On Friday, General Motors announced its support of a National Zero Emissions Vehicle (NZEV) program.  The program, modeled on California’s electric vehicle efforts, would gradually increase the percentage of electric vehicles that car manufacturers must produce each year in their fleet, beginning in 2021 at seven percent.  The company said the plan would lead to seven million long-range electric vehicles on the road by 2030.  GM is asking the Trump administration to implement the plan nationwide, which would relieve automakers from having to follow specific electric vehicle sales requirements in individual states.  GM announced its proposal through comments to the Environmental Protection Agency’s Safer Affordable Fuel-Efficient rule that was announced this summer; the rule, in part, rolled back Obama-era emission standards.

GM has been pushing for electric vehicles for a while.  The company already has a successful electric vehicle in its Chevrolet Volt.  GM stated that the NZEV program would “promote innovation in the United States and help the US to become a leader in “technologies of the future.”

While General Motors’ proposal seems like a noble effort to move towards cleaner technology, it is important to note that the NZEV program could create a multitude of economic benefits for GM. First, some of General Motors’ competitors have been slower to break into the electric vehicle market.  Given GM’s successful Volt and focus on electric vehicles, the company is likely better positioned than some of its major competitors to increase its production of electric vehicles.

Second, following a nationwide mandate on electric vehicle production would be easier for automakers rather than requiring manufacturers to meet individual states’ electric vehicle production mandates. California has one of the strictest electric vehicle standards in the country.  The state wants 15.4 percent of car sales to be from either electric vehicles or other zero emission vehicles by 2025.  Nine other states have also adopted this standard.  In January, California Governor Jerry Brown announced his goal of having five million zero-emission vehicles in California by 2030, a goal much more ambitious than that proposed by General Motors; there are currently around 350,000 of these vehicles on the state’s roads.  By having a single standard that applies to all fifty states, automakers would not need to make different cars for different states, which would likely reduce production costs.

The Trump administration has been an outspoken critic of California’s electric vehicle measures and goals, arguing that consumers do not want electric vehicles.  As a result, the Trump administration claims, automakers must spend billions on cars that have to be sold at a loss.  The administration has also said it is considering banning California from enacting its own emissions standards.

General Motors Wants the Trump Administration to Back a Nationwide Electric Vehicle Program

This past May, the Supreme Court released a 6-3 decision which legalized sports betting across the US. One study predicted that following the decision thirty-two states would likely offer sports betting within the next five years. While all four major sports leagues supported upholding the sports gambling ban in court, all of the league commissioners, aside from the NFL, showed some openness to the idea of change outside of court.

A Nielsen Sports survey, commissioned by the American Gaming Association, was released last week. The survey concluded that the big four US sports leagues, the NBA, NFL, NHL, and MLB, were likely to gain $4.2 billion each year from legal betting. The most fascinating aspect of this survey was that most of the projected revenue is expected to come from increased fan engagement, not from the betting itself. One explanation for this may be that sports betting is a novel issue and leagues have yet to lay out plans for revenue sharing with the gaming industry.

While leagues were originally reticence to legalized betting due to fears of losing integrity, they have since spoken more freely about their desire to share in the profits. As such, the NBA and MLB both suggested they should take 1% of all bets wagered on their games. Further, the leagues are not the only ones who will see a benefit from legalized sports betting. Sports media analysts also view the decision as a welcome sign in a time of recent turmoil. The sports media business may be in trouble since rights costs to sporting are rising, viewership is decreasing, and many are cutting cable altogether. However, the legalization of sports betting nationwide will be paired with an increase in viewership and engagement since sports bettors are said to watch almost twice as much coverage as non-bettors.

Although some fear that legalized betting creates skeptics out of fans who may believe games will become fixed, the reality is that fans already place bets legally in Nevada and others do so illegally through private sportsbooks nationwide. Even though some fans will be turned off by the acceptance and full embrace of gambling, the increase of fan interest overall will far outweigh this group.

Sports have always been intrinsically linked to the gambling industry, which only further increased with the rise in fantasy sports in the 2000s. As technology continues to evolve, people are offered an increasing amount of options in regard to how they spend their time. This ruling will give the sports industry another leg up in attracting a larger viewership, ranging from old to new fans who now have a vested interest in the results.

U.S. Sports Betting Legality- Profit Windfall for Leagues

Biotechnology startup Allogene Therapeutics debuted earlier this month as one of the largest startups in the field to go public since 2009. The initial public offering started at $18 per share, before surging over 30% on the first day of trading. At the midpoint of the target range of share prices, the firm commanded a market capitalization of $2.1 billion. Allogene amassed a $1 billion valuation after receiving over $400 million in initial proceeds to fund CAR-T therapies, potential anti-cancer fighting agents.

CAR-T therapies use cells from healthy donors rather than patients’ own cells. This means the cells do not have to be personalized for each patient and can instead be created in batches, leading to a cascade of effects—reduced costs and more readily available treatment for a greater number of patients. Robust results in earlier experiments point to a positive growth outlook for the company.

As is typical of many emerging biotechnology companies, Allogene has reported in its SEC registration filing that its product development is still speculative at this stage. The company is entailing significant upfront capital expenditure with the risk that future products will not reach an “acceptable safety profile, gain regulatory approval, and become commercially viable.”

Investing in newly public biotechnology startups has always been a risky venture for investors basing decisions off revenues and projected earnings, because many of these startups have little revenue and go public to raise additional funds for clinical trials. Despite the risks, investments are still flowing in rapidly. The pace of startup innovation is especially fast-moving today in the biotechnology industry—more biotechnology and healthcare startups have gone public this year than technology companies. The market is in a particularly bullish segment of the cycle for this industry, prompting the emergence of more companies.

Adding Allogene’s IPO to the 41 other U.S. stock listings by other life science companies this year brings the total to $4.3 billion raised. This is the highest amount since the excitement over gene therapies in 2000. As the results of previous years of investment and innovation lead to more developed curative therapies, venture capital money will flow in and pump life into biotechnology startups. Allogene is but one case in point for this burgeoning sector.

The Growth of Allogene and the Biotechnology Startup Sector

The financial technology arena is heating up as unregulated cryptocurrencies, digital tokens like Bitcoin that can be used as money without the backing of any country’s central bank, breed chaos and expose a need for international regulation. The Financial Action Task Force (FATF), Paris-based global watchdog for money laundering, is set to develop the first rules on cryptocurrency oversight in June. This is an important step toward creating global standards for an otherwise unfettered industry subject to patchwork approaches by different governments.

With impending concerns about fraud and unregistered business platforms trading cryptocurrencies, it follows that this emerging economy be subject to regulation. Many, including anti-money laundering lawyers and members of Congress, welcome the creation of international standards because the digital asset class is notorious for weak consumer protection and frequent security breaches. Lack of global coordination could be encouraging illicit use. Furthermore, as the digital money technology becomes increasingly more complicated, businesses may rely on a uniform set of rules to inform their financial practices and investments.

Still, others are apprehensive about rushing into normalized standards and want to proceed with caution, noting that extreme price volatility and regular exchange theft has defied historic regulatory approaches. In the world of cryptocurrencies, blockchain, and digital wallets, anonymity rules the day, and a user does not have to be the ultimate beneficial owner to proceed with coin exchanges, opening the door wide for fraudulent theft activities. In effect, developing a homogenous regulatory system will require creative reimagining of the finance industry to include genius technology, of which cryptocurrency is just one example.

Even in the face of standardized regulation, societal views and differences in technology access might impact regulation in action. In countries like China that subject their citizens to censored internet use, access to the technology might warrant strict regulation. On the other hand, countries like the U.S., which encourage individual autonomy, might want looser rules as a way of increasing business productivity and encouraging more participation from entrepreneurs and investors.

Cryptocurrencies Put a Fire Under Global Regulation

As evidenced by the large but temporary plummet in the U.S. stock market in 2010, later coined the “flash crash,” market manipulation has taken on a new and adaptive form. Earlier this month, the Department of Justice filed a lawsuit against Yuchun Mao, Kamaldeep Gandhi, and Krishna Mohan for commodities fraud and futures-spoofing. This spoofing scheme allegedly resulted in a 60 million-dollar loss among various market participants between 2012 and 2014. These allegations come amidst a wide-spread and targeted effort by the DOJ to crack down on the relatively new illicit practice of futures-spoofing.

With the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, spoofing, a mechanism that is used to systematically manipulate market prices by making fraudulent offers or bids without the intention to execute them, was deemed illegal. Not only does spoofing skew market prices in a matter of seconds, it deceives other traders, particularly those engaged in high-frequency trading, and results in many unexpected losses. In terms of federal regulation, while there were initial technological barriers that made it difficult to isolate instances of spoofing, intent was difficult to prove as traders often cancel bids or offers. However, as technology has progressed, this illegal trading practice has picked up steam, and the DOJ has taken notice.

Notwithstanding the difficulty of isolating intent, the DOJ has directed its efforts towards market research to isolate instances of spoofing and, ultimately, protect investors. Earlier this year, eight individuals were charged with spoofing-related allegations. Unfortunately, this is just one example of how rapidly-changing technology in conjunction with a profit-driven industry can spin out of control. While fluctuations are frequent in the common stock exchange, coordinated spoofing efforts have the capacity to cripple the market and diminish investor confidence. This puts pressure on the DOJ to reign in market manipulation and continue to focus its efforts towards producing technology that can efficiently isolate market irregularities.

Moreover, this new age of market manipulation will likely continue to place pressure on investment firms. In order to better protect their investors’ interests, investment firms should allocate resources towards internally regulating their trading practices in order to maintain trust and keep the DOJ at arms-length. Intentional efforts to keep traders from engaging in market manipulation will not only allow investment firms to escape potential liability but will aid in the DOJ’s efforts of protecting consumers and investors alike.

Spoofing – A New Age of Market Manipulation Means Work for the DOJ

The Saudi investment conference, nicknamed “Davos in the Desert,” took a hit after three Wall Street executives and dozens of top business leaders withdrew their attendance over the disappearance and murder of Jamal Khashoggi, a Saudi critic and Washington Post journalist. Some of those leaders were Jamie Dimon of JPMorgan, Stephen Schwarzman of Blackstone, Larry Fink of BlackRock, and Masayoshi Son of Softbank. The boycott’s main purpose was a call for an investigation into Khashoggi’s death and punishment of those involved. While business leaders chose to publicly boycott the conference, inaction was the U.S. Government’s predominant response, leaving some to question if CEOs are acting as the country’s new diplomats.

Davos in the Desert was created to attract foreign investment into the Saudi economy to assist Prince Mohammed bin Salman’s, who is suspected of ordering Khashogg’s killing, visions of economic reform and modernization of Saudi Arabia. The conference commenced on October 26 and is taking place at Riyadh’s Ritz-Carlton Hotel. The effects of the boycott were present during the first day of the conference. While many of the sessions were packed, others were sparsely attended. The question now is whether the boycott accomplished its supposed request for an investigation into Khashoggi’s death.

A more interesting question to ask is if the boycott will actually translate into an economic impact on Saudi Arabia or if it was just for show. Henry Hall, the associate director at Critical Resource, stated that his decision not to attend is separate from the prospect of investing in Saudi Arabia and that there are “huge economic opportunities in Saudi Arabia,” which companies need to balance along with reputational risks. Saudi Arabia is a top purchaser of Western weapons, generating billions in revenue for the U.S. The fear of straining business relationships with Saudi Arabia lead many companies to send lower-level executives in lieu of top executives, which seems to point towards a false boycott.

Distrust of the world’s business leaders’ morally grounded demonstration seems well placed. Considering that such a boycott could cause irreparable harm to the leaders’ business interests in Saudi Arabia, it is likely that their actions were just for show. Harming their business interest is not a well-known risk that business leaders take on grounds of morality. After all, another event overshadowed by the boycott and drenched in human rights abuses is the Yemen war created by Saudi Arabia and assisted by the U.S., which has led to Yemen’s most severe famine in 100 years. Are the CEOs planning to boycott Saudi Arabia on these grounds as well?

CEOs Are Americas New Diplomats

Last week, Canada became the first major economy to legalize recreational marijuana use to the excitement of Canadian youth and cannabis companies that intend to expand beyond medical marijuana products.

Despite the excitement, shares in publicly traded cannabis companies fell following the announcement. The downturn followed months of high stock prices and growth for many of Canada’s largest marijuana companies, including Canopy and Tilray.

Still, these businesses are expected to become behemoths as the public warms to the idea of legalized recreational marijuana. Market experts have told investors to keep an eye out for rising stock prices following the initial announcement.

Many are likening the so-called “green rush” to both the re-legalized fervor of the end of prohibition as well as the dot-com boom of the 1990s — and the boom’s inevitable crash. Currently, the country’s top 12 marijuana companies are worth a combined $55 billion. But, experts caution that not every cannabis company to enter the stock market will emerge successful.

This chilling point partly stems from the volatility of marijuana stocks. Tilray’s stock price rose an astounding 78 percent following an announcement that the company had permission to export cannabis to California for medical research in September.

For now, Canadians looking to get high will have to settle for dried cannabis, oils, and seeds — with the potential future of cannabis candies and marijuana drinks. No matter which way the market turns, one thing is for certain: Canada appears to have its finger on the pulse of the next generation.

Weed Bubble

Fiat Chrysler Automobiles (FCA) sold Magneti Marelli to KKR for $7.1 billion on Wednesday. The deal will combine two giant car component companies to form the seventh largest automotive parts supplier in the world, with almost 200 facilities across the globe.

The newly formed automotive parts supplier may intend to catch the high wind of the sector’s expansion into new technologies like automated driving, connected cars, and electric vehicles. But, success may not be a given in light of China’s recent slowdown and demand suppression in the European market.

KKR paid a substantial premium to buy Magneti Marelli. The $7.1 billion transaction cost KKR 16 times next year’s earnings, even though most companies limit payment to 10 times a year’s earnings. In addition, KKR’s return on invested capital may be as low as 10.7 percent by 2023. Moreover, FCA may soon be worthless.

Despite such criticism, the aggressive purchase will surely send the automotive industry into a spin. Whether or not the deal will boost the progress of high-tech automotive technology, the $7.1 billion deal is bound to cause a stir in the automotive industry.

Car Parts Supplier

Streaming giant Netflix announced on Monday October 22^nd that it is planning to take on an additional $2 billion in debt. Netflix plans to use the money for “general corporate purchases,” for the development of original programming, and for the acquisition of more licensed titles in order to fill out its library and keep competitors at bay. This latest offering is in line with Netflix’s overall business strategy, which has caused the company to rapidly spend exorbitant sums of money.

Netflix’s offering of unsecured bank bonds is only the latest instance in which the company has taken on enormous amounts of debt. In October 2017, Netflix issued $1.6 billion in notes. In addition, in April 2018, there was a subsequent offering for $1.9 billion. In all, this latest offering will put the company over $10 billion in long term debt.

Netflix’s actions has some analysts concerned as taking on more debt will increase the negative cash flow, which already totals around $3 billion. This prompted Moody’s to classify Netflix’s recent notes as “junk bonds.” That said, Moody’s expects Netflix to be able to eventually pay off the notes as they enter new markets and finish developing original content. Thus, Netflix is transitioning away from its previous model of licensed content. Many analysts feel that Netflix’s new strategy is best for the company and its investors.

However, the more skeptical analysts do not think that Netflix’s borrowing will continue indefinitely. Further, these analysts think that borrowing will lead to long-term success. These concerns are not without merit as they are grounded in Netflix’s overwhelming degree of debt and strategy to continue borrowing. This could lead to creditors becoming unwilling to participate in raising further capital if the cycle of burning through money and then borrowing does not end.

In the alternative, if Netflix wishes to remain the market leader in streaming, it may need to continue acquiring licensed titles as well as developing original content. Netflix must already contend with a considerable number of competitors in the streaming market. Further, this market is only becoming more crowded. Both Disney and AT&T have already unveiled their plans to create streaming services. These heavyweights may force Netflix to spend more as titles owned by both companies are potentially pulled from Netflix’s library, a move which Disney has already undertaken in preparation for its new service.

Netflix’s stock, which experienced a bump of 8% after the release of the company’s earnings report last week, has since retreated to its original value.

Netflix Acquires Another $2 Billion in Debt

President Donald Trump successfully negotiated the United States-Mexico-Canada Agreement (“USMCA”) on October 1, 2018. For a large segment of American workers, the deal appears to be better than its predecessor, the North American Free Trade Agreement (“NAFTA”). But, we should be clear about what these treaties are. USMCA is not a “free trade agreement.” A free trade agreement is a treaty among nation states to eliminate tariffs, quotas, subsidies, and other prohibitions on goods and services crossing borders. USMCA is not that.

There are two reasons why USMCA is not a free trade agreement. First, the agreement is about more than trade. Trade is about goods and services crossing borders. But, USMCA contains various side provisions about labor policy, intellectual property regulation, and monetary policy. While labor policy, intellectual property regulation, and monetary policy can be relevant to trade, it is misleading to call a treaty full of additional regulations a “trade agreement.”

Second, USMCA is not an agreement to make trade free. Restrictions on trade are still in place, including tariffs on automobiles and materials. The agreement is admittedly better than NAFTA, as tariffs are reworked in favor of some American industries. Yet, we must not forget what “freedom” actually means in the context of trade: no government interference in the economic activities between citizens of different states. USMCA, on the other hand, imposes terms on what should be produced, where, for how much, and under what conditions.

The beginning of wisdom is to call things by their proper name. USMCA is not a free trade agreement because it is not about trade and it is not about freedom. President Trump, to his credit, does not pretend that this is a free trade agreement that will benefit everyone. He promised a better deal for American workers and delivered on that promise.

A treaty like USMCA might be the best thing we can ask for in the context of international economic gamesmanship. However, we should be under no illusion that USMCA (or TPP, or NAFTA) was ever about free trade. A free trade agreement would be an absence of government regulation — an agreement between governmentsnot to impose tariffs or quotas. Anything short of that is a necessary compromise.

Not-So-Free Trade