkoff, D. (2016). Throwing Rocks at the Google Bus. New York, NY: Random House.