Date: 10/26/2022
Author: Mr. X
Cloud computing has been one of the main drivers for growth in tech stocks. It could be argued that Amazon (AMZN) itself was slowly shifting towards more of a cloud computing company than an online shop.
However, Microsoft (MSFT) was down nearly 7% yesterday in after-hours trading. Its cloud computing division, Azure, grew less quickly than expected. This also comes on top of an announcement about a week ago that the company would be laying off about 1,000 workers.
AMZN fell by more than 4.3% in after-hours. It will report quarterly earnings on October 27, and it’s difficult to see the drop as anything other than anticipation by traders that the company will share Microsoft’s fate. Whatever the Fed, the Biden Administration, or anyone else says, Big Tech has been acting like it expects a recession. It was reported just this week that Amazon’s own cloud division, AWS, froze hiring, even telling candidates who were pursuing openings that the jobs no longer exist.
Alphabet (GOOGL) is reducing hiring, with CEO Sundar Pichai diplomatically calling it a lower amount of “headcount additions.” He said the company is “focused on moderating operating expense growth.” This comes after Snapchat’s (SNAP) disastrous collapse last week, which showed a general slowing in the online advertisement market.
That said, SNAP was up more than 15% yesterday. It might be as simple as investors grabbing a stock that they think is cheap, but there could be some wishful thinking involved. The slowing growth in housing costs, relatively high energy costs, inflation, the war in Ukraine, and the trade war between China and the United States in advanced technology have some suggesting that the Fed is going to pivot on interest rates soon.
Allianz economic advisor Mohamed El-Erian’s recent comments on the difficult economic situation facing the Fed are widely being reported as if he’s anticipating the central bank will slow rate hikes. In truth, while he said a recession is not certain, he argued that the challenge the Fed faces is worse than that which Paul Volcker faced during the early Reagan Administration.
“The problem that he [Fed Chairman Jerome Powell] has that Volcker did not have is a trilemma,” El-Erian said. “Volcker dealt with growth and inflation. Chair Powell has on top of that financial stability.” He argued that it’s that concern about financial stability, not inflation, which might lead to the Fed slowing interest rate hikes. This is hardly good news for tech, because it raises the prospect of stagflation.
The underlying labor market remains strong, so strong that Labor Secretary Marty Walsh thinks that the real problem is that we don’t have enough workers. Instead of worrying about inflation or recession, Secretary Walsh says “we’re going to have a bigger catastrophe if we don’t get more workers into our society and we do that by immigration.” He doesn’t seem to recognize the contradiction between calling for “more workers into our society” and demanding businesses pay higher wages, but leave that aside. The real problem is that the Biden Administration is being remarkably complacent about the prospects for future economic growth.
It’s important to recognize that right now, the market is somewhat artificially rigged so the American economy looks stronger than it really is.
The Biden Administration released oil from the Strategic Reserve to reduce energy costs, but this has won the enmity of Saudi Arabia. Europe could be facing a severe energy crunch this winter, something that the United States doesn’t have to worry about. Russia has been all but cut off from Western economies; China posted better than expected growth figures but remains well behind on its yearly targets. America’s restrictions on advanced semiconductors being exported to Beijing will also pose a significant obstacle to China’s future economic growth.
The United States is a (relative) beacon of prosperity in a world facing global recession and competition over resources. We Americans can get away with it because the dollar is the world’s reserve currency, but China and Russia are now deliberately trying to remove that status. The current federal debt is over $31 trillion and the interest payments are rising as the Fed hikes rates. It won’t matter in the short-term… but things that can’t go on forever, don’t.
Internationally, America’s de facto empire is getting restless. European populations may become restive with the possibility of never-ending aid to Ukraine as the Continent itself hits a recession. Saudi Arabia is becoming increasingly hostile; Iran is an open enemy. Russia has no way out of the current conflict and attempts to pressure the government of Belarus may lead Europe’s last dictator, Alexandr Lukashenko, to openly join the war.
Opposition leader Sviatlana Tsikhanouskaya said Belarussian soldiers should refuse to fight if ordered. However, if the military and security forces didn’t rally to her after the last disputed election, why would they listen to her now, especially when they have Russian troops at their back? The last thing the world needs is more World War II comparisons, but I need to make one. Belarus’s army might be like Italy’s after the German occupation following Mussolini’s fall, committed to a fight whether it wants to be or not.
Contemptuous Western journalists who mock that Vladimir Putin’s allies are turning on him should consider that men like Chechnyan president Ramzan Kadyrov and private military corporation leader Yevgeny Prigozhin of Wagner think Russia is being too soft. If Putin is removed from power, or (more likely) needs to take a step back because of health issues, it’s probable his heir will crack down further on dissent and force a greater commitment to the war. Onetime “pro-Western” leader Dmitry Medvedev sounds more militant than Putin. Consider what he said in August:
“I’m often asked why my Telegram posts are so harsh. Well, I’ll answer: I hate them [presumably the rulers of NATO countries and Ukraine]. They are bastards and degenerates. They want us, Russia, to die. And while I’m still alive, I will do everything to make them disappear.”
I’m not counting on some miraculous pro-democracy coup in Moscow when that’s the way the onetime liberal hope is talking.
The country’s best known dissident, Alexei Navalny, is safely in jail – and even he has never said that Crimea belongs to Ukraine. Given that Ukrainian president Volodymyr Zelenskyy has vowed to reclaim all Ukrainian territory, including Crimea, I don’t have much hope in Navalny or someone like him suddenly taking power. At least some Russians, especially those in the military, would regard a Russian leader who ceded Crimea as the French did Louis XVIII, “arriving in the baggage train of the enemy.”
Outright military defeat could force the Russians to cede Crimea – but what Russian leader wouldn’t turn to the country’s nuclear arsenal to defend that territory? Without Crimea, Russia ceases to be a significant power.
A few months ago, I’d say that there was a chance that China would pressure Russia to make concessions or at least to offer the status quo ante bellum. However, as I explained earlier this week, China has fundamentally shifted. President Xi Jinping is now dictator in all but name. Hayman Capital founder Kyle Bass may be exaggerating when he says Jinping has “installed a war cabinet,” but not by much. At the very least, President Jinping can be under no illusions that the United States will allow China to reach peer status with the United States.
The world is caught in the familiar Thucydides Trap, where a (relatively) declining power tends to war with a (relatively) rising power. It may even be more dangerous because I believe China’s rise is overstated – and authoritarian governments tend to seek foreign triumphs when they can no longer deliver economic growth at home. Besides, the United States and its allies will rarely be as distracted as it is now.
The extraordinary economic growth that the United States and Europe enjoyed in recent years were premised upon three things.
- Cheap energy from Russia for Europe
- Cheap manufacturing in China and the ability of tech companies to operate in both Chinese and American markets
- Saudi Arabia and other Middle Eastern states quietly establishing relations with Israel in a de facto partnership with the United States against Iran
All of these things are now in jeopardy. Former German Chancellor Angela Merkel recently said that at the time, it made sense for Germany to pursue cheap Russian energy. It hasn’t aged well, and the German diplomats who openly laughed at President Donald Trump’s warnings about being dependent on Russia are presumably silent now.
As for China, companies like Apple (AAPL) and Tesla (TSLA) will face significant problems if we actually see the long-feared decoupling of the American and Chinese markets. Other tech companies will be disproportionately hit by any slowdown in global economic growth, especially as the Federal Reserve keeps increasing interest rates. There’s as yet no sign from the Fed itself that it is considering a pivot. It’s just hope and speculation.
Finally, Saudi Arabia’s open disdain towards the United States, including Crown Prince Mohamed bin Salman’s reported personal mockery of President Joe Biden, is extremely ominous. The United States can’t afford to be alienated from both Saudi Arabia and Iran.
Chairman of the Joint Chiefs General Mark Milley recently said that the entire “global international security order” created after World War II is at stake in Ukraine. He might be right, but ordinary Americans are unlikely to see it this way. As President Barack Obama observed years ago, Ukraine will always be a core interest for Russia but not for the United States.
Others might say that Taiwan will always be more important to the People’s Republic of China than the United States. President Biden recently said American troops would defend Taiwan against a Chinese invasion, which may be morally and strategically correct but not something you should tell China about in advance.
Especially as the recent Communist Party Congress emphasized Taiwan’s status as part of China (something which the United States technically admits), America risks being wildly overstretched. At the least, the new Russa-China axis, far more united than it was even a month ago, will likely probe and test American commitments in areas around the world.
None of this bodes well for American economic growth, especially the tech sector. Excluding Russia from Western economies has created trouble; losing China would lead to catastrophe. It would be a profoundly irrational choice for China to plunge itself into economic ruin for the sake of national pride, but states don’t always act rationally. Rulers will often put prestige over wealth, especially when their own credibility is at stake. We’ve seen from China’s “zero-COVID” policy that President Xi Jinping prioritizes control ahead of economic growth. If he begins responding with his own trade restrictions on American companies to counter President Biden, there’s no limit where it could potentially end.
Move Fast. Keep Winning.
Is disaster inevitable? No. One good thing Europe has going for it is that this winter is projected to be relatively warm, which checks Russia’s gambit to force Europe to the bargaining table by freezing it. Jinping’s pursuit of control may also lead him to extreme caution, as we saw with China’s muted response to Nancy Pelosi’s visit to Taiwan. However, if anyone in Riyadh, Tehran, Moscow, Minsk, or Beijing decides they have more to gain from chaos than order, the house of cards sustaining American prosperity will swiftly collapse.
For that reason, when it comes to tech stocks, I’m inclined to be careful now – and wait for hard evidence of a Fed “pivot” before even thinking that we’ve hit bottom. Investors interested in short-term gains should stick to technical signals on specific trades; and consider shorting China. President Jinping’s options are becoming limited, and like President Putin, that might lead him to do something out of desperation.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
