1 big thing: "How it Happened: Putin's Invasion"

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1 big thing: How Fed policy can narrow racial divides

2. Catch up quick

3. Inflation’s poster child

4. So much for global mega banks

5. Charted: Hedge funds still can’t match the S&P 500  

💰 Good morning, Markets friends! Today's newsletter is 1,065 words, 4 minutes.

🚨 It’s Lael Brainard’s turn to head to the Senate today, where she’ll make her case to be confirmed as vice chair of the Federal Reserve. The hearing kicks off at 10am ET, and some Senate Republicans are open to voting yes, Axios’ Hans Nichols and Neil Irwin report. 

1 big thing: Gap grows between rich, poor countries

An illustration of the world as a cracked piggy bank.

3. Powell's next four years

Federal Reserve Chair Jerome Powell. Photo: Graeme Jennings-Pool/Getty Images

4. One piece of the worker shortage

5. Exclusive: King Center, Goldman's One Million Black Women partner

https://images.axios.com/veMWeVOjfFMWe4Ha31Ka8oRN-bA=/0x435:3264x2271/1920x1080/2022/01/11/1641944830414.jpg

👋 Good morning! Today’s newsletter is 1,206 words, 5 minutes.

👀 All eyes will be on the latest inflation numbers when they’re released this morning. 

Economists expect that as of December, the Consumer Price Index will show an increase of 7% over the course of the year. 

1 big thing: Putin's (natural) gaslighting of Europe

Photo illustration of Vladimir Putin surrounded by yellow stars and pipelines.

Bonus chart: Europe's natural gas problem

3. Meme stock test

Outside view of the closed AMC Theater, amid the coronavirus pandemic

4. More Fed trading fallout

Outgoing Fed vice-chair Richard Clarida at his 2018 confirmation hearing. Andrew Harrer/Bloomberg via Getty Images

5. Not-so-private capital

☀️ Good morning, Markets people! Today’s newsletter is 1,228 words, 5 minutes. 

🚨 This morning, Fed chair Jerome Powell heads to his confirmation hearing before the Senate Banking Committee. 

In his opening statement, he’ll pledge to use the Fed’s tools to prevent higher inflation from becoming entrenched. See his full statement here. 

1 big thing: The labor shortage is bigger than the pandemic

Bonus chart: Missing in action

3. Rising mortgage rates could slow house price surge

4. Corporate America's incredibly profitable pandemic

5. Court nixes workplace vax mandate

🥳 Happy Friday! We Markets newsletter writers will be off on Monday observing Martin Luther King Jr. Day — we'll be back in your inbox Tuesday.

🚨Breaking late last night: President Biden's nominees for the Federal Reserve's board of governors. Read more about Sarah Bloom Raskin, Lisa Cook and Philip Jefferson — and what their nominations mean for the future of the Fed. 

⏱ Today's newsletter is 1,189 words, 4.5 minutes. 

Cities and states across the country are looking to transform vacant office buildings into housing — a solution for both empty downtowns and housing shortages.

Why it matters: Commercial districts with little to no residential presence turned into near ghost towns during the pandemic, becoming a blight on the cityscape and a detriment to local businesses like shops and restaurants.

Live-work neighborhoods, however, fared better.

And much of the U.S. still faces a persistent housing shortage.

What they're saying: “We need to recognize how we’ve evolved during the pandemic,” said Dan Garodnick, New York City's director of city planning and the chair of a new Adaptive Reuse Task Force that's expected to recommend regulatory changes by the end of the year that would spur conversions of obsolete office buildings. 

Adaptive reuse of old office buildings has happened on the margins for decades, but the pandemic has accelerated interest in it, says Wendi Shafran, a principal at FXCollaborative Architects, and also a member of the N.Y.C. task force (views her own, not the task force's).

The big picture: Despite the fact that offices are still only half-full in many cities, these types of conversions have yet to really pick up steam. They’re expensive, and loads of red tape and zoning laws usually get in the way. 

But a few big cities are creating new incentives they hope will unleash a wave of housing conversions in the decade ahead. 

State of play: It's not just New York. Chicago just this week proposed an initiative to repurpose high-vacancy buildings in its downtown financial district into homes, offering tax credits and incentives along with financing tools. 

The Los Angeles City Council is expected this fall to consider an updated ordinance that would provide financial incentives and wider eligibility to convert downtown office buildings. 

California's 2023 budget allocates $400 million in incentive grants for office-to-residential conversions;  Denver's provides funds to study the matter. Washington, D.C. Mayor Muriel Bowser pitched a 20-year tax abatement tied to these kinds of conversions.

Converting office buildings won’t alone solve the housing shortage, but it’s one of many avenues that government officials want to tap to make a dent in the problem. 

By the numbers: Real estate trade association REBNY estimates that a "conservative" conversion rate of 10% of N.Y.C's lower-tier office buildings could generate approximately 14,000 new residential units.

And an L.A. study by Rand Corp identified underutilized commercial properties that could collectively produce about 92,000 housing units.

Between the lines: Adaptive reuse of existing buildings is also gaining popularity for its environmental benefits, says Roberto Vazquez, project director at Omgivning, an L.A.-based architecture firm. 

What we're watching: Office leases are often anywhere from 10 to 20 years long, so the full extent of the office-building exodus isn't even clear yet.

But a lot of leased office space now has less than half the daily occupancy that it did before the pandemic, swipe-in data from Kastle covering 10 metro areas shows. 

If vacancy rates grow further, the most likely candidates for conversion will be older, smaller buildings in need of upgrades — those that are now out of favor with companies that want newer, amenitized environs with which to lure employees. 

The playbooks: Lower Man­­hattan and downtown L.A. undertook similar efforts in the early 2000s.

In New York, city and state coordination on financial incentives — plus regulatory and zoning changes — targeting the depressed post-9/11 financial district led directly to around 25,000 housing units created from office buildings over the past few decades.

“It changed the character of the community … it really did revitalize the neighborhood,” said Shafran, who previously worked in lower Manhattan. 

And L.A.’s original 1999 Adaptive Reuse Ordinance (which the city's current proposal would expand) made it easier for developers to undertake conversions downtown. It was groundbreaking at the time — and was hugely successful, says Vazquez. 

The bottom line: Saying goodbye to concentrated office districts and 9-to-5 downtowns is probably a process that will play out for decades — part of the pandemic’s lasting impact on our lifestyles and communities.

Cities push to convert deserted office buildings into housing

These conversions are hard, but they've been done before.

Illustration of a high-rise office building with an oversized "Home sweet home" embroidery piece framed and hanging from the roof

Cities

Economy & Business

Data: U.S. Census Bureau, Haver Analytics, Deloitte; Chart: Simran Parwani/Axios

This holiday season, don’t look for e-commerce growth to slow down,

Driving the news: Economists at Deloitte forecast growth of 13.5% in e-commerce sales this holiday season, pushing sales up to $262 billion, according to a new report out this morning. 

That's an even bigger increase than last year when e-commerce grew 8.4% (2020 was the watershed year when online sales jumped a whopping 50%).

Why it matters: Online shopping was turbocharged by the pandemic, and it's one trend that's not going away. 

"Holiday shopping in the last six or seven years has largely gone from being an in-store experience to an online experience," Rod Sides, Deloitte Insights Leader, tells Axios. 

The bottom line: The expected e-commerce growth is in stark contrast to overall holiday sales, which Deloitte estimates will grow by a smaller 4%–6% — less than the current annual inflation rate (8.5%).

Holiday e-commerce sales forecast to grow 13.5% — report

That's in stark contrast to overall holiday sales, which may only grow 5%.

Retail

This holiday season, don’t look for e-commerce growth to slow down,Driving the news: Economists at Deloitte forecast growth of 13.5% in e-commerce sales this holiday season, pushing sales up to $262 billion, according to a new report out this morning.

A bankruptcy case in Indiana could help upend the mass tort litigation system in the U.S.

Driving the news: 3M, the conglomerate, recently put its Aearo Technologies subsidiary into bankruptcy. It aims to use the bankruptcy process to settle over 230,000 lawsuits from military service members who allege faulty earplugs made by Aearo caused hearing loss — the biggest multi-district litigation (MDL) in history.

Why it matters: Aearo's rationale for the bankruptcy involves questioning whether the U.S. mass tort and MDL system is even functional, calling its own experience "a cautionary tale of a MDL that is broken beyond repair."

And large companies regularly exposed to mass torts — think pharma and medical device makers — are closely watching what happens with both Aearo and last year’s bankruptcy of a Johnson & Johnson subsidiary. The latter was filed to help settle baby powder litigation and is the second largest MDL in history.

The outcomes could provide a playbook for large, profitable parent companies — which don't appear to be insolvent — to take advantage of certain features of the bankruptcy process without actually filing for bankruptcy themselves.

In other words: The benefits of bankruptcy, without the drawbacks.

The benefits: Bankruptcy provides an efficient route to settling with a sprawling group of claimants. Instead of plodding through thousands of individual cases, the bankruptcy court estimates the liability via expert testimony and bellwether verdicts so far and facilitates settlement negotiations if the company doesn't have the money.

Often, bankrupt entities get an "automatic stay" (or pause) of litigation against them, which prevents additional unfavorable trial verdicts from rolling in — and can thus give them more leverage in settlement talks.

The drawbacks: Bankrupt entities come under court control for day-to-day financial decisions like paying vendors and their use of cash. They typically wouldn’t be able to transfer value to shareholders in the form of dividends or spinoffs (3M is currently planning to spin off its health care business).

What they're saying: After the J&J case last year, "the flood gates are open," wrote Georgetown Law professor Adam Levitin on the Credit Slips blog.

In Levitin’s view, "like J&J, 3M appears solvent and capable of paying all of the hearing claims in full. So instead, it is hoping to use bankruptcy to be the forum for forcing a deal on plaintiffs."

State of play: So far, the Indiana bankruptcy judge isn't totally going along with it — he refused to stay the litigation against 3M. The company's appealing.

Meanwhile, critics cite 3M's planned health care spinoff in particular as a way to potentially move assets out of reach of the litigation claimants — and a group of earplug plaintiffs has sued to block the spinoff. (3M chief legal officer Kevin Rhodes says the two transactions have completely separate rationales; 3M maintains the earplugs were effective when used properly.)

By the numbers: Whether the spinoff plans are a bad look or not might depend on how much you think the earplug plaintiffs will ultimately be owed.

3M estimates it’ll likely be about $1 billion — and it funded a trust with that amount in conjunction with Aearo’s bankruptcy filing. Rhodes says the estimate is based on valuation analysis by consulting firm Bates White.

But the plaintiffs allege it could be more than $80 billion, based on extrapolating the bellwether cases so far (plaintiffs prevailed in 10 of 16 jury trials). Meanwhile, a 3M sell-side research note published by Wells Fargo listed a settlement expectation in the $15-$20 billion range. 

For comparison, 3M’s market cap is about $66 billion, and analysts estimate the health care business it plans to spin could be worth as much as $45 billion.

The bottom line: The MDL process "is going to be the foremost issue in Aearo’s bankruptcy. It’s not an understatement to say this case will help decide whether mass tort MDLs remain viable, or whether defendants like Aearo will routinely use bankruptcy to avoid them," wrote Reuters' Alison Frankel.

3M unit's bankruptcy could put U.S. mass tort system on trial

It faces lawsuits from service members who claim its earplugs were faulty, but says the process is "broken beyond repair."

Illustration of a hundred-dollar bill being shattered by a gavel.

Bankruptcy

A bankruptcy case in Indiana could help upend the mass tort litigation system in the U.S.Driving the news: 3M, the conglomerate, recently put its Aearo Technologies subsidiary into bankruptcy. It aims to use the bankruptcy process to settle over 230,000 lawsuits from military service members who allege faulty earplugs made by Aearo caused hearing loss — the <a class="gtmContentClick" data-vars-link-text="biggest multi-district litigation (MDL)" data-vars-click-url="https://www.reuters.com/article/us-products-3m/how-3m-earplug-litigation-got-to-be-biggest-mdl-in-history-idUSKBN2BP1BQ" data-vars-content-id="5191113b-866a-48f6-aeca-814880816fff" data-vars-headline="3M unit&#x27;s bankruptcy could put U.S. mass tort system on trial" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.reuters.com/article/us-products-3m/how-3m-earplug-litigation-got-to-be-biggest-mdl-in-history-idUSKBN2BP1BQ" target="_blank">biggest multi-district litigation (MDL)</a> in history.

Unions haven’t been this popular since the 1960s, according to a new Gallup poll.

The big picture: The low unemployment rate has helped shift the balance of power between workers and employers, laying the groundwork for the recent union formations at corporate giants like Starbucks and Amazon. 

And before that, the pandemic highlighted the difficult conditions facing essential workers — like those in food service and healthcare. 

What they're saying: "U.S. workers see unions as critical to fixing our nation’s broken workplace — where most workers have little power or agency at work," wrote the Economic Policy Institute Tuesday in response to the Gallup poll findings. 

By the numbers: About 71% of Americans say they approve of unions, up from 64% pre-pandemic and a low point of 48% in 2009, the polling found.

What we're watching: The Federal Reserve is on a mission to crush inflation — which is expected to send the unemployment rate back up a bit. 

The big question: Whether that'll shift the power balance back toward employers. 

Poll: Union popularity hits 57-year high

The low unemployment rate has helped shift the balance of power between workers and employers.

Labor unions

Unions haven’t been this popular since the 1960s, according to a new <a class="gtmContentClick" data-vars-link-text="Gallup poll" data-vars-click-url="https://news.gallup.com/poll/398303/approval-labor-unions-highest-point-1965.aspx" data-vars-item="in_content_link" href="https://news.gallup.com/poll/398303/approval-labor-unions-highest-point-1965.aspx" target="_blank">Gallup poll</a>.The big picture: The low unemployment rate has helped shift the balance of power between workers and employers, laying the groundwork for the recent union formations at corporate giants like Starbucks and Amazon.

Data: Bloomberg Global Aggregate Index and Bloomberg U.S. Aggregate Index via FactSet; Chart: Axios Visuals

It's not just stocks. A key index tracking global bonds has also reached bear market territory.

Why it matters: Market behavior this year has thrown a wrench in the traditional 60/40 strategy — the idea that if stocks are down, then bond performance will offset the losses, and vice versa.  

State of play: The benchmark S&P 500 index plunged by as much as 24% this year, and though it’s rebounded, many analysts say we’re still deep in a bear market. 

But for most investors, their bond portfolios won't help them out either. A flagship Bloomberg index of global government and investment grade corporate bonds is now down more than 20% versus its peak in January 2021.

A bear market — or a 20% decline from a recent peak — is rare for these higher-credit quality bonds, since they tend to be much less volatile than the stock market. 

The drawdown over the last year and a half is the index's largest fall since its inception in 1990, Bloomberg reports.

What to watch: Whether a similar index of U.S. bonds, which is currently down 12.6% from its peak, heads closer to bear territory as well.

Bonds swoon into bear market territory

Along with stocks, a key index tracking global bonds has also reached bear market territory.

Bond markets

A chart showing total return of U.S. and global bonds from Jan. 2021-present.

It&#x27;s not just stocks. A key index tracking global bonds has also reached bear market territory.Why it matters: Market behavior this year has thrown a wrench in the traditional <a class="gtmContentClick" data-vars-link-text="60/40 strategy" data-vars-click-url="https://www.axios.com/2022/03/31/60-40-portfolio-first-quarter-2022" data-vars-item="in_content_link" href="https://www.axios.com/2022/03/31/60-40-portfolio-first-quarter-2022" target="_self">60/40 strategy</a> — the idea that if stocks are down, then bond performance will offset the losses, and vice versa.

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Stories

Cities push to convert deserted office buildings into housing

Holiday e-commerce sales forecast to grow 13.5% — report

3M unit's bankruptcy could put U.S. mass tort system on trial

Bonds swoon into bear market territory

Poll: Union popularity hits 57-year high

Newsletter editions

Podcast: Putin's Invasion

🚨 Businesses' top threat

The Fed and inequality

🌎 Pandemic’s “permanent scar”

📈 Europe's latest energy crisis