Jan 14, 2019

Axios Markets

Situational awareness:

  • PG&E CEO Geisha Williams left the company and the utility is preparing to declare Chapter 11 bankruptcy today. (WSJ)
  • Former Theranos CEO Elizabeth Holmes and ex-President Ramesh “Sunny” Balwani are expected in a California court for a hearing on criminal charges Monday. They could each face prison sentences of up to 20 years. (NYTimes)
  • MNG Enterprises, better known as Digital First Media, will offer to buy Gannett for $12 a share, a 23% premium over Friday’s closing price of $9.75. (WSJ)
  • The Trump corporate tax cuts likely will cost $2 trillion over the next 10 years, up $400 billion from the prior estimate, Bloomberg's Stephen Gandel writes. In 2018, the tax cut saved S&P 500 companies $144 billion, but resulted in less growth than expected. (Bloomberg)
1 big thing: PG&E's climate change warning to big business

Illustration: Rebecca Zisser/Axios

A battle between California politicians and PG&E, the state's largest utility, is being waged over who should have to pay the price of wildfire damage, Axios' Courtenay Brown and Andrew Freedman write.

Why it matters: Companies are being forced to face the consequences of a changing climate, which is leading to more frequent and destructive wildfires and other natural disasters. PG&E's situation is a warning to other power companies and businesses around the country.

The big picture: The Camp fire, which destroyed the town of Paradise, was the costliest catastrophe worldwide, with $16.5 billion in damages, per reinsurance company Munich Re.

"Market participants have woken up to the reality that [wildfires] can happen again and probably will. The expected value of future wildfire liabilities is so much bigger [thanks to climate change]," Michael Wara, a research fellow at Stanford University's Energy and Policy program, tells Axios.

PG&E could be on the hook for billions of dollars in liability costs related to last year and the prior year's wildfires, far more than its insurance would cover.

Driving the news: California is one of the few states that hold utilities liable for damages tied to their equipment, even if the companies were in compliance with the state's safety rules.

Why you will hear about this again: The rest of the U.S. is increasingly feeling the effects of climate change.

  • Utilities in hard-hit states could be increasingly cash strapped, and some will likely face stark questions about their liability in contributing to particular disasters.
  • The National Climate Assessment (NCA) found that a sea level rise of 1 meter, or 3.3 feet, by 2100 "would put an additional cumulative total of 25 gigawatts (GW) of operating or proposed power capacities at risk" of flooding.

The bottom line: PG&E's predicament could be repeated elsewhere as the impacts of climate change hit increasingly hard.

Go deeper:

Bonus stat: Fortune 500 female CEOs of color

Geisha Williams' departure from PG&E takes the percentage of Latina Fortune 500 CEOs from 0.2% to 0.0%, equaling the percentage of black female CEOs. With Indra Nooyi stepping down as CEO of PepsiCo in October 2018, the total number of Fortune 500 CEOs who are women of color is now 0.2%. The lone woman leading a Fortune 500 company is Joey Wat of Yum China.

Editor's note: This piece has been corrected to show that the total number of Fortune 500 CEOs who are women of color is 0.2% and that Joey Wat is the CEO of Yum China.

2. Trump may have won his battle with the Fed

Federal Reserve Board Chairman Jerome Powell. Photo: Getty Images

"Don't underestimate how likely it is that the Fed just backs away from everything because they don't want the politics. [The Fed doesn't] want to be susceptible to criticism that they are doing something to hurt Trump or aid Trump."
— Jefferies' Chief Market Strategist David Zervos

Fed Chairman Jay Powell will hold a press conference after every FOMC meeting in 2019. Zervos says that rather than providing more clarity, the market may just tire of Powell's indecisiveness and start listening to someone else.

"It's like a friend who says that one day they're coming out to meet you and then they don't come to meet you and then the next day they do come to meet you. After a while, I don't know when they are coming or not. Maybe the market will start listening to [Fed Vice Chairman] Rich Clarida or [New York Fed President] John Williams."
3. China posts largest ever trade surplus with U.S.

China posted its largest trade surplus with the U.S. on record in 2018, the country's government data showed Sunday. The trade surplus was nearly $50 billion greater than 2017, with exports rising by 11.3%.

  • The trade surplus increase seemed to largely reflect changes by the U.S., including the $1.5 trillion tax cut and $300 billion increase in spending passed by Republicans in 2017 and the stronger dollar. Fiscal stimulus increases buying power, which often translates to increased purchases of foreign goods when a country's currency is stronger.
  • The Trump administration’s tariffs, and threats of more to come in 2019, also pushed Chinese exporters to quickly fill orders, and a weakening Chinese yuan meant attractive prices for American businesses and consumers.

Why it matters: President Trump has made cutting the trade deficit with China a top administration priority, however it has widened significantly since he became president.

Worth mentioning: China's global trade surplus — how much the country exports vs what it imports from the rest of the world — fell to its lowest level since 2013.

  • Per Bloomberg: "The latest trade data from China showed worse-than-expected numbers. The 7.6 percent drop in imports, the worst reading since 2016, pointed to softening demand at home, while exports fell 4.4 percent in December from a year earlier amid the trade dispute."
4. The shutdown is starting to do damage to Q1 growth
"The partial government shutdown is now the longest on record, with little chance of a near-term resolution. It has now lasted long enough that we have to start thinking about the impact on first quarter GDP growth, which was already set to slow as a result of the drop in stock prices in the fourth quarter and the fading fiscal push... if the shutdown were to last through the whole quarter, we would look for an outright decline in first quarter GDP."
— Pantheon Macroeconomics Chief Economist Ian Shepherdson
5. Smaller tax refunds in 2019 could slash U.S. auto sales

Photo: Sean Gallup/Getty Images

Last year's tax reform spurred stronger-than-expected car sales by giving consumers more disposable income, but the payback will come this spring when many Americans could discover they're not getting the tax refund they had expected, Axios' Joann Muller writes.

Why it matters: Car sales are a key driver of the U.S. economy, and the industry sees a big uptick every spring as consumers turn their tax refund into a deposit on a new or used car. Without that seasonal bounce, 2019 auto sales may be lower, making a recession more likely.


  • More than 102 million Americans received an average tax refund of almost $2,800 last year.
  • When the new tax law took effect in early 2018, the IRS and Treasury rushed to change the tax tables, but many Americans failed to check the IRS withholding calculator and adjust their W-4 forms.
  • In July, the government warned that 30 million Americans were not withholding enough for taxes, meaning they felt richer than they were.

Yes, but: Tax reform isn't the only reason auto sales are likely to decline this year. Vehicles are becoming less affordable, due to tariffs on steel and other commodities, rising interest rates and the cost of premium features and technology.

The bottom line: Cox Automotive, the digital information giant behind AutoTrader, Kelly Blue Book and Manheim Auto Auctions, sees U.S. auto sales falling to 16.8 million units in 2019.

Go deeper: Electric vehicles surge but falling short of long-term global target

6. Stop trying to make Brexit happen. It's not going to happen

The British pound rallied going into the weekend, rising to its highest level against the dollar since Nov. 22. That's odd considering the spate of bad news for British Prime Minister Theresa May's one and only Brexit deal.

It seems, however, that the market is not pricing a better Brexit agreement, but no Brexit at all, says Bannockburn Global Forex Chief Market Strategist Marc Chandler.

What they're saying: "This bullish price action suggests market participants may be looking beyond the January 15 vote in the House of Commons," Chandler wrote in a Sunday note to clients.

  • PredictIt.org odds have just a 20% chance that the UK leaves the EU on March 29. 
  • Reuters reported Friday that billionaire Peter Hargreaves and hedge fund manager Crispin Odey expect Britain to stay in the EU. The two were among the largest financial backers of the campaign for Brexit.
  • Odey, who runs Odey Asset Management, said he is now positioning for the pound to strengthen.

Watch this space: CFTC data shows speculators are still widely betting on the British pound to fall in value, but new data hasn't been reported since Dec. 21 because of the U.S. government shutdown.