Mar 2, 2020

Axios Markets

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Situational Awareness: Finance ministers from G7 countries will hold a teleconference this week to coordinate a response to the coronavirus outbreak. (Bloomberg)

πŸŽ™β€œYou can kill ten of our men for every one we kill of yours. But even at those odds, you will lose and we will win.” - See who said it and why it matters at the bottom.

1 big thing: Bank group calls for return of financial crisis measures

Illustration: Sarah Grillo/Axios

Top officers at America's largest bank lobbying organization are calling on the Fed to not only cut U.S. interest rates, but also institute a series of reforms that were last put in place during the 2008 financial crisis.

What's happening: The president and CEO, the chief economist and the head of research of the Bank Policy Institute, which represents the nation's leading banks, posted a blog Sunday laying out a set of policy prescriptions they encourage the Fed to use to fight possible economic damage from the coronavirus outbreak.

  • The proposals include cutting banks' reserve requirements to zero, lowering the Fed's discount borrowing rate, and several other measures designed to increase banks' resilience to a major financial shock.

Why it matters: The note shows how worried banking industry advocates are about the impact of COVID-19.

  • It's also the latest example of the industry attempting to use a crisis to rollback Dodd-Frank financial regulations that were designed to prevent another market meltdown.

Watch this space: Since rates in the repo market spiked in September, the Fed has been working with officials at major financial institutions to revise some of its rules.

2. The Bernie economy

Illustration: Sarah Grillo/Axios

The economy according to Bernie Sanders looks unlike anything any politician this close to the presidency has ever put forth before. It's a rethinking of the entire American economic model.

What it means: To understand the Bernie economy β€” his plans for free health care, college tuition and a government-guaranteed job for every American β€” it helps to view it through the lens of modern monetary theory, or MMT.

  • While Sanders has not labeled himself an acolyte of MMT, the theory helps explain the unorthodox framework of his economic policy.

The premise is fairly simple: MMT argues that the way we have viewed government policy β€” that it's like a household with a fixed capacity for earning and spending β€” is wrong.

  • The question is not, "How much will a new program or policy add to the deficit?" but "Can a policy be implemented without significantly raising inflation?"
  • If the answer is yes, then whether it adds $50 billion or $50 trillion to the deficit is largely irrelevant because the U.S. government can pay off its debt at any time by printing more dollars and handing those out to its creditors.

Details: "We need to make budgets centered around our real resource capacity and not some arbitrary, imaginary revenue constraint," Stephanie Kelton, an economics professor at Stony Brook University and MMT's most well-known advocate, told Axios recently on the sidelines of the National Association for Business Economics conference in Washington.

The intrigue: Critics point out that Sanders' ideas for increasing government revenue β€” including heavy taxes on the wealthy, raising the corporate tax rate to 35%, and eliminating most corporate tax breaks and loopholes β€” will fall well short of paying for the new programs he proposes.

  • But the tax changes are not intended to offset the spending so much as they are designed to rewire the economy and "spread the wealth," a central tenet of Sanders' democratic socialist philosophy.

The takeaway: There's no telling whether Kelton and Sanders are right, because no government has ever attempted to implement the MMT approach.

  • However, the fact that the U.S. national debt has ballooned to $23.4 trillion and both U.S. and global inflation are near their lowest levels on record does support their case.

The bottom line: Sanders' economic agenda is not merely to "give people free stuff."

  • Backed by the fundamentals of an untested economic model (MMT) and socialist redistribution, a Sanders presidency would question and seek to overhaul much of what has underpinned U.S. government policy for generations.
  • Whether that is good or bad depends on how much one likes the current state of things.
Bonus: The limits of MMT

While MMT is viewed at best with trepidation and at worst with contempt by most mainstream economists, many of its tentpole findings are in step with those of today's top economic thought leaders.

  • The government creation of automatic stabilizers β€” like the federal jobs guarantee proposed by Sanders (and backed by Kelton) β€” has been supported by former Fed chair Janet Yellen, former Treasury Secretary Larry Summers and former OECD chief economist Catherine Mann, to name a few.

Yes, but: Kelton says the economy is "resource constrained," so there is some limit on how much policymakers can spend. She just hasn't calculated what that is and puts the onus on Congress to "manage that risk."

  • She has evaluated Sanders' plans for student debt forgiveness and the federal jobs guarantee β€” and surmises that both would create sufficient demand to account for their spending.
  • However, she does not want to be "tied to" the accounting for Sanders' proposals like Medicare for All and the Green New Deal, which carry the largest price tags.
3. Catch up quick

Washington state declared an emergency as two people died and more coronavirus cases were discovered inside a nursing home, plus New York had its first reported case. (N.Y. Times)

Walmart and Verizon are in discussions to outfit the retailer’s stores with antennas and equipment to create 5G wireless service at two locations this year. (WSJ)

China's manufacturing activity dropped to a record low of 35.7 in February, well below consensus, and a reading of its services sector was even weaker with non-manufacturing PMI falling to 29.6 in January. (SCMP)

4. Waiting for Jerome

Photo: Sarah Silbiger/Getty Images

Fed chair Jerome Powell's statement on Friday afternoon that the U.S. central bank was "closely monitoring developments" and would "act as appropriate to support the economy" has eliminated any doubt that the Fed will cut U.S. interest rates at its meeting on March 17–18.

What we're hearing: "A Fed cut in March appears nearly certain," analysts at Goldman Sachs said in a late Sunday note to clients.

  • Goldman is now expecting a 50 basis point cut this month, followed by two more rate cuts "in April and June, for a total of 100bp."

Where it stands: U.S. interest rates are currently set at 1.50%–1.75%, and cuts at that level would take them to 0.5%, giving the U.S. negative "real" rates β€” well below the level of inflation, according to the personal consumption expenditures measure the Fed favors.

  • Fed funds futures prices show the market expects the Fed to cut 100 basis points by July, with rates falling to 0.25% by December.

What's happening: Speculation that the rate cuts are on the way helped pare losses in U.S. stock market futures prices, as did comments from Bank of Japan governor Haruhiko Kuroda who said the central bank would provide β€œample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

  • The BOJ followed the statement up by offering to buy $4.6 billion of government bonds with a repurchase agreement.

The big picture: Guggenheim Partners global CIO Scott Minerd, a member of the New York Fed's investor advisory committee, said last week that he had been contacted by officials and was expecting a statement regarding "some sort of monetary coordination."

  • That would likely mean the world's central banks are planning interest rate cuts or additional stimulus.

Worth noting: The Fed cut rates three times in 2019 and has added nearly $400 billion to its balance sheet through a new bond-buying program it began after the repo market spike in September.

5. Commodities sink on fears of decreasing global demand
Expand chart
Data: FactSet; Chart: Axios Visuals

The coronavirus outbreak has sparked one of the worst routs in commodity prices in years, WSJ's Amrith Ramkumar writes.

  • Investors are now bracing for even steeper declines β€” a warning signal about the state of the global economy.

What's happening: Commodities have been among the hardest hit investments since the outbreak began spreading around the globe.

  • Oil prices have fallen 32% in less than two months and last week recorded their worst week since the financial crisis. Industrial metals from copper to aluminum are also taking a beating, Ramkumar notes.

The big picture: Commodity prices can provide a real-time indicator of activity, and "the current slide reflects slumping demand and bloated inventories."

  • Plus, "some investors worry the widespread selling of assets associated with risk also portends more pain ahead for stocks."

On March 2, 1946, Ho Chi Minh became president of North Vietnam, sparking a series of events that would lead the U.S. to invade the country, beginning what was then the longest-ever U.S. war.