Apr 17, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • The U.S. Treasury yield curve inversion does not signal an impending recession, say 86% of respondents in Bank of America-Merrill Lynch's latest fund manager survey.
  • Justice Department officials told T-Mobile and Sprint that their proposed merger is unlikely to be approved as currently structured. (WSJ)
  • A woman who accused JD.com founder Richard Liu of rape has filed a lawsuit against Liu and the company. (AP)
  • China’s economy grew a better-than-expected 6.4% in the first quarter thanks to the government’s stimulus measures. (Axios)
1 big thing: Economic predictors are ignoring politics at their peril

Illustration: Rebecca Zisser/Axios

When it comes to making predictions about the world economy, policymakers and asset managers are whiffing because they are failing to account for the increasingly dysfunctional state of global politics.

The world's top economic concerns — Brexit, the U.S.-China trade war — are the result of policy decisions rather than unavoidable shocks.

Why it matters: IMF officials, whose forecasts are used by top central bank officials and finance ministers in a majority of the world's countries, can't say how they're incorporating politics into projections.

  • "We do see that policy uncertainty, and in many cases bad decisions are a root cause for financial distress," IMF financial counselor Tobias Adrian told Axios at the organization's spring meetings last week.
  • Asked specifically how that's being used in economic outlooks: "It is a risk, and we’re looking at it closely."
  • Questions posed to IMF deputy managing director David Lipton and chief economist Gita Gopinath yielded largely similar answers.

Checking the numbers: A recent Bloomberg analysis found that on average, the IMF's forecasts are off by 2 percentage points — a wide margin given that GDP growth in most countries is in single digits.

  • Private forecasters don't do much better, according to a 2014 report from the IMF Independent Evaluation Office. It's largely for the same reason.

A much ballyhooed report from multinational bank Standard Chartered predicted by 2030 India would surpass the U.S. in terms of economic size, China would have double its GDP (measured by purchasing power parity), and 7 of the world’s 10 largest economies would be current developing countries.

  • It too ignored politics, even though expected rising stars like Turkey, Russia and Brazil are now in the midst of politically derived economic uncertainty.

"It's very hard to pinpoint political dynamics," Madhur Jha, senior global economist at Standard Chartered, told Axios in January. "So that’s something that is a risk and a clear risk but not something we can explicitly take into account when we make projections."

The bottom line: A clear example of the importance of political leadership is the BRICS countries — Brazil, Russia, India, China and South Africa — which ahead of the financial crisis were all seeing GDP growth above 5% annually.

  • Since then, China and India have had steady leadership with clear policy direction. South Africa and Brazil have deposed sitting presidents, while Russia's president has cost the country billions of dollars in international sanctions.
  • India and China's economies grew 48% and 79%, respectively, between 2011 and 2018, whereas Brazil, South Africa and Russia's economies shrank by double digits.
2. The strangely steady U.S. quit rate
Expand chart
Data: BLS via Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The period between June 2018 and February 2019 has seen U.S. businesses add as many as 312,000 jobs and as few as 33,000 jobs. But the quit rate has remained unchanged.

The high quit rate — the number of Americans who voluntarily leave their jobs as a percentage of total employment — is an indicator of a strong economy, and it's been holding at a 15-year high and is the second highest rate since the government began tracking the data in 2000.

  • If the rate remains at 2.3% in March, it will be the longest trend on record.
3. Netflix will burn more cash
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Chart shows non-GAAP free cash flow; Data: YCharts; Chart: Andrew Witherspoon/Axios

Netflix will bleed more cash this year than analysts expected, but the payoff won’t be more subscribers, Axios’ Courtenay Brown writes.

Driving the news: In its earnings report, Netflix said it expects its free cash flow deficit to be $3.5 billion this year — more than the $3 billion loss it previously estimated (the company says it's because of a change in corporate structure and investments in real estate and infrastructure).

  • Netflix also dialed back its expectations for subscriber growth, "anticipating a net add of 5 million paid subscribers for the second quarter," which is below Wall Street’s expectations for 6.09 million new paid members, as Axios’ Sara Fischer reports.
  • CEO Reed Hastings said last quarter that this year would be the peak for cash burn: "We’re still expecting free cash flow to improve in 2020 and each year thereafter, driven by our growing member base, revenues, and operating margins."

Why it matters: Wall Street has given Netflix’s cash burn a pass. The spend on content usually translates into more subscribers driven to the platform for said content. But investors’ knee jerk reaction was to sell the stock after its less-than-stellar guidance.

  • The stock rebounded after initially falling as much as 5% after the bell on Tuesday.

What to watch: With the launch of Disney+, viewers have yet another, cheaper option. This isn't lost on investors. Analysts, however, point out that streaming is not necessarily a zero sum game.

  • Of note: In the face of the heightened competition, Netflix is raising — not cutting — its monthly cost.
4. Apple-Qualcomm deal reshapes U.S. chip business

Apple's surprise deal with Qualcomm not only resolved one of the biggest legal disputes in the tech industry, but changed the balance of power in the chip industry, Axios' Ina Fried writes.

Just hours after announcing the settlement — which included a multiyear agreement for Qualcomm to supply chips to Apple — Intel said it was scrapping plans to release a 5G modem chip next year and re-evaluating whether there is enough business making modem chips for PCs and internet-of-things devices to justify continued investment.

Why it matters: The shake-up comes as the U.S. seeks to increase its role in 5G and future cellular generations.

  • The deal strengthens Qualcomm's position as the dominant U.S. player in 5G but likely diminishes the chances that Intel remains a significant player going forward.
  • Given that all of the key equipment suppliers (Ericsson, Nokia, Samsung and Huawei) are from outside the U.S., chips remain the country's primary influence in the cellular industry.

The big picture: This is another big setback for Intel, which had already missed out on being a player making the core processor for phones, despite spending several years and billions of dollars in a catch-up effort.

What they're saying: "Given the announcement’s timing, it’s clear that Intel management lost interest in — or couldn’t deliver —mobile 5G, which forced Apple to settle with Qualcomm, not that Apple’s settlement forced Intel to exit 5G modems," said tech analyst Avi Greengart on Twitter.

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5. Wall Street reckons with climate change

Illustration: Aïda Amer/Axios

Some of the biggest names on Wall Street are partnering with climate science groups to produce the first countrywide, property-level maps attempting to financially navigate the age of extreme weather-driven calamity, Axios' Steve LeVine writes.

These maps are so granular that they can pick out individual commercial buildings and electric power stations, and thus advise investors about the potential impact to their specific assets through the end of the century.

  • BlackRock and consulting firm Rhodium this month released a sophisticated program classifying the threat to investments in U.S. municipal bonds, electric utilities and commercial real estate.
  • Wellington Management, CalPERS and Woods Hole Research Center have produced a similar system for the U.S., with the goal of expanding into a global analysis.

Their early conclusion: An all-but oblivious Wall Street is underpricing the risk of intense heat, wildfires, drought, storms and floods to their investments. "Even the scientifically rudimentary things are something the investment community hasn't thought about at all," said Philip Duffy, president of Woods Hole.

The big picture: If one views climate change as a prolonged period of chaos, it makes sense that investors would seek to protect their current holdings, be careful about what they bet on next — and look out for shrewd places to put their long-term money.

For instance:

  • Between 2060 and 2080, up to 26% of metros would likely have 100 days a year of 95 degree heat, up from 1% today, according to Rhodium and the Climate Impact Lab.
  • Why it matters: Greater heat reduces the productivity of outdoor labor, increases mortality rates, pushes up spending on air conditioning, and lowers agricultural output.
  • The investment: All that heat could seriously reduce the value of real estate in hot places, like Arizona and Texas, while triggering a rush of property interest in cooler locations like North Dakota, northern Minnesota, Maine and New Hampshire.

Biggest losers: The Gulf Coast, much of Arizona, the South Atlantic. Naples and Key West, Florida, could lose 15% or more of GDP a year, mostly from coastal storms, BlackRock says. Local tax bases could shrink if populations migrate away in the face of chronic storms.

Biggest winners: A net gain along the West Coast in Oregon and Washington state, Maine, and patches of the north-Midwest. Jamestown, North Dakota, could see its GDP rise by 5.2% a year by 2040, and 6.5% in 2060–2080, under a business-as-usual emissions scenario.

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Dion Rabouin