Jul 23, 2020

Axios Markets

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,317 words, 5 minutes.)

🎙"Throughout history, it has been the inaction of those who could have acted, the indifference of those who should have known better, the silence of the voice of justice when it mattered most, that has made it possible for evil to triumph." - See who said it and why it matters at the bottom.

1 big thing: The future of business is now

Reproduced from PricewaterhouseCoopers; Chart: Axios Visuals

The coronavirus-induced recession led to a decline in deals during the first half of the year, but global firms are quickly coming off of the sidelines and setting in motion major changes to their business strategy, according to a new research from PwC.

Why it matters: Business leaders are laying out the blueprint for the future of commerce in the U.S. and around the world right now and trends are starting to emerge.

What happened: Deal activity in the second quarter saw the largest year-over-year decline since the dot-com recession in 2001.

  • But volumes have risen every month since May and mega deals already have been announced in July, including Berkshire Hathaway’s nearly $10 billion acquisition of Dominion Energy and semiconductor maker Analog Devices’ plans to buy rival Maxim Integrated Products for more than $20 billion.

The big picture: Tech is driving the market and size is incredibly important, as big companies are expected to begin making significant investments and are embracing newer technologies earlier than in previous cycles, PwC notes.

What they're saying: "Through the rest of 2020, we expect private equity to become even more active. As deal processes renew and investors put $2.6 trillion to work, private equity deal volume likely will return to its long-term average of about 20% to 25% of total US deal volume."

  • "The same pattern is emerging with respect to well-capitalized corporate investors, especially in the tech sector."

The intrigue: PwC highlights an important characteristic of this recession — in previous downturns the first step following the recession was that companies with sufficient resources would acquire ailing competitors. This was generally followed by a period of transformational deals, in which companies tried to adapt their business models to the realities of the new business environment.

  • "In the current crisis, however, we are seeing both trends unfold in tandem."

What's next: "Looking ahead, tech companies will likely be among those driving M&A’s recovery, both as acquirers and as targets."

  • "With their outsized access to capital, many firms are well-positioned to make deals poised to reshape emerging sectors."
2. Catch up quick

Tesla reported four straight quarters of profitability on a GAAP basis, which means it can now be considered for inclusion on the S&P 500. (CNBC)

Microsoft said sales rose 13% to $38 billion in its fiscal fourth quarter, and that it generated a net profit of $11.2 billion, but shares fell as much as 3% in after-hours trading. (WSJ)

3. Why economists don't like the idea of a payroll tax cut
Reproduced from Institute of Taxation and Economic Policy; Chart: Axios Visuals

A proposal to suspend Social Security and Medicare payroll taxes for employees and employers through the end of the year is a “very high priority” in any new stimulus deal, White House chief of staff Mark Meadows said Wednesday.

  • Economists largely agree it would do little to help the economy.

What they're saying: “The White House’s latest economic policy trial balloon leaves out the most important solutions and floats some policies that are diametrically opposed to what the country needs," Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, said in a recent analysis.

  • “The proposal re-ups tax breaks for the wealthy and fails to laser focus on vulnerable families that need the most help."
  • "A payroll tax cut does more for those who are paid (and paid more) than for those who’ve lost jobs in this downturn. It would likely send at least two-thirds of benefits to the richest fifth of Americans and about a quarter to the top 1 percent."
4. Dispelling myths about the racial wealth gap

Illustration: Aïda Amer/Axios

Ask and you shall receive. All 10 articles on myths about the racial wealth gap have been put together in one location.

  • For new subscribers and those who may have missed the series, here's a refresher (click the links to open the full stories).

1. The racial wealth gap can be closed through education. On average, Black households led by college degree holders have lower net worth than white households with less than a high school education. Black households with post-college education have about half as much wealth as the average white household with a college degree.

2. Personal responsibility. Even if Black people could close the income gap by "working harder,"a 2018 paper from Duke notes, "Earnings and other types of income are not key determinants of wealth."

3. Home ownership. The data show Black homeowners in the U.S. on average start with much less wealth, purchase lower-priced houses and grow less value in their homes, no matter their age or income level. White homeowners have disproportionately benefited from federal housing programs.

4. Individual accomplishment. Over the last 30 years, as individual Black Americans have seen increased success, the overall wealth gap has widened.

5. Increased savings. A 2004 study found that if income is controlled, there is "a slight savings edge for Black households" over white households.

6. Black-owned banks. If every single Black-owned business put every single dollar of its revenue into Black-owned banks every year, after a decade Black-owned banks would have 6% of the total assets that banks led by white people had in the fourth quarter of 2019.

7. Entrepreneurship. Black Americans have unequal access to capital. "Black-owned firm application rates for new funding are 10 percentage points higher than white-owned firms, but their approval rates are 19 percentage points lower," according to a 2016 Fed report.

8. Financial literacy. A 2017 report from the St. Louis Fed finds, "[M]eager economic circumstances — not poor decision making or deficient knowledge — constrain choices and leave asset-poor borrowers with little to no other option but to use predatory and abusive alternative financial services."

9. Imitating "model minorities." A 2014 BLS study finds that across races in the U.S., "Once families decide to invest in their children’s higher education, little difference exists in the level of expenditures between racial and ethnic groups."

10. "Stronger families." "[W]ealth differences among white and Black women persist despite type of family structure, marriage, age, or education," a Duke study noted in 2018.

5. Highest ever U.S. home prices poised to go higher
Data: National Association of Realtors; Chart: Axios Visuals

U.S. home prices rose to their highest level on record last month, thanks to a shift toward bigger homes and properties outside of urban centers, the National Association of Realtors (NAR) said Wednesday.

  • In addition to the climb in prices, sales of existing homes rose by nearly 21%, the most on record.

What's happening: Data from the Mortgage Bankers Association (MBA) have shown a sharp rebound in mortgage purchase applications since May, and activity has now surpassed year-ago levels for nine straight weeks.

What they're saying: “The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown," NAR chief economist Lawrence Yun said in a statement.

  • "This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue."
  • "Home prices rose during the lockdown and could rise even further due to heavy buyer competition and a significant shortage of supply."

Why you'll hear about this again: "We continue to highlight the extraordinarily low level of housing inventory, both in terms of the absolute number of properties on the market, as well as months’ supply," said Mike Fratantoni, chief economist for MBA.

  • "Constrained supply will continue to support home prices in the months ahead, while also making it challenging for some would-be buyers to reach the market."
  • "Record-low mortgage rates should keep demand strong, even as the unemployment rate remains extremely elevated.”

The big picture: Economists are seeing more of the pickup in housing sales and increasing prices driven by moves to the suburbs after a decade of skyrocketing populations and prices in urban centers.

  • "With housing as our focal point and a shift to work-from-home lessening the importance of location, home purchases started rolling in," Ali Wolf, chief economist for Meyers Research, noted in a blog. "In fact, new residential sales are on-track to post the best year since 2007."

But, but, but: “While fundamentals will support some activity, the slow recovery in the economy and labor market will limit the growth in home sales,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, told Reuters.

  • “The leveling off in the recovery as new Covid-19 cases surge lends a further downside risk, particularly since hard-hit regions account for the largest shares of home sales.”

Thanks for reading!

Quote: "Throughout history, it has been the inaction of those who could have acted, the indifference of those who should have known better, the silence of the voice of justice when it mattered most, that has made it possible for evil to triumph."

Why it matters: On July 23, 1892, Ethiopian Emperor Haile Selassie I was born. Selassie was an eminent internationalist and pan-Africanist who led Ethiopia to become a charter member of the United Nations and was a founder of the Organization of African Unity.

  • Selassie is seen as the messianic figure of the Rastafari movement and followers believe his life will lead to a future golden age of eternal peace, righteousness, and prosperity.