Jul 27, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"I believe that if you'll just stand up and go, life will open up for you. Something just motivates you to keep moving." - See who said it and why it matters at the bottom.

1 big thing: Exclusive...Bob Johnson's solution for wealth equality

Photo illustration: Sarah Grillo/Axios. Photo: Brendan Smialowski/Getty Images

After reading Axios' 10 myths about the racial wealth gap, BET co-founder and entrepreneur Robert L. Johnson is issuing a challenge to politicians, civic leaders and Black organizations across the country: Refute the findings or lay out a set of actionable solutions.

What he's saying: And if they can't, "they need to have the courage to stand up to Black people and say, 'You are perpetually a second-class economic population in America,'" Johnson said during an hourlong one-on-one interview Sunday.

  • "Say to Black America, all 40 million of us, 'Guys, you will never attain the wealth of white families in this country ... Get used to it.'"

Where it stands: Johnson asserts that there is only one way to truly close the U.S. racial wealth gap. "The simple conclusion is white America, if they really want to see Black people equally wealthy to them: Give Black people more wealth, more capital, more cash," he says.

  • "White people, from the beginning of this country, have had more access to capital to create wealth than Black people. And wealth in a capitalist society — or access to capital in a capitalist society — propels you to more wealth."

Why it matters: The man who created the first Black-owned company listed on the New York Stock Exchange and then sold it for a reported $3 billion argues that the research in the story "devastated a generation of notions as to how Black people could compete in a capitalist society and get equal opportunity and access to capital."

The big picture: Johnson now asserts that public officials and organizations like the Urban League, NAACP and Congressional Black Caucus need to change course in their advocacy.

Yes, but: Johnson is not hopeful.

  • Even if Congress passed H.R. 40, the Commission to Study and Develop Reparation Proposals for African-Americans Act, he's convinced legislative actions would only invest in the same programs proven not to work by years of research from the Fed, Department of Commerce, Brookings Institution and others.
  • And having spoken to a litany of fellow CEOs and entrepreneurs, he says the private sector has "bought into what you call myths ... And therefore, they will take no other alternatives because they believe in the dogma."

The last word: "If government-subsidized, means-tested programs don't work ... then go to the other way, which is [to] give wealth to Black people using tax policy. And reparations is nothing but tax policy."

  • "If you taxed every white American eight dollars a day for 30 years, you'd get to $14 trillion of wealth being transferred to Black America."
2. Catch up quick

The White House and Senate Republicans have finalized a coronavirus relief package worth about $1 trillion to introduce today but it's full of proposals rejected by House Democrats. (CNBC)

New coronavirus cases are falling in many states, including Florida, Arizona, California, Texas and New York, but daily death tolls rose above 1,000 for a fourth consecutive day on Saturday for the first time since May, with 10 states reporting record daily fatalities. (Bloomberg)

American companies operating in China agree with the Trump administration’s criticisms of the Chinese government, but are not leaving and feel they are being unfairly targeted without any clear direction of what steps to take. (The Hill)

The first coronavirus vaccine may arrive soon, but experts doubt it will be the knockout punch many expect. (Axios)

3. The Fed's balance sheet could rise to nearly $20 trillion

Data: Federal Reserve via FRED, projection from Deutsche Bank; Chart: Andrew Witherspoon/Axios

The Fed's outlook is relatively pessimistic about the future, based on recent speeches and communications from top policymakers and likely augurs a massive expansion of the central bank's balance sheet in coming years, Deutsche Bank chief U.S. economist Matthew Luzzetti says in a new research note.

What's happening: "We find that the Fed will need to provide significant accommodation — roughly equal to a fed funds rate of -5% — and that [quantitative easing] and forward guidance could be insufficient."

What it means: Given the Fed's reluctance to introduce negative nominal interest rates and the deteriorating state of the economy, Luzzetti argues the Fed will need to expand its balance sheet by up to an additional $12 trillion in short order.

  • "[T]he more optimistic scenario would take nearly four years to achieve, while the more pessimistic view would take more than eight years."

Watch this space: The analysis relies on "optimistic" assumptions, including "that the Fed’s unconventional tools are as potent today, with yields at record low levels and the market pricing a negative fed funds rate in the coming quarters, as they were several years ago when yields and risk premia were much higher and the market actually anticipated future rate hikes."

  • So, the balance sheet could rise by much more.
4. Rural small businesses may not survive another shutdown
Expand chart
Reproduced from Center for American Progress; Chart: Axios Visuals

Axios' Kim Hart writes: Coronavirus case numbers in rural communities have now surpassed the COVID-19 case numbers in big cities, and rural economies will have a harder time recovering from a second shutdown.

Why it matters: Without additional federal relief for rural regions, "people and businesses will not have enough confidence to return to their jobs and daily activities," Olugbenga Ajilore, senior economist at the Center for American Progress, argues in an analysis out today.

  • "The result will be a prolonged, deep recession."

What happened: The $1,200 direct payments to households as part of the CARES Act relief, along with expanded unemployment insurance, revived spending and business revenues in April and May. Small businesses began to shut down again in late June as COVID-19 cases spiked, per CAP's analysis.

  • In Southern rural communities characterized by large African American populations, household expenditures rebounded in May as Southern states such as Georgia and South Carolina aggressively reopened. But that trend reversed in June with steep drops in the number of businesses and revenue.
  • Midwestern rural communities characterized by blue-collar jobs saw an even steeper drop in household spending, although it has since plateaued. Small businesses are struggling to stay open.
  • Western rural communities followed a similar pattern, with the number of open merchants and revenue both plummeting at the end of June as household spending plateaued.

Even rural areas with higher pre-pandemic economic success have been hit hard, including "Graying America" communities with large aging populations in the West, as well as the Northeast and Florida (see above).

The big picture: Rural America has a higher-risk population and fewer safety-net programs for people who get sick. And many rural communities are still struggling to recover from the Great Recession.

5. Housing is the strongest part of the economy

Given the latest reports on existing and new home sales and mortgage applications, "housing is the strongest major sector of the economy," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Driving the news: Friday's report showed new home sales jumped to the highest level in nearly 13 years.

Why you'll hear about this again: The impact of falling mortgage rates, which have fallen 80 basis points this year, "is more than offsetting the wave of Covid-induced job losses, which seem to be hitting younger renters rather than would-be homebuyers," Shepherdson writes in a note to clients.

  • He notes that sales rose across the country in June, despite the resurgence of COVID-19 infections.

By the numbers: Applications for mortgages to purchase a house dropped sharply after the pandemic outbreak, "but all the lost ground has been recovered and the trend is now running some 17% higher than a year ago," Shepherdson says.

  • "That points to a modest further [increase] in sales, and with inventory very low — just 4.7 months in June, compared to 5.5 months in June last year — prices are likely to rise at a solid rate."
  • "The median price data are wildly erratic in the short term but it’s pretty clear that developers cut prices at the height of the Covid crisis and are now pushing them back up."
Dion Rabouin

Thanks for reading!

Quote: "I believe that if you'll just stand up and go, life will open up for you. Something just motivates you to keep moving."

Why it matters: On July 27, 1967, Tina Turner filed for divorce from her husband Ike, ending their 16-year marriage and musical partnership and launching Tina as a successful solo act.