Good morning and happy Friday.
Here’s an extra-credit question for those in the mood for a brainteaser this early in the day: Name the industry that is the most intensely regulated by government, the most overwhelmed by haphazard data, the most guild-protected, and the least transparent to consumers when it comes to the questions of what things truly cost, why they cost so much, and who’s paying for them.
Want a hint? The sector accounts for more than 17% of U.S. GDP—and spending on these goods and services is expected to grow at a staggering 5.8% a year over the next decade—1.3 percentage points faster than the economy as a whole.
Yup, you got it: We’re talking about health care.
If ever there were an industry ripe for disruption, this one is it. The good news is, there’s reason to think a seismic shift may actually be coming. As big data (and, importantly, smarter data) converge with biology, and a host of new technologies—from sophisticated wearable sensors to virtual reality to 3D printing to gene-editing tools to artificial intelligence—begin to mature, we are seeing the rumblings of a revolution of sorts.
Can it be that Moore’s Law is finally asserting its authority over health care? Will prices really come down? Hmmm. That may be too much to ask for in the near term. But it may finally be possible to get more for our money.
That, indeed, is what Fortune is going to explore over the first two days of November in an extraordinary gathering in San Diego. With help from our founding sponsor, IBM Watson Health, we are convening some of the best and brightest minds in health, medicine, technology, and pitch-fork disruption at our inaugural Fortune Brainstorm HEALTH conference. We’ll probe the potential of all this new medtech, challenge orthodoxy, poke a few sacred cows, and do a fair amount of big-sky dreaming about what’s possible—and what ought to be.
Here’s a sneak peek at the working agenda and speakers. (I’m not sure if I’m supposed to share this yet, but heck, I’m the co-chair.) Our goal isn’t just to talk for a couple of days, though. Our intention, rather, is to build a powerful new community of leaders at the forefront of this 21st century healthcare transformation.
The conference is by invitation only, but if you’ve got some expertise or professional interest in this area, we welcome your application as a delegate. CEO Daily readers, naturally, get special consideration.
More news below.
Alan Murray is on vacation this week. Fortune’s Deputy Editor Clifton Leaf is filling in.
NOTE: We’re switching to a new email provider soon. To ensure delivery of this newsletter, please whitelist or add firstname.lastname@example.org to your address book.
• Too Big To Fail, Too European To Succeed
Stock market screens are a sea of red this morning as fears for the health of European banks drag markets down across the continent. The problems go well beyond the fate of Deutsche Bank (of which, more below): profitability is under intense pressure from low and even negative interest rates (banks can no longer generate any income at all from holding low-risk assets); trade, and the demand for trade finance, is slowing; cost bases are high and inflexible, and disruption from new technologies and business models is a very present strategic threat. Widespread doubt about the workability of new European rules on bank resolution, and the political will to implement them, cloud the picture further. Credit Suisse’s CEO Tidjane Thiam said yesterday the sector as a whole was “uninvestable”, a message that investors appear to be taking literally. Reuters
• Exhibit D
All the above fears and more crystallize in the case of Deutsche Bank, whose shares fell 8% at opening in response to reports that major hedge fund clients had started to scale back their dealings with it and withdraw funds. Reuters says CEO John Cryan has told staff that: “There are forces now under way in the market that want to weaken confidence in us.” That may be a stock response through the ages of bankers deflecting attention away from the weakness of their position, but Deutsche is very different from, say, Bear Stearns and Lehman in 2008 in that its balance sheet is not full of worthless assets. And Cryan does have a point: Deutsche is widely resented by its peers for its market power, and is now also the victim of political grandstanding by the Department of Justice, which (according to the Financial Times) wants to announce an omnibus settlement with Deutsche, Credit Suisse and Barclays just before the election for maximum political impact. It isn’t paranoia if they really are all out to get you. Fortune
• Qualcomm Eyes NXP
Consolidation in the chip industry is picking up again, after a brief lull. The Wall Street Journal reported that Qualcomm is in talks to buy Dutch-based NXP Semiconductors for somewhere north of $30 billion, citing people familiar with the matter. Qualcomm’s reliance on a near-saturated mobile phone market for revenue makes any diversification welcome, and NXP’s core market of the automotive sector is undeniably hot. The deal would also be an efficient use of its offshore cash pile–$31 billion at the end of June—absent the long-promised reform of U.S. corporate taxes. Fortune
• Costco Beats Expectations
Warehouse club retailer Costco Wholesale reported a higher-than-expected quarterly profit, benefiting from paying lower fees to its new credit card partner Visa, whom it tapped to replace American Express last year. Lower payments to Visa helped offset falling prices of grocery and fresh food in the quarter, Chief Financial Officer Richard Galanti told an analyst call. Margins at grocery retailers have taken a hit due to ongoing competition for market share from Wal-Mart, Dollar General and online entrants. Although weak income growth continues to dog the sector, Galanti said Costco’s numbers were boosted by shoppers spending more on appliances, electronics and hardware. The company’s shares, which have badly underperformed Wal-Mart this year, rose 1.7% in after-hours trading. Fortune
Around the Water Cooler
• Duterte Embraces Hitler Parallels
The unraveling of President Barack Obama’s policy in south-east Asia gathered pace as China made public overtures to replace the U.S. as the Philippines’ chief strategic partner. Beijing offered support for President Rodrigo Duterte’s self-styled ‘war on drugs’ and said it was “willing to cooperate” with the recently-elected leader, only days after Sens. Patrick Leahy and Benjamin Cardin threatened to halt U.S. aid to the country. Duterte had cancelled the regular annual joint naval exercises with the U.S. in response. Beijing’s encouragement emboldened Duterte to make his most egregiously offensive and sinister comments yet, as he embraced the parallels with Adolf Hitler made by his foreign critics. Drawing his own analogy to the Holocaust, Duterte said “there are three million drug addicts (in the Philippines). I’d be happy to slaughter them.” Reuters
• Hackers in Mass Attack on Security Cameras
Hackers used an army of hijacked security cameras and video recorders to launch a number of large-scale internet attacks last week, according to The Wall Street Journal. The incident raises ever increasingly pressing questions about the vulnerability of “smart” and Internet-connected devices in homes and businesses. The number of such devices is certain to grow into the billions in coming years, and the defense of an exponentially-rising number of vulnerable points and networks seems nigh-on impossible. According to the WSJ, the attackers used as many as 1 million Chinese-made security cameras (largely from the Dahua Technology company), digital video recorders and other devices to generate data requests and knock their targets offline. WSJ, subscription required
• DoJ Hits Wells Fargo For Repossessions
Wells Fargo almost got through 24 hours without any further negative publicity, but not quite. The Justice Department said Wells would pay over $4.1 million to resolve allegations of improperly repossessing cars owned by members of the U.S. military. While that’s still a lot less than the $20 million mooted earlier by Bloomberg, it still adds a new dimension to the revelations of predatory practices at the bank, and adds to the evidence of systematic abuse of customers sanctioned at a level well above that of rank-and-file bank employees. On a brighter note, Warren Buffett, whose Berkshire Hathaway is the bank’s largest shareholder, told CNBC that he wasn’t agitating with Wells Fargo’s board over the head of CEO John Stumpf, while Buffett’s spokesman also denied a report claiming he had opened a short position on the bank. Fortune
• Coming Soon to a Hotel Near You
Chinese tourists are about to descend on destinations at home, elsewhere in Asia and further afield around the world. The country’s markets and business shut down tomorrow for “Golden Week”, a weeklong holiday beginning tomorrow to celebrate the Communist Party’s rise to power. A record 589 million Chinese are expected to travel during the holiday, according to the China Tourism Academy’s estimates. That’s almost half the population and a 12% bump over last year. They will spend $70 billion, up 13.5% over 2015, almost $125 for every household across the country. Chinese travelers listed older tourist spots as top domestic destinations—places such as the Forbidden City in Beijing and the ancient city of Lijiang in the south—but they also cited the newly opened Shanghai Disneyland. Macau, Hong Kong and Thailand are the most popular destinations beyond the mainland, with Japan also popular for shoppers. If past years are any indication, get ready for pictures documenting what it looks like when almost 600 million people hit the road. Fortune