Hypersonic China Shines a Light on Investor Opportunities in Silent Arms RaceAug14

Autos (S)

Electric Utilities (L)

TIPS (L)

Long-Dated UST (S)

Defense  (L)

Industrials (L)

Materials (L)

U.S. Financials & Regional Banks (L)

ASEAN Markets (L)

Oil & U.S. Energy (L)

France (L)

Greece (L)

Saudi Arabia (L)

Palladium (L)

U.S. Pharmaceuticals (S)

Gold & Gold Miners (L)

Robotics & Automation (L)

Video Gaming (L)

Lithium (L)

Steel (L)

Value Over Growth (L)

v 

Solar (L)

CRISPR (L)

Obesity (L)

Markets

Banks: Investors Dump European Banks Exposed to Turkey

European bank shares fell Friday as investors scoured markets for exposure to Turkey, where a sharp fall in the lira is raising concerns about Turkish lenders’ ability to repay their large foreign debts. The selloff came on news the European Central Bank was examining the exposure of several of the region’s banks to the unfolding situation in Turkey. Although the ECB’s banking watchdog’s concern isn’t too high at present, the sudden falls in bank stocks underscore the potential for contagion.

On Friday, the lira plunged almost 12% against the dollar. The lira has lost around 42% of its value against the greenback this year amid concern about sky-high inflation and the country’s high foreign debts. The Euro Stoxx Banks index was down 3.1%, with large falls in those banks that have operations in Turkey or are thought to be exposed to the country’s debt. Shares in Spanish lender BBVA were down 5% at ��5.65, BNP Paribas was down 3.6% at ��52.24, and Italy’s Unicredit was down 4.1% at ��13.89.

Friday’s falls come after the region’s banks spent almost a decade cleaning up their balance sheets after the financial crisis. But while many have returned to profitability, their shares continue to lag behind U.S. peers. Holding them back are continued concerns about political stability in Italy and the threat of U.S. tariffs on Europe, among other factors. WSJ

↑

Economics & Trade

Turkey: Trump Hits Turkey When It’s Down, Doubling Tariffs

President Trump said on Friday that he would double the rate of tariffs on steel and aluminum imports from Turkey, inflicting additional pain on President Recep Tayyip Erdogan, whose country is in the midst of an economic crisis. Mr. Trump’s abrupt and unilateral action came amid worsening relations with Turkey, which has continued to detain an American pastor on espionage charges despite the United States’ insistence that he be released.

If the doubling of the tariffs was in fact direct retaliation for the treatment of the pastor, Mr. Trump would be undermining the stated rationale of the steel and aluminum tariffs — to protect American metals producers considered vital for national security.

Eswar Prasad, an economist at Cornell University, said the use of tariffs in this scenario set “a worrying precedent for future trade sanctions that could be triggered by purely market-driven changes in exchange rates.” “It could serve as a template for further tariff actions against China if the renminbi depreciates further relative to the dollar, even if that depreciation were mainly a reflection of the relative strength of the U.S. and Chinese economies,” Mr. Prasad said. NYT

Inflation: US core inflation rises at fastest pace in 10 years

Core consumer prices in the US rose by their quickest pace in a decade in July and topped market forecasts, keeping the Federal Reserve on track to raise interest rates twice more this year. The data add to a robust picture of the US economy, which grew by a speedy annual rate of 4.1 per cent in the June quarter. The unemployment rate is close to its lowest level in 18 years.

Core inflation, which strips out volatile energy and food prices and is closely followed by the Fed, rose 2.4 per cent year on year in July and up from 2.3 per cent in June. That was the fastest annual pace of core inflation since September 2008, and topped market forecasts for 2.3 per cent. Growth in headline consumer prices held steady with June at 2.9 per cent year on year in July from a year ago, buoyed by higher fuel prices and in line with the median forecast among analysts surveyed by Thomson Reuters.

While headline inflation is rising more quickly than average hourly earnings, Michael Feroli, US economist at JPMorgan Chase, said he expected wages to pick up given the strength of the labour market. The picture, he said, is “pretty close to Goldilocks”, leaving the Fed well positioned to carry on tightening policy at its current pace, with no reason to either speed up or slow down. FT

↑

Labour, Education & Demographics

Robotics & Automation: Labor Terminators: Farming Robots Are About To Take Over Our Farms

Of the industries facing automation, agriculture could see the most upside from robots in the next few years. And the farming robot wave, along with other new agriculture technology, could come even sooner than you think, as the Trump administration’s immigration crackdown worsens an acute labor shortage.

Loup Ventures managing partner Gene Munster compares this next agricultural revolution to the one seen last century, when new equipment, fertilizers, pesticides and high-yield crop breeds sparked an explosion in farm production around the world. The farming robot is actually just one new agriculture technology that will transform the sector; improved automation and big data analytics are joining with farming robot technology, pointing to big benefits. Goldman Sachs estimates precision farming — the combination of agriculture and technology — could be a $240 billion market by 2050.

Harvest Croo Robotics’ is a Florida-based startup developing a robot strawberry picker that two-thirds of the strawberry industry has helped fund to bring to market. A single Harvest Croo machine will be able to pick a plant in just 8 seconds. It will also cover eight acres in a single day and replace a team of more than 30 human pickers. In Europe, Spanish company Agrobot is developing a rival strawberry farming robot. Its machine uses up to 24 robotic arms to pick fruit and is capable of autonomous navigation. And in England, Dogtooth Technologies is developing its own series of smart autonomous robots capable of picking fruit. IBD

↑

Services

Cord Cutting: Cord-cutting slows down, but not for satellite TV

According to the latest cord-cutting report from analyst firm MoffettNathanson, satellite-TV providers Dish Network and DirecTV continued to shed traditional subscribers over the past three months, even as cord-cutting has leveled off in the broader pay-TV industry. Combined, the two companies lost 483,000 satellite-TV subscribers in the second quarter, the sector’s worst quarter yet. At the same time, the major cable companies lost a combined 301,000 subscribers in the quarter, which is pretty bad but not as bad as the 315,000 they’d lost in the prior quarter.

Dish and DirecTV both offer their own over-the-top streaming services – Sling TV and DirecTV Now, respectively – but there are signs that the growth of those services will not be enough to offset declines in traditional subscribers, at least in the long run. As we reported last week, DirecTV Now is still growing at a healthy rate, but Sling TV is already losing steam. MoffettNathanson estimated that the service gained only 41,000 new subscribers in the second quarter, compared to DirecTV Now’s 325,000. FastCo

Grocers: China’s tech innovations could change US grocery retailing

When it comes to technology and the future of grocery shopping, Chinese rivals Alibaba and JD.com may very well illustrate where the U.S. — and the rest of the world — is heading. In China, 10.3% of grocery sales occurred online in 2017, according to Bernstein data cited by Bloomberg — the most of any country by 2 percentage points, followed by the UK (8.3%) and France (5.6%). The U.S. ranks fourth, with 4.7%. In technology terms, that is a very big lead for China, and it grants Alibaba and JD.com valuable insights into what is resonating with its growing ranks of e-commerce customers.

More than a year prior to Amazon’s acquisition of Whole Foods, Chinese e-commerce giant Alibaba launched Hema, a “technologically advanced blend of online grocery shopping, dining and bricks and mortar.” Alibaba’s competitor in the Chinese market, JD.com Inc., has also launched a high-end brand called 7Fresh. As both concepts experiment with grab-and-go technology, unmanned stores, robotic restaurants and other technology innovations, they are pressuring traditional grocers in China, according to Bloomberg.

Walmart has joined JD.com to invest $500 million in Dada-JD Daojia, a Chinese online delivery company. JD Daojia delivers goods from local supermarkets and other partners via a location-based smartphone app and has about 20 million monthly active users. If successful, Walmart will likely translate some of those insights into the U.S. market, where demand is rising for a “brick and order” technology. FDive

Video Games: “Netflix of games” a threat to developers

Downloadable subscription game services and on-demand game streaming are not new. But what is new is the fervor with which the industry has been pursuing both ideas of late. Sony has had both on the PlayStation family of systems for years. Microsoft and Electronic Arts have their own subscriptions and both announced plans for streaming services at E3. Smaller publishers like Capcom are testing out streaming, and an assortment of start-ups like Hatch, Jump, Utomik, and PlayKey have also joined the field. Google is rumored to be muscling in on game streaming as well, and Amazon has tested out subscriptions with Twitch Prime. These “Netflix of Games” pose a threat for game developers.

Look at discoverability, for example. An industry-reshaping streaming platform set up like Netflix–where you can only find things by searching for the title or browsing endlessly through an algorithm’s idea of what you might like–would have particularly concerning implications for small creators.

But for developers, the biggest concern is funding. The investments made in smaller titles are often predicated on the idea that their investment may one day see a return. When working with a digital storefront, developers know how many copies they sell and how much they’re charging for those copies. Compare that to subscription services, where the metrics a developer has for their game’s performance will likely be limited to the number of times it was downloaded/streamed, or perhaps cumulative and average time spent playing. Even if platforms do give developers the metrics for their own games, those numbers alone don’t give accurate insight into how much money a given game has brought in. This opacity could be disastrous for creators, and make the idea of a sustainable career in independent game development seem like that much more of a pipe dream. GI

↑

Manufacturing & Logistics

Military Modernization: China just tested a hypersonic weapon the US can’t defend against

China has successfully tested a new hypersonic aircraft that would likely make a mockery of US missile defense systems in battle. The experimental “waverider” vehicle, China’s first, rides the shock waves generated during hypersonic flight. It could one day carry multiple nuclear warheads. The US’s existing missile defense systems, criticized for their high price and spotty track record, struggle to intercept more conventional projectiles, much less hypersonic aircraft, which travel in a less predictable manner and are hard to detect.

This is the first time China has officially confirmed its development of “waverider” technology, though it has been working on hypersonic glide vehicles since 2014. China, Russia, and the US are the main contenders in the hypersonic arena, and are engaged in what some see as a new arms race based on the technology.

The US Missile Defense Agency asked for $120 million in its 2019 budget to develop hypersonic missile defenses, up from $75 million in this year’s. QZ

Military Modernization: U.S. would need a mega-constellation to counter China’s hypersonic weapons

The Pentagon admittedly is already five to 10 years behind in the development of an anti-missile system to thwart advanced hypersonic weapons that are now being tested by China and Russia. The good news for the Defense Department is that the commercial space technology boom that is fueling the development of mega-constellations could help the military reach that goal. The Pentagon is studying options to build a space-based surveillance network to fill blind spots in the nation’s current defenses — which were designed to counter ballistic missiles that fly on a predictable arch-shaped pattern.

To detect and track hypersonic weapons — which fly into space at supersonic speeds and then descend back down to Earth directly on top of targets — the answer is a large constellation of small satellites. The hypersonic threat brings a “new urgency” that the United States has not seen since the Cold War and that demands a different type of thinking about the architecture. The only way to provide global coverage and not go bankrupt installing radars on the ground is to go to space.

Like any major defense procurement, the space sensor layer will have to be approved by the White House and get support from Congress. The 2019 National Defense Authorization Act adds $140 million to the Missile Defense Agency’s budget for the development hypersonic defense capabilities. SN

Military Modernization: This Is No One-Size-Fits-All Army Modernization

The U.S. Army’s major overhaul of its network may lead to a communications structure capable of conforming to an array of operational situations, including the possibility of providing offensive cyber and electronic warfare capabilities. Because future adversaries are likely to possess advanced technologies similar to those used by U.S. forces, Army officials have created six cross-functional teams to lead an extensive effort to modernize the force in six key areas: long-range precision fires; next-generation combat vehicles; future vertical lift platforms; air and missile defense capabilities; soldier lethality; and the network. Today’s Army network is considered too complex, with too many systems, and too fragile to effectively counter electronic warfare attacks by a technologically sophisticated adversary.

Army officials in recent months have described the modernized network as simple, intuitive, mobile, expeditionary, resilient, available, reliable, standards-based, upgradable, accessible to allies, difficult for adversaries to detect, capable of communications on the move and usable as a weapon system. “We’re looking for scalable, tailorable solutions,” says Gen. Peter Gallagher, USA, who leads the cross-functional team for the Army network. AFCEA

Military Modernization: How China could beat the West in the deadly race for AI weapons

Last month, some of the biggest names in technology signed a pledge promising not to develop lethal autonomous weapons. Coming just after the recent employee-led protest over Google’s Project Maven, some have praised these initiatives as ethical and moral victories. Some, but not all. For Sandro Gaycken, a senior advisor to Nato, such initiatives are supremely complacent and risk granting authoritarian states an asymmetric advantage.

If the arms race has already begun, the stakes are significant. AI’s pattern recognition capabilities, ability to judge and weigh probabilities and make sense of large amounts of data at speed, could confer numerous advantages to military and intelligence organisations. “Ultimately war is about decision-making. And AI, above all else, is a decision-making technology,” says Kenneth Payne from the defence studies department at King’s College London.

The other domain in which AI is likely to play a decisive role is in future cyber conflict. Developing faster, more insightful AI could enable one side to enhance the communications and situational awareness of their forces. It could also enable them to disrupt, degrade and deny those of their adversary.

For the time being, America and other Western nations still possess dominance in technology, knowledge and research breakthroughs. But, according to Gaycken, in order for the West to win this race, it must change approach. “The industries will have to cooperate very strongly and very closely with the military and they will have to exchange their intellectual property with each other.” A scenario which, for the time being, seems unlikely. WIRED

Industrials: Parts Shortages Crimp U.S. Factories

Suppliers of everything from engines to electronic components aren’t keeping up with a boom in U.S. manufacturing, which has lifted demand in markets such as energy, mining and construction. As a result, some manufacturers are idling production lines and digesting higher costs. Many industrial companies have reported strong sales and profits in recent weeks, and the pace of factory hiring has more than doubled this year compared with the first seven months of 2017. However, deliveries from suppliers have slowed for 22 consecutive months through July. Machinery was the hardest-hit sector. Aerospace and car companies are also compiling big order books and experiencing supplier delays.

Terex Corp. said its mobile-crane-making unit incurred a loss in the second quarter as parts shortages hurt efficiency at its plants. Machinery giant Caterpillar Inc. and power-equipment maker Eaton Corp. are among those struggling to keep up with orders as supply-chain kinks join labor shortages and inflated transport costs as threats to the sector’s recovery. Oshkosh Corp. idled production of its mobile cranes because of parts shortages several times in the past quarter.

A shortage of specialized workers including welders and truck drivers is exacerbating the crunch. And the electronics supply-chain environment remains challenging, with constraints across several component categories. Years spent making supply chains as lean and efficient as possible are hurting big customers now as demand climbs. WSJ

↑