Sep 26, 2019

Axios Markets

Dion Rabouin

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Situational awareness:

  • Income inequality grew to its highest level in more than 50 years of tracking, the Census Bureau reported. (AP)
  • Peloton sold 40 million shares yesterday for $29 each, raising $1.16 billion in its IPO and valuing the company at $8.1 billion. (Bloomberg)
  • The CEOs of Juul and EBay stepped down on Wednesday, following a record high for CEO turnover in August, according to data from Challenger, Gray & Christmas. (CNBC)
1 big thing: The unusual new leaders of our unusual new world

Illustration: Lazaro Gamio/Axios

The announcement Wednesday of Kristalina Georgieva as IMF managing director cements a clear changing of the guard at the world's most important economic institutions.

  • Fed chair Jerome Powell is not a lifelong central banker or even a PhD economist. He's a lawyer and former private equity manager, who became the first Fed chair without an economics pedigree since the disastrous William Miller whose tenure from 1978-1979 led to U.S. stagflation.
  • Christine Lagarde, the incoming ECB president, is also a lawyer by training and became managing director of the IMF after a career in politics with no real background in central banking.
  • David Malpass, president of the World Bank, is best known for his time in the Reagan administration and at Bear Sterns where months before the financial crisis he wrote an op-ed titled, "Don't Panic About the Credit Market."

Why it matters: "Economists tend to have a certain view of how the economy works," Mark Zandi, chief economist at Moody's Analytics, tells Axios. "It’s more difficult to move monetary policy in a significant way because economists have a set framework of how they think about things."

  • "Lawyers don’t have that, so they’re more willing and able to shift."

Georgieva is a well-respected economist with significant experience, but the first ever IMF managing director from an emerging country is a night-and-day change from outgoing director Lagarde and the prototypical leaders of the fund.

Our thought bubble, per Axios' chief financial correspondent Felix Salmon: "Georgieva was also born in post-war Bulgaria, grew up behind the Iron Curtain, and was European Commissioner for Humanitarian Aid and Crisis Management. She’s very different from the French financial technocrats we’re used to."

The intrigue: The economic world's new leaders arrive as politicians like U.S. real estate mogul and reality TV star Donald Trump, Ukrainian comedian Volodymyr Zelensky and formerly fringe politicians like Mexico's Andrés Manuel López Obrador and Brazil's Jair Bolsonaro have become leaders of some of the world's most important democracies.

The bottom line: These atypical appointees are taking over the world's top institutions at a time of unprecedented global uncertainty and change.

  • Global debt is at an all-time high and central banks are re-evaluating their policy tools. The typical structures that have upheld banking, the economy and even money itself are being completely upended.
  • Their arrival could bring a flood of fresh new thinking, but could also leave the world's most important financial decisions up to folks who are not up to the task.
2. No precedent for impeachment's market impact
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Reproduced from LPL Financial; Chart: Axios Visuals

It's still early days in a possible impeachment process, but "it would be complacent to think that the impeachment process just adds another ring to the circus," cross-asset strategists at JPMorgan warn in a note to clients.

What they're saying: They point out 4 important variables about the expected impeachment drama in Washington...

  1. "US constitutional conflicts like the impeachment process are rare events, with [prior] market outcomes too context-specific" to use as a rubric.
  2. "The unique context now involves four elements — global growth slowdown, classic late-cycle vulnerabilities, high market valuations but somewhat defensive investor positioning."
  3. The "international wildcards are the implications for US-China trade and US-Iran relations."
  4. "The domestic wildcard is the implication for 2020 Presidential and Senate elections."

Be smart: Analysts at BMO Capital Markets point out that the Fed was "in the midst of a 75 bp fine-tuning series of rate cuts" during former President Bill Clinton's impeachment scandal and "should probably get more credit for the positive growth sentiment than the risk of a presidential ousting."

3. "Something's very wrong with the financial system"

Despite tens of billions of dollars of cash infusions every day for more than a week, things are getting worse, not better, in the systemically important repo market that banks use to access cash.

  • It's prompted the New York Fed to again increase the size of overnight cash loans offered to $100 billion a day, and to double the size of a 2-week offering to $60 billion.

Why it matters: The dysfunctional market signals "that something’s very wrong with the financial system," former Minneapolis Fed president Narayana Kocherlakota wrote in an op-ed for Bloomberg.

What's happening: The market is designed to operate so that banks with collateral like U.S. Treasury bonds can quickly trade those for cash, but a decreasing level of liquidity has banks "scraping the bottom" and relying on the Fed's infusions to conduct everyday business, strategists tell Axios.

  • The clearest evidence of this market stress was Wednesday when the Fed supplied $75 billion of cash and got $92 billion of offers, showing an extreme lack of available dollars.

What we're hearing: "Nobody knows right now whether this will blow over or not," Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios.

Threat level: The injections are prompting suspicion the Fed is instituting a clandestine new phase of quantitative easing to boost asset prices and help stimulate the economy, but that's not the case, according to market strategists.

The big picture: The unexpectedly large budget deficits of the Trump administration, combined with the Fed's attempt to unwind its previously $5 trillion balance sheet, have caused a backup in the market. The Fed is now having to supply cash to fix the plumbing in a process that looks eerily similar to QE.

  • Strategists who have spoken with Fed officials are expecting the central bank to unveil a $300 billion–$500 billion standing credit line to the market at its meeting next month, in order to provide consistent liquidity and keep the market functioning.

The bottom line: "What the Fed is trying to do is make sure we don’t have episodes like this in the future," said Ian Lyngen, the head U.S. rates strategist at BMO Capital Markets, a primary dealer that does business directly with the Fed.

  • If the market dysfunction continues, "that’s going to weigh on corporate profitability, the cost of money becomes more expensive, and then it has real economic consequences," Lyngen tells Axios.
4. Silent decline of employer health care market
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Reproduced from Kaiser Family Foundation; Chart: Axios Visuals

While everyone was laser-focused on the Affordable Care Act for the past decade, the backbone of the American health care system was gradually deteriorating, Axios' Caitlin Owens and Bob Herman write.

Between the lines: Employer insurance has become increasingly unaffordable over the last decade, contributing to today's political debates over surprise medical bills, drug prices and Medicare for All.

Driving the news: The average cost of family health insurance offered by companies climbed 5% this year, exceeding $20,000 for the first time, according to the newest annual survey of employer health benefits from the Kaiser Family Foundation.

The intrigue: Workers aren't just paying more in monthly premiums. Employers continue to raise the average deductibles, which means more workers are paying for more of their care out of pocket later into the year.

  • Workers' earnings rose 26% from 2009 to 2019. Deductibles soared 162% in the same time span.

The bottom line: Employer health coverage continues to get more expensive and less comprehensive for workers — all coming at the expense of people's paychecks.

Dion Rabouin