by Louis Navellier
February 2, 2021
The Wall Street Journal recently featured a great article about how “China Overtakes the U.S. as World’s Leading Destination for Foreign Direct Investment.” While the flows into the U.S. have been nearly cut in half (falling 49%) during 2020, the inflows to China rose 4% last year. This essentially means that China has dealt with the pandemic more effectively than any other nation, thereby reinforcing its reputation as a global manufacturer that has significantly expanded global trade. Back in 2016, foreign investment in the U.S. was $472 billion, while China attracted only $132 billion that year. However, foreign investment in the U.S. plunged to $134 billion in 2020, while China attracted $163 billion in foreign investment, so as a result of the pandemic that began in China, China is now the world leader for attracting foreign capital!
In a video presentation to the World Economic Forum, China’s President Xi Jinping used several interesting “trigger” phrases, like “inclusive growth,” “green development,” “global governance” and “consensus building.” In other words, China is striving to appeal to the ruling elites by using their favorite “buzz” words! Another popular idea President Xi expressed was that “the strong should not bully the weak,” but he failed to mention that China had recently flown more than a dozen planes over Taiwan’s airspace in military maneuvers. So essentially, China continues to try to dominate (bully) the weak – economically, via key industries, and militarily by provoking Hong Kong, India and Taiwan.
On Wednesday, the Biden Administration (via executive order) imposed a moratorium on all new oil and natural gas leasing on federal land, pending a review of the entire program. Currently, federal land accounts for approximately 9% of onshore crude oil and natural gas production. Candidate Biden said that he would push the U.S. to “transition away from the oil industry.” He seems to be honoring that promise.
Interestingly, the Biden Administration’s pick for Energy Secretary, former Michigan governor Jennifer Granholm, is going to have her hands full making this transition. The estimated 12,000 pipefitter union jobs now lost from banning the Keystone Pipeline has put Granholm in an uncomfortable position.
In addition, the United Auto Workers (UAW) union is very uncomfortable with the transition to electric vehicles (EVs), since they require fewer parts and jeopardize many UAW jobs. Overall, it will be interesting to see how Granholm tries to appease the UAW and other unions, since right now they are becoming increasingly upset over the speed of the transition to the Biden Administration’s green agenda.
As I mentioned on my Thursday podcast, Tesla received $401 million in tax credits in the fourth quarter and posted $270 million in earnings. For all of 2020, Tesla received $1.58 billion in tax credits and posted $721 million in earnings. In other words, they made no operational earnings, but instead made money on tax credits by selling carbon credits to other auto makers, so they can meet California and EU standards.
As VW Group, Nissan, Mercedes, Ford, GM and other manufacturers continue to make more electric vehicles (EVs), how will Tesla’s lucrative tax credits be impacted? Fiat Chrysler has been the largest purchaser of Tesla’s EV tax credits, but recently they merged with Peugeot in France, which posted a 543% surge in EV sales in 2020. I can’t understand how Tesla can keep thriving by selling EV carbon credits, but as they lose more market share in the EU, I continue to worry about their long-term viability.
There are potentially at least two million high-paying energy jobs that could be lost or “disrupted” by the Biden Administration’s green agenda. The faster we make the transition to EVs, the stronger we make China, since they dominate lithium battery manufacturing, according to the WSJ review.
Specifically, the WSJ article pointed out that China dominates 57% of the lithium processing as well as 100% of the natural and synthetic graphite used to make lithium batteries. Additionally, China dominates 86% of the Anode and 70% of Cathode production to make lithium batteries. Fully 75% of all lithium battery cells are made in China. In other words, we can try to move more lithium battery manufacturing to the U.S., as LG Chem, QuantumScape and Tesla are striving to do, but China now dominates the industry!
The good news is that higher energy prices are boosting the value of U.S. exports, so ironically, the Biden Administration’s actions to ban the Keystone Pipeline and suspend drilling on federal land is helping to increase the value of U.S. energy exports – but higher energy prices won’t sit well with U.S. consumers.
Can the Fed Keep Long-Term Rates Low with $2+ Trillion Annual Deficits?
At the Fed’s Federal Open Market Committee (FOMC) meeting last Wednesday, the FOMC announced that they would leave key interest rates and quantitative easing unchanged. Fed Chairman Jerome Powell said at his press conference that the economic outlook remained “highly uncertain” and would depend on the path of the coronavirus. I, for one, am getting nervous now that the federal budget deficit is forecasted to surpass $2 trillion, surpassing 10% of GDP, and the Fed may not have enough tools to control Treasury yields. It is obvious that the Fed can control short-term rates, but it is allowing the Treasury yield curve to tilt higher, so the Fed may soon start to curtail its quantitative easing on long-term Treasury bonds. (I will be able to verify that at the next Treasury auction, when I’ll monitor the average “bid to cover” ratios.)
Speaking of GDP growth, the Commerce Department announced that its preliminary estimate for fourth quarter GDP growth was an annual rate of 4%, well below the Atlanta Fed’s latest estimate of 7.2%. For all of 2020, GDP contracted 3.5%, the largest annual GDP contraction since 1946. Looking ahead, the International Monetary Fund (IMF) forecasts that the U.S. GDP will expand 5.1% in 2021, while private economists are forecasting 4.3% growth. Much of the pace of GDP growth will be impacted by Covid-19 restrictions, so as California and other states reopen their economies, GDP growth should improve.
The other economic news last week was mixed. The Conference Board announced that its index of consumer confidence rose to 89.3 in January, up from 87.1 in December. Unfortunately, the “present situation” component declined to 84.4 in January, down from 87.2 in December. Consumers clearly remain nervous, especially since the Covid-19 restrictions in many states are still impeding job growth.
On Wednesday, the Commerce Department announced that durable goods orders rose 0.2% in December, which was substantially below economists’ consensus expectations, but the good news is that November’s durable goods were revised up to a 1.2% increase from the 1% previously estimated.
A 51.8% decline in non-defense aircraft was largely responsible for the lackluster December durable goods report. Also notable is that, excluding transportation, durable goods orders rose by a more robust 0.7% in December, which was higher than economists’ consensus expectation of a 0.5% increase. A 2.4% increase for machinery and strength in fabricated metals was also encouraging. Finally, durable goods shipments rose a healthy 1.4% in December. Overall, durable goods have risen for eight straight months.
On Thursday, the Labor Department reported that weekly unemployment claims declined to 847,000 in the latest week, down from a revised 914,000 in the previous week. As California and other states lift their Covid-19 restrictions, new unemployment claims should continue to decline. The other good news is that continuing unemployment claims declined to 4.6 million, down from 5 million the previous week. Overall, it appears the new Biden Administration will want to open up the economy to generate growth.
Navellier & Associates does not own Quantumscape Kensington Capital Acquisition Corp (QS), Toyota (TM) General Motors (GM), Ford (F), Fiat Chrysler, or Volkswagen (VW), in managed accounts 1 account owns Tesla Motors In. (TSLA) per client request. Louis Navellier and his family do not own Quantumscape Kensington Capital Acquisition Corp (QS), Toyota (TM) General Motors (GM), Ford (F), Fiat Chrysler, or Tesla (TSLA) or Volkswagen (VW).