Apr 28, 2020

Axios Markets

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🎙 “My father told me ‘Name your price in the beginning. If it ever gets more expensive than the price you name, get out of there.’”- See who said it and why it matters at the bottom.

1 big thing: Beware the "inflation bomb" ... for real this time
Data: St. Louis Fed; Chart: Axios Visuals

The combination of the Fed's seemingly limitless monetary policy and the open floodgates fiscal response from the White House and Congress has investors worrying about inflation again.

Why it matters: Inflation not only increases the cost of goods and services, but it could force the Fed to raise interest rates before the economy has recovered, depressing growth as the U.S. starts to emerge from the coronavirus-induced recession.

  • The pandemic is currently choking off growth and inflation, but once nationwide lockdown orders are removed, the unprecedented action could spark inflation levels not seen in a generation.

Flashback: Many feared inflation would flare up when the Fed unveiled quantitative easing to battle the global financial crisis in 2008, and it never happened.

  • That may have provided policymakers a bit of false confidence, warns David Kelly, chief global strategist at JPMorgan Asset Management, and could "give us another opportunity to ignite the inflation bomb."

Reality check: Following the 2008 recession, the U.S. money supply stayed muted as banks hoarded capital and refused loans to riskier borrowers despite piles of money from the Fed.

  • Then the Dodd-Frank Act passed, increasing bank capital requirements.
  • That was followed by spiking income inequality and Congress enacting various fiscal austerity measures.
  • Those all "acted as a brake on the demand for goods and services and diverted income towards the purchase of financial assets," Kelly says in a note to clients.

The intrigue: That was the exception, writes Michael Ashton, research director and portfolio manager at Real Asset Strategies. This recession follows the rule.

  • There is no current banking crisis, so the Fed’s "massive balance sheet expansion, coupled with a relaxing of capital rules (e.g. see here, here and here), has immediately produced a huge spike in transactional money growth," he says.
  • "M2 has grown at a 88% annualized rate over the last month, 34% annualized over the last 13 weeks, and 14.8% annualized over the last 52 weeks."

What it means: M2 is a measure of the U.S. money supply that includes cash, checking deposits, savings deposits, money market securities, mutual funds and things like certificates of deposit.

  • It is a closely watched inflation indicator.

Why you'll hear about this again: The year-over-year M2 growth rate through April 13 is 10 times what it was at this stage in both 2018 and 2019, according to an Axios analysis of Fed data. It's also higher than it ever reached during the financial crisis.

  • Ashton finds that the growth in the money supply has broken the record from 1976. "And they're just getting started."
2. Catch up quick

Some states are starting to ease lockdown measures as global coronavirus cases top 3 million (WSJ)

U.S. intelligence agencies warned President Trump about the threat of coronavirus in more than a dozen classified briefings in January and February. (The Washington Post)

The total number of U.S. mortgages in forbearance jumped to 7% as of April 19. (MBA)

The Fed expanded the number of municipalities it will buy debt from to 200. (Bloomberg)

3. Americans fear economic collapse

Data: Axios/Ipsos poll; Chart: Danielle Alberti/Axios

Axios' Margaret Talev writes: Nearly nine in 10 Americans now worry about the U.S. economy collapsing, a view that transcends party lines, according to the latest installment of the Axios-Ipsos Coronavirus Index.

  • While three-fourths also fear their communities reopening too soon, there's a massive gulf between how Democrats and Republicans view the threat.

What they're saying: "When you force one question over the other, health is still more important, over the economy," said Cliff Young, president of Ipsos U.S. Public Affairs. "But that’s going to start changing."

  • "As economic woes stick around and health challenges subside a bit, the economy’s going to become front and center."
  • "There’s going to be increasing pressure to open up. But there is less tolerance for easing among Democrats."

By the numbers: The survey shows an especially grim way Democrats have been affected by the pandemic: They're twice as likely (15%) as Republicans (8%) to know someone who died.

  • African Americans (28%) are three times as likely as white people (9%) and twice as likely as Hispanics (13%) to know someone who has died.
  • People who live in the Northeast (25%) are more than three times as likely as those in the West (7%) or Midwest (8%) and twice as likely as those in the South (12%) to know someone who died.

Between the lines: Partisanship is the biggest driver of concerns about communities reopening prematurely.

  • 88% of Democrats say they're extremely, very or somewhat concerned, compared with 56% of Republicans and 74% overall.
  • 88% of Hispanics and 85% of African Americans — clear majorities of whom identify as Democrats — are concerned, compared with 67% of white respondents.

Methodology: This Axios/Ipsos Poll was conducted April 24–27 by Ipsos' KnowledgePanel®. This poll is based on a nationally representative probability sample of 1,021 general population adults.

  • The margin of sampling error is ±3.4 percentage points at the 95% confidence level, for results based on the entire sample of adults.

Read more

4. Americans are saving their stimulus checks

Data: Axios/Ipsos poll; Table: Axios Visuals

More Americans who have received their CARES Act direct payment checks have chosen to save rather than spend them, even to catch up on bills or purchase household needs, the latest results of the Axios/Ipsos poll show.

What happened: Despite nearly 20% saying they had been furloughed, laid off or otherwise separated from their job, the most popular response to the question about spending their CARES Act checks was to sock money away, with 38% saying they put it into savings.

Why it matters: Economists have worried that one major effect of the coronavirus pandemic could be that Americans become more conscious of their savings and cut back on spending.

  • While few were expected to spend their checks on discretionary purchases like TVs or vacations, given nationwide lockdown orders, the particularly high rate of savings could signal a shift.

Between the lines: While around a third of respondents from all racial, age and income groups chose savings, it was not the top choice for black or Hispanic respondents or those making less than $50,000 a year.

By the numbers: Black folks’ top choice — 49% compared to 26% of all respondents — was to pay off debt, while more Hispanics planned to pay for food and basic household needs (40% vs. 25%), as did respondents earning under 50k (35%).

  • White respondents were the most likely to be uncertain what they would do with the money, with 21% saying they had not spent it yet but planned to.
  • That compared to 16% of black folks and 5% of Hispanics.

Of note: Respondents were permitted to choose more than one option.

5. Small farmers face "absolute disaster" from coronavirus

Axios' Felix Salmon writes: Chef and author Dan Barber tells "Axios on HBO" that the economic fallout from the coronavirus will be an "absolute disaster" for small farmers: "It is the tsunami. It's coming."

Why it matters: Barber has been surveying local farmers in New York's Hudson Valley, where he works, and 90% of them anticipate they will go out of business if restaurants are forced to operate at 50% capacity during the height of harvest season this summer.

  • If that happens, decades of work and effort could be lost. "The neural connections to this movement, once shattered, do not return," Barber says.

The big picture: Only the government can save local agriculture in the short term, according to Barber. But in the longer term, he sees great potential not only for American regional cuisine but also regional supply chains.

Background: Food prices are low thanks to efficient national and global agricultural supply chains, based on just-in-time delivery and massive economies of scale. But the crisis has shown just how fragile those supply chains can be.

  • "Meat facilities around the U.S. have closed," Walmart CEO Doug McMillon tells "Axios on HBO." "There are enough cattle available, but the processing process has broken down."

Read more

ICYMI: Our latest video on the Wall Street investment strategy that is likely driving recent gains: #BTFD.

Quote: “My father told me ‘Name your price in the beginning. If it ever gets more expensive than the price you name, get out of there.’"

Why it matters: The quote is from Dave Chappelle, who was recently awarded the Kennedy Center's Mark Twain Prize for American Humor. He converted to Islam in the late 1990s, and like billions of Muslims around the world is currently celebrating the holy month of Ramadan.