January 22, 2019

Was this email forwarded to you? Sign up here.

Situational awareness:

  • Tesla signed a preliminary agreement with China’s Tianjin Lishen to supply batteries for its new Shanghai car factory. (Reuters)
  • Foxconn, which assembles Apple's iPhones, said it was not planning mass layoffs and in fact is looking to add more than 50,000 jobs at its China campuses for the first quarter. (Reuters)
  • A separate report asserts Foxconn is considering making iPhones in India to reduce Apple’s dependence on China for manufacturing and, possibly, for sales. (WSJ)
  • EasyJet says drones at England's Gatwick airport cost the airline £15m ($19.34 million) in passenger compensation and lost revenues, and hit 82,000 customers. (BBC)

1 big thing: Global debt — where do we go from here?

Illustration: Lazaro Gamio/Axios

Last year, the world's debt rose to $244 trillion, or 318% of global GDP, the Institute of International Finance (IIF) found.

The two largest contributors to the rise in debt have been emerging market corporate entities and developed market governments.

  • Governments in developed countries like the U.S., Japan and Europe, "have done very little to bring down debt in recent years despite low borrowing costs and the recent pickup in growth, which should have encouraged them to reign in budget deficits," IIF's Managing Director of Policy Initiatives Sonja Gibbs said. "A good example is the U.S., which has not run an annual budget surplus since 2001."
  • The world is now "pushing at the boundaries of comfortably sustainable debt," she says.

Why it matters: In times of economic strength countries have traditionally reduced their debt, seeking balanced budgets and a safety net for the future. But over the past few years the world's largest economies have done just the opposite.

  • The U.S. added close to $2 trillion in fiscal stimulus to its debt, with increased spending and a massive tax cut, in 2017.
  • The euro zone recently ended $2.5 trillion in monetary stimulus, though European Central Bank head Mario Draghi suggested that end may be temporary.
  • Japan just approved an all-time-high $860 billion budget in addition to $3.5 trillion in monetary stimulus from the Bank of Japan.

However, "after two years of solid expansion the world is growing more slowly than expected and risks are rising," IMF Managing Director Christine Lagarde said at the World Economic Forum's opening this week.

Making matters worse: Emerging economies also have borrowed at an unprecedented rate and at a time when global interest rates are rising and the dollar has strengthened, meaning the loans will cost more to pay back.

  • Gibbs and IIF's Emre Tiftik tell Axios that poorer countries in Africa and the Middle East that have borrowed heavily — more than 25% of guaranteed bilateral credit now comes from China, up from less than 1% in 2007 — are some of the institute's biggest worries.

The bottom line: In 2019 the global economy will face stresses it hasn't seen in at least a decade and central bankers and governments globally will be armed with fewer tools to fight them.

2. Is China really slowing?

Illustration: Rebecca Zisser/Axios

China's year-end economic data dump presented an ambiguous picture of the world's second-largest economy that analysts chose to paint in various ways by cherry picking data points.

What they're saying: Some have been ringing the alarm of an economic slowdown in China, pointing to historically weak readings.

  • China's economy expanded 6.6% in 2018 — the slowest annual pace the country has seen since 1990.
  • In the fourth quarter, GDP growth came in at 6.4% year-over-year, the slowest since 2009.

China's government has long been accused of padding the numbers on economic data, and some expect that weak readings like these are proof that the country's real economy is actually growing much more slowly.

Yes, but: Also included in the data dump are a collection of strong data releases that don't fit the falling dragon motif.

  • China's industrial output rose 5.7% year-over-year in December, more than the 5.3% economists were expecting.
  • Fixed asset investment rose 5.9% year-over-year, nearly matching economists' predictions of 6%.
  • Retail sales data rose 8.2% in December, up from November's 8.1% gain.
  • Production in high-tech industries, strategic emerging industries and equipment manufacturing expanded 11.7%, 8.9% and 8.1%, respectively.

When taken as a whole, the data reflects an economy that could be slowing or could be slowly turning from one driven by high-flying export growth to one sustained by a consumer-focused, service sector that Chinese government officials have declared they want.

What to watch: For U.S. businesses, a clearer picture of what's happening could come this week when companies with significant revenue from China — including Starbucks, Wynn Resorts and Ford — report quarterly results.

3. Actively managed funds had their worst month ever

If the deluge of forced exits at BlackRock and State Street didn't paint a clear enough picture of what's happening in the world of asset management, December's Morningstar data certainly did.

  • Actively managed funds saw nearly $143 billion of outflows in December, their worst month on record.
  • Total outflows for 2018 climbed to $301 billion, just below of 2016's record $320 billion of outflows.
  • Investors generally blamed volatility and the down market, but passive funds pulled in almost $60 billion in December, Morningstar's data shows.
  • Overall, long-term U.S. funds had their greatest monthly outflows in December since October 2008, with $83 billion of cashflow moving out of the investments.

The big picture: This is the continuation of a long-running theme on Wall Street. Institutional investors, retail investors, high net-worth individuals and even some endowments and pension funds are consistently moving away from asset managers and into low-fee passive strategies.

4. Trucking may be in trouble

Data: Cass Information Systems; Chart: Lazaro Gamio/Axios
Data: Cass Information Systems; Chart: Lazaro Gamio/Axios

Truck shipments' year-over-year growth fell in December for the first time since 2016, data from the Cass Freight Index showed.

Why it matters: Truck shipments are thought to be a leading indicator as they're very sensitive to market fears. When things are good, suppliers load up, but in hard times the oversupply of trucks and weak demand from shippers can lead to quickly declining rates and a prolonged downturn for the industry, often coupled with more widespread economic malaise.

5. 26 people own as much wealth as half the world's population

As the world's gross domestic product increases, the gains are being gobbled up by an ever smaller number of people, a new report from Oxfam finds.

By the numbers: Last year, 43 of the world's wealthiest people held assets — cash and resources like real estate — that totaled as much as half the world's population. This year the number of individuals it took to match the wealth of the poorest 3.8 billion people on the planet fell to 26.

Other findings from the study included:

  • In the 10 years since the financial crisis, the number of billionaires has nearly doubled.
  • Between 2017 and 2018, a new billionaire was created every two days.
  • The wealth of the world's 2,200 billionaires rose by $900 billion in 2018, or $2.5 billion a day.

Oxfam calls for a 1% tax on the world's richest to help close the wealth gap and asserts that it would produce enough money to educate every child not in school and provide health care that would prevent 3 million deaths.

  • Previous reports have accused "big business and the super-rich" of "fueling the inequality crisis by dodging taxes, driving down wages and using their power to influence politics."

6. Private jets at Davos expected to increase by 50% from 2018

Many of the world's billionaires will be at the World Economic Forum in Davos, which kicks off Tuesday, and private jet provider Air Charter Service predicts there will be close to 1,500 private jet flights over the week.

  • That's a 50% increase from the service's 2018 prediction of 1,000 private jet flights. The website noted it ended up totaling more than 1,300 aircraft movements, an 11% increase from 2017 and the highest number on record.
  • Air Charter Service's website also points out: "According to WingX figures the average number of aircraft movements — arrivals and departures ... for the week of the forum ... rises to an average of 218 — an increase of 335%, with the two busiest days ... seeing 251 and 301 movements, respectively."
  • "Top countries involved in terms of arrivals in and departures out of the airports were Germany, France and the U.K. The U.S. came in fourth with 41 arrivals and 51 departures."

Important: The estimates do not include helicopter trips.

7. All the data we've missed

A chart showing each of the economic data releases missed so far during the government shutdown.
A list of all the U.S. economic data releases missed because of the government shutdown.

As the U.S. government shutdown passes the one-month mark, Bloomberg notes, "There are more questions than answers about how and when the delayed data might get released. Even after the data begin getting released, it will easily take a couple of months before the Commerce Department’s release calendar returns to normal."

Flashback: "A 16-day shutdown in October 2013 that affected a larger number of reports (because the Labor Department was closed as well) sparked doubts about the accuracy of some key measures for months afterward. For example, part-time employees weren’t able to go out during the shutdown to collect inflation data for the consumer price index."

Check out my piece on the economic philosophy of Martin Luther King.

  • Better yet, if you have an hour and seven minutes, listen to the good reverend doctor's 1967 "Where Do We Go From Here" speech. He goes deep on economic opportunity, income inequality, communism and capitalism, guaranteed basic income, labor rights, welfare reform, black nationalism, and much more.

Days without a factual error: 7