View from the US: the US economy and the tech cold war

Are you an American citizen living abroad? Or simply interested in how the US media reports major financial stories? If so, read our monthly, two-minute round-up of major business and financial news – as viewed through the lens of US media.

Is the US heading for a traditional recession?

“If there were still hopes of a ‘V-shaped’ comeback from the coronavirus shutdown, this past week should have put an end to them”, says the Washington Post.

States such as Florida, Texas and California are seeing record numbers of new Covid-19 cases – and “more than 70 percent of the country has either paused or reversed reopening plans”, notes the paper, citing research from Goldman Sachs. After adding jobs in May and June, the US economy could start losing them again in July and August. Economists had assumed that the pandemic would be “a temporary business interruption”. However, “in a worrisome sign… layoffs are spreading beyond companies that provide services requiring direct human contact. As disruption from the pandemic lingers, this could mean that the job loss is starting to feed on itself in a classic recessionary spiral.”

What would a Biden win mean for investors?

“After months of fixating on the pandemic, Wall Street has something new to worry about: a possible Biden presidency”, says the New York Times. Tax is the key issue – and in particular Biden’s plan to roll back Trump’s tax cuts. They were “a windfall for major American corporations, helping to drive up the profitability of companies in the S&P 500 more than 20 percent in 2018”.

Some investors see a silver lining, suggesting that “a Biden presidency would result in less trade tension with China”.

However, this is not a certainty. The Wall Street Journal suggests that while there was once “bipartisan consensus in favor of free trade”, this consensus has now shifted “and Mr Biden has moved with it”. The Democrat candidate plans to encourage companies to move their supply chains back to the US. The proposals reflect “a new consensus, born of the coronavirus crisis, that America has become too dependent on China for critical goods and supplies. More broadly, the Biden initiative also reflects a new bipartisan, cross-ideological feeling about boosting manufacturers.”

TikTok – and the Himalayas

China’s clash with India in the Himalayas “could seriously set back Beijing’s ambition to replace the US as the world’s dominant technological power” cautions the Wall Street Journal. Last month, a border skirmish between Indian and Chinese soldiers – involving hand-to-hand combat – resulted in over 20 deaths. The conflict “began after the Indian media reported that Chinese troops had intruded in at least three places on territory India regards as its own”. In response, New Delhi has banned 59 Chinese apps, including the popular video-sharing app TikTok. “Preventing Indian teenagers from showing off their Bollywood dance moves doesn’t seem like the most effective way of reversing a People’s Liberation Army land grab,” the Journal says. But given the size of the Indian market, there is much at stake.

“Banishment from India, which has more than 500 million smartphone users, hobbles China’s effort to compete with US firms like Facebook, Google and Amazon for ‘the next billion users’.”

When ETFs go wrong

Exchange Traded Funds (ETFs) have been an incredibly useful addition to the investment firmament. But every so often a reminder comes along that they can be complex products requiring careful handling. The Wall Street Journal has been following the travails of the US Oil Fund. The fund, which was designed to track the price of US crude, has lost almost 90% of its value over the past decade – though it is still worth $4.6 billion.

“Unlike with some precious metals, which asset managers can store in a vault, funds tracking industrial commodities have to own futures contracts,” the Journal explains. This can be problematic when “the price of oil further out in the future is more expensive than nearer-term futures. A fund like USO often loses money in a structure like this because, as the futures contracts it owns near maturity, it must settle them and buy more expensive ones expiring later.”

The collapse of the oil market in March threatened to turn a “slow burn” into a “bonfire.” The fund “quickly changed its structure to avoid disaster,” the Journal says, concluding that it has been left with a serious “identity problem” and looks even more “likely to deviate from its original mandate.”


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