Wall Street Breakfast: The New Volcker

The new Volcker

The economic symposium down in Jackson Hole was about as hawkish as investors could have expected, sending markets into a tailspin on Friday. All three major averages slumped between 3%-4%, sending risk-off signals to other sectors and asset classes (Bitcoin fell below $20K for the first time since early July). Sentiment may remain dented in the week ahead, or stay at somewhat of a standstill until the release of fresh market data (home prices on Tuesday and the jobs report on Friday). U.S. stock futures: Dow -0.9%; S&P 500 -1.1%; Nasdaq -1.3%.

No doves here: Going into Jackson Hole, there were some hopes that the Fed would telegraph a “pivot” on its aggressive policy tightening, but Chair Jerome Powell shot down any such intentions. “Restoring price stability will take some time and is likely to require a sustained period of below-trend growth and softer labor market conditions,” he told the conference, adding that the road ahead would “bring some pain to households and businesses.” It’s a clear message that the central bank is willing to forego any economic gains made during the pandemic, and possibly a soft landing, in order to ensure that inflation doesn’t get out of control.

“July’s increase in the target range was the second 75-basis-point increase in as many meetings and I said then that another unusually large increase could be appropriate at our next meeting,” Powell continued. “We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Is Powell the new Paul Volcker? In his speech, the Chair referenced the famous inflation slayer of the 1980s, saying part of the equation in anchoring price stability was to also break the grip on inflationary expectations. As pressures become more entrenched, more people expect them to remain high, and factor them into their wage and price decisions. “A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation in the early 1980s… after multiple failed attempts over the previous 15 years… and our aim is to avoid that outcome by acting with resolve now.” (15 comments)

To the moon!

NASA is looking to recapture some attention this morning, when its new moon rocket – known as the Space Launch System – makes its debut at the Kennedy Space Center in Cape Canaveral. The 38-story-tall rocket packs 8.8M pounds of thrust, and carries a capsule named Orion, which will go on a journey around the moon and test a new heat shield as it re-enters Earth’s atmosphere. The mission, known as Artemis I, has been nearly a decade in the making, costing a whopping $4.1B after a series of technical, legal and cost-related delays (the entire Artemis program is budgeted at $93B from 2012-2025).

Bigger picture: The goal here is to create a long-term presence on the Moon, which will provide enough momentum (and funding) for sending earthlings to Mars. If all goes well with the mission, astronauts could strap in as soon as 2024 for a loop around the moon, with NASA aiming to land two people on the lunar surface by the end of 2025. More landings would follow, in addition to a small space station that would have a lunar orbit, and by 2030, NASA hopes to have built a habitat on the moon that would be complete with rovers and hospitable infrastructure.

Compared with the space race of the 1960s, this time around, NASA’s competition is in the form of private industry. Elon Musk’s SpaceX (SPACE) is also constructing a powerful rocket called Starship, that is fully reusable, and is designed to launch people toward the moon and Mars. However, NASA also needs Starship to prove itself, as the Artemis program calls for a moon lander that will need help from Starship rockets to reach lunar orbit.

For investors: Many publicly traded companies are involved in the SLS program, including a booster built by Northrop Grumman (NOC), RS-25 engines made by Aerojet Rocketdyne (AJRD) and core/upper stages and avionics manufactured by Boeing (BA). SLS also intends to carry astronauts inside the Orion capsule built by Lockheed Martin (LMT). Smaller contractors are additionally involved with component manufacturing, such as Redwire (RDW), Aeva Technologies (AEVA) and KULR Technology Group (KULR). (68 comments)

Meta settlement

Facebook parent Meta Platforms (META) has reached an undisclosed settlement in a class-action lawsuit filed over the infamous Cambridge Analytica scandal. The episode saw the U.K. consulting firm harvest up to 87M Facebook users’ data for use in political ad campaigns. The two sides provided no details about the settlement, although some had speculated that META could face hundreds of millions of dollars in damages if it lost the suit.

Backdrop: Word broke in 2018 that Cambridge Analytica used an online quiz to collect a whole slew of personal information – not only on people who took the poll, but users’ public profiles, Web pages they had liked and more. The company allegedly used the data to help clients like the 2016 presidential campaigns of Donald Trump and Texas Republican Sen. Ted Cruz target online ads. Some suspect the company provided further info to the successful 2016 pro-Brexit campaign in Britain, though the official probe found that the company was not involved “beyond some initial inquiries.”

Facebook’s stock lost nearly $120B in market cap in the days after the scandal became public, and the company eventually paid a $5B fine to the U.S. Federal Trade Commission. The social-media giant also agreed as part of an FTC settlement to impose stronger protections on users’ data, while Zuckerberg had to testify before Congress about the scandal, and took out full-page newspaper ads to apologize to Facebook users.

Go deeper: The latest settlement comes just weeks before the plaintiffs’ lawyers expected to subject Meta CEO Mark Zuckerberg to a six-hour deposition, and former company COO Sheryl Sandberg to five hours of questioning. As for Cambridge Analytica, the firm eventually declared bankruptcy in the United States and went out of business. (17 comments)

U.S.-China audit deal

Chinese tech stocks, including Alibaba (BABA), JD.com (JD) and Baidu (BIDU), gave up their gains on Friday, and are slipping again premarket, despite an agreement to let American auditors access to New York-listed Chinese firms. The preliminary deal was signed off by the SEC, the Public Company Accounting Oversight Board (PCAOB), the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. According to the PCAOB, inspectors can already be on the ground by the middle of next month to begin inspections.

Movement: The reversal appeared to be attributed to comments from Fed Chair Jay Powell, who spoke at the Jackson Hole Symposium in Wyoming, but the statement is only a first step, and U.S. regulators still remain cautious about the deal’s enforcement.

“Make no mistake. The proof will be in the pudding,” SEC Chairman Gary Gensler declared. “This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.”

Flashback: Congress passed the Holding Foreign Companies Accountable Act in 2020, which would kick foreign companies off American stock exchanges if they failed to comply with U.S. auditing standards for three years in a row. The rules also mandated that firms prove to the SEC they are not owned or controlled by an entity of a foreign government and to name any board members who are Chinese Communist Party officials. As part of the agreement, the PCAOB has “sole discretion” to select the firms, perform the audits and levy potential violations during its investigation, with no consultation or input from China. Let’s see if it happens. (67 comments)

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