October 07, 2020

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🎙 "Do your little bit of good where you are; it's those little bits of good put together that overwhelm the world." - See who said it and why it matters at the bottom.

1 big thing: Why Trump dumped stimulus negotiations

President Trump. Photo: Tia Dufour/The White House via Getty Images

Markets were stunned by President Trump's announcement on Twitter that the White House was pulling out of stimulus discussions with House Democrats on Tuesday — and several Trump advisers even told Axios' Jonathan Swan they were perplexed by the "inept" decision, calling it a "gift" for House Speaker Nancy Pelosi.

  • But it makes sense if you follow the logic of Trump's economic advisers.

Where it stands: Trump has surrounded himself with die-hard acolytes of supply-side economics, like one-time pick for the Federal Reserve Stephen Moore, who argue that fiscal stimulus measures and increased benefits for unemployed Americans not only don't help, but hurt the economy.

  • "We're very worried about Trump doing a deal with Pelosi that would have very negative effects on the economy," Moore told Axios' Alayna Treene in July.
  • Moore predicted that if unemployment benefits from the CARES Act are extended, "You're not gonna have a jobs recovery in the fall. Not only is that bad for millions of Americans, but Trump can't win an election if we don't have a good economy."

Those advisers have been lobbying Treasury Secretary Steven Mnuchin, who's leading negotiations for the White House, to focus exclusively on tax cuts and more deregulation to counter the downturn.

The intrigue: Trump's economic adviser Larry Kudlow is also a dyed-in-the-wool supply-sider and has been calling for payroll tax cuts while playing down the value of relief spending for months.

  • Other prominent conservatives have consistently hit the talking point that the recovery from the global financial crisis was the weakest since the Great Depression because of stimulus measures.
  • Such thinking ignores the low growth environment globally and the fact that President Obama and a Republican Congress followed the stimulus with fiscal austerity measures.

One level deeper: Americans have been growing concerned about the spiraling U.S. budget deficit and the national debt, which has surpassed U.S. GDP, while the U.S. debt-to-GDP ratio is on course to overtake even World War II levels.

  • The orthodoxy of fiscal conservatism and fear about the debt emboldened Republican senators to insist on a hard price cap for a second relief bill.
  • And better-than-expected readings on jobs and stocks also kept pressure off to make a deal.

Bonus chart: Investors think stimulus is still coming

Data: FactSet; Chart: Axios Visuals

While the stock market turned decisively negative after Trump's tweet, Treasuries and currencies were little moved.

  • Many investors focused on the end of Trump's tweet — that a stimulus bill would be passed after the election — and expect that more spending will be delivered at worst in early 2021 no matter who wins November's election.
  • "What we don’t know is how much gamesmanship is taking place behind the scenes that we’re not privy to," Tom Stringfellow, president and CIO of Frost Investment Advisors, tells Axios.
  • "Is this a negotiation ploy? That’s not an outlandish statement in politics for either party, playing a little bit of poker."

Stay woke: Trump tweeted later on Tuesday that he wanted Congress to approve $25 billion in aid for airlines and $135 billion for the Paycheck Protection Program, plus a standalone bill providing $1,200 direct payment checks for Americans.

Double bonus chart: Small businesses worry about survival

Data: Alignable; Chart: Axios Visuals

Small business owners and employees have been less sanguine about a delay in fiscal spending than stock traders.

Driving the news: A new survey from Alignable finds that many small businesses are growing more worried about "a severe cash crunch," with 42% saying they could collapse by the end of the fourth quarter.

  • Small business owners' top concern was that they would completely run out of financial reserves. 
  • 45% of all small businesses have earned 50% or less of their pre-pandemic revenue — eight months into the pandemic.
  • When asked what would help them the most right now, 35% said reducing the COVID-19 case levels to increase consumer confidence.

Heads up: Goldman Sachs economists estimate that winter weather will reduce total restaurant spending by 3%–4% and consumption by 0.2 percentage points.

  • This translates to a 0.3 percentage point hit to real GDP growth in Q4 and a 0.1 percentage point hit in Q1 next year, followed by a rebound as temperatures rise.

2. Catch up quick

Nasdaq is in talks with Gov. Greg Abbott about potentially relocating its electronic trading systems from New Jersey to Texas. (Dallas Morning News)

Microsoft and Wells Fargo have been contacted by the U.S. Labor Department inquiring whether their plans to hire more Black employees violate U.S. civil rights laws. (Bloomberg)

The House Judiciary Committee's antitrust subcommittee released the findings from its investigation into Big Tech. (Report)

3. A “K-shaped recovery” in credit markets

The K-shaped recovery happening in the broader U.S. economy, where the wealthy are seeing their fortunes rise while the poor see theirs fall, also is happening in credit markets, analysts at S&P Global say.

What it means: The pace of overall credit rating downgrades has slowed from earlier this year, but negative outlooks are at historical highs, and defaults could double within a year.

  • Some sectors — like technology, consumer staples, retail essentials, homebuilders and health care — appear likely to navigate the coronavirus pandemic with little or no effect on their creditworthiness.
  • Others face a "bleaker" future and are not expected to see credit ratings recover until at least 2023 — like the auto, leisure, travel, and aerospace industries.

What they're saying: "Downgrades have come down from their peak, but negative outlooks are at historical highs both for nonfinancial corporates (37%) and banks (30%) globally, pointing to more rating actions ahead."

  • "Since the outbreak of the pandemic, credits at the lower end of the scale (‘B’ and below) have represented over half of the downgrades, while 90% of defaults were from credits in the ‘CCC’ category."
  • "We forecast the speculative-grade corporate default rate to double by June 2021, from the current 6.2%, to 12.5% in the U.S. and from 3.8% to 8.5% in Europe."

Between the lines: A record $4.5 trillion worth of corporate bond issuance has come to market year to date, 29% higher than this time last year, and analysts are urging caution as fears of renewed market volatility pushed many corporates to front-load bond issuance ahead of the U.S. elections.

  • The analysts also noted a return of "aggressive financial policies" such as the use of debt by private equity owners to finance dividend payments for themselves paid for by using entities under their ownership to take on potentially unsustainable debt.

What to watch: There is also worry that U.S. election uncertainty in early November and the failure of the EU and U.K. to reach a Brexit agreement by the end of the month could create volatility and constrain access to financing for vulnerable firms.

4. New York's delayed return to work

Illustration: Eniola Odetunde/Axios

Axios' Erica Pandey writes: Americans all over the country are going back to their offices, but New Yorkers aren't.

Why it matters: Office workers are super-drivers of New York City's economy and essential to its post-pandemic recovery. Scores of businesses in the city are suffocating as they delay their return to work or, worse, decide to work from home forever.

  • "Manhattan has really gone downhill since the pandemic began," says Mitchell Moss, a professor of urban planning at NYU. "There are no tourists, no shoppers and, of course, no workers."

By the numbers: Nationally, around 25% of workers have returned to offices, the Wall Street Journal reports. In Los Angeles, 32% have gone back, and in Dallas, 40%.

  • But only 12% of New Yorkers have returned, according to the latest numbers from commercial real estate firm CBRE, which manages 20 million square feet of office space in the city.

What's happening: "All of the reasons why New York is suffering disproportionately right now are related to its competitive advantages," says Tim Tompkins, president of the Times Square Alliance.

  • The city has a robust public transit system, which is how most people get to work. Driving-first cities have seen higher rates of return than New York, where many workers are still nervous about virus transmission on buses and trains.
  • The restaurants, shops, museums and theaters that give the city its charm are closed or running at limited capacity, and so many have fled to the Hamptons or elsewhere, and commuters who travel in from Long Island, Connecticut or New Jersey are staying away.
  • The city's density is also working against it. In fact, in the city's suburbs, return-to-work rates are around 33%, per CBRE.

Thanks for reading!

Quote: "Do your little bit of good where you are; it's those little bits of good put together that overwhelm the world."

Why it matters: On Oct. 7, 1931, longtime advocate for peace and human rights Desmond Tutu was born. Tutu earned the Nobel Peace Prize in 1984 and became the first Black person ever appointed the Anglican dean of Johannesburg, later becoming an Anglican archbishop.

Editor's note: First bonus chart story corrects Tom Stringfellow's title to CIO, or chief investment officer, from CEO.