CITY 4724 August 2019 THE WEEKTalking pointsEvery August, the Federal Reserve Bank
of Kansas hostsasymposium for central
bankers and other financial luminaries in
the Wyoming resort of Jackson Hole.
“Some years, guests have little to do but
chew the fat,” said Larry Elliott in The
Observer. In others, “the conclave takes
place withacrisis looming”. One such
year was 2008. And we may be in
another. Last week, share prices slumped
amid fears that “the first recession since
the big crash is just around the corner”.
The trigger was developments in bond
markets, where yield curves have been
“inverting”–indicating that investors
“think there is more risk in holding
short-term government bonds than long-
term ones”; normally it’s the other way
around. The next day, “yield curves” were being discussed all
over the media–and that was worrying in itself: when “City
argot becomes part of everyday parlance”, it often spells trouble.
Inverted yield curves don’t always lead toarecession, but in the
US, there isacorrelation between the two.
President Trump reacted to “the flashing warning signs” by
lashing out at the US Federal Reserve “for not cutting interest
rates more aggressively”, said The Wall Street Journal. But the
slowdown isn’t justaUSaffair. Germany and China have posted
figures showing worrying “sluggishness”. Meanwhile, analysts
have worried investors by slashing their
third-quarter corporate profit estimates.
Trump is still boasting that the economy
is “doing tremendously”. But his advisers
are looking at defensive “options”:
cutting payroll and capital gains taxes,
and possibly reversing some recently
imposed tariffs. Most forecasters think
the chances of near-term recession are
only about one in three, said Neil Irwin
in The New York Times. But it’s easy
to see how one might play out. “Trade
wars andabreakdown in economic
diplomacy cause businesses around the
world to pull back”–leading to more
market tumbles, job losses andaknock
to consumer confidence. “High corporate
debt loads” then “createawave of
bankruptcies”–and central bank policy proves “impotent”.The “astounding appetite for the safest of assets”, government
bonds, shows something is up, said The Economist. But the
world economy is still growing, albeit more slowly. “Jobs are
plentiful; wages are picking up; credit is still easy.” Nonetheless,
central banks are “anxious”: Brazil, India, New Zealand and
Thailand have all recently cut their benchmark interest rates. And
after arecord ten years of expansion in America, “a downturn
feels overdue”. The worry is that with interest rates already so
low, “the capacity to fight one” has been “depleted”.Issue of the week: is aglobal recession looming?The WeWork float:what the experts think●Red flag
“Lots of things are
going awry in the
global financial
system,” said
John Stepek on
MoneyWeek.com. But
the “warning signal”
that is most worrying
is “the potential listing
of one specific
company”: WeWork.
If the trendy office-
space provider manages to go public it will
surely mean we’ve reached the peak of the
market. It’s only “right at the top”, just
before the bubble bursts, that you get “the
critical mix of founder arrogance and
investor credulity” needed to get away
with valuations “that would be impossible
to justify in more ‘normal’ times”. And
WeWork has it all: “a visionary founder”,
Adam Neumann, “who spouts TED-talk-
style garbage at every opportunity”; an
old-school business model (renting office
space to companies) givena“tech-ified
sheen”; and an absurd valuation once put
as high as $70bn. Its float plan also has
features of the worst hallmarks of “the
modern-day IPO”–shareholders will have
“virtually no control” because of the
founder’s “supervoting” shares.
●We hope
“The red flags are so numerous” that it’s
hard to find “a bull, or even partial bull”
ahead of this float, said
Bloomberg. But they
do exist. Investor
Sandy Kory of
Horizon Partners
reckons that WeWork
is “misunderstood” –
and that it isa“hyper-
growth” company
poised to tapa$3trn
revenue opportunity
from its 280 targeted
cities globally.
Neumann may be mocked for describing
WeWork as “a community” and “a state
of consciousness”. But, inafragmented,
historically tech-averse industry, there is a
real opportunity forabig player to disrupt
the existing model withanew “platform”.
Look what Amazon did to shopping.●Alittle light reading
Yet what emerges from “the inspirational
gibberish” in WeWork’s prospectus is its
“continued massive cash burn”, said
Robert Cyran on Reuters Breakingviews:
annual losses mushroomed to $1.61bn in- Think of it as the ideal prospectus
for anyone after “light reading for the
beach”, said Richard Waters in the FT. It
isn’t “fiction”, but it “certainly stretches
the boundaries of its genre”. Loss-making
Uber, whose stock is languishing at new
lows, “is probably enjoying being upstaged
in the battle for the title of Year’s Most
Controversial IPO”.
Operation
Yellowhammer
The leaked report on Operation
Yellowhammer–which warns of
shortages of food, fuel and medicine
in the event of no deal–will have a
“familiar ring to anybodyau faitwith
the Fall of France” and “the mood of
establishment defeatism” in Britain
in May 1940, said Ambrose Evans-
Pritchard in The Daily Telegraph. The
Joint Chiefs had drawn upapaper
entitled “British Strategy inaCertain
Eventuality”, warning that Britain now
faced starvation, occupation and an
“internal attack by the ‘Fifth Column’.”
None of that came about–and the
same is probably true of the dire
scenarios in the leaked report. Lurid
predictions of port chaos are “not even
Project Fear”, they’re “slapstick”.Business groups are not so sanguine,
said Richard Vaughan on iNews. The
Freight Transport Association is worried
about fuel shortages–the threat of
which it says it had not been told about.
CBI director general Carolyn Fairbairn
warned that “trying to getadeal” must
be the Government’s “number-one
priority”–not least because Brussels
is “even less prepared” for no deal.
The leak of the Yellowhammer
contingency plans hasn’t helped the
pound, said the FT. Although it has
recovered from its recent “near-historic
lows”, traders are still “grappling with
how to price the currency amid deep
political uncertainty”.There are multiple signs of an impending global economic downturn–and we’re certainly due oneTrump lambasted Jerome Powell (left)Adam Neumann: “visionary founder”