NAKED CAPITALISM

The Bizarre and Widely Disparaged Fitch Downgrade of US Government Debt to AA+

Posted on August 2, 2023 by Yves Smith


Fitch shot a rocket at Treasuries that turned out to be a dud, in the form of its downgrade of US debt from AAA to AA+. This leaves Moodys alone among major rating agencies scoring Treasuries as AAA.

One might think, given all the hand-wringing about US debt, that the press and investors would be in a funk over this action. After all, when S&P threatened to downgrade Federal obligations from AAA to AA+ in 2011, business commentators, nearly all analysts, and the press spoke with one voice that this would be a meteor-wiping-out-the-dinosaurs-level event, an end of the financial universe as we knew it. Your humble blogger was virtually alone in disputing this view.1

Unlike S&P in 2011, Fitch did not broadcast its plans in advance. Even though investors and commentators seemed surprised, and the White House predictably got huffy, Mr. Market shrugged. Not only did the usual Democratic party economists like Larry Summers, Paul Krugman, and Jason Furman come out swinging on Twitter, but so to did highly respected, perceived-as-nonpartisan analysts like Mohamed El-Erian.2

Mind you, none of these arguments rely on the MMT point, that the US can always meets its Federal obligations. As a currency issuer, it cannot run out of money. It can engage in net fiscal spending (aka deficits) in excess of economic capacity and generate too much inflation.

The one way Fitch was correct is the US could make a voluntary default due to failed debt ceiling negotiations. But with the US economy showing pretty good groaf and inflation weakening (according to the Fed’s preferred measures), the idea that the US situation is worsening and therefore debt wobbles are becoming more likely is not an imminent worry.

Another way the debt critics could be correct, but it is an argument that is virtually never made, is that deficits should not be as big a worry as where the spending goes. If net fiscal spending is directed significantly to investments and programs that increase the productive capacity of the economy, like infrastructure, basic R&D in high potential sectors, education, cheaper broadband, the deficit spending will pay for itself via higher GDP growth.

Now if you want to make a case for poor US prospects, there is plenty of grist for that argument: falling US lifespans; rentierism by the health care, higher eduction, real estate, and arms sectors, which hurts productivity and competitiveness; rising partisanship; and as we and others (see Andrei Martyanov, for instance) a serious and accelerating fall in strategic and operational capability on a widespread basis.

But even with the US in decline, it is still faring better than Europe and some other areas of the world. And the elites are very good at preserving their interests even as the prospect of decline looms. Recall that even in the Dark Ages, the nobility did not fare too badly. Archeologists have found evidence they still were able to procure luxuries from around the world, like spices and fine china.

So the US sell-by date is coming but it is not imminent. That does not mean the US will not take yet more self destructive action, but the charges Fitch made largely did not stand up to scrutiny.

____

1 From an August 2011 post:


Remember Y2K? The world was gonna end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. I know people in who went into survivalist mode, stocking up months of supplies, and others who took less extreme precautions, like having lots of cash on hand in case ATMs were disrupted.

As we now know, January 1, 2000 came in without major incident, since the widespread publication of this software threat to End the World as We Know It led to lots of preventive action. Perversely, the big effect of the Y2K scare was that it accelerated tech spending, since many firms bought new systems and upgraded hardware as part of their overhaul. That increased the severity of the post-bubble economic downturn….

It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much, and may perversely hit wobbly stock markets more than Treasury yields.

But there is a much bigger issue, namely S&P’s highly questionable conduct, the lack of any analytical process behind this ratings action, and the political implications.

2 For instance: Mohamed El Erian says Fitch downgrade of the US is a strange move, likely to be dismissed ForexLive.

3 Cynical and seasoned observers know that this debt/budget game of chicken is in large measure a play act and the principals won’t precipitate a default. Congresscritters if nothing else have too much in the ways of investments to be in the net worth self-harm business. However, given the way the US acting against its self-interest by escalating with China while things are not going at all well in Ukraine, it is not impossible that some ideologues down the road will get their hands on the wheel and not steer out of a crash.

Treasury yields fell, meaning investors were buying more, not fewer Treasuries at the margin, and the softening of the dollar is expected to be fleeting:

The financial press didn’t even give the story prominent billing this morning.

 The latest Trump indictment was the hot news:

At the Wall Street Journal, the Trump story is given so much real estate that the Fitch downgrade is 

below the fold (admittedly, it is the top story on the left once you scroll down):

So what exactly happened here?? As we’ll explain, one element of Fitch’s critique is correct, 

that the ugly and too frequent debt ceiling and budget cliffhangers are a sign of political 

dysfunction and raise the specter of a disastrous miscalculation.3

But the big reason for the collective yawn is Fitch’s economic case was weak and contradicted

 by recent data. We’ll turn the mike over to Twitterati as representing common views among

 the economist and investor cohorts:

Note that Zandi is super orthodox and we have criticized him regularly on this site, so for him

 to blow the downgrade off is telling:

And just because Jason Furman is an administration defender does not make this argument wrong:

7 COMMENTS 

floraAugust 2, 2023 at 7:52 am

After the ratings agencies helped pump up the subprime market which imploded in the 2008-2009 Financial crisis, they afterward claimed their ratings were not advice but mere opinion (a free speech issue, so they could not be sued). Many people decided – fairly or not – that the rating agencies were not impartial and might be engaged in pay-to-play.

Who would benefit from this downgrade? Would it be a lever the Fed can use to justify raising rates? Inquiring minds… / ;)
Reply ↓
egAugust 2, 2023 at 9:05 am

Yeah, these sovereign debt ratings don’t seem terribly credible in a world of fiat currencies, and it’s even more bizarre to me when applied to the risk free asset against which all other assets denominated in $USD are priced.

And I’m with Yves that it’s not the right metric by which to measure US relative decline — look there to the real metrics as she outlines.
Reply ↓
chrisAugust 2, 2023 at 9:12 am

Re: Trump above the fold, it makes you wonder what is going to happen if Trump ever goes away? Do they have more headlines that they want to obscure? I can see them all now…

“Trump indicted for 50th time!” California runs out of potable water in Southern part of state, emergency declared…

“Trump brand valued at 50% less than previously, loans called in” average US worker needs 55 hours a week to earn a living wage…

“Trump smells like a fart when he talks, advisers suspicious he’s drunk all the time…” Glorious Leader Biden gets standing ovation from Congress while signing bill enshrining Freedom from Privacy act, “all those terrorists have nowhere to hide now”…
Reply ↓
NotThePilotAugust 2, 2023 at 9:17 am

This is getting into inner arcana of the finance world that I know really nothing about, but I did see this in the news. And I wondered if there’s another explanation for why Fitch did this so suddenly and everyone else is blowing it off.

Is it possible someone at Fitch was tipped off about something most of us don’t know (and that other well-connected people have to extricate themselves from more slowly)? Sort of like signaling in a game of bridge?

Otherwise, while I consistently underestimate America’s ability to memory-hole bad news and “extend & pretend”, I always get a bad feeling a hammer’s about to fall when people talk like in the one tweet by Cullen Roche.
Reply ↓
LASAugust 2, 2023 at 9:22 am

The Congressional Budget Office recently published a study of what would happen to the national debt and the economy if social security benefits were reduced by 25% in 2034. Who ever requested that study might be under pressure to slash benefits to avoid raising taxes on corporations and the well-to-do for budget balancing, even though it will likely lead to a recession in the short-term at least. As to forces at work behind the smokescreen, any or more than one large corporate/finance entity that makes regular use of Fitch might have been influential.
Reply ↓Yves SmithAugust 2, 2023 at 9:47 am

It is hard to say enough bad things about the CBO but we have tried to do our part. Some examples:


Jeff Madrick: Why the CBO Can’t Be Trusted

Jeff Madrick: CBO’s Lack of Independence Means We Need a Shadow CBO

CBO – Still Pushing Deficit Scaremongering Propaganda

Dean Baker Exposes How CBO Cooks Inflation Forecasts to Promote Deficit Scaremongering

Fed Budgetary Experts Demolish CBO Health Cost Model, the Linchpin of Budget Hysteria

And I agree completely with your suspicion that someone pressured Fitch. That could even account for the peculiar timing, that they were being arm-wrestled to get this out while the deficit fights were in progress, but some processes (vetting? editing? internal debates against being manipulated?) meant it come out late.
Reply ↓
Clint Olsen WrightAugust 2, 2023 at 10:54 am

Furman identifies in his tweet: “Factors that could, or collectively, lead to negative rating action/ downgrade”.
The second bullet point- “Structural”, and the third “Macroeconomic policy…” read as though Fitch should have considered downgrading the U.S. to BBB-.
Reply ↓

Treasuries Are Still In a Class of Their Own Despite Fitch Cut

Ruth Carson and Matthew Burgess
Tue, August 1, 2023 
 

(Bloomberg) -- The US sovereign rating may have slipped but Treasuries remain a buy.

That’s the prognosis of strategists, who say US government bonds will still be the cornerstone of portfolios even after Fitch Ratings cut the nation’s AAA credit grade. The reason? There are few assets that can rival Treasuries’ status as the haven of choice.

“Because Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt,” Goldman Sachs Group Inc. economists including Alec Phillips wrote in a note. “We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade.”

The view was reflected in market moves on Wednesday as short-end Treasuries rose and a gauge of the dollar reversed a drop to edge higher. Taking the US out of the equation, investors have a limited pool of AAA-rated sovereign debt to choose from. Economies with the highest credit rating at S&P Global Ratings, Fitch and Moody’s Investors Service include Germany, Denmark, Netherlands, Sweden and Norway.

Such rating cuts “are a bit like these debt ceiling debacles — they can cause a bit of short term angst, but never amounts to anything much,” said Amy Xie Patrick, money manager in at Pendal Group. There needs to be a “credible alternative in terms of both being safe enough and large enough” to displace Treasuries, and there are no clear options now, she added.

Fitch cited the US’ ballooning fiscal deficits among the reasons for its decision, which echoes a a move made more than a decade ago by S&P Global Ratings.

2011 Downgrade

S&P’s rating cut in 2011 triggered a selloff in risk assets such as global equities, but boosted Treasuries as investors sought out havens. Yields on 10-year Treasuries slid 24 basis points on Aug. 8 that year, the first trading day after the S&P downgrade.

Fitch’s decision fueled a similar reaction on Wednesday, with Asian stocks declining and the two-year Treasury yield falling as much as three basis points. Benchmark 10-year US yields edged up one basis point to 4.03% after declining two basis points.

“Treasuries still provide the broad risk off hedge during periods of stress, which ironically, the downgrade may morph into,” said Marvin Loh, global macro strategist at State Street Corp. “When we look at 2011, credit and stocks initially were the most volatile following the S&P downgrade.”

“We do not believe the Fitch downgrade will have a huge market impact, as this brings the US into line with S&P ratings,” said James Wilson, senior portfolio manager at Jamieson Coote Bonds in Melbourne. “The financial system has weathered much bigger storms since then, and the bigger factor toward higher yields is the glut of Treasury supply that is set to come through the market with the larger coupon announcement.”

On Monday, the Treasury raised its net borrowing estimate for the July-through-September quarter to $1 trillion, more than some analysts expected and well above the $733 billion it had predicted in early May. The Treasury will preview its quarterly financing plans on Wednesday at 8:30 a.m. in Washington.

Borrowing Risk

Some commentators including Larry Summers and Mohamed El-Erian have criticized Fitch’s decision given US economic resilience. Summers, a former Treasury Secretary, said while there were reasons for concern about the long-run US deficit trajectory, the nation’s ability to service its debts isn’t in doubt.

Yields on 30-year US debt climbed eight basis on Tuesday and held at 4.10% in Asia Wednesday, around the highest level since November.

What Bloomberg Strategist Says...

“There shouldn’t be much lasting impact on Treasuries as Fitch put the US onto a stable outlook from negative. That means another move is very unlikely — its a one-and-done operation and marking to market with S&P’s AA+ rating.”
Mark Cranfield, Markets Live strategist

While some parts of the US curve face selling pressure, the consensus is that demand for Treasuries will persist as investors struggle to find other safe and liquid options to park their cash in.

“The Fitch downgrade will have minimal negative impact on the allure of US Treasuries,” said Chang Wei Liang, strategist at DBS Bank Ltd. in Singapore. In fact, it “may ironically support Treasuries buying on concerns of follow-on downgrades to US corporate credit.”

--With assistance from Michael G. Wilson.

Fitch cuts US credit rating to AA+; Treasury calls it 'arbitrary'

Tue, August 1, 2023 at 3:52 PM MDT·5 min read
By Davide Barbuscia

(Reuters) -Rating agency Fitch on Tuesday downgraded the U.S. government's top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution of the debt ceiling crisis two months ago.

Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.

Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalize the review in the third quarter of this year.

With the downgrade, it becomes the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating.

The dollar fell across a range of currencies, stock futures ticked down and Treasury futures rose after the announcement. But several investors and analysts said they expected the impact of the downgrade to be limited.

Fitch's move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government's $31.4 trillion borrowing limit, ending months of political brinkmanship.

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the rating agency said in a statement.

U.S. Treasury Secretary Janet Yellen disagreed with Fitch's downgrade, in a statement that called it "arbitrary and based on outdated data."

The White House had a similar view, saying it "strongly disagrees with this decision".

"It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world," said White House press secretary Karine Jean-Pierre.

REPUTATIONAL DENT

Analysts said the move shows the depth of harm caused to the United States by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May.

"This basically tells you the U.S. government’s spending is a problem," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.

Fitch said repeated political standoffs and last-minute resolutions over the debt limit have eroded confidence in fiscal management.

Michael Schulman, chief investment officer at Running Point Capital Advisors said the "U.S. overall will be seen as strong but I think it’s a little chink in our armor."

"It is a dent against the U.S. reputation and standing," said Schulman.

Others expressed surprise at the timing, even though Fitch had flagged the possibility.

"I don't understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved," said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington D.C.

Still, investors saw limited long-term impact.

"I don't think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fitch took us from AAA to AA+," said Jason Ware, chief investment officer at Albion Financial Group.

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.

"This was unexpected, kind of came from left field," said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. "As far as the market impact, it's uncertain right now. The market is at a point where it's somewhat vulnerable to bad news."

LIMITED IMPACT

In a previous debt ceiling crisis in 2011, Standard & Poor's cut the top "AAA" rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation's fiscal outlook. Its rating is still "AA-plus" - its second highest.

After that downgrade, U.S. stocks tumbled and the impact of the rating cut was felt across global stock markets, which were at the time already in the throes of the euro zone financial meltdown. Paradoxically, U.S. Treasuries prices rose because of a flight to quality from equities.

In May, Fitch had placed its "AAA" rating of U.S. sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden.

A Moody's Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.

Other analysts had pointed to risks that another downgrade by a major rating agency could affect investment portfolios that hold top-rated securities.

Raymond James analyst Ed Mills, however, said on Tuesday he did not anticipate markets to react significantly to the news.

"My understanding has been that after the S&P downgrade a lot of these contracts were reworked to say 'triple-A' or 'government-guaranteed', and so the government guarantee is more important than the Fitch rating," he said.

Others echoed that view.

"Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the U.S. economy and markets," Mohamed El-Erian, President at Queens' College, said in a LinkedIn post.

(Reporting by Davide Barbuscia in New York, Jyoti Narayan in Bengaluru, Lewis Krauskopf and Saeed Azhar; Editing by Megan Davies, Arun Koyyur, David Gregoiro, Gerry Doyle and Sam Holmes)

CRIMINAL CAPITALI$M; BIG PHARMA

India orders drugmaker linked to Cameroon cough syrup deaths to stop manufacturing

Reuters
Updated Tue, August 1, 2023 

NEW DELHI (Reuters) -The Indian government has ordered a drugmaker whose cough syrup was linked to the deaths of at least six children in Cameroon to stop manufacturing, it said on Tuesday, the fourth Indian company to face a crackdown over tainted medicines.

The move comes as Indian regulators step up inspections at drugmakers after cough syrups made in the country were linked to the deaths of dozens of children overseas, denting India's image as the "pharmacy of the world".

Riemann Labs, based in the central Indian state of Madhya Pradesh, was ordered to stop manufacturing activities after an inspection by central and state drug regulators, Deputy Health Minister Bharati Pravin Pawar told the parliament.

Rajesh Bhatia, one of the three directors at Riemann Labs, according to the company's website, told Reuters by phone that he wasn't aware of the matter. He did not answer further questions and his phone was later unreachable.

India has suspended manufacturing licences for three cough syrup makers so far. Pawar did specify if Riemann's licence was also suspended.

Cough syrups made by two of the three firms were linked to the deaths of at least 89 children in Gambia and Uzbekistan last year. The companies deny any wrongdoing.

The World Health Organization said last month that a batch of cough and cold syrup sold in Cameroon under the brand name Naturcold contained extremely high levels of a toxic ingredient.

The agency has sought help from Indian authorities to establish the origins of the syrup.

Pawar did not name the cough syrup sold by Reimann in Cameroon.

India has tightened its testing of cough syrup exports since June, making it mandatory for companies to obtain a certificate of analysis from a government laboratory before exporting products.

(Reporting by Sakshi Dayal and Shivam Patel, Editing by Louise Heavens and Mark Potter)

CRIMINAL CAPITALI$M

Japan Insurers Sink on Concerns Over Suspected Price Fixing

Taiga Uranaka and Nao Sano
Wed, August 2, 2023 



(Bloomberg) -- A price-fixing scandal at Japan’s biggest casualty insurers is escalating following a media report that the suspected collusion is likely to be wider than initially believed.

Shares of Tokio Marine Holdings Inc. fell 5.9% in Tokyo trading on Wednesday, the most since March, after Nikkei reported that more corporate clients may have had premiums fixed. MS&AD Insurance Group Holdings Inc. and Sompo Holdings Inc. dropped more than 4%.

The allegations first came to light in June, when the insurers were said to have tried to set premiums for railway operator Tokyu Corp. The Financial Services Agency ordered them to submit a report on the matter, amid questions over whether the suspected collusion was an isolated incident or systematic.

Nikkei, citing people familiar with the matter, said on Tuesday that dozens of suspicious cases have emerged during the insurers’ investigations. They are alleged to have colluded in determining premiums for companies including refiner Eneos Corp. and East Japan Railway Co., the newspaper said.

The FSA is planning to issue a second order for insurers to report on the price-fixing allegations to expand the scope of information gathering, Nikkei said in a separate article. The regulator declined to comment.

A Tokio Marine spokesman said the company can’t comment on specific clients or contracts, while adding that it continues to look into the matter. Representatives for Sompo and MS&AD declined to comment, citing the ongoing investigation.

The possibility of regulatory action is weighing on the shares of the property-casualty insurers, said Masayuki Otani, chief market analyst at Securities Japan Inc. “Foreign investors are especially averse to this kind of scandal and their wait-and-see stance is likely pushing down stocks,” Otani said.

Japanese insurers also face regulatory scrutiny on another matter. Finance Minister Shunichi Suzuki said this week that the FSA has issued a report order on a unit of Sompo and six other insurers in connection with alleged insurance fraud by used-car dealership Bigmotor Co. The minister said the FSA will check the facts around Sompo seconding its employees to Bigmotor and their business relationship.

Sompo said last week that it’s preparing to end its contract with Bigmotor, which has admitted to deliberately damaging vehicles and padding insurance claims.

WORKERS CAPITAL

California Teachers’ Pension Keeps Shrinking Its Exposure to China

Bei Hu
Tue, August 1, 2023 




(Bloomberg) -- China fell out of the top 12 ranking of the California State Teachers’ Retirement System based on country asset exposure, following a broader US pension retreat from the world’s second largest economy.

The pension giant’s fund allocation to China trailed South Korea, India, Mexico and Ireland by the end of May, according to its latest disclosure based on market value and revenue exposure. China’s weight in its overall investment book tumbled from 2.1% at the end of 2020, the latest percentage undisclosed.

South Korea rounded out as the fund’s 10th largest market, accounting for 0.6% exposure at the end of May. It was followed closely by Mexico and Ireland, Calstrs said. The pension fund had an investment portfolio of $309 billion then versus $283 billion in late 2020. That means the value of its China allocations tumbled by at least 69% over the last three years.

Trade journal Pensions & Investments ranked Calstrs as the second-largest defined benefit pension manager, trailing only the California Public Employees’ Retirement System. As late as the end of 2022, Calstrs had 1% of its portfolio parked in China across all asset classes, making the nation its sixth-biggest geographical allocation, according to a document posted on its website. It was fourth in late 2020, behind only the US, Japan and the UK.

The slide came during a spat between the US and China over issues ranging from technology to audits of Chinese companies and the future of Taiwan and Hong Kong. Some American politicians have balked at the fact that the country’s pension funds were backing companies in a geopolitical and economic rival.

President Joe Biden is planning to sign an executive order to limit critical US technology investments in China by mid-August, people familiar have said.

The Calstrs report did not reveal to what extent the slippage was the result of active reduction of holdings versus poorer performance of Chinese assets compared with other markets.

The pension fund’s largest global exposure is to public equity, accounting for more than a third of assets and over half of risk. Calstrs had about $3.7 billion invested in Chinese public equities at the end of last year.

In this bucket, the decline in China exposure has been driven by underperformance relative to peers elsewhere, Calstrs said in an emailed response to a Bloomberg News query. In the 2.5 years through June 2023, the MSCI China IMI index used by the pension as a benchmark had an annualized loss of nearly 19%, against the 4.1% gain of the MSCI ACWI IMI gauge.

Beijing’s shock suspension of Ant Group Co.’s record listing in late 2020 marked the start of a years-long crackdown on technology companies and shook investor confidence.

Calstrs Chief Investment Officer Christopher Ailman has long expressed mixed feelings about investing in China.

Speaking on Bloomberg Television on the heels of the Ant IPO halt, Ailman said the event amplified the point that investors couldn’t fight the Communist Party when investing in China and the country was both a friend and a foe.

“You can make money there. It’s gonna have a growth economy,” he said, while adding that the country is “full of” environmental, social and governance issues. “As investors, it’s a real conundrum for us.”

Still, the pension giant in August 2022 solicited bids from dedicated China stock managers for the first time. It has shortlisted 19 candidates, the latest email said. Such managers “could provide more specialized expertise on the ESG aspects of the China market compared to a broad global emerging markets approach,” it added.

Among other North American retirement funds, The Ontario Teachers’ Pension Plan announced earlier this year it was shutting an Asia equity investment team in Hong Kong, cutting five jobs. It said it would continue to invest in private and public assets in China via fund partners, and in public companies through its global investment teams. It halted direct investment in Chinese private assets, people familiar said in January.

Teacher Retirement System of Texas last year switched to a tailored emerging markets stock benchmark, effectively halving its target allocations to Chinese stocks.

Bloomberg Businessweek

SOMEONE LIKES CHINA
AMD plans AI chip debut by year-end, sees China AI opportunity

Tue, August 1, 2023
By Max A. Cherney and Chavi Mehta

(Reuters) -Advanced Micro Devices on Tuesday forecast a strong finish to the year, driven by the planned launch of artificial-intelligence chips that could compete with Nvidia semiconductors.

AMD shares rose about 3% in after-hours trading.

CEO Lisa Su said AMD is set to ramp up production of its flagship MI300 artificial-intelligence chips in the fourth quarter. The accelerator chips, which are in short supply, are designed to compete against the advanced H100 chips already sold by Nvidia.

Su said customer interest in the MI300 series chips is "very high" and AMD expanded its work with "top-tier cloud providers, large enterprises and numerous leading AI companies" during the third quarter.

Investors are betting that MI300 chips, due for release later this year, will challenge Nvidia in the surging market for advanced AI chips.

MI300s exceed the performance limits for sale to China under export controls issued in October, and unlike Nvidia and Intel, AMD has yet to create special chips for the lucrative Chinese market.

Nvidia modified its H100 chips to comply with U.S. Commerce Department restrictions on advanced AI semiconductor sales to China. AMD is mulling a similar strategy with its MI300 and older MI250 chips, Su said on a conference call with analysts on Tuesday.

"Our plan is to, of course, be fully compliant with U.S. export controls. But we do believe there's an opportunity to develop product(s) for our customer set in China that is looking for AI solutions, and we'll continue to work in that direction."

AMD has not given a detailed full-year forecast but said it expects 2023 sales in its data center business, including MI300 chips, to exceed the $6.04 billion in 2022.

Jenny Hardy, portfolio manager at GP Bullhound, which owns Nvidia and AMD stock, said Nvidia still faces supply constraints, leaving an opening for AMD's chip.

"If AMD can ramp production and launch those MI300 chips in the fourth quarter, they will likely see strong demand because plenty of people cannot get their hands on Nvidia chips. So we would assume that AMD can effectively kind of fill some of that supply-demand gap," Hardy said.

AMD has enough components for MI300 chips for an "aggressive" launch in the fourth quarter, and ample supply for 2024, Su said.

Su cited "strong interest" in its older MI250 chip, which remains a "very good option" for less complicated AI tasks.

For the second quarter, revenue at AMD's data center business fell 11% to $1.32 billion, while revenue at its client business slumped 54% to $998 million from $2.2 billion a year ago.

Large cloud players like Microsoft and Google plan to ramp up spending on data centers in the second half of the year, analysts said, noting that spending will skew toward AI chips and infrastructure.

However, a decline in PC shipments has moderated and demand has started showing signs of improvement.

"Looking to the third quarter, we expect our Data Center and Client segment revenues to each grow by a double-digit percentage sequentially driven by increasing demand for our EPYC and Ryzen processors, partially offset by Gaming and Embedded segment declines," said AMD finance chief Jean Hu.

The company forecast current-quarter revenue of about $5.7 billion, plus or minus $300 million. Analysts polled by Refinitiv on average expect revenue of $5.82 billion.

(Reporting by Chavi Mehta in Bengaluru and Max A. Cherney in San FranciscoAdditional reporting by Stephen Nellis in San FranciscoEditing by Arun Koyyur, Sayantani Ghosh, Matthew Lewis and Richard Chang)

EV's ARE POSTMODERN FORDI$M

China's Leapmotor unveils new manufacturing platform, wants others to use it

Reuters
Mon, July 31, 2023

Leapmotor's EV    WORKERLESS production line in Jinhua


SHANGHAI (Reuters) -Chinese electric vehicle maker Zhejiang Leapmotor Technology unveiled on Monday a new platform it developed in-house for making vehicles, which its chief executive said it wants to license to other automakers.

The "Four Leaf Clover" architecture features an integrated computing platform capable of controlling all intelligent functions including an EV's autonomous driving and smart cockpit functions, Leapmotor's CEO Zhu Jiangming told reporters in Shanghai.

The company hopes to sell the platform to other automakers via tech licensing agreements, he said.

Leapmotor is in advanced talks with two foreign companies about such partnerships, including a new player in the electric vehicle segment, which could produce Leapmotor-developed models in overseas markets, Zhu said without elaborating.

"We hope Leapmotor will not only be an EV brand but also a licensor of core technologies," Zhu said.

Companies in the automotive sector use the terms platform and architecture to describe the basic engineering and design that determines a vehicle’s size, weight and key elements of performance.

A senior Leapmotor engineer told the event the firm had achieved cost savings with the architecture by reducing the use of controls and wire harnesses, and Zhu said this would cut the materials cost per car by 500 yuan ($70).

The company is already planning to launch the platform's next generation in 2025, which would include improvements in computing capabilities and smart cockpits, Zhu said.

Zhu, a veteran electronics engineer who co-founded surveillance giant Dahua, launched Leapmotor in 2015 with the backing of investors including state-owned Shanghai Electric Group Corp and Hongshan, formerly known as Sequoia Capital China.

The company and its fellow Chinese EV startups have been struggling with losses and declining sales since U.S. rival Tesla started a price war at the beginning of the year.

Leapmotor, which employs more than 2,000 engineers, sold 44,500 units in the first half, 14% fewer than a year ago.

But some young EV manufacturers, thanks to their heavy research and development investment, have been at the forefront of EV technology innovation that appeals to tech-savvy Chinese consumers who like having more intelligent features in cars.

Leapmotor spent 11% of its total revenue on R&D in 2022.

Volkswagen and Xpeng announced last week a partnership to jointly develop EVs on Xpeng's G9 "Edward" platform, in a fillip for the Chinese startup that analysts said could boost its sales and profitability.

($1 = 7.1512 Chinese yuan renminbi)

(Reporting by Zhang Yan and Brenda Goh; Editing by Jacqueline Wong, Robert Birsel and Tomasz Janowski)

Volkswagen in talks with Leapmotor on tech tie-up for Jetta brand - China media


Reuters
Wed, August 2, 2023 

A Volkswagen ID.7 vehicle is pictured during the carmaker's annual shareholder meeting

BEIJING (Reuters) -Volkswagen is in talks with Chinese electric vehicle startup Zhejiang Leapmotor Technology about the possibility of cooperation for Volkswagen's Jetta brand, a Chinese media outlet reported on Wednesday, citing sources.

A joint venture between VW and state-owned Chinese automaker FAW Group could "buy" a platform of EV technologies from Leapmotor, according to the state-backed financial news website Cailianshe.

Leapmotor and VW China declined to comment. Reuters was unable to independently confirm the reported discussions between the companies.

Leapmotor unveiled on Monday a new platform it developed in-house for making vehicles, which its chief executive said it wanted to license to other automakers.

CEO Zhu Jiangming told reporters that Leapmotor was in advanced talks with two foreign companies about such a partnership, including a new player in the electric vehicle segment, which could produce Leapmotor-developed models in overseas markets.

Leapmotor's shares in Hong Kong jumped as much as 5% in afternoon trading after the Cailianshe report, reversing earlier losses.

Volkswagen and Xpeng announced last week a partnership to jointly develop EVs on Xpeng's 'Edward' platform on which the Chinese startup's G9 model was built.

(Reporting by Beijing newsroom; Writing by Liz Lee; Editing by Robert Birsel and Muralikumar Anantharaman)

Why Is VW Teaming Up with Yet Another Chinese Automaker?

Jay Ramey
Mon, July 31, 2023 

Here’s Why VW Is Teaming Up with Automaker XPengXpeng

Volkswagen and Guangzhou-based automaker XPeng plan to collaborate on two new EVs meant for the Chinese market, relying on XPeng's own platform, with the two expected in 2026.

XPeng has achieved much in a short period of time in the sphere of EVs and autonomous tech since launching in 2014.

Volkswagen is seeing increased competition from local automakers as well as Tesla in the field of EVs, as it enters a new era of its operations in China.

Volkswagen is the European automaker with the longest presence in China, having landed in the Middle Kingdom in 1983 with the Santana sedan. And for decades, the country has been one of its most important overseas markets, with VW establishing joint ventures with a number of automakers over the years.

In the era of electrification, VW produces two EV models unique to the Chinese market, under joint ventures with First Automotive Works (FAW) and Shanghai Automotive Industry Corporation (SAIC)—two of China's oldest automakers that have also collaborated with American automakers on several vehicles for the domestic market.

VW is now teaming up with automaker XPeng, taking a 4.99% stake in the company and investing $700 million in the process, with plans to develop two electric models scheduled to be launched in 2026. Their development will be overseen by a new entity called Volkswagen Group China Technology Company (VCTC), with over 2000 development and procurement experts slated to work on EVs.

The main difference to prior efforts will be that these VW-branded vehicles won't be based on Volkswagen's platforms. Instead, VW will use XPeng's own "Edward" architecture, which has underpinned its P7 and G9 models.

"Together with XPeng, we aim to put two additional fully connected electric vehicles on the road from early 2026 onwards, thus opening up new customer groups for the VW brand," said CEO VW Brand Region China, Stefan Mecha.

For the moment, the focus of these two new VW models will be on the Chinese market. But XPeng's export potential is something VW will be looking at down the road.

Guangzhou-based XPeng, launched in 2014, is a relatively small automaker by the country's standards, but the company has sought to take on larger automakers directly with the sleek and innovative vehicles, including the G9 crossover pictured above. The company has seen its share of early success among China's New Energy Vehicles, which include EVs and hybrids, and has also opened offices stateside.

XPeng has sought to challenge Tesla and others in China with high-tech models like the P7.XPeng Motors

XPeng is also well known in the field of autonomous vehicles, having developed its own systems instead of relying on outside developers. It is expected that VW will benefit from XPeng's expertise in this field in developing the two new models, amid increased competition with Tesla in China.

Audi, also part of the VW Group, plans to expand its cooperation with automaker SAIC, with the aim of extending its offerings in the premium segment.

"It is planned to start with electric models in a segment where Audi does not as yet have a presence in China," the automaker hinted.

The two agreements, revealed last week after months of rumors, work to cement VW's presence in a market that is rapidly changing, and one in which VW is not as dominant as it once was. For one thing, there are plenty of new Chinese brands on the market with EVs in their lineups, which was not the case a. decade ago. For another, European and American automakers have seen their market shares in China fluctuate wildly over the past decade as the public's taste has continued to evolve.

The VW Group has managed to weather these changes thanks to its dominant position in the market, which relied on midsize and executive cars for quite some time.

"The partnerships aim to swiftly expand the Group’s product range with further models from China for China in particularly promising customer and market segments," VW summed up the goals of the agreements.

The main takeaway is that the EV market in China has developed to a point where a foreign automaker like VW can launch several models entirely unique to that market, relying on Chinese automakers' platforms and technology instead of the other way around.

Will we see a Chinese automaker offer EVs stateside in this decade under its own brand, as had been promised for years, or is this unlikely at the moment? Let us know what you think.

Ford restarts electric pickup truck factory after retooling to increase output, says orders are up


Ford Lightning electric pick-up trucks are displayed at a dealership, Monday, Feb. 6, 2023, in Manchester, N.H. Ford is resuming production of the F-150 Lightning electric pickup after closing a factory in Dearborn, Michigan, to add more production capacity.

Tue, August 1, 2023 


DETROIT (AP) — Ford is resuming production of the F-150 Lightning electric pickup after closing a factory in Dearborn, Michigan, for six weeks to triple production capacity.

The move comes just two weeks after the company cut prices on all versions of the trucks, some by as much as $10,000, fueling speculation that demand had fallen.

But company officials said Tuesday that they're getting six times the orders now than before the price cuts, and Ford has an order bank big enough to take up 45 days of production at the reworked Rouge Electric Vehicle Center. The company wouldn't give an exact number of orders.

Lightning sales in the second quarter of the year were more than double the same period in 2022, but there were up only 4% from the first quarter.

Ford says that's because they stopped production at the Rouge Electric Vehicle center in June to add equipment and expand the plant so it can make more vehicles. The plant, which now employs about 2,000 workers, will be able to produce electric trucks at a rate of 150,000 per year starting this fall.

Two weeks ago, Ford slashed prices on the electric trucks by thousands of dollars across the board in anticipation of increased factory output, falling costs for battery raw materials and internal efforts to scale production.

The price cuts across the Lightning line, some as deep as $10,000, were seen on on Wall Street as more evidence of a coming price war among electrical vehicle makers.

The cuts also were announced two days after Tesla said its first production Cybertruck electric pickup had rolled off the assembly line, though nearly two years behind the original schedule and with little information about how much they may cost. Large-scale Cybertruck production isn't expected until late this year or early next year.

Marin Gjaja, chief customer officer for Ford's Model e electric vehicle unit, said the company sees strong EV demand at present “but the future is somewhat unpredictable and volatile.”

The company has orders to match the increased factory output, but Gjaja said Ford will watch to see how things play out. “We’re seeing competition increase. We’re seeing inventories out there grow as competition adds supply and availability. And we’re going to have to adjust with the market. Ultimately, the customers are going to decide,” he said.

The updated starting price for the Pro model, Ford's lowest priced electric pickup, will be $49,995, down about $10,000. The price for the high-end Platinum Extended Range version of the Lightning was cut from $98,074, to $91,995, a drop of more than $6,000.

Ford and others face increasing competition from automakers rolling out full-size electric pickup trucks. Rivian's R1T is already on sale, and Chevrolet's Silverado EV is due out soon. Stellantis says it will have a Ram electric pickup in the fourth quarter of next year.

Last week Ford predicted its pretax losses this year on electric vehicles will balloon to $4.5 billion, from $3 billion previously.

Ford shares rose 0.6% to $13.29 in midday trading Tuesday.

Harley-Davidson profit skids, cuts yearly outlook on slowing demand


A view of a showroom floor at Chicago Harley-Davidson Wrigleyville 

dealership in Chicago

Updated Thu, July 27, 2023 
By Bianca Flowers and Kannaki Deka

(Reuters) -Harley-Davidson Inc. missed Wall Street expectations on Thursday as profit declined 18% in the second quarter and slowing consumer demand in North America, its largest market, prompted the company to cut its sales outlook for the year.

Despite disappointing earnings, shares for the Milwaukee-based company were up 5.3%. Gross margins improving 400 basis points from last year tamped down on market concerns, said Garrett Nelson, a senior equity analyst at CFRA Research, in an email.

"Investors are focusing on the positives -- significant gross margin improvement, ongoing share repurchases, and a view that [Harley's] guidance has been brought down to more achievable levels," he said.

Company executives partially attributed the earnings miss to production being temporarily halted in June at the company's York, Pennsylvania, assembly plant for the second time in just over 12 months due to a parts shortage.

The 120-year-old manufacturer revised its full-year revenue target and is anticipating sales growth for its motorcycles and related products to be flat to 3% from its previous forecast of 4% to 7%. Operating margins are expected to be between 13.9% and 14.3%.

Tighter credit for American borrowers is denting consumers' ability to purchase big-ticket leisure items, Harley Chief Executive Jochen Zeitz told investors on a conference call.

"We've seen clear impact on customer demand and affordability with higher interest rates giving pause to higher-credit customers," he said.

Harley's price increases and surcharges for popular models have lifted the manufacturer's earnings per share in previous quarters, but analysts say the slowing demand is also reflective of consumers becoming less tolerant of price hikes.

Harley has sustained margin growth through its wealthier customer base but hasn't been as successful luring younger riders with the release of its electric bikes, such as its more affordable Del Mar model that retails for nearly half the price point of its top-selling bikes.

The manufacturer also shifted its electric motorcycles unit sales for the year. Lower sales for its latest model, LiveWire ONE, and electric-powered balance bikes for kids translated to a 44% yearly decline in revenue.

Worldwide retail sales were up 3% year-over-year, while bike shipments declined 10%.

Net profit declined to $178 million, or $1.22 earnings per share, in the quarter ended June 30, falling below analysts' forecasts of $1.25 per share. Revenue for motorcycles and related products came in at $1.2 billion, a 4% drop from the year prior.

(Reporting by Bianca Flowers in Chicago and Kannaki Deka in Bengaluru; Editing by Sriraj Kalluvila and Conor Humphries)

LiveWire Delays Rollout of S2 Del Mar Electric Motorcycle

The venture still majority-owned by Harley-Davidson is forecasting a 2023 operating loss of around $120 million.

Jennifer Ramsay
Feb. 22, 2023

LiveWire, Harley-Davidson Inc.’s all-electric motorcycle division, has sharply lowered its 2023 sales forecast because of a delay in the release of its new offering, the S2 Del Mar. It will now be released sometime during the second half of 2023. Executives forecasted the expected sale of units to be between 750 and 2,000, down from the original 7,000. In 2022, the company delivered 597 units of the LiveWire ONE (starting price $22,799), and the S2 motorcycle was projected to sell at a higher volume due to its lower price ($16,999).

Deployment of the S2 will not be limited to North America, either. 2023 will also see the company expand into Europe, with a new European vice president.

When asked about how the delay would affect LiveWire’s original expectation to deliver 15,000 units in 2024, President Ryan Morrissey focused on the long-term, saying it won’t affect his team’s larger strategy.

“We're continuing to focus on innovating in the core EV systems, the product portfolio, and expanding our distribution,” Morrissey said. “If you continue to look at the long-term trajectory and the long-term goals that we've set for the company, they continue to be the right ones.”

Launch of the S2 Del Mar was expected to help put the company on track to profitability in 2026. Currently, the anticipated operating loss for 2023 is approximately $120 million.

On the financial side, the company had a 31% increase in revenue to $47 million for 2022. However, there was an operating income loss of $29 million in Q4 alone, and $85 million for the whole year. In comparison, the net loss for 2021 was $68 million, with $20 million in Q4. LiveWire ended the year with $265 million in cash and cash equivalents.

Shares of LiveWire are trading at just over $7 per share, five months after it became as the first EV motorcycle company on the NYSE. Harley-Davidson made shares public in a bid to raise funds for new public development as LiveWire merged with SPAC AEA-Bridges Impact Corp. and Taiwanese electric scooter company KYMCO.

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Why execs predict 'massive' future for stalled electric unit at Harley-Davidson's LiveWire


Rich Kirchen
Mon, July 31, 2023 

Harley-Davidson Inc. CEO Jochen Zeitz’s goal of creating an all-electric motorcycle brand has stalled but executives say LiveWire ultimately will make “a massive impact” on electrifying the industry.

Continue reading

UK regulator seeks public input on Microsoft-Activision deal

Mon, July 31, 2023 


LONDON (Reuters) -Britain's antitrust regulator on Monday called for public responses on whether Microsoft's $69 billion takeover of Activision Blizzard, maker of video game "Call of Duty", should be cleared ahead of a final decision by Aug. 29.

Microsoft says the deal, which the Competition and Markets Authority (CMA) blocked in April, should be revisited given legally-binding commitments to the European Commission and a licensing deal with Sony.

The U.S. software giant said, in arguments published on Monday, that its agreements with NVIDIA, Boosteroid and Ubitus to licence Activision games for a decade after the merger had already improved competition in the cloud gaming market.

The CMA said Microsoft believed there were material changes of circumstance and/or special reasons why the regulator should not impose its final order to prohibit the deal.

"Submissions of this nature are possible but are very rare," a CMA spokesperson said.

"We will consider Microsoft's submissions carefully, along with other responses from interested parties, ahead of the 29 August statutory deadline."

Microsoft also said any breach of its commitments would mean European approval would no longer be valid and put it at risk of fines of up to 10% of its worldwide turnover, which would amount to $19.8 billion if based on its 2022 turnover.

Its deal with Sony to keep "Call of Duty" on its PlayStation console for a decade was also significant in terms of the impact of the Activision deal and "addresses the primary concern of the most outspoken opponent of the merger," Microsoft said.

The CMA called for anyone wishing to comment on the new version of Microsoft's takeover to do so by Aug. 4. It said it was aiming to make a final decision on the deal by Aug. 29.

The public consultation raises the chance that the biggest gaming deal in history could go ahead, with the deadline for completion having been extended by the parties to Oct. 18.

The Competition Appeal Tribunal (CAT) in London, which was set to examine the CMA's decision to block the deal, has already published Microsoft's argument that the binding commitments accepted by the European Commission shortly after Britain blocked the deal had changed the situation.

Microsoft's appeal at the CAT was put on hold earlier this month to give the parties more time to resolve the dispute.

The CMA was left increasingly isolated in its opposition after the U.S. Federal Trade Commission struggled in its attempts to block the deal.

Microsoft said in its arguments published on Monday that evidence that emerged in the U.S. bolstered its case on market definition in relation to cloud gaming.

(Reporting by Sarah Young, Sam Tobin and Paul Sandle; Editing by Kate Holton, Barbara Lewis, Christina Fincher and Sharon Singleton)

LIVING IN THE ❤ OF THE BEAST

Here's why the Fed's rate hikes haven't actually hit Americans that hard

Phil Rosen
Mon, July 31, 2023

Shoppers walking through a mall.

Kena Betancur/Getty Images

The Federal Reserve has raised interest rates 11 times in the last year and a half.


But the impact may not have hit most Americans, Moody's data suggests.


Americans don't have much floating-rate debt, which means many are likely locked into lower rates.

The Federal Reserve's historic rate hiking campaign may not have actually hit most Americans that hard.

That's because most household debt is likely still locked into lower, fixed rates secured before the central bank started aggressively ratcheting up rates to control inflation.

According to Moody's Analytics data shared with Insider, just 11.1% of household debt carried a floating rate as of the first quarter of this year, meaning that only a small amount of total household debt outstanding was adjusted higher as market rates climbed over the last year and a half.

That figure hovered close to 27% in 1997 and then 25% in 2000, but has since fallen steadily over the last two decades.

From the time of the Great Recession of 2008 up until last year, the US central bank kept rates historically low, leading many Americans locking in fixed rate borrowing costs on all kinds of consumer loans that are much lower than what's being offered today. This has prevented a lot of pain, as floating rate debt resets on a regular basis as benchmark rates rise.

In short: Americans sidestepped the worst of the Fed's monetary policy tightening campaign.

"US households have been largely insulated from Fed rate hikes, as most consumer debt carries a fixed interest rate, the bulk of which is in mortgages," Cristian deRitis, Moody's deputy chief economist, told Insider on Monday. He pointed to separate Equifax data that shows nearly 70% of mortgages carry an interest rate below 4%.

"Existing borrowers have not seen their monthly mortgage payments change even as the Fed Funds rate has risen," he said. "Most auto, student, and personal loans carry fixed rates as well, further insulating borrowers from interest rate increases."

While many US households aren't immediately exposed to rising rates, they have had a big impact on things like like credit cards. That could lead to higher credit card delinquency rates, deRitis noted.

Last Wednesday, the Fed announced a 25-basis-point rate hike to bring the federal funds rate to the 5.25%-5.50% range, with Chairman Jerome Powell maintaining that the inflation battle still hasn't been won. Markets, meanwhile, are acting as if it's the final hike of the year, and that policymakers will begin loosening in early 2024.

While the Fed's rate hike campaign may be at an end, anyone who took out a floating rate loan before the Fed started hiking rates —such as a home equity loan, a new personal line of credit, or certain auto loans–are likely facing higher payments today.

At the same time, at least some Americans are likely to have decided against taking out a loan because of high rates. Access to credit may have also diminished in recent months for some borrowers.

"Borrowers seeking new credit have been directly affected by higher rates leading some to forego taking on additional credit," deRitis said. "Tighter lending standards and a sharp increase in denied credit applications may further limit credit formation going forward."

 Business Insider