Aug 10, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙“Every man is a valuable member of society, who, by his observations, researches, and experiments, procures knowledge for men.” - See who said it and why it matters at the bottom.

1 big thing: Transformation of the Fed

Illustration: Eniola Odetunde/Axios

The Federal Reserve is undergoing an overhaul. Conceived to keep inflation in check and oversee the country's money supply, the central bank is now essentially directing the economy and moving away from worries about rising prices.

What we're hearing: The move to act less quickly and forcefully to tamp down on inflation has been in the works for years, but some economist fear that the Fed is moving too far from its original mandate.

  • It would be "a significant shift because the new strategy I would interpret as one that tries to deliberately engineer higher rates of inflation instead of just tolerate them should they come about," Peter Ireland, an economics professor at Boston College and member of the Shadow Open Market Committee, tells Axios.
  • "I would worry if I were on the FOMC that the Fed is just trying to do too much fine tuning. ... And that by trying to do too much the Fed does risk making mistakes like it did in the past."

Between the lines: There are other concerns with the Fed's new stance.

  • "Free market enterprise no longer exists," Scott Minerd, CIO of Guggenheim Partners, tells Axios. "The Fed by essence of what it's doing has taken control of the market."

Why it matters: "The definition of market prices is whatever the Fed says it will be," says Minerd, a member of the New York Fed's Investor Advisory Committee on Financial Markets.

  • "As long as the Fed continues to manipulate the cost of credit in the manner that it's doing, which it has never done in its history, then you have to adjust your view of the investment paradigm that we're living in."

The big picture: Keeping a lid on inflation historically has been the Fed's primary objective, but with growth and inflation readings undershooting 2% for more than a decade despite near-zero interest rates in the U.S. and developed markets around the world, things look to be changing.

What it means: That change may not only mean lower rates for longer but also more room for stimulative policies like quantitative easing (QE), which was previously an emergency program that has become a standard part of the Fed's tool kit.

  • There's also long-term potential for its new special purpose vehicles that buy corporate bonds and lend money directly to businesses as mechanisms for holding up larger chunks of the economy.

The intrigue: The idea that the Fed is controlling or setting prices in financial markets was once the fodder of conspiracy theorists and cranks.

  • But since the Fed's unprecedented intervention into credit markets in late March, it has become a general understanding stated openly by economists and asset managers, including those at high-profile investment firms like Deutsche Bank and Bank of America.
Bonus content: The Fed's dilemma
Expand chart
Data: Federal Reserve; Chart: Axios Visuals

Not all of the Fed's new programs have worked as planned. After significant delays, its $600 billion Main Street Lending Program has provided less than one-tenth of 1% of its allotted funding to needy small businesses even as the Paycheck Protection program has whiffed and business closures have spiked.

Be smart: Compare that to the trillions it has used on QE and the billions it has purchased in debt from some of the country's largest companies using a backstop of taxpayer money and it's no wonder politicians and economists have called the Main Street program a "failure" and an "unmitigated disaster."

On the other side: The Fed's efforts to support large companies have helped spawn a "buy-anything market" in which even negatively correlated assets have risen together since the start of the third quarter.

  • "That creates a bit of a potential political problem for the Fed," Julia Coronado, president and founder of MacroPolicy Perspectives, tells Axios.
  • "It doesn’t feel right to people on the street, on Main Street. ... That’s one reason why the Fed is underscoring the need for fiscal [stimulus]."

But, but, but: The push for Congress to approve fiscal spending measures could become another political problem for the central bank, warns Boston College's Ireland, who previously served as an economist at the Richmond Fed.

  • "I do get the feeling that they’ve been more aggressive in their commentary on fiscal policy and more generally on non-monetary policy issues."
  • "In an environment where they should be concerned about preserving Fed independence, they should be conscious of the fact that in turn they stick to talking about what they’re supposed to do."
2. Catch up quick

Telemedicine company Hims is in talks to go public through a merger with blank-check company Oaktree Acquisition in a deal that could value Hims at about $2 billion. (Bloomberg)

The largest mall owner in the U.S. has been in talks with Amazon to convert some Sears and JC Penney stores into Amazon fulfillment centers. (WSJ)

The number of COVID-19 cases recorded in the U.S. surpassed 5 million on Sunday morning, per Johns Hopkins data. (Axios)

An estimated 27% of U.S. adults missed their rent or mortgage payment in July, according to a nationwide Census Bureau survey. (Bloomberg)

3. Richer Americans more comfortable eating out

Reproduced from CivicScience; Chart: Axios Visuals

A new survey from CivicScience shows higher-income Americans are returning to dining and delivery at a higher rate than their less wealthy peers.

Why it matters: Wealthy Americans have a greater share of overall U.S. income than ever before and increased spending could be a boon to the restaurant and fast food sectors.

  • The richest quarter of Americans cut their consumer spending more than any other income group during the pandemic, according to a study by a team of Harvard University researchers.

Between the lines: While spending has rebounded over the last three months, that has been much truer for low-income households.

  • Spending among high-income households remains considerably lower than pre-coronavirus levels and appears connected to perceived pandemic health worries, the Harvard researchers found.

By the numbers: Wealthier people tend to eat the most fast food, according to a 2018 study from the CDC that found the percentage of adults who consumed fast food increases with family income.

  • 31.7% of adults in households at 130% of the federal poverty level ($31,590 for a family of four) or less reported eating fast food on any given day.
  • But 36.4% of Americans making 130% to 350% of the federal poverty level ($31,590 to $85,050 for a family of four) eat fast food on any given day.
  • And 42% of those making more than 350% of the federal poverty level eat fast food.
4. What Trump's executive actions do

President Trump signed three memorandums and one executive order on Saturday aimed to make up for the lack of a new coronavirus relief bill from Congress.

What happened: Trump's executive actions postpone payroll taxes through the end of the year, provide $400 in “bonus” unemployment insurance, help people “stay in their homes” and waive student debt payments through the end of 2020.

  • But there is significant uncertainty about the measures, writes Heather Long of the Washington Post.

The payroll tax cut: It's actually "a payroll tax deferral, not a cut, meaning the taxes won’t be collected for a while but they will still be due at a later date" for those making less than $104,000 a year, per WashPost.

  • It postpones the 6.2% tax that employees pay for Social Security Sept. 1 through Dec. 31.

Increased unemployment payments: "Trump’s memo calls for federal aid to restart at a level of $400 a week. But there’s a catch: The federal government is only paying for $300 of that. States have to kick in the other $100," Long reports.

  • The order calls for $44 billion of funding to be moved from HHS' Disaster Relief Fund for hurricanes, tornadoes and massive fires over to unemployment.
  • However, that "isn’t enough money to make it to October, unless the number of people on unemployment falls dramatically."

Eviction moratorium: The order calls for HHS Secretary Alex Azar and CDC director Robert Redfield to “consider” whether an eviction ban is needed.

  • It calls for Treasury Secretary Steven Mnuchin and HUD Secretary Ben Carson to see if they can find any funds to help renters avoid evictions.

Student loan payments: "Trump's memo waives all interest on federal student loans through the end of 2020 and allows borrowers to delay payments," Long writes.

Dion Rabouin

Thanks for reading!

Quote: “Every man is a valuable member of society, who, by his observations, researches, and experiments, procures knowledge for men.”

Why it matters: On Aug. 10, 1846, the Senate passed the act organizing the Smithsonian Institution, thanks to funds from James Smithson, a British scientist who left his estate to the United States to found “an establishment for the increase and diffusion of knowledge.”

  • Smithson was the illegitimate child of a wealthy Englishman, who traveled a great deal during his life, but had never set foot on American soil.
  • No one actually knows why he left his wealth — equal to 1/66th of the United States' entire federal budget at the time — to a country he had never visited.

Learn more.