Talibs Weekly Email - Week 45
🇺🇸 Joe Biden without the Senate, ✈️China keeping $ inside &🚨 the PPP fraud
Good Afternoon,
Hope everyone is having a great weekend and is gearing up for a spending bonanza next week RE: Black Friday. Again - appreciate all the articles/podcasts recommendations
If you’re looking for a unique conversation to listen to while you run, walk or want to listen to two extraordinary individuals speak.
Kara Swisher has a conversation with Chamath Palipathipua and they discuss the current election, the centrist attitude, SPACs and the issues with an extreme right or an extreme left attitude.
What I’m listening to as I write this weeks email
Tweet that got me thinking
🇺🇸Planet Money: What can Joe Biden do without the senate.
✈️Bloomberg: China Has a Clever Plan to Keep Its Citizens Spending at Home
🚨The Journal: How Fraud and Waste seeped into a Covid Stimulus Program
TLDR: Joe Biden may not have the senate who enact some major laws but the US Presidential powers go quite deep in enforcing bank laws, negotiating tariffs, helping local communities by enabling them to use data to make housing/transportation decisions, and making sure the consumers are not taken advantage of by the banks/lending institutions.
🏦a) Banks: Millions of Americans do not have a bank account and this is inconvenient to pay bills and in essence is quite dangerous. Most bank accounts have minimum balance requirements and often you have to pay high fees to keep the account open. In 2017, apparently 14.7 million adults did not have a bank account.
🏳️How can Biden make this mandatory? Well, he appoints people who can regulate banks. Banks do not act like every other private entity; they are given a special charter from the government and that charter gives the government power over the banks. Banks have a legal duty to serve their community.
🧷 Why is this an issue? Basically why should the federal government tolerate banks doing things not in the best interest of society yet get all the special benefits of being a bank.
💲Political power: Some politicians have been calling for the government to offer cheap bank accounts at the post-office and tech companies are starting to compete with banks by offering bank-like services likes Venmo. This is an intersection of politics + tech pointing in the same direction and both of these things would force banks to change.
b) Tariffs:
🇨🇳Trump Tariffs with China: It does seem decades ago, but Trump was involved with some contentious back & forth tariffs with China in 2017. In essence, there were some significant tariffs levied on Chinese imports. Tariffs are taxes that are paid by US Companies bringing stuff into the country; he didn’t need any congressional support for raising or lowering these taxes.
📑What can Biden do? Well Biden can eliminate these tariffs but the Americas relationship/views against China is one of the few things that draws bi-partisan support. Biden could look to negotiate these tariffs down so US can also benefit rather than imposing a tariff for tariff war.
🤝IP: When American companies have to seek to operate in China in some sectors; they have to go in partnership with Chinese local companies (i.e joint venture). They’ve had to divulge more intellectual property (IP) than they wanted in the past and do not have as much power in that relationship.
The ideal plan would be to lower these tariffs for China making it easier for U.S businesses to go in and do business in China without having to set up a joint venture with a Chinese company.
c) Rule of Suburbs
🏠What is the Affirmatively Furthering Fair Housing Rule? This rule was implemented in 2015 by the Obama administration that was in essence a fundamentally anti discrimination rule; it applied to cities, states and counties.
🏘️What did this rule do? This rule created tools such as mapping tools, data tools that cities could use to study disparities in housing based on race, among other factors so they can figure out who didn’t have access to schools, parks & transportation. The goal of this rule was to make sure everyone in a community regardless of their background would have equal access to transportation, equal access to good schools and equal access to housing opportunities.
👥What did the federal government get? This rule told cities and counties that after they’ve used the data & maps, they would have to let the federal government know and what they would do to fix it (change zoning or transportation routes) and only then - you would get access to federal housing money.
💸Trump? Well, the trump administration didn’t like the rule so they killed it and talked about giving local communities more control and taking away the burden of having to report this to the federal government.
🔢Biden: Biden has stated he plans on bringing this rule back so they can study the data, maps to solve the local problems they find.
💳4) The CFPB
The Consumer Financial protection Bureau (CFPB) is a government organization that supposed to make sure that the banks do not get too tricky with their customers. They are out there to protect the publics interests.
⛏️How is it run? This bureau was created after the 2008 financial crisis and they decided it would be run by a powerful director who would be chosen by the President and confirmed by the Senate and it would be hard to fire the director until their 5 year term was up.
👨⚖️Why? The goal was to to shield this position from the kind of attacks and threats the director would get from well connected business interests and hence was hard for the President to fire. The director could only be removed for inefficiency, neglect or malfeasance.
🚩What happened after 2008? The law passes and the CFPB is created and the bureau gets aggressive and they get billions of dollars in settlement payments from banks and other companies. Companies started filing lawsuits arguing against having a hard to fire director and claiming it was unconstitutional to give so much power and independence to one person who wasn’t really elected.
💸Funny fact? A debt relief firm in California that was investigated by the CFPB argued in federal court that the US President should be able to fire the director for any reason at all. The Supreme court decided that the strong director was unconstitutional and the President should have the right to remove the director
🔥What did Trump do? Trump fired the director in charge and hired a new director who hasn’t been as aggressive as the previous director. Now Biden can fire this director and appoint someone else who may be more aggressive.
My Thoughts: All these 4 items are things that I hadn’t thought of or read much in the news; we’ve all heard the main things such as healthcare reform and climate change (Paris agreement). This is why voting is important; this is why electing officials at your local level is important because they have power to make changes such as the housing rule that was in place. Its through joint collaboration between federal and state/provincial levels that you can actually make change to your everyday life i.e banking.
🇨🇳Bloomberg: China Has a Clever Plan to Keep Its Citizens Spending at Home
TLDR: China has realized that the increasing savings rate for their citizens isn’t a good thing since they are reluctant to travel abroad and come back to stricter quarantine measures. They’ve introduced incentives to increase spending within the nation to keep that $ flowing.
✈️How is China handling the pandemic? China has become almost free of COVID-19 due to the aggressive measures they’ve had. However, they’ve kept a tight lid on incoming passengers from foreign countries.
🌎Incoming visitors: Beijing added restrictions just six weeks after resuming flights in early September. Overseas travellers must be tested 3 times instead of twice. They also have to spend two weeks isolated in a hotel chosen by the government.
🧳How much money do Chinese citizens spend while traveling? Last year, approx 170 million Chinese traveled out of the homeland and spending around $220 billion abroad.
🛍️Spending Patterns: Chinese tourists often spend heavily on luxury goods when they travel abroad. In fact; Canada Goose just recorded Q3 highs fuelled by Chinese demand for their $1000 parkas.
🛒What has the government done?
a) AliBaba expanded its annual singles day shopping offering two checkout periods with special discounts on multiple days.
b) Municipal governments have handing out billions of yuan in shopping vouchers to be redeemed in physical stores only. The idea is that those consumers will go to those stores to redeem their vouchers and end up purchasing/dining out as well.
c) Duty Free: China raised the cap on duty free shopping for travellers in Hainan (China’s Hawaii) to $15K. In the 3rd quarter, the islands duty free sales rose by 230% with bulk of purchases in luxury categories in cosmetics, jewelry and watches.
🌏Next Step: COVID-19 has begun its second coming across U.S & Europe; it makes sense that China is discouraging nonessential foreign travel but there is also financial motivation to keep that spending within the country.
My Thoughts: China has been trying to keep spending within the country for years and as many middle class Chinese citizens have moved money out of the country for traveling or investments. This could be a significant impact on China’s economic recovery plus a hit on tourist heavy places in the USA/Europe. Chinese citizens who travel spend significant amount of money on luxury goods.
🚨 The Journal: How Fraud and Waste seeped into a Covid Stimulus Program
💰How much money? The government awarded a total $525 billion in PPP loans to 5.2 million companies since April, according to the Small Business Administration.
🛒What as the initial issue? If you recall, there were rumblings in the news that certain large companies such as Shake Shack and Ruths SteakHouse had gotten PPP funding that was reserved for smaller businesses. The rumblings weren’t about the fact that these companies were hurting but they were accessing funds that were reserved for smaller businesses whereas these larger companies have a relatively easier access to capital.
🇺🇸What happened? 10s and thousands of companies applied and received loans and mainly cause the process was actually quite easy. In April/May, all the companies had to do was show that they were facing economic uncertainty and have under 500 employees.
🛍️How? For example, delivery companies who usually transport amazons goods etc applied for these loans and claimed economic uncertainty. They had more business than before but the uncertainty was a vaguely defined term. They claimed that if any of their deliverymen got covid - there would be economic uncertainty. Basically, virtually any company could’ve said that. This technically wasn’t illegal.
If a company had fewer than 500 employees and certified “current economic uncertainty makes this loan request necessary to support the ongoing operations,” it was generally approved based on the honor system
💸What type of money? The purpose of this loan was get the money to the businesses as quickly as possible. In doing so, the speed that this loan was processed caused many missteps along the way. Usually in any government programs, there is a % of fraud that occurs however the % of fraud that was raised during this time was quite troubling.
The Treasury Department in September received 2,495 suspicious-activity reports involving business loans from banks and other depository institutions, more than the total for any year dating back to 2014.
🚨What happened? Well, the FBI decided to investigate on these loans and the government starting charging people who had misused the program blatantly. They often fund companies who had made companies up and applied for a loan, claimed they had 18 employees when it was only themselves.
Several hundred PPP-related investigations have been opened, involving nearly 500 suspects and hundreds of millions of dollars of loans, according to the Federal Bureau of Investigation.
SARS - Suspicious activity reports
Source: U.S. Treasury Department's Financial Crimes Enforcement Network
How effective were these loans?
📛What are the economists saying? Researchers at MIT compared the payroll data at PPP-eligible companies to ineligible ones and estimated that the program boosted around 2.3 million jobs; costing around $224,000 per job (which seems absurd)
💲Congressional Budget Office: The CBO stated that these loans increased GDP by 36c for every 1 dollar; however they saw a higher increase in Enhanced Unemployment benefits (Income given directly to people) at 60cents for 1 dollar for benefit. In effect, the PPP was not as good as the other direct to consumer programs.
New Loans: The PPP stopped accepting new applications Aug. 8, but Congress is considering approving another round of funding, and fraud reports could be a factor.
⚖️Next Steps? There is a proposal offered by Republicans which would allow many businesses to apply for a second PPP loan with the following provisions. Gross revenues must have dropped at least 35% between the first 3Q and the same quarter last year.
My Thoughts: I’m not surprised at the amount of fraud that would’ve occurred when a program of this magnitude was rolled out so quickly without the appropriate safeguards in place. This is also similar in Canada where a recent report claimed the level of fraud in CERB payments made out. The difference here is the % of fraud that was planned for vs the economic benefit that these programs have actually contributed to. The issue with PPP program in the states or the CEWB (Canadian Emergency Wage Benefit) to employers is that these programs are short-lived; these programs will decline in size and surely it will be interesting or sad to see the number of businesses that received these economic benefits close for good anyways.
Heres an interesting fact; looking at the OSB Canadian insolvency data for Q3; we see that bankruptcies for businesses is actually down 20% year o/ year and not up! This could be an indication that these businesses are utilizing the CEWB programs effectively at the moment. The deadline for these applications would be extended until Jan 31, 2021.
Books of 2020
Here are my books to read/finish for the next while
Tanking to the Top - Yaron Weltzman (Philadelphia 76ers “The Process”)
Completed
Educated by Tara Westover (9/10)
Loonshots by Safia Bahchall (8/10)
Range - David Epstein (7/10)
American Dirt by Jeannine Cummings (9/10) [fiction]
We The North - Doug Smith (8/10) - Nice history from a Raptors beat writer
If you’re looking for books to get, I would suggest checking out bookdepository.com or thriftbooks.com (both are cheaper than amazon at time)