Macro Hive Podcast Playlist: Inflated Unicorns / Tariffs Don’t Work / China’s Birthday Party

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Now on to our curated playlist – we chose this week’s podcasts to give colour on the top headlines and take a break from Brexit. We feature an in-depth analysis of how the energy market will change after the recent Saudi attacks in our first podcast. Oil is here to stay as an energy source but will be challenged by new security risks.

Next, we couldn’t help but join the buzz around WeWork and overvalued unicorns. For our second podcast, we discuss whether inflated start-ups are slowly driving hefty incumbents out of business (think Thomas Cook and AirBnB) or are just an unprofitable and volatile mess.

We also talk about big US plans to tackle currency manipulators – Obama started it with his 2015 Trade Facilitation Act but Trump has more ambitious plans. The third podcast discusses why they might (not) work.

We then feature Michael Pettis, Senior Fellow at Carnegie Endowment explaining why tariffs might not be an effective tool against China after all. Finally, we stay with China for our last podcast, where celebrations of the Party’s 70th birthday are underway. Slow growth, escalating Hong Kong unrest, trade war and issues with Taiwan are continuing to weigh down on power. Happy Birthday!

Enjoy!

In the Aftermath of Abqaiq (Macro Voices, 64 min listen) Energy markets expert Dr Anas Alhajji, commercial broker Pat Hemsworth, and petroleum geologist Art Berman form a panel to discuss energy. They consider the market reaction to the Abqaiq attacks in Saudi Arabia and the possible long-term and short-term effects. Crude oil streams and supply are no concern, but the panel sees the future of oil and other fossil fuels changing due to security risks. They agree that oil will stick around for now despite a lot of noise around renewables. For example, they point out that electric power as an alternative to oil comes with its own environmental issues such as disposal of the toxic waste. From an economic perspective as well, the EU collects billions of dollars in gasoline and diesel taxes, and it is unclear how they will make up for this cash inflow without these sources of energy. Lastly, the panellists dispute US claims that the country is no longer oil dependent and underline how quality and logistics makes it difficult for them to be independent.

Why does this matter? Following the drone attacks on the oil processing facilities in Abqaiq, Saudi Arabia, we must consider what impact this incident might have on global oil output and geopolitical risk premia. From a foreign policy perspective, the attacks add complications to existing US-Iran tensions. Moreover, a sharp spike in the oil price would be passed on to the US consumer – ahead of the 2020 presidential elections. In this scenario, the propensity for US oil supply to increase would be key to mitigating spillovers.

Implosions (Slate Moey, 46 min listen) Startups have a notoriously difficult time of things, and this year has been especially tough for those going public. This episode is a good overview of markets sobering up to inflated company valuations. Last year, more than 80% of companies filing IPOs were unprofitable and a number of companies ended up trading below their IPO prices. Felix Simon, a financial Journalist at Reuters, discusses the overpricing caused by floods of cheap private capital and also how going public now happens at later stages of the lifecycle. Will we eventually witness the decline of IPOs and find more companies being valued within the private markets and raising capital there instead? On that line of thought, Simon and Emily Peck, a senior reporter at Huff Post consider the vaping company Juul that was just massively over-valued in the private market based on forecasting trends that vaping is the future while failing to price in health controversy and regulatory risk. Lastly, they consider the lack of stability of Thomas Cook and how its value rapidly plummeted as it entered insolvency. They debate the reasons for this and compare the European airline market – which is saturated with low cost airlines – to the US airline market, which has higher barriers of entry.

Why does this matter? The prospect of a tech company becoming a ‘unicorn’ has meant the market has tended to value the tech sector highly, despite the fact that many of these companies are not even close to profitability. Yet 48% of companies that went public this year are now trading below their IPO prices. This is unprecedented. Is it a shift in market psychology on how start-up companies should be valued? In contrast, the demise of Thomas Cook shows how traditional business models are also struggling to compete in an environment where technology is able to connect buyers and sellers more directly. Overall this is a challenging business environment – the market seems unwilling to pay its ‘unicorn’ premium at (and after) the IPO, but it is also losing trust in old business models.

How to Hit Currency Manipulators and Fight the Strong Dollar (Peterson Perspectives, 29 mins listen) Soumaya Keynes, the Economics and Trade editor at the Economist and Chad Bown, a Senior Fellow at Peterson Institute, delve into currency manipulations – in particular the fact that countries use them despite laws against the practice and how better controls might be put in place. Senior Fellow at Peterson and form IMF Chief Economist Maury Obstfeld also joins the conversation. Currently, the IMF is the currency manipulator watchdog, but their only punishment is ‘naming and shaming’. The discussion guides listeners through the recent history of regulations and laws around the practice, most recently Obama’s 2015 ‘Trade Facilitation and Trade Enforcement Act’. This year, regulatory tariffs were introduced for countries believed to have artificially deflated their currency. It’s up to the Treasury to decide who they want to hit, but the Commerce Department isn’t obliged to act. Another idea is to give the US Treasury and Federal Reserve new access to hundreds of billions of dollars to use as countervailing currency intervention by essentially selling dollars. The fund is currently too small to have an impact – $95bn worth of assets is not a credible threat.

Why does this matter? With the trade-weighted US dollar re-approaching multi-decade highs, in political spheres it is becoming increasingly common to blame currency manipulators abroad. If policy makers are serious about trade intervention, they need a credible toolkit. Aggressive protectionism such as tariffs might hurt the US’s international commitments (e.g. WTO), while also failing to solve the underlying problem that the US economy invests more than it saves. The countervailing currency intervention seems more plausible, undoing distortions in prices, and it is a one-off and so easy to reverse. However, such a policy would probably undermine the US dollar’s status as a reserve currency, which could have knock-on impacts to the Treasury’s cost of funding.

From Mao to Now (Deep Dish on Global Affairs, 25 min listen) In this episode, Professor Julia Lovell from the University of London talks about how the legacy of Mao Zedong (‘Maoism’) still affects contemporary China. Being one of the founding members of the CCP, Mao was regarded as the nation’s ‘supreme leader’ after 1949. According to Lovell, ‘Maoism’ – a collection of Mao’s political theories and practices – stressed the importance of adapting socialism or communism according to different political climates. Despite the shortcomings of Maoism, Lovell argues that it was important for the Chinese Communist Party to protect Mao’s image since doing so helped stress the historical legitimacy of the CCP regime. The current Chinese President, Xi Jinping, echoed several Maoist practices during his term, especially the ‘cult of personality’ techniques that Mao employed as supreme leader. However, China today is too integrated with the rest of the world for Xi to revive all of Mao’s legacies, especially the mass export of ideologies and socialist revolutions in the 1950s.

Why does this matter? China is currently facing challenges that also have great global impacts as the Party’s 70th birthday approaches. It has the slowest domestic growth in decades, trade tensions with the US, continuous civil unrest in Hong Kong, and unsolved issues with Taiwan – to name just a few. How Chinese leadership approaches these problems is becoming a major talking point. The ongoing clash between political ideologies in China and the West remains a key driver of geopolitical uncertainty.

How Financial Repression in China Helped Cause the Trade Wars (Odd Lots by Bloomberg, 42 min listen) Michael Pettis, Finance Professor at Peking University and a Senior Fellow at the Carnegie endowment, discusses whether China has achieved its goal of rebalancing its economy. Pettis argues that China is progressively moving from an investment-driven economy to a consumption-driven one. He discusses the required structural change and how the US trade tariffs will affect this. Pettis highlights that the tariffs actually fail to achieve their aims. Tariffs merely change relative prices and shift bilateral trade, but they do little to change underlying savings investment balances. China’s excess savings have to be exported somewhere, and the US economy is still likely to be the top choice (where there remains an ongoing shortage of savings). As such, tariffs will do little to correct the US current account deficit.

Why does this matter? The trade war is unlikely to drive a rebalancing of global trade. For this to happen, we need to see structural shifts in domestic savings and investment of both US and China’s economies. This means that trade tensions will not dissipate quickly – China’s rebalancing toward a more consumption driven economy is ongoing but intrinsically gradual.