THE DAILYALTS PLAYBOOK

April 27, 2020

The DailyAlts Playbook: Incentives for Work, Crude Crushed, Monty Bennett Keeps the Money, and Cuomo’s Collective

PRIME OVERVIEW

Good morning,

We start this morning with Scott Minerd’s take on the V-shaped recovery, unintended consequences of fiscal and monetary policy, and the moral hazard facing our economy.

The CIO of Guggenheim Partners dropped his latest insights in the middle of the night, and they’re quite jarring. If you don’t know Minerd, be sure to read his analysis during the COVID crisis.

You’re not going to get this type of research on television or from the financial newspapers. His work is always thought-provoking.

Minerd projects a pending “Era of Recrimination” in America.

Though he never explains the use of the word, it appears he is talking about a breakdown of people end up blaming each other for the strife we’ve just endured.

He advocates that there need to be more incentives to get people back to work – otherwise we’ll see unemployment sitting above 10% well into next year.

I raised concerns recently about the extra $600 per week that some advocates pushed for in additional weekly unemployment benefits.

Then it hit me – that $600 divided by 40 hours a week brings us to $15 per hour – the national minimum wage goal that has become the drumbeat over the last four years.

Due to the $600 payments, millions of workers now earn more in unemployment than they did actually working. In some cases, people are earning upwards of $24 per hour.

Yet, a lot of “essential workers” who are working today aren’t coming close to that figure.

There are countless cases of entrepreneurs successfully getting a loan from the PPP, only to have the workers revolt because they’d get more from the government than their typical paycheck. That’s a troubling trend. So, even if we do return the economy back – are people really going to search for work or want to work?

Some people argue that bosses should just pay their workers more or give them an ownership stake in the small business (hence turning them into collectives.) That’s a whole other animal with its own problems build around incentives and responsibilities.

This dislocation between the benefits today and the need for incentives on the other side creates a whole host of issues.

Minerd suggests his support for the temporary increase in payments. But he notes that $1,200 a week doesn’t really solve the bigger, longer-term term problems for people who started this crisis with less than $500.

Minerd recognizes that whatever the response may be – whether it’s a living wage or some other animal – it will likely be designed with the best intentions but offer ugly incentives that could deter work and prolong our economic problems.

I don’t know how this will play out, but it drives me to believe that we’re going to see a whole lot more automation in the future.

Minerd’s bigger issue – however – centers around the Federal Reserve. Everything that the central bank has done started with the best intentions (I think we’d all like to at least believe this). But the Fed has really stepped into uncharted territory over the last month.

“The Fed has established a new market precedent,” he writes. “Our central bank will never be able to get back to what was viewed as normal prior to April 9.”

He argues that the Fed has created a new normal by socializing credit risk. What we’re seeing today goes well beyond anything that the Fed did in 2008-09.

“The United States will never be able to return to free-market capitalism as we knew it before these policies were put in place,” he continues.

The result appears to be a more divided country where blame is assigned, but solutions are few. Whether we endure a Green New Deal (it already feels like we’re living it with no planes, UBI, less traffic, and meat plants closing) – the top-heavy solutions from Washington will likely fail to bolster real economic growth and productivity over the long term.

Minerd hopes that policymakers will “address fundamental reforms in the economy to restore growth and reduce inequality.”

That’s a big ask in today’s political climate.

MORNING MOMENTUM

UGLY: The U.S. economy will soon face unemployment levels not witnessed since the Great Depression. White House economic adviser Kevin Hassett said that the unemployment rate could soon hit 16% and that economic data could be terrible for “the next couple of months.” Hassett said that COVID-19 is the “biggest negative shock that our economy” that he has ever seen. The Labor Department will release the April jobs report in two weeks, and the unemployment rate could easily hit 23%.

CORONAVIRUS: According to Johns Hopkins University, the number of global COVID cases hit three million. In the United States, the number of cases surpassed 900,000. Around the world, more than 200,000 people have died due to coronavirus. [That said, the Financial Times suggested this weekend that the death toll could be much higher.] New York Governor Andrew Cuomo announced that his state’s economy would begin reopening in phases. The plan comes on news that coronavirus-related hospitalizations dropped for 14 days, while deaths in the state are at a one-month low. Other states like Georgia are exploring plans to reopen their economy as well.

CRUDE UPDATE: Crude oil prices are facing renewed pressure on Monday as investors weigh the possibility of the economy reopening in the weeks ahead. WTI crude futures fell another 24% overnight as U.S. storage levels approached an all-time high. Brent crude slipped about 6.5% and sits very close to $20.00 per barrel. U.S. inventory levels sit at 518 million barrels, just shy of the storage record set in 2017. Meanwhile, floating crude storage – oil currently sitting in tanker ships – rose to a new record of 160 million barrels. The ongoing economic disruption and demand shock of coronavirus has led many oil producers to leave crude in the ground and stop output. We’ll be looking for more insight into the crisis this week when we receive earnings reports from oil majors Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).

ACCRUED INTEREST

BUBBLE: A few weeks ago, I said that colleges would be among the biggest losers in the post-coronavirus world. Rana Foroohar at the Financial Times reported this weekend, universities are facing significant debts and an inability to shift to virtual eduction as revenues sink. The article points out the obvious – if you went to Harvard or Yale, you’re gonna be fine. But the rise of many secondary colleges led to an explosion of debt combined with weak brand names that offer little upward mobility. A lot of Americans believed that buying a house and getting a college degree could create a lifetime of economic security. Instead, it’s created the opposite. And a lot of universities may soon go under, just as they did during the Great Depression.

BARRED: It’s official. Hedge funds and private equity firms are banned from getting PPP loans. The Small Business Administration explicitly said these firms are not allowed access to the latest round of financing. “Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP (Paycheck Protection Program) loan,” the SBA wrote in an update. President Trump signed another bill authorizing $484 billion in coronavirus on Friday. The release comes after just 1.6 million small businesses received funds in the first round. That means that 94% of American small businesses received no funding.

BAILOUT: The SBA announcement comes at the same time that the Wall Street Journal reported the fate of Steward Health Care System. The firm, owned by Cerberus Capital Management, requested a $40 million bailout or else it planned to shut the doors of Easton Hospital during the COVID-19 breakout. “Easton Hospital will no longer be able to serve the community’s health-care needs and will be forced to close” if it did not receive that money, the firm said.

EVENT: While everyone is focused on the U.S., we’re going to see a sharp decline in global trade this year. The WTO puts that figure as high as a 32% drop in trade. In today’s new world, how will emerging markets survive or thrive? And what role will ESG play in these economies? Tomorrow, Reuters Events, Emerging Markets Investor Alliance, NDC Partnership and the Inter-American Development Bank will host an event to discuss ESG and Emerging Markets in the years ahead. Learn more, here.

QUOTES OF THE DAY

“It’s not about me; it’s about ‘we’. Get your head around the ‘we’ concept. It’s not all about you.”

New York Governor Andrew Cuomo defined the ongoing crisis with a defining line. David Yu writes that this attitude will fuel the permanence of ESG investing in the years ahead.

“We plan to keep all funds received under the PPP, which were provided as a result of the application process and other specific requirements established for our industry by Congress.”

That’s a statement from three Monty Bennett-run companies, including Ashford Hospitality Trust, which received $38 million in PPP checks. This isn’t going over well, but to quote the Jackal at the end of Dirty Rotten Scoundrels… “I’m keeping the money. Is that wrong?”

CARRIED INTEREST

Here are the other headlines getting our attention this morning.

• AI: Microsoft Talks AI and a Pandemic in Rural America
• FINTECH: Yieldstreet is facing pressure from BlackRock over payments
• DIGITAL ASSETS: Titan Reveals Its Investment Strategy
• VENTURE CAPITAL: Quest Ventures Leads Round for Logistics Firm
• PRIVATE EQUITY: Blackstone Will Keep Its Dividend
• ESG: The Resiliency of ESG
• CANNABIS: Americans are stockpiling cannabis
• E-GAMING: It’s a Good Time for eGaming Giants
• VENTURE CAPITAL: OMERS Ventures Launches $750 Million Fund
• LIQUID ALTERNATIVES: Fixed Income Flows Boom in ETFs
• HEDGE FUNDS: Citadel took a big stake in Tesla, because…why not.

VENTURE CAPITAL IN FOCUS

Despite concerns about COVID and globalization, American companies are venturing into China for growth opportunities.

Starbucks Corporation (NASDAQ: SBUX) has launched a partnership with venture capital firm Sequoia. The two companies will co-invest in China and look to launch “commercial partnerships with next-generation food and retail technology companies.”

In a statement, Starbucks said it will provide retail expertise, infrastructure, and scalability to targeted companies.

“Starbucks has an insatiable appetite for innovative ideas that augment the Starbucks experience and keep it at the forefront of China’s retail landscape,” said Belinda Wong, Chairman and CEO of Starbucks China.“The partnership enables Starbucks to tap into the most dynamic Chinese technology entrepreneurs in order to delight our customers with meaningful innovations created in China, for China.”

This is the latest deal Starbucks completed for the purpose of expanding its reach in the world’s second-largest economy. In 2018, the firm launched a partnership with Alibaba Group (NYSE: BABA) to start the delivery of its goods. Last month, Starbucks China announced it would build a Coffee Innovation Park to boost its international roasting network. The firm also announced a plant-based platform in China, that will include new drinks and food options.

The new partnership will center on the use of data, analytics, and modeling for decision making, according to the statement.

For more insight on venture capital and other alternative investments, check out our latest news at DailyAlts.com.

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.