Jan 24, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness: China is building a hospital for patients infected with the new coronavirus that's "killed 26 people, sickened hundreds and prompted unprecedented lockdowns of cities during the country’s most important holiday." (AP)

🎙 "In the chill climate in which we live, we must go against the prevailing wind. We must dissent from the indifference. We must dissent from the apathy. ... We must dissent because America can do better, because America has no choice but to do better.” - See who said it and why it matters at the bottom.

1 big thing: America's local economy keeps shrinking
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Data: Yelp; Chart: Andrew Witherspoon/Axios

Growth slowed for local economies virtually everywhere in the U.S. last year, and is declining again at the start of this year as consumers pare back spending and business growth stalls.

  • So says business directory service Yelp, which used data from its more than 100 million users to track the number of businesses opening or closing and consumer demand.

What's happening: The Yelp Economic Average had its largest quarter-over-quarter decline in a year in Q4, "fueled by slumps in retail and services businesses."

  • The fourth quarter of 2019 marked the fifth straight quarter the measure has shown a level of economic strength weaker than in 2016, when the metric debuted.

Why it matters: "Yelp has information not only on millions of U.S. brick-and-mortar businesses but on the consumer demand expressed by the millions of consumers who view, review, and post photos of businesses on Yelp every day," the company said in a release accompanying the analysis.

  • Yelp says its data is able to more quickly identify trends found in GDP, retail sales, purchasing managers indexes and other economic reports released by the government and large private companies.

Yes, but: Yelp's data does not track online shopping or purchases, which is an increasingly important segment of the U.S. and global economy.

The big picture: If Yelp's data is correct, it shows economic prospects are deteriorating for brick-and-mortar businesses of all kinds.

  • Even among the strongest major metro areas in Yelp's report, eight of the top 10 show declining growth year over year.
  • Retail, food and automotive businesses almost across the board fared poorly, with stores selling mobile phones, shoes and appliances seeing the worst losses.
  • Food and nightlife businesses had declining business in every state except Wyoming, Nevada, the Dakotas and Vermont.

Watch this space: Large states and metropolitan areas like California, Texas, Florida, New York City, Chicago and Seattle saw some of the worst scores.

P.S. You can see Yelp's methodology for calculating the economic average here.

2. Catch up quick

Goldman Sachs CEO David Solomon said the investment bank won't help companies go public unless they have at least one board member who is not white and male, “with a focus on women." (CNBC)

Former Wells Fargo CEO John Stumpf was ordered to pay $17.5 million and barred from ever working at a bank. Meanwhile, the former head of Wells Fargo’s Community Bank unit, Carrie Tolstedt, faces a $25 million fine. (CNBC)

The U.S. posted its worst result in at least eight years, falling to 23rd in the 2019 Corruption Perceptions Index. (Bloomberg)

3. Russian hedge funds were big winners in 2019
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Data: eVestment; Table: Axios Visuals

As I wrote on Wednesday, Russian stocks and bonds had a blowout year in 2019, and they even managed to give a significant bump to hedge funds.

  • Hedge funds were one of 2019's worst performing assets, suffering almost $100 billion in net outflows, the most in three years.
  • But the glaring exception was in funds that had broad exposure to Russia, data from eVestment shows.

What happened: EM-focused hedge funds with exposure to Brazil, Russia and China saw average gains of more than 25%.

  • Russia-exposed hedge funds had the best performance, with a nearly 27% average gain last year.
  • Russian hedge funds even outperformed the S&P 500 in December and the fourth quarter overall.
4. S&P finds record low fallen angels

The number of companies around the world that had their credit ratings downgraded from investment grade to speculative grade — so-called fallen angels — hit the lowest level in 23 years, S&P Global reported Thursday.

  • There were only 19 fallen angels last year, which marked the fourth consecutive year the number has declined, the longest stretch on record.

But, but, but: While BBB-rated bonds grew to a record 50% of all outstanding investment grade U.S. corporate debt last year, downgrades fell to a record low 0.3%, data from BofA Global Research found.

  • The number of “zombie companies,” or businesses with interest payments higher than their annual earnings, has reached a level not seen since the global financial crisis, BofA estimated.
  • And the percentage of public companies in the U.S. losing money over 12 months has risen close to 40%, its highest level since the late 1990s outside of post-recession periods, WSJ reported.

Why it matters: Many companies appear to be holding their investment grade rating by adding significantly to their debt load.

  • "Last week, researchers at the Federal Reserve Bank of New York also warned that downgrades to the flood of bonds sitting at the lower end of the investment-grade spectrum pose a financial stability concern," MarketWatch's Joy Wiltermuth writes.
  • "In October, the International Monetary Fund said that some $19 trillion of corporate debt globally could be at risk in a recession that is half as severe as the global financial crisis, in its annual global financial stability report."

On the other side: The global tally of companies with credit ratings upgraded to investment grade from speculative grade was 22 in 2019 — the lowest in 10 years.

5. Climate change becomes a top business threat
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Reproduced from High Lantern Group; Chart: Axios Visuals

Climate change has, quite suddenly, become a lightning rod for business and finance leaders around the world, Axios' Amy Harder and I report

Driving the news: Climate is the topic generating the highest degree of public pressure on corporations by activists, policymakers and journalists, according to data analyzed by consultancy High Lantern Group and provided exclusively to Axios. The topic's mention rose 77% over 2018.

How it works: This is the survey's second year and includes analysis of more than 6 million tweets.

The big picture: The survey comes amid an intensifying backdrop. In recent months, the world's foremost economic institutions have advocated for policies cutting greenhouse gas emissions. This trend is driven by a confluence of factors, including more extreme weather and greater public pressure.

  • The institutions include the International Monetary Fund, Bank for International Settlements, the Organization for Economic Co-operation and Development, and major central banks.
  • And the official agenda at the World Economic Forum this week is dedicated entirely to climate change.

What they're saying: The BIS — known as the central bank for central banks — warned Monday in a research paper that climate change could cause "potentially extremely financially disruptive events that could be behind the next systemic financial crisis."

  • "This complex collective action problem requires coordinating actions among many players including governments, the private sector, civil society and the international community."
  • IMF head Kristalina Georgieva said in a speech last week that the Fund "ought to begin to build standards for disclosure of climate risks," including "mandatory disclosure standards."

The intrigue: Finance and economics-focused groups have increasingly been pushing governments to implement carbon taxes, an approach championed last year by every living former chair of the Federal Reserve and dozens of former chairmen of the Council of Economic Advisers and Nobel laureate economists.

But, but, but: All this rhetoric should be scrutinized carefully and often. Talking about supporting policies addressing climate change is very different from actually doing something about it. Rhetoric often outpaces action on this topic, partly because it’s a slow-moving issue that’s hard to track: Goals are made 10–30 years out.

  • For example, although JPMorgan CEO Jamie Dimon said on TV Wednesday he would advocate for such a policy, his company is not a member of groups supporting it, including the Washington-based Climate Leadership Council and its lobbying arm Americans for Carbon Dividends.
  • A JPMorgan spokesperson declined to comment further.
6. ECB announces policy review, but little expected to change

European Central Bank governor Christine Lagarde said Thursday the central bank would begin its first strategic review in 16 years.

  • However, Lagarde's praise for negative interest rates and the stimulus programs from her predecessor, Mario Draghi, has investors betting the ECB holds rates at the current level of -0.5% for at least 18 months.

Quick take: The ECB left policy unchanged at Thursday’s meeting, and Lagarde said interest rates would only be raised from negative territory when eurozone inflation “robustly” meets the central bank’s target of just under 2%.

Dion Rabouin

The great Thurgood Marshall, who argued Brown v. Board of Education as a lawyer, founded the NAACP Legal Defense and Educational Fund and became the first African American U.S. Supreme Court justice. He died on Jan. 24, 1993, at the age of 84.