Mar 19, 2019

Axios Markets

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Situational awareness:

  • Former economic adviser to the Clinton and Obama administrations and Princeton economics professor Alan B. Krueger was found dead on Sunday at the age of 58. The cause of death was suicide. (Daily Princetonian)
  • Japan's debt has risen to 250% of its GDP. (Asia Times)
  • "Shorting European equities" is the most crowded trade for the first time in Bank of America Merrill Lynch's monthly survey of fund managers. (Reuters)
  • "What we have now is a form of inflation that's never been seen before — it's all concentrated in housing," a new economic study finds. (Cornell University)
1 big thing: Bitcoin is losing its Wall Street buy-in

Illustration: Rebecca Zisser/Axios

The public markets' cryptocurrency hype is no more and it's losing votes of confidence from Wall Street, Axios' Courtenay Brown writes.

Driving the news: The Cboe will no longer support bitcoin futures trading after June, despite being the first exchange to pioneer the bitcoin-futures market in late 2017.

  • Citi nixed its plan to launch "Citicoin," a bank-backed cryptocurrency, CoinDesk reported on Monday: "Citi concluded that, while the [Citicoin] technology has the potential to live up to its promises, there were other more effective and efficient ways of making improvements in payments."

The big picture: News that Wall Street and traditional banks were buying into the digital currency phenomenon was seen as validation and drove crypto prices higher. However, things look to have turned.

  • Prices barely budged when J.P. Morgan said it was creating its own dollar-backed digital currency, "JPM Coin." (Perhaps because only institutional clients will be able to use it.)
  • But when Goldman Sachs said late last year it was scrapping its plan for a dedicated crypto trading desk, prices of bitcoin and other alt-coins plunged.

Dion's thought bubble: Crypto began as something of a counter-cultural current and Wall Street jumped on the bandwagon when it rose to a pop culture phenomenon, pushing prices higher. Those days are over now.

Crypto will live or die based on whether or not a sustainable use case can be found for it. There are a number of ongoing experiments:

  • Facebook is holding conversations with cryptocurrency exchanges about selling the "Facebook coin" to consumers — as the New York Times reported last month — and the company looks to be setting up a WeChat-like payment system where users can pay one another (or any of Facebook's 2.3 billion users) with the coin.
  • Crypto is also just now starting to make significant inroads in the porn (link suitable for work) and cannabis communities, underground industries with large user bases that have trouble accessing traditional banking services.
  • Venezuelan President Nicolás Maduro even tried to make a cryptocurrency the country's official payment system.

But if nothing catches on in a big way soon, crypto may be out of lifelines.

Bonus: Crypto, decrypted
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Reproduced from Wolf Street using CoinDesk; Chart: Axios Visuals

Financial analyst Wolf Richter points out that even without the Cboe, bitcoin futures trading isn't dead yet.

Bitcoin has managed to hold near the important $4,000 per coin level and CME Group, which still offers bitcoin trading, has seen higher trading volumes than Cboe. CME reps told CoinDesk that it has "no changes to announce re our bitcoin futures contract."

2. The S&P's market cap markdown
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Data: GlobalData; Chart: Harry Stevens/Axios

The S&P 500 lost $1.5 trillion in collective market cap since the beginning of last year, according to recent analysis by research firm GlobalData, Courtenay writes.

  • 8 out of the S&P's 11 sectors lost market cap value, with companies like Exxon Mobil, Wells Fargo and Walmart seeing their market cap shrink by more than $40 billion.
  • The utilities sector was the only sector to see double-digit market cap growth, with companies like NextEra and Duke Energy gaining $5 billion in value.

Interestingly, tech still dominates the S&P by a wide margin, despite losing $90 billion in market cap.

  • The tech sector is 12 times bigger than the smallest S&P sector (which also includes some tech names), Communication Services.

Go deeper: Big Tech's hold on the market might not last

3. The size of the black market
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Data: OECD; Chart: Harry Stevens/Axios

There's no such thing as a reliable set of counterfeiting statistics. But the best that we have comes from the OECD, which released an 88-page report yesterday on "Trends in Trade in Counterfeit and Pirated Goods," Axios' Felix Salmon writes.

The report updates the OECD's data to 2016; previously, data only went up to 2013. Among the report's findings:

  • In terms of overall value of fake exports, counterfeit "electrical machinery and electronics" comes in at the top of the list, with a potential value as high as $138 billion per year. Fake watches don't even come close: their value is put at no more than $4.2 billion per year. Fake footwear is capped at $13.9 billion.
  • Watches were the top category by replacement value of customs seizures. At 22.7%, watches more than double the value of any other grouping on the list.
  • Globally, 23% of customs seizures were of footwear, with knitted clothing in second place at 17%. (Non-knitted clothing, for some reason, accounted for just 1% of seizures.)

The bottom line: According to every counterfeiting report, the amount of trade in fakes is a direct function of the amount of international trade overall. The decline in trade from 2014 to 2016 resulted in a concomitant decline in the maximum value of the international counterfeit economy, from $623 billion to $509 billion.

4. Recalibrating GDP

When GDP became the dominant measure of economies in the 1940s, wide adoption of the internet was still a half-century away. Today, the internet is responsible for a major chunk of economic activity, but GDP misses much of it. This has widened the gap between the closely watched metric and actual economic health, Axios' Kaveh Waddell writes.

A global effort reaching back decades is picking up steam to either change or supplement GDP as the go-to gauge for understanding a country's — and the world's — level of prosperity.

  • The efforts seek to account for relatively new industries, plus intangibles like income inequality, clean air and water.
  • But the dizzying pace of technological advances may be enlarging the gap even as researchers work to close it.

Why it matters: The problem with GDP is not merely academic — reliance on the economic benchmark deserves part of the blame for the 2008 financial crisis, according to a 2009 report from a commission led by Nobel laureate Joseph Stiglitz. If economists had been watching other metrics, too, like indebtedness, they would have had an earlier warning of trouble ahead, the commission wrote.

The latest proposal comes from a group of economists led by MIT's Erik Brynjolfsson. In a forthcoming working paper, they propose a measure called GDP-B, adding in the benefits of free digital goods and new technology.

They estimate that hidden benefits from Facebook alone have added 0.05–0.11 percentage points to GDP every year since its 2004 launch. That would have totaled 1.54 percentage points from 2003 to 2017 — a result "too large to be ignored," according to University of Maryland's Charles Hulten, who was not involved in this research.

  • Right now, when an old-school product gives way to a digital substitute, only half of the trade-off shows up in GDP, says Avinash Collis, an MIT researcher who co-authored the GDP-B paper. The decline of landlines is captured, for example, but the rise of its replacement — social media and free messaging apps — is not.

What's next: GDP has solidly remained ubiquitous despite its critics, but Hulten, who advises the Bureau of Economic Analysis, says the body is again considering alternatives. "Agencies are very aware of the need to change," he says, but are burdened with a busy schedule — plus many decades of inertia.