Jan 21, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “If liberty means anything at all, it means the right to tell people what they do not want to hear.” - See who said it and why it matters at the bottom.

1 big thing: The IMF tries to rain on the global stock parade

Photo illustration: Sarah Grillo/Axios. Photo: Olivier Douliery/AFP via Getty Images

Stock indexes around the globe have been roaring higher since the start of the year, but expectations of improved economic growth and soothed international tensions may be getting a bit ahead of themselves.

Driving the news: The IMF released its latest World Economic Outlook Monday, showing yet another revision lower of its expectations for global growth in 2019 and in 2020. IMF head Kristalina Georgieva also issued a number of warnings, suggesting that the worst may not have passed yet.

  • "If I were to mark the words that come to my mind at the start of this decade it would be increased uncertainty," she said on Friday during a speech at the Peterson Institute for International Economics. "And we know that uncertainty is not a friend to investment, growth and jobs."

Why it matters: Economists and market watchers worry that if trade and the manufacturing sector do not improve soon, the health of the global economy could be at risk.

  • While the IMF said "tentative signs that manufacturing activity and global trade are bottoming out" have helped boost market sentiment, they also noted that "few signs of turning points are yet visible in global macroeconomic data."

Yes, but: Georgieva told Axios following her speech that she understands why stock investors have gotten especially bullish lately, even in light of the IMF's worsening assessment of global growth.

  • Sure, "90% of the world’s economy by GDP has slowed down simultaneously, but it doesn’t mean there is no growth," she said. "For the next year and year to follow we are a bit more optimistic."

Watch this space: Pessimism and worry were the big themes during last year's impressive run for global equities, but that feeling reversed itself in the fourth quarter of 2019 and a number of metrics are starting to show that traders now have become overly exuberant.

  • Ned Davis Research warned on Friday that its sentiment index had reached “excessive optimism” territory. Earlier this month its analysts released a note saying the S&P 500's profits-to-earnings ratio was "well above fair value."
  • Renaissance Macro Research said its metrics show bullish sentiment has reached "the uncomfortable stage,” nearing levels last seen ahead of January 2018's "Volmageddon" selloff.
  • CNN Business' Fear & Greed index has risen to 89, indicating “extreme greed.”

The bottom line: Deutsche Bank investment strategist Parag Thatte points out, "Equity positioning, like the market itself, has run far ahead of current growth as investors price in a global growth rebound."

Bonus: Deeper financial markets and shallower trust

Georgieva also signaled some worry over the overly complex nature of financial markets, particularly in the U.S. and other industrial countries like Japan and Western Europe, in her remarks on Friday.

  • "There is a point at which financial deepening is associated with exacerbated inequality and less inclusive growth," she said.

What it means: Deepening financial markets have long been considered beneficial for a country's growth and development, but Georgieva argued that research is beginning to show that there is a point at which financial depth becomes negative.

  • "The more sophisticated your financial system is … the less accessible it would be for less sophisticated people and firms, and then inevitably it would mean some degree of exclusion."

The intrigue: The 2020 Edelman trust barometer, released Monday, shows data may be starting to show the stress from overly deep financial markets in industrial countries.

  • Throughout the life of its survey, Edelman has found that the more economic growth a country has, the higher the trust in its institutions.
  • While that connection has held up in developing countries in the Middle East and Asia, it is now decoupling in industrial countries with deep and complex financial markets.

What they're saying: "[N]ational income inequality is now the more important factor in institutional trust," CEO Richard Edelman said in a release accompanying the results.

  • "Fears are stifling hope, as long-held assumptions about hard work leading to upward mobility are now invalid.”
2. Catch up quick

Climate change threatens to provoke “green swan” events, or "climate black swans," that could trigger a systemic financial crisis and endanger humanity more than financial crises. (BIS)

President Trump and French President Emmanuel Macron agreed to a truce in their dispute over digital taxes that will mean neither side imposes punitive tariffs this year. (Bloomberg)

Asian equity prices fell as worries about a coronavirus, a cousin of respiratory illness SARS, caused a fourth death and following the Bank of Japan's decision to keep interest rates on hold. (MarketWatch)

Boeing is seeking funding of $10 billion or more to deal with costs stemming from its two fatal 737 MAX crashes. (CNBC)

Isabel dos Santos, Africa’s richest woman, looted possibly billions of dollars from Angola and its state oil company, with the help of McKinsey, Boston Consulting Group, PwC and other Western firms. (ICIJ)

3. What's worrying the Davos crowd
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Reproduced from PwC’s Annual Global CEO Survey; Chart: Axios Visuals

Axios' Dave Lawler writes: PwC's annual Global CEO survey — 1,581 CEOs across 83 territories — was conducted in the fall and released Monday as the World Economic Forum opened. It makes for some pretty alarming reading.

The big picture: 53% of CEOs expect global economic growth to decline in 2020, up from 29% in 2019 and just 5% in 2018. Their views of their own companies’ prospects were the bleakest since 2009.

  • That sentiment was spread across all regions, though CEOs in the Asia-Pacific are most optimistic and North American CEOs least so.

Go deeper: Read Dave's full story here.

4. Two big takeaways from the JOLTS report
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Data: BLS via Federal Reserve Bank of St. Louis; Chart: Andrew Witherspoon/Axios

There were two themes that persisted in November's U.S. job openings and labor turnover survey (JOLTS) released on Friday — the stubborn quits rate and the consistent decline in the number of job openings.

The big picture: Job openings fell by 561,000 to 6.8 million, the Labor Department said, the biggest drop since August 2015. That pushed the number of job openings to the lowest level since February 2018.

  • The number of job openings in the U.S. peaked in November 2018 and has fallen almost every month since, with the pace of the decline picking up steam toward the end of the year.

On the other side: After rising near a record high in July and August, touching 2.4%, the quits rate has fallen back and again looks stuck at 2.3%. The percentage of people who willingly leave a job is a positive sign of economic momentum and confidence.

  • The quits rate stayed at 2.3% from June 2018 to June 2019, the longest streak on record.
  • It hit 2.5% in January 2001 and has not been able to reach that number since.
5. King and the Fed's dual mandate

Activist Coretta Scott King addresses the 1988 Democratic National Convention in Atlanta. Photo: Wally McNamee/Corbis via Getty Images

Coretta Scott King played an integral role in establishing the Fed's dual mandate of stable prices and maximum employment.

Why it matters: Most central banks have only a singular objective — maintaining price stability, or keeping inflation in check. The Fed, however, has two and that is thanks in no small part to King.

Details: "King played a pivotal, but not widely recognized, role in advocating for full employment," a policy paper from the Center for Economic and Policy Research notes.

  • "As a founder of the National Committee for Full Employment/Full Employment Action Council, King joined Congressional leaders Augustus Hawkins and Hubert Humphrey in calling for and eventually passing the landmark 1978 Full Employment and Balanced Growth Act (Humphrey-Hawkins Act)."

What it means: The Humphrey-Hawkins Act "clarified the role that monetary policy can play in improving the employment picture and required the Fed to weigh the impact that its interest rate policy would have on the job market."

  • It legally required the Fed to pursue maximum employment.

The bottom line: AP reporter Errin Haines points out that Martin Luther King Jr. Day "is Mrs. King’s as much as it is Dr. King’s, because she demanded that the country that disrespected her husband in life would respect him in death, year after year, until it became a reality."

Shout out to MacroPolicy Perspectives president Julia Coronado for sending me the CEPR's paper.

Dion Rabouin

George Orwell wrote the quote at the top in a proposed preface for "Animal Farm" that was never published, but can be read in full here in the New York Times archives.

  • Orwell, born Eric Arthur Blair, died on Jan. 21, 1950.