Sep 12, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness: The ECB today is expected to announce it will lower interest rates to -0.5% and add some stimulus measures, after ending its bond-buying program in December and having already restarted its TLTRO bank lending program. (Quartz)

1 big thing: It's not just manufacturing anymore
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Data: Tariffs Hurt the Heartland; Chart: Andrew Witherspoon/Axios

President Trump announced Wednesday night he would postpone the latest round of tariffs on $250 billion worth of Chinese imports for 2 weeks. The news will likely soothe the market, but the tariffs have already done a number on the U.S. economy.

Why it matters: "The data speaks for itself," Torsten Slok, chief economist at Deutsche Bank Securities, says in a note to clients. "The trade war is having a serious negative impact on the US economy."

  • Slok's note includes data from recent months detailing clear downturns in several areas, including: fixed investment and capital expenditures, CEO and business confidence, the percentage of firms planning to hire, consumer goods spending, job openings, and average hours worked, among others.

Threat level: The trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels absent the trade war, Moody’s Analytics estimates.

  • That number will rise to about 450,000 by the end of the year if there's no change in policy and could top 900,000 by the end of 2020, the firm’s chief economist, Mark Zandi, told Yahoo Finance's Rick Newman.

The big picture: The most damaging part of a trade war is not the tariffs, but the costs associated with the uncertainty it creates. However, the tariffs themselves also are making a dent.

  • The total amount of tariffs paid to the U.S. Treasury has skyrocketed because not only have the tariffs increased, both U.S. and Chinese companies are scrambling to ship more goods to get out in front of further tariff increases.
  • That has pushed the total U.S. importers paid for tariffs to an all-time high of $6.8 billion in July alone, according to data from Tariffs Hurt the Heartland, an alliance of trade groups opposing the measures.

Between the lines: Trump’s tariff policy has reduced the economic benefits from programs like tax cuts and deregulation that had a positive effect on the economy, David G. Tuerck and William Burke write in a recent paper from the National Foundation for American Policy.

  • They estimate tariffs will cost U.S. households $2,000 each by next year.
  • They also note that the positive impact of deregulation has been cut by 29% because of the tariffs, "and the additional anticipated tariffs on Chinese imports will eliminate all remaining economic gains from the administration’s deregulation actions."

The bottom line: Some have argued that because manufacturing and trade are such small pieces of the U.S. economy the trade war would have a negligible impact. But it's no longer just the manufacturing sector that's hurting as a result of the trade war — harm is now being inflicted and felt throughout the economy.

Bonus: U.S. is losing more in subsidies than it's gaining in tariffs

Trump has argued that revenue raised by the tariffs benefits the U.S. by bringing "billions of dollars into our Treasury" and has been "partially responsible for our great economic results."

Reality check: Tuerck and Burke in their paper find that the subsidies provided to American farmers represent 159% of the revenue raised by tariffs through June 30.

  • In essence, Trump's bailout package to offset losses to farmers, incurred because of China's decision to stop buying U.S. agriculture products as retaliation for tariff increases, has cost 1.5 times what the tariffs has generated.
2. Even baby boomers close to retirement are way behind on savings
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Reproduced from Clever; Chart: Axios Visuals

Public pension funds are underfunded by trillions of dollars, which is a problem for the states that have guaranteed them, but data shows most Americans have badly underinvested in their own retirement funds as well.

What's new: A survey from Clever Real Estate finds that even baby boomers who are nearing retirement have only saved about 30% of the recommended amount, and the average boomer is about $320,000 shy of the income level financial advisers like Fidelity recommend, based on their average salary.

  • "Fidelity's rule of thumb: Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67."

Worse, data shows many boomers don't have any emergency savings. The study finds:

  • 40% of baby boomers are still paying off credit card debt. 
  • 59% of baby boomers believe Social Security will be a major source of income in retirement.
  • Baby boomers in the study planned to retire by 68, but generally lack the savings to realistically do so.
3. Purdue Pharma's "global" settlement likely settled very little

Axios' Bob Herman writes: Purdue Pharma has tentatively reached the first "global" settlement in the nationwide opioids lawsuit, the New York Times and AP report. The plaintiffs later confirmed this to Axios.

The big picture: The deal would reportedly result in the maker of OxyContin entering bankruptcy and the Sackler family owners paying $3 billion over 7 years, among other terms.

  • Some states still aren't on board with the proposal and may pursue Purdue and the Sacklers further, NYT reports. But the first major deal appears imminent ahead of the scheduled October trial.

Key quote from plaintiffs' lawyers Paul Hanly, Paul Farrell and Joe Rice:

"While this agreement represents significant progress in the litigation, we continue to move forward toward October’s federal bellwether trial against other opioid manufacturers, distributors, and pharmacies."
4. BAML: Apple can't match Netflix

Netflix stock has been on a distinctly negative trajectory since early July when it rose to $381 a share, near its all-time high. It's been downhill since then and the stock has lost nearly $100 a share, closing Wednesday at $288.27.

What's happening: The company looks to be loading up its war chest, going on an unprecedented spending spree of original programming and comedy specials in an effort to keep subscribers and lure new ones after reporting disappointing earnings in its last quarter.

  • Netflix will need to stock up, because Apple's recently announced Apple TV+ looks to be taking aim at its subscriber base, offering a 1-year free trial of the service to go along with 9 original new titles and a significantly lower price point ($4.99 vs. $8.99 for Netflix basic).

But analysts at Bank of America Merrill Lynch argue Apple doesn't have the firepower.

  • Netflix's collection of more than 400 original series along with nearly 4,000 movies and 1,828 series, according to data from SNL Kagan, will be tough to match, BAML analysts say.
  • "Until Apple's content library gains scale to compare to Netflix or Amazon, it is likely as a nice-to-have for Apple device users/buyers and no substitute for Netflix's large catalog of licensed content and originals," the BAML Global Research team writes in the note.

Yes, but: Apple's stock jumped more than 3% on Wednesday, as equity analysts from Barclays, Morgan Stanley, JPMorgan, Goldman Sachs, UBS and others praised Apple's new low-priced offerings, with Morgan Stanley's Katy Huberty calling Apple a "top pick heading into 2020."

  • The stock has been moving in the opposite direction of Netflix, with Apple reaching its 2019 high on Wednesday and moving up toward the all-time high it touched in August 2018.
5. Oil prices sink as Trump hints he could remove Iran sanctions
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Data: FactSet; Chart: Axios Visuals

Oil prices sank almost immediately after a Bloomberg report that Trump discussed easing sanctions on Iran in an effort to secure a meeting with Iranian President Hassan Rouhani.

Why it matters: The market slumped as the news could mean more supply back on the market, with WTI futures dropped nearly 3% and Brent crude fell more than 2.25%.

  • The news came just a day after Trump announced that national security adviser John Bolton, who had argued to push Iranian oil exports to zero, would step down.

The big picture: Oil is still trading within the range that it has been for much of the past 3 months. Despite significant volatility, the market has made little headway in moving decisively up or down as it did during the first half of the year.

Dion Rabouin