National

Billionaire wealth — on paper, at least — has tumbled dramatically during Wall Street’s recent turmoil, illustrating important lessons for everyone about the ephemerality of stock gains and losses.

Why it matters: Net worth is something of a public obsession, and a bit of a chimera avidly followed by publications like Bloomberg or Forbes. Yet the stark reality about paper wealth – especially fortunes tied to volatile technology stocks – is that it can be ephemeral, and attempts to put an exact figure on it can be misleading. 

Elon Musk, Jeff Bezos and Bill Gates are hardly paupers. But their fortunes, (most of which are linked to the value of shares in the companies they founded, wax and wane dramatically, and are largely subject to fickle market forces.

Musk, technically the richest person on the planet — again, on paper — isn’t liquid enough to write a check to buy Twitter outright. That inconvenient truth has weighed on Tesla’s stock.

And it’s not just the rich: This week, JPMorgan estimated that American nest eggs have seen a collective $5 trillion evaporate in recent months, and that figure could nearly double by year’s end.

What they’re saying: The euphoria of watching stocks in a portfolio is great, but the inevitable fall to earth can be much tougher to digest. 

“There’s a large difference between decline and loss, and I think that’s the main thing here,” Zach Stein, chief investment officer at Berkeley, Calif.-based Carbon Collective, tells Axios. 

“For an individual that distinction is really important to hold, as humans we’re focused a lot more on loss than gain.”

There’s a lesson for retail investors, or someone watching the swings in their retirement account. The focus should be on a balanced portfolio — and the long term. Strong markets lure investors into betting too heavily on riskier investments.

“This tracking of every lost and gained billion for the richest among us amplifies the misconception of many that investing is more about gambling for large gains or losses and shifts the attention away from the true magic of patient and disciplined financial planning,” Burt White, Managing Partner at Carson Group, with $20 billion in assets, tells Axios.

The cold truth about paper wealth

Why you shouldn't envy the wealth of Musk, Bezos or Gates

Illustration of a saw cutting a gold bar. 

Wealth

Stock market

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

The Federal Reserve's preferred gauge of inflation remained high in April, though the pace of price spikes showed signs of stabilizing, according to new government data released on Friday.

Why it matters: The personal consumption expenditures price index may be leveling off at a high level as the Fed moves aggressively to tamp down price spikes.

By the numbers: For the month, prices for goods and services Americans consume were up 0.2%. Excluding volatile food and energy costs, prices rose 0.3% — the same pace for the third month straight.

Prices rose 6.3% from a year ago, down from 6.6% in March, receding from a 40-year high. 

Strip out volatile food and energy, and inflation rose 4.9% year-over-year (compared to 5.2% the prior month).

Details: Americans' spending is rising much faster than their incomes, plunging the savings rate. 

The personal saving rate was 4.4% in April, down from 5% in March and the lowest since September 2008, the onset of the Global Financial Crisis.

It suggests Americans are spending down some of the extra savings accumulated during the pandemic, in part to keep up with high inflation.

Over the last two months, consumption spending rose by 2.3% (not adjusted for inflation), while disposable personal income rose only 0.7%.

Key inflation measure stayed steep in April

However, the pace of price spikes showed signs of stabilizing.

Inflation

Retail

A top Federal Reserve official gave a stark warning to House lawmakers on Thursday: Move too slow in issuing a central bank digital currency and the dollar's global dominance could eventually be in jeopardy. 

Why it matters: The U.S. so far remains largely on the sidelines amid a global race for countries to roll out their own digital cash, which could reshape the way millions of people use money. 

What she's saying: "We shouldn't take the dollar's global status as the dominant payment currency for granted," Lael Brainard, the Fed's vice chair, said at a congressional hearing on central bank digital currencies (CBDCs).

"If major foreign jurisdictions move to the issuance of their own digital currencies, it's important to think about whether the United States would continue to have the same kind of dominance without also issuing."

"I would hate for Congress to decide five years from now: 'You, Federal Reserve, you need to catch up. China's out there. The [European Central Bank] is out there.'"

Where it stands: The Fed just wrapped a public comment period on its highly-anticipated report laying out the pros and cons of developing its own CBDC. This came amid the explosion in popularity of stablecoins, which aim to tie their value to a fiat currency (like the U.S. dollar).

The debate over whether America needs its own digital currency — issued and backed by the U.S. government, much like dollar bills — was reignited in recent weeks after the high-profile blowup of privately-issued stablecoin TerraUSD.

Brainard told lawmakers a U.S. digital dollar could co-exist and complement stablecoins. (Stablecoin issuer Circle said in a comment letter to the Fed that their coin essentially does what a potential CBDC would do, so there's no need for both.)

The intrigue: The hearing was Brainard's first congressional appearance in her capacity as Fed vice chair. While the Fed is split on the need for a CBDC, Brainard has emerged as someone who sees a case for one.

"The Fed today was far more bullish on a CBDC than we have heard before," says Josh Lipsky, director at the Atlantic Council’s GeoEconomics Center, a think tank that tracks CBDC pilots and launches around the world.

What to watch: Brainard said that the Fed won't move ahead on issuing a CBDC without "support by the executive branch and by Congress," which would "ideally take the form" of legislation.

But a big sticking point among Republicans at the hearing was whether Brainard views legislators' blessing as simply "ideal" — or as a clear requirement. 

Top Fed official warns about U.S. falling behind in digital dollar race

"I would hate for Congress to decide five years from now: 'You, Federal Reserve, you need to catch up.'"

Fed vice chair Lael Brainard testifies before Congress

Federal Reserve vice chair Lael Brainard during a Senate confirmation hearing earlier this year. (Photo: Al Drago/Bloomberg via Getty Images)

Cryptocurrencies

Policymaking

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

The federal government's budget deficit is expected to shrink this year before skyrocketing in the years ahead, the Congressional Budget Office (CBO) said Wednesday.

Why it matters: America's reprieve from climbing deficits is only temporary as coronavirus-related government spending wanes and tax revenues increase.

By the numbers: The CBO projects the budget deficit will shrink to $1 trillion this year, down from $2.8 trillion in 2021. It's expected to rise to more than $2 trillion in 2032, reaching 6.1% of GDP, up from a projected 4.2% this year.

Federal debt held by the public is estimated to dip from 100% of GDP at the end of this year to 96% in 2023, reflecting rapid inflation that is causing GDP to expand more rapidly. It's expected to reach 110% of GDP — the highest ever recorded — by the end of the decade.

Details: The CBO is now expecting higher interest rates over the coming years than it did in the last forecast, as the Federal Reserve acts to try to contain inflation. Higher interest rates would strain the nation's fiscal position further.

Last July, for example, the CBO projected that the 10-year Treasury yield would average 2% in 2023; now that projection is 2.9%.

In the CBO projections, interest costs alone will pass $1 trillion in 2030, nearly doubling as a share of the economy to 3% of GDP, from 1.6% last year.

In its economic projections, both growth and inflation decelerate rapidly in the coming years. GDP slows from 5.5% last year to 1.5% in 2024, while inflation for personal consumption expenditures falls from 5.5% to 2.1%.

Those numbers are consistent with the economy coming in for a soft landing, not falling into recession, as many commentators fear is becoming more likely.

The CBO forecasts have the unemployment rate rising only slightly from its current ultra-low level in the next couple of years.

The caveat: The CBO projections are based on current law, which is certain to change, and on economic forecasts, which are highly uncertain. The actual pathway for the economy, deficits and debt remains uncertain.

The bottom line: Higher rates mean that deficits may act as a constraint on lawmakers in a way they haven't over the last decade.

CBO: Deficits are falling now, are set to soar later

The CBO projects the budget deficit will shrink to $1 trillion this year.

President Biden speaking about inflation and the economy earlier this month. (Photo by Drew Angerer/Getty Images)

Economy

Joe Biden

It's not just the cost of borrowing to buy a home that's getting more expensive. Pricier credit card debt is also putting a squeeze on consumers who are relying more on plastic amid the worst inflation shock in decades.

Why it matters: For those carrying a balance, that debt is expected to get even costlier to pay off, as the Federal Reserve continues an aggressive interest rate hike campaign to tamp down red-hot price growth. 

"The prime rate may end the year at 6%. Add in credit card companies' average margin and that could push the average credit card rate a little over 19% — the highest we have on record," says Ted Rossman, a senior industry analyst at Bankrate.

Credit card rates — unlike mortgage rates — move with a lag in response to Fed policy.

By the numbers: Consumers have opened a record number of new credit card accounts so far this year — 11.5 million, according to Equifax. 

And in a sharp shift from a pandemic-era trend, credit card balances are growing again. Balances jumped consecutively in the final three quarters of 2021, before backing off slightly last quarter, according to the Fed's latest household debt and credit report.

Balances are still about 10% below the pre-pandemic peak. 

The bottom line: Amid the booming job market, delinquency rates remain at rock-bottom levels, though there's been a slight uptick in borrowers with lower credit scores starting to fall behind on payments.

Latest borrower squeeze: Credit card rates climb

It comes as some consumers rely more on plastic amid the worst price shock in decades.

Credit cards

Jobs

Axios Markets

Some are warning that the Federal Reserve's effort to slow inflation could potentially return the U.S. economy to the unusual condition it found itself in during the 1970s and early 1980s: Stagflation. 

The big picture: Despite high inflation, the U.S. economy is humming along — with unemployment at 3.6% in April —near the low levels that last prevailed in the late 1960s. 

Stagflation describes a highly unusual economic state of affairs when the economy is weak or stagnating — with high or rising unemployment — yet inflation is also elevated.

This is the opposite of what usually happens. 

High inflation tends to break out when economic growth is really roaring. 

Periods of weak economic growth, and rising joblessness, are typically accompanied by slow price increases, or even falling prices.

While the annual pace of price increases have surged to 40-year highs in recent months, unemployment is incredibly low.  This is an inflationary environment, not stagflation.  

When's the last time we had stagflation? 

The best-known stagflationary episodes hit the U.S. in the 1970s and early 1980s, when a series of oil shocks — especially the 1973 embargo that Arab members of OPEC placed on the United States in response for military support of Israel — sent fuel costs and inflation surging, as unemployment simultaneously shot higher. 

The combination of energy shocks and stagflationary conditions lasted on and off  into the early years of the Reagan administration. As late as 1982, unemployment was hovering around 10% and prices were rising as much as 6% annually. 

A number of economic policy bigwigs — former Federal Reserve chairman Ben Bernanke, current Fed chair Jerome Powell and Treasury secretary Janet Yellen (who also led the Fed) — have recently either implicitly or explicitly suggested that as the Fed tries to bring down inflation, unemployment will likely rise. 

That will likely mean we'll have an economy that is sort of stagflationary, at least for some period of time. In other words, growth will be weakening, but inflation will still be high.

Treasury Secretary Janet Yellen on Wednesday: "The economic outlook globally is challenging, and uncertain, and higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world."

Bernanke in a New York Times article published this week: ''Even under the benign scenario, we should have a slowing economy ... And inflation's still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,'' he predicted. ''So you could call that stagflation."

Powell told the Wall Street Journal this week: "I would say there could be some pain involved in restoring price stability."

What can Biden do about stagflation if it actually occurs?

Not much that wouldn't be politically unpalatable. 

Biden could propose a sharp reduction in federal deficit spending. That could help reduce inflation, but it would likely hurt growth and raise unemployment. 

He could attempt the kind of wage and price controls that President Nixon imposed in 1971, though that seems extremely unlikely and not particularly effective. 

He could basically let the Fed deal with it. That's essentially the path Jimmy Carter took in the late 1970s. The soaring Fed rate hikes and the deep recession that followed contributed mightily to his annihilation in the 1980 presidential election.  

The bottom line: Like we said above, we don't yet have stagflation. It's possible that the Fed is able to thread the needle so perfectly that inflation comes down easily and unemployment raises ever so slightly and nobody notices. 

But stagflation is a possibility, and an unappealing one for practically everyone. 

What stagflation means and what Biden could do about it

High inflation tends to break out when economic growth is really roaring.

Illustration of a dollar sign covered in cracks with pieces of tape over the cracks.

Stagflation

The recent stock market mayhem won't change the Federal Reserve's plan for a series of aggressive interest rate hikes meant to curb soaring inflation, Fed chair Jerome Powell said on Tuesday.

Why it matters: The nation's most influential economic policymaker says the Fed won't back down from an historic campaign to squash prices rising at the fastest pace in 40 years. 

What he's saying: "What we need to see is inflation coming down in a clear and convincing way. We’re going to keep pushing until we see that,” Powell said, speaking at a Wall Street Journal event.

"If that involves moving past broadly understood levels of [the neutral interest rate], we won’t hesitate to do that."

Catch up quick: The Fed earlier this month enacted the steepest interest rate hike in over two decades. Powell reaffirmed on Tuesday that the central bank is on pace for similar 50 basis point moves in coming months, "if the economy performs about as we expect."

The bottom line: "It's been good to see financial markets reacting [to] the way we're speaking about the economy," Powell said.

"Financial conditions overall have tightened significantly. That's what we need."

Market sell-off won't stop Fed's interest rate hike campaign

"Financial conditions have tightened significantly. That's what we need."

Fed chairman Jerome Powell speaks onstage at a conference

Federal Reserve Board Chair Jerome Powell. (Photo: Samuel Corum/Getty Images)

Federal Reserve

Allianz Global Investors will pay $1 billion to settle what regulators charged was a "massive fraudulent scheme" that involved over 100 institutional investors, including public pension funds.

In a statement on Tuesday, the Securities and Exchange Commission said the complex investment strategy, which began as early as January 2016, came undone after the brutal COVID-19 bear market of March 2020 resulted in billions in losses. 

Three portfolio managers were named in the complaint, with two pleading guilty to criminal charges.

Allianz's parent company will also cough up over $5 billion in restitution to the victims. 

Why it matters: Germany-based Allianz is one of the biggest names in the financial world, with well over $2 trillion in assets under management. The scheme ultimately manipulating investors to sink $11 billion into a strategy called "Structured Alpha" that netted the firm around $550 million in fees. And a billion-dollar SEC settlement is a lot of money.

What they're saying: In recent days, the SEC has moved to reassert itself as the sheriff of Wall Street, and the downturn in markets is providing them with lots of fresh opportunities.

"Allianz Global Investors admitted to defrauding investors over multiple years, concealing losses and downside risks of a complex strategy, and failing to implement key risk controls," said SEC Chair Gary Gensler. 

"The victims of this misconduct include teachers, clergy, bus drivers, and engineers, whose pensions are invested in institutional funds to support their retirement. 

Thought bubble: A bull market can cover a multitude of sins — but when things get turbulent, malfeasance and criminality get exposed. That's when the "bezzle" comes to a screeching halt, and the crackdowns begin as Axios' Felix Salmon noted last week.

Allianz settles charges with SEC for $1 billion

Illustration of Benjamin Franklin wearing a burglar's mask

Wall Street

Consumers continued to spend in April, with retail sales jumping 0.9% from the prior month, according to government data released on Tuesday.

Why it matters: Shoppers aren't pulling back on spending even as prices soar at the fastest pace in 40 years. This is a good sign for the American economy amid fears of a coming recession as inflation rages.

Retail sales rose 8.2% from a year ago, a period when inflation jumped by 8.3%.

Stripping out spending on gasoline, retail sales were even stronger, rising 1.3% from the prior month.

Details: Consumers upped spending at restaurants and bars, and spent more on clothing, furniture and cars.

Spending on gas fell 2.7% compared to March, when gas prices rose as Russia invaded Ukraine.

The bottom line: Economists are keeping a close eye on consumer spending for signs of how they are grappling with soaring prices. So far, activity remains robust.

What to watch: Walmart, the nation's biggest retailer, says it sees some signs that cash-strapped consumers are adjusting their behavior because of higher prices.

CFO Brett Biggs told CNBC on Tuesday that the company is seeing more sales of half-gallons of milk and its private brand of lunch meat. The company expects inflation to continue to crimp its business this year.

Editor's note: This story has been updated with additional details from the report.

Retail sales jump as prices soar at fastest pace in 40 years

Retail sales rose 0.9% last month — a good sign for the economy.

People shopping in the meat aisle in a grocery store 

People shop at a grocery store this month in New York City. Photo: Spencer Platt/Getty Images

Consumers

The roots of the great market crack-up of 2022  — in which a dramatic fire sale is engulfing stocks, bonds, cryptocurrencies and nearly everything in between — have been evident for a while.

The big picture: Workers who watched with awe as their 401Ks soared are now facing the harsh reality that stimulus from Uncle Sam couldn't last forever, and that it came at a cost —namely, soaring inflation.

Details:  Fiscal stimulus and loose monetary policy from the Fed helped grease the wheels of the market’s breathtaking recovery in 2021. As the central bank moves to tighten that up, the party has come crashing to a halt.

Meanwhile, overly bullish buyers drove an ultimately unsustainable bubble in cryptocurrencies, culminating in last year’s record highs. Those chickens are also now coming home to roost, as Axios’ Brady Dale explained on Thursday, with selling and margin calls aplenty.

What they're saying: “There is one thing [the Fed] had tremendous success with," veteran Wall Street watcher and implacable Fed critic Peter Boockvar wrote Thursday.  "They get an A+ for creating asset price inflation over the many years and are now doing a bang up job with stoking asset price deflation.”

Jay Hatfield, chief investment officer Infrastructure Capital Management in New York, said this week that the market pandemonium is “primarily driven …by the unprecedented explosion of Fed liquidity that drove high risk technology investments into a bubble” that’s now being pierced.

The withdrawal of excess Fed liquidity is also weighing on bitcoin, which Hatfield thinks will sink as low as $20,000 by year’s end.

Our thought bubble: Just as markets display “irrational exuberance” on the upswing, they can display excessive pessimism on the downside. 

There are tentative hopes prices are coming off the boil. And, as some have argued, the current fire sale is a buying opportunity for longer-term investors. 

If the Fed is able to stick the landing with tighter policy without cratering the economy, the current tumult will fade into memory.

The market collapse was easy to see coming

Illustration of a cracked dollar bill with water leaking out

Data: YCharts; Reproduced from Razum Capital; Chart: Axios Visuals

Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year. 

Why it matters: Anyone searching for evidence that the stock market and the real economy are not the same thing, should look no further.

Tesla’s frenzied ride in the capital markets culminated on Monday in the company being the largest entrant ever be included in the S&P 500, the main benchmark stock index.  

Tesla’s true believers are not paying for actual performance, but they are betting on Elon Musk as a visionary and the potential upside in the still nascent electric vehicle market.

The merits of that investment thesis diverge greatly from the current state of affairs in the automotive industry, and the broader economy. 

Reality check: The overall equity market’s meteoric rise in the face of a U.S. economy that will end 2020 3% smaller than it started the year, is just the latest example of the economic reality decoupling from stocks.

The equity market backdrop is a simple case of buyers needing to “invest in the market you have, and not the one that you want,” says  Quincy Krosby, chief market strategist for Prudential Financial. 

“It is a market that has been engineered by the liquidity of central banks. ... It is surprising how far we've come, and that includes Tesla," Krosby says.

Driving the news: While Tesla mania was once limited just to those who back Musk, after today anyone invested in an S&P index fund is essentially being forced along for the ride.  

After months of anticipation and active buying, technical pressure pushed the stock down about 6% after its S&P 500 debut.

That's happening alongside a broader market decline tied to a new wave of coronavirus concerns in the UK.

What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note. 

In the past two years, Tesla’s shares have risen more than 800% as analysts have increased average 12-month price targets more than fourfold and simultaneously lowered earnings per share estimates annually through 2024, Brinkman notes. 

Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities.  

Ives estimates that EV sales will grow from 3% of overall auto sales to 10% by 2025. "Many of the naysayers are probably the same individuals that thought LeBron wasn't going to be a good basketball player 15 years ago.” 

Tesla mania vs. economic reality

Evidence that the stock market and the real economy are not the same thing.

Business

If Trump's presidency is about to end, an unprecedented golden era for big businesses could end with it.

Why it matters: Thanks to support from the president, Congress, the Supreme Court and the Federal Reserve reaching levels not seen in recent history — if ever — large companies have done a lot of winning.

What we're hearing: Trump's policies have "created a favorable business environment," U.S. Chamber of Commerce president Suzanne Clark tells Axios in an email. 

"We’ve seen some promising economic and fiscal policy developments over the last few years." 

Between the lines: Businesses have benefited most from the people Trump put in charge. 

The Fed: The success of big corporations is perhaps best evidenced by the stratospheric level of U.S. companies' stock value relative to GDP, and that's been thanks in large part to Trump's handpicked Federal Reserve chairman Jerome Powell.

The market capitalization of U.S. publicly traded companies has grown from around 200% of U.S. GDP in 2016 to a record high 266% of GDP this year — meaning corporations are worth roughly two-and-a-half times the value of everything produced and consumed by the U.S. in a year.

In 1995, the number was about 80% of GDP.

"Big businesses are outperforming the broader economy," Julia Coronado, president of MacroPolicy Perspectives, tells Axios. 

"One of the things that's interesting is that market capitalization didn't get knocked on its ass in the current recession. It's at an all-time high." 

The Supreme Court: With Trump's first Supreme Court nominee, Neil Gorsuch, in place the Chamber of Commerce went 9-1 in cases where it supported business interests in the 2017-2018 term, its most lopsided record in six years. 

With Brett Kavanaugh on the Court in the 2018-2019 and 2019-2020 terms, the Chamber's victory rate declined to around 65% but included a historically high number of cases involving big business and many more where businesses had lost in the lower court.

"Only twice did the Court agree  to review decisions favoring business interests—and in both cases the  Court affirmed those pro-business rulings," notes the Constitutional Accountability Center, in reference to the 2018-2019 period. 

The Court's recent pro-business rulings included pushing employees into arbitration over job complaints, making it harder for employees to join class action lawsuits, limiting protections for whistleblowers and striking down the ban against sports gambling.

Don't forget: The 2017 Tax Cut and Jobs Act passed by a GOP-led Senate and House reduced corporate taxes from 35% to 21%, but it also eliminated the graduated corporate tax rate schedule and the corporate alternative minimum tax, disproportionately benefiting big companies which downsized their tax bills to record low levels.

Trump also cut funding for the IRS by $239 million in 2017 — the combination led to business taxes in 2019 accounting for the lowest portion of federal revenue on record, dating back to 1929. 

Business tax revenue as a proportion of GDP dropped by the most of any industrialized country in 2018, reaching just 1.1%.


Reproduced from Haver Analytics via MacroPolicy Perspectives; Chart: Axios Visuals

State of play: Trump's trade wars and tariffs have hurt small businesses and manufacturers but big companies managed to largely pass the costs of tariffs onto smaller suppliers. 

And since the coronavirus pandemic hit, large U.S. companies have boosted their cash holdings and many have increased their market share as smaller competitors have fallen by the wayside.

Even some of the companies specifically targeted by Trump have seen their fortunes rise. 

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Stock market

The big picture

Tesla mania vs. economic reality

Big businesses' corporate paradise may be coming to an end

The fall of an empire

Investors say ignore the coronavirus pandemic and buy stocks

Markets swell as the economy shrinks

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