Feb 13, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • A record 7 million Americans are 90 days or more behind on their auto loan payments, even more than during the wake of the financial crisis. 2018 marked the highest level in the 19-year history of the loan origination data, with $584 billion in new auto loans and leases. (New York Fed)
  • Oregon's Senate approved a proposal for statewide rent control, as well as new restrictions on evictions. It is expected to pass the state House. (The Oregonian)
  • Mortgage applications decreased for the second week in a row, according to data from the Mortgage Bankers Association. The numbers have continued to fall despite interest rates falling to their lowest level in 10 years. (MBA)
1 big thing: Fading corporate profits

Illustration: Rebecca Zisser/Axios

After predicting eye-popping 11% first quarter profit growth for S&P 500 companies last year, analysts have massively scaled back expectations to the tune of roughly $16 billion in profits. They are now predicting the first year-over-year decline in 3 years, Axios' Courtenay Brown and Felix Salmon report.

Why it matters: Those lofty expectations had been set as recently as March and have come down drastically since, with some now predicting an "earnings recession" — negative earnings growth in the first two quarters of the year.

  • The drawdown in expectations has its origins in many of the same factors that economists say could cause an unexpected economic recession: overhang from the trade war and fears that damage from the Fed’s contentious rate hiking cycle has already taken hold.

What happened: Estimations of how much and how long companies would benefit from tax reform were way too high, judging by the ratcheted up expectations after passage of the tax bill, which have since been revised down.

But disaster may not be imminent.

The big picture: There’s no clear correlation between an earnings recession and an economic recession. The last earnings recession started in the third quarter of 2015 and the economy continued to grow.

  • "Equity returns can still be positive [during an earnings recession], but they will likely be weaker than they otherwise would have been," Mike Wilson, an equity strategist at Morgan Stanley, wrote in a note to clients this week.

Be smart: If an earnings recession does happen it's expected to be short-lived. Analysts still expect fourth-quarter earnings to be 9% higher than they were a year previously.

1 bonus chart: The epic comedown of profit expectations
Expand chart
Data: FactSet; Chart: Chris Canipe/Axios

Analysts' expectations for S&P 500 earnings growth this quarter started to drift downward from 6% at the end of last year — in the midst of the stock market sell-off — to the current estimate of -1.2%.

  • Meanwhile, Q4 earnings growth expectations are on the upswing as S&P 500 companies report stronger than expected results. But growth estimates for Q1 are declining as those companies give soft forward-looking guidance.
  • So far, 53 S&P 500 companies have issued negative guidance for Q1, while only 12 have revised guidance upward, according to FactSet.
2. Emerging markets go mainstream

Nearly half of fund managers surveyed by Bank of America Merrill Lynch expect global GDP to fall in 2019 and 55% say they're bearish on both the world's growth and inflation outlook next year.

  • That's causing many to increase their cash positions, cut back on allocation to stocks and strangely to increase their holdings of emerging market assets.

What it means: Emerging market stocks and bonds are typically thought of as more risky than developed market securities because emerging countries have less deep and less developed capital markets and are often more vulnerable to large swings in volatility.

  • In times of uncertainty, investors typically sell, not buy.

Yes, but: BAML strategists say that despite the overall wall of worry — the U.S.-China trade war tops the list of biggest tail risks cited by investors for the ninth straight month — EM was the most crowded trade for the first time in survey history. That's even more impressive considering shorting EM was the third most crowded trade just last month.

But since the third quarter of 2018 EM has not only outperformed developed market peers like the U.S. and Europe, it has been less volatile.

What they're saying: Julian Howard, head of multi-asset solutions at GAM, said on CNBC in August that the market may have reached the peak of the anti-EM trade.

  • "It's almost as though we can see the top of the hill, and that should bring relief to emerging markets."

Fund managers at firms including Wells Fargo, USAA and BNY Mellon subsidiary Standish told me they were betting on EM in mid-2018, but the asset class failed to attract strong flows because of a torrid selloff early in the year.

3. Income inequality is likely worse than before the Great Depression

U.S. wealth concentration, or income inequality, has returned to levels not seen since the 1920s, and it could actually be significantly worse than that time.

Driving the news: New research from Gabriel Zucman, an economics professor at the University of California, Berkeley, for NBER was unearthed recently by MarketWatch and finds that the top 1% owns about 40% of total household wealth. It reaches 40.8% when including the Forbes 400.

Further, the top 1% richest U.S. families own 40 times the average family's wealth.

  • "No country (apart from Russia) for which estimates of wealth inequality are available has similarly high recorded levels of wealth inequality," Zucman writes.

Between the lines: Perhaps the most interesting part of Zucman's research may be his point that the top 1% of American households likely hold much more of the nation's and the world's wealth than anyone realizes.

  • "It is not enough to study wealth concentration using self-reported survey data or tax return data," Zucman says in the report, estimating that 8% of the world’s household financial wealth is held offshore.

"Because the wealthy have access to many opportunities for tax avoidance and tax evasion—and because the available evidence suggests that the tax planning industry has grown since the 1980s as it became globalized—traditional data sources are likely to under-estimate the level and rise of wealth concentration."

Zucman also notes that data shows the share of total wealth owned by the top 1% has increased by 9 points since 1989 and by 10 points when including the Forbes 400. In capitalized income estimates it has increased by 11 points.

  • "The share of wealth owned by the bottom 90% has collapsed in similar proportions."

Worth mentioning: Zucman is one of the economists behind Elizabeth Warren's wealth tax proposal.

4. U.S. national debt hits $22 trillion
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Data: U.S. Treasury; Chart: Andrew Witherspoon/Axios

The total U.S. public debt rose above $22 trillion, according to a Treasury Department report Tuesday. The financial burden is now expected to grow at a rate of $1 trillion a year.

Facts about $22 trillion dollars:

A stack of 22 trillion 1-dollar bills would go to the moon and back twice and once more to the moon and halfway back. It would weigh 220 tons.

If you stacked it in 100-dollar bills, it would be 880,000,000 inches or 13,889 miles high.

The average NFL franchise is worth $1.4 billion, thus the entire value of all NFL teams is around $45 billion. You could buy all of them and still have 99.8% of your money to purchase the MLB, NBA, NHL NASCAR, Premier League soccer, MLS, La Liga, UEFA Champions League, Formula 1...

What does just $1 trillion look like?

Here's an optical representation of what the debt looked like in 100-dollar bills at a quaint $11 trillion. Picture that times two.

A group called Demonocracy made this video depicting $20 trillion stacked around the Statue of Liberty.

5. 1 fun thing: Stock market advice
Screenshot from Jose Canseco's Twitter feed.

You may laugh, but the Canseco Index, a blend of securities identified by former Major League Baseball star Jose Canseco's proprietary blockchain AI algorithm, has returned 107.9% year-to-date.*

*There is no such thing as the Canseco Index. I made that up.

Dion Rabouin

History: Dr. George Franklin Grant was a professor, dentist and inventor. Grant worked for his hometown dentist, first running errands and later as an assistant. At age 19, Grant found work as a dental assistant and at 21 was accepted to Harvard Dental School, the first university-based dental program in the country. In 1870, Grant graduated with honors, the second African-American to earn a degree in dentistry.

He became a faculty member of Harvard University's school of medicine in 1871, becoming the university's first ever African-American professor. He was a founding member and later the president of the Harvard Odontological Society.

Franklin's best known invention was in the field of sport. In 1899 he filed a patent for a wooden spike with a flexible rubber peg for a golf ball — the world's first wooden golf tee. In 1991 the U.S. Golf Association recognized him for his contribution to the game.