Apr 24, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • British Prime Minister Theresa May approved limited access for Huawei to help build parts of the U.K.'s 5G network. (Telegraph)
  • Brazil’s pension reform bill — considered one of the most important pieces of legislation in the country’s history — is one step closer to becoming law. (Bloomberg)
  • Occidental Petroleum has offered to buy Anadarko at a 20% premium to what Chevron offered the oil and gas driller earlier this month. (CNBC)
1 big thing: How depreciating money could save the global economy

Illustration: Rebecca Zisser/Axios

Central banks have unloaded trillions of dollars of stimulus in efforts to push inflation above 2% in countries from the U.S. to Japan and across the eurozone, but nothing seems to be working.

Driving the news: One radical idea that could boost spending and help resuscitate moribund economies is Silvio Gessell's proposal for depreciating money, writes Stephen Mihm, an associate professor at the University of Georgia, in an editorial for Bloomberg.

What it means: Money, if not spent, would lose its value by 5% a year. That would encourage people to spend, rather than hold onto it. Such a plan would radically boost the "velocity" of money, giving a major boost to developed economies where services account for a hefty majority of economic growth.

  • "In Gesell's formulation, money became a 'hot potato' that note holders tried to use before it lost value," Mihm writes. "As far-fetched as they seem, his writings had practical implications because they pointed a way out of the impasse the world confronted in the Great Depression."

The idea has been tried before. The mayor of Wörgl, Austria, used the town’s funds to put Gesell's depreciating currency into rotation and managed to stimulate a minor boom in the midst of the Great Depression.

  • "The'Wörgl miracle' became the object of immense fascination, and other municipalities copied it — until Austria's central bank became worried about losing its monopoly over issuing currency. Not long afterward, the nation's highest court ruled that 'emergency currency' was illegal."

Depreciating currency has even been studied, by "several academic economists eager to find a way for central banks to circumvent the 'zero bound' in interest rates" as recently as the 1990s.

The bottom line: While it's unlikely the Fed will be jumping on the Gesell bandwagon anytime soon, Mihm says that the idea of a depreciating currency could serve the U.S. and the global economy in the event of another downturn.

  • As central banks have already pushed interest rates into negative territory and governments have increased debts to historically unprecedented levels, unorthodox means may be required to dig the world out of its next hole.
2. A reliable recession indicator is reversing course
Expand chart
Data: Treasury Department; Chart: Axios Visuals

Following a yield curve inversion in March that sent tremors through financial markets, the spread between 10-year Treasury notes and 3-month T-bills has reversed and widened.

The inversion caused significant worry among economists and some market participants as it is one of the most reliable financial market recession indicators available.

Yes, but: While a prolonged inversion would have been worrisome, analysts say the market isn't signaling all is well with the economy just yet.

  • "I'm actually surprised we haven't seen a more meaningful selloff in bonds, given the good news that has pushed stock prices up — the delay in Brexit, the trade war and expectations for a pickup in growth in the second half of the year," Subadra Rajappa, head of U.S. rates strategy at Societe Generale, told Axios.

What to watch: Rajappa says, the rise in yields hasn't pushed the spread between 10-year and 3-month Treasuries that much higher. The difference of 15 basis points is still very tight and near levels seen in 2007.

  • "The market's much more focused on what's happening globally," she said, including growth slowdowns in Europe, Japan and China.

Bonus: The yield curve is still inverted on the short end with 1-month bills holding higher yields than maturities as long as 5 years.

3. Why China's stimulus isn't all good

China's fiscal and monetary stimulus measures have been credited with turning around the country's economy and perhaps underpinning a rebound in European and global trade this year by high-minded economists, including at the IMF.

  • The country's leaders have even announced intentions to switch their economic focus from growth to reform and restructuring.

Why it matters: The congratulations may be a bit premature, a new report from the OECD suggests. While the stimulus has helped improve economic data, China has worsened a problem that was already "excessive and unsustainable."

  • "Faced with a dampening of domestic demand and export orders, the authorities have resorted to stimulus measures involving taxes, access to credit and infrastructure investment. The stimulus risks increasing once again corporate sector indebtedness and, more generally, reversing progress in deleveraging."

What they're saying: Ed Yardeni, president and chief investment strategist at Yardeni Research, points out that while China's headline numbers look good, the growth in GDP is increasingly a direct result of fiscal stimulus.

  • "We question the sustainability of the Chinese government's initiatives. But they seem to be successful at maintaining some economic momentum for now."
4. How M&A advisers stacked up in the first quarter
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Data: GlobalData Financial Deals Database; Chart: Andrew Witherspoon/Axios

Half of the top investments banks advised on fewer deals in the first quarter than the prior year period, but the deals were bigger, Axios' Courtenay Brown writes.

Research from analytics firm GlobalData shows the usual suspects again topped the list of advisers on the biggest M&A deals in the first quarter, but it was their participation in just 2 deals that made the difference: Bristol-Myers Squibb's purchase of Celgene, and Saudia Aramco's deal to acquire a majority stake in Saudi petrochemical company SABIC.

  • JP Morgan, Evercore, Morgan Stanley and Citi advised on the Bristol-Celgene deal, while Citi, JP Morgan and Morgan Stanley advised the Saudi-SABIC deal.

Between the lines: Advisers typically pocket M&A advisory fees that are based on the total transaction value.

  • These fees aren't reflected in the banks' Q1 results since the deals haven't closed yet. But M&A advisory fees for Goldman Sachs, for example, helped offset sluggish trading revenues.
5. Stephen Moore says critics are "pulling a Kavanaugh"

Stephen Moore, a potential nominee by President Trump to the Fed, called into North Dakota's WZFG AM 1100 to make his case to join the central bank Tuesday.

Moore said that while he would be an independent voice on the Fed, he "loves Trump" and he thinks that's a good thing. He accused detractors of attempting to stall his nomination because they oppose the president.

"They're pulling a Kavanaugh against me ... the easy thing to do would just be to throw in the towel and say, 'I don't need this.' I'm taking a 68% pay cut to do this job. I mean, it's true public service. The people who keep me going are the people who love what Trump is doing and love the growth rate of this country and love the prosperity that Trump is bringing."
6. Tuesday's stock market report in 3 tweets
Screenshot of Ivan the K's Twitter feed.

The S&P 500 and Nasdaq hit record closing highs Tuesday. The Dow Jones Industrial Average gained 145 points to close just 1.1% from its all-time high.

Dion Rabouin