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Illustration: Aïda Amer/Axios
The Trump administration said tax cuts would push businesses into an all-out spending spree, turbo-charging wages and investments in growth. Instead, corporate buybacks hit a new record, Axios' Courtenay Brown reports.
What's happening: Thanks to the Q4 GDP report, we know how much businesses used their tax windfalls to invest in buildings, machinery or intellectual property since the lower corporate tax rate took effect.
Why it matters: Going forward, that leaves the U.S. economy largely dependent on the labor force for an economic boost, which may also be tapped out soon.
What they're saying:
What to watch: "We would not be surprised to observe downward revisions in the estimate to business investment given the outright weakness in industrial production and durable goods data through the end of 2018," Joe Brusuelas, chief economist at RSM, a consulting firm, wrote in a note to clients.
Capital spending contributed the second most to GDP in the fourth quarter of 2018, but nowhere near as much as it added to economic growth in 2011, its peak since before the financial crisis, Courtenay writes.
What's going on: "Labor has become the new capital in this [economic] cycle," Megan Greene, chief economist at Manulife Asset Management, tells Axios. "Companies can buy a fancy new machine or, because labor is cheap, they can just hire more people."
Also of note: Once a big boost to economic growth, housing has become a drag since the financial crisis, as the New York Times' Ben Casselman points out. Housing contributed -0.01 percentage points to last year's 2.9% GDP growth.
The initial fourth quarter U.S. GDP reading beat expectations, rising 2.6%, which puts the annualized figure at 2.9% (or 3.1% depending on whom you ask).
DRW Trading strategist Lou Brien breaks the report down for Axios.
By the numbers:
The big story may have been intellectual property, which saw a 13.1% increase on the quarter, registering the second highest reading since 1999, and contributing 0.56% of the report's total.
The big picture: "Overall, it was just OK; unremarkable except for a few data points," Brien said.
Relity check: "Net exports were a record deficit, -$963.2 billion, but it was not too much worse than the previous quarter (the previous record deficit), so there was only a slight drag on the report, just -0.22%, whereas the previous quarter was about -2%."
On the other hand: "The inventories were quite high. But then, after two large accumulations in consecutive quarters, maybe this is ready for a down quarter and that could hit the upcoming GDP reports; we'll have to see."
The bottom line: "Annualized rate for 2018 was 2.9%, matching the best year during the Obama Administration."
Tesla's convertible bond payment is due today, and the bonds won't convert to equity. Shareholders won't be crying.
By the numbers:
It may be a good thing that Telsa won't have to give its underpriced stock to bondholders, Axios' Felix Salmon writes.
Between the lines: When Tesla's 2019 bond was trading over par in late 2014, the stock wasn't anywhere near the $360 conversion price.
Why it matters: If Tesla was going to issue dilutive new equity, it would want to do so in a way that actually brings in cash for the company.
Investors look to have rekindled their love affair with emerging markets in the first 2 months of the year.
What's happening: The dovish shift from the Fed and global central banks, and de-escalating China-U.S. trade tensions are bringing investors back to the asset class after a rough 2018 performance.
Details: EM securities attracted $26.3 billion of foreign capital in February.
After 5 consecutive months of outflows, IIF analysts estimate that net capital flows, including banking and foreign direct investment, to emerging markets was $20.9 billion in January.
MSCI said Thursday it would quadruple the percentage of access foreign investors can get to stocks from mainland China in its widely tracked emerging-markets index, which is tracked by nearly $2 trillion of funds.
"We like what we see in China, the evolution and all that.
"I actually think if there is a trade war with the U.S., China would double down on the capital account in a positive way. I spent a lot of time with senior leadership of the Chinese government and it's going to take decades to balance the trade relationship with the U.S.
"One way to cure that is to do it through the capital accounts, to say, 'Look, we're going to let a lot more American money or Western money come flood the capital markets in China.'
"We're lucky that China is going slow in opening up because it would create enormous disruption.
"Think about this, would you invest in German 10-year bonds at 15 basis points rather than Chinese 10-year bonds at 3%? Germany's pretty good but China’s reserves are a lot bigger and they will deliver on their obligation to pay.
"So there would be a lot of selling of German bonds and a lot of buying of Chinese bonds if it were a completely fungible market.
"The smart people in emerging markets are saying, 'Wow, a whale is about to jump into the pool here.'"— Henry Fernandez, Chairman and CEO of MSCI, at a press conference in Manhattan
P.S. ... Fernandez tells Axios a WSJ article alleging MSCI added China A shares to its index "after it came under heavy pressure from the Chinese government, which tried to curtail the company’s business in the country" is totally false.
Fernandez says MSCI is staunchly independent and its process is very long and transparent. "So, to think we do all of that and then in a dark room we’re going to be subjected to influence that goes this way or that way is just dumb. It’s just naïve."
Bonus History: Jordan Michael Houston is an artist, record label owner, entrepreneur and producer from Memphis, Tennessee.
Houston won an Academy Award in 2006 and is the only Oscar winner in history to also be nominated for an American Music Award, BET Hip Hop Award, MTV European Music Award, Grammy Award, Nickelodeon Kids' Choice Award and a World Music Award.
Houston is known professionally as Juicy J.
Thanks to everyone for all the positive responses to this little addendum via email and Twitter (if you haven't yet, feel free to reply to this email or @ me any time with your thoughts). A quick note about the previous month's Black History Month factoids:
I wrote back in 2013 about what a failure BHM has been. Rather than use the time to illuminate little-known portions of black history, the month generally is spent talking about Jackie Robinson and Martin Luther King and the 8 other black people everyone already knows. My goal was to show that black history is more than entertainers, athletes and a bus boycott once upon a time.
Our history also includes kings and queens and presidents and dignitaries and intellectuals who changed and shape the world we live in today. It includes billionaire investors and inventors, luminaries and legends.
Throughout history, we have created things — inoculations, the cure for leprosy, the filament that made the light bulb an every-household product. And more often than not — in fact, in almost every case — we don't get credit until decades later, if ever.
Anyway, I'll be switching this up to something I hope will be a bit more interactive and easy to come up with in the early hours of the morning. Thanks for reading.