Oct 11, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • The EU will hit the U.S. with sanctions if a settlement isn’t reached in a long-running dispute over subsidies to Airbus and Boeing's recent win at the WTO, France’s finance minister said. (Bloomberg)
  • Turkey attacked Kurdish militia in northeast Syria, forcing tens of thousands of people to flee and killing at least dozens of people in a cross-border assault on U.S. allies. (Reuters)
  • Planned outages by PG&E had left more than 700,000 California households and businesses without electricity in an effort to prevent active power lines from sparking wildfires. (WSJ)
1 big thing: Mainstream economists are getting radical

Illustration: Aïda Amer/Axios

As global growth continues to fall, the world’s top economists and financial authorities are signaling an openness to experimenting with previously fringe economic ideas that just a few years ago would have been considered extreme or even laughable.

What they're saying:

  • ECB president Mario Draghi recently suggested the eurozone consider modern monetary theory, or MMT — which argues that governments with their own currency should ignore deficits and keep spending until inflation becomes a problem, with federal legislators in control of setting interest rates.
  • A collection of former central bank presidents are calling for “helicopter money" — a program in which central banks would deposit money directly into every citizen's checking account.
  • Top strategists at BlackRock, the world's largest asset manager, are urging more central banks to start buying stocks.

What’s happening: Central bank policies, which now include negative interest rates in Japan and the eurozone, have yielded negligible improvement.

  • Even monetary policies previously considered extreme have failed to offset the persistent drag from the world’s worsening demographic trends (too many old people, not enough young ones) and a lack of demand, so policymakers are getting more extreme.

Reality check: The unorthodox policies are being encouraged by either former central bankers or those like Draghi who are on their way out of office. Current central bank leaders largely continue to reject such ideas, even in the face of growing evidence their policies aren't working.

  • Fed chair Jerome Powell declared that the U.S. central bank is undergoing a wide-ranging examination of its policy toolkit, but also said this week that the only unorthodox plan the Fed is really considering is yield curve control. This was implemented in Japan in 2016 and has yet to deliver meaningful growth or inflation for the country.

The big picture: “The Fed needs new ideas,” Christina Romer, a former chair of the Council of Economic Advisers, told Axios at this week's National Association of Business Economists conference in Denver.

  • For Romer, now an economics professor at UC Berkeley, the rethink is required because the previous rules governing how central banks operate have been upended by rock bottom inflation and interest rates. That will make traditional monetary policy less effective.
  • “To their credit, [the Fed] did a rethinking of their framework, but didn’t really conclude that they needed to rethink all that much. I think they need to rethink a little more radically,” she added.
Bonus: More radical ideas
Expand chart
Data: FRED; Chart: Axios Visuals

For anyone looking, there are a growing number of unorthodox ideas on the horizon — from mainstream, highly credentialed economists.

Federal Reserve economist Claudia Sahm has proposed automatic government payments directly to individuals when the 3-month average unemployment rate rises 0.50 percentage points above the low from the previous year.

  • She picked that metric because every time it has happened since the 1970s the economy has gone into contraction. The indicator currently shows a reading of 0%, suggesting the economy looks stable.

Romer told Axios she supports similar plans that include so-called automatic stabilizers, or government spending, that activates based on data rather than legislators needing to authorize new spending.

  • "Building more of that into the system would be healthy," she said.

Catherine Mann, a former chief economist at the OECD and current global chief economist at Citi Research, has proposed a program that would use central bank funds to deposit shopping vouchers directly into consumers' accounts.

  • She says many new proposals ignore the realities of declining aggregate demand, income distribution and lower productivity.
  • "I think we’re having the wrong discussion," she told Axios at the NABE conference.

Julia Coronado, a former Federal Reserve economist and current president of MacroPolicy Perspectives, said she's working on a paper that will advocate combining helicopter money with a central bank digital currency.

  • "We’re not on the edge," she said during an interview at NABE. "We’re chief economists at major global banks, for God’s sake. We’re hardly fringe players."
2. A synchronized global slowdown
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Data: IMF, IIF, OECD and World Bank; Chart: Axios Visuals

The Institute of International Finance on Thursday lowered its growth forecast for 2019, the latest in a series of downward revisions from international economic organizations since the beginning of last year.

  • Elina Ribakova, deputy chief economist at the IIF, said the organization remains upbeat on the outlook despite the revision.
  • "We expect central banks to continue easing against the backdrop of slowing growth and assume no further deterioration in trade tensions," she told Axios in an email.

What's next: The IMF and World Bank earlier this week said they expect to write down their 2019 growth projections again — the third downward revision this year — at their meetings next week in Washington, D.C.

The big picture: “The global economy is now in a synchronized slowdown,” incoming IMF managing director Kristalina Georgieva said at a recent news conference.

  • The IMF now expects slower growth in 90% of the world and that “growth this year will fall to its lowest rate since the beginning of the decade.”

Flashback: It hasn't even been 2 years since then-IMF managing director Christine Lagarde said in January 2018 that the global economy was experiencing “the broadest synchronized global growth upsurge since 2010" and that “all signs point to a continuous strengthening.”

3. Investors sell stocks and hide cash in money market funds
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Data: Investment Company Institute; Chart: Andrew Witherspoon/Axios

Investors moved an additional $20.2 billion into money market funds last week, while pulling $13.8 billion out of equity funds, data from the Investment Company Institute shows.

  • It's the continuation of a trend that has been in place all year and accelerated in the second and third quarters.

Why it matters: The increased desire for money market funds, which are ostensibly savings accounts, has come as yields on the 10-year Treasury note fell from 2.51% on April 3 to 1.59% on Oct. 2, showing it's fear rather than greed driving fund flows.

Details: Year to date, investors have moved $424 billion into money market funds, $361.5 billion of which has been deposited over the last 6 months. Conversely, $154.1 billion has been drained from equity mutual funds and ETFs in 2019, with $136.9 billion of outflows coming in the past 6 months, according to ICI's data.

  • More than $3.5 trillion currently sits in money market funds, the most since 2009.
4. Apple shakes off critics as stock hits 52-week high

Apple's stock rose 1.35% Thursday, more than doubling gains by the S&P 500 and the Nasdaq and touching a 52-week high.

  • The strong gains came despite criticism of the company for pulling apps from its store in recent days to appease Chinese authorities.

What's happening: Apple shares have seen that kind of outperformance all year. The stock price has risen by around 45% this year, more than double the S&P's YTD gains and well above the 29% rise of tech ETF XLK. It's also the best-performing FAANG stock this year by a wide margin.

  • Apple shares have benefited from stronger-than-expected sales of the iPhone 11 and increased excitement about its wearables, such as the Apple Watch and AirPods.

Yes, but: Wall Street analysts remain bullish on Apple in words, but the average price target is below the company's current $230 stock price.

  • Of the 48 analysts covering Apple, 25 have Buy ratings, 18 have Holds, and 5 have Sells, according to Bloomberg data cited by Barron's. Their average 12-month target for the stock is $224.10.

Watch this space: Apple also continues to see overall iPhone sales drop, with volumes expected to fall 15% this year from 2018's total, according to a September report from IDC.

Dion Rabouin