Apr 4, 2019

Axios Markets

Was this email forwarded to you? Sign up here.

Situational awareness:

  • President Trump will meet with Chinese Vice Premier Liu He at the White House on Thursday to discuss a trade deal. (Bloomberg)
  • Tesla delivered fewer Model 3s in the quarter than analysts expected. Deliveries of all models fell 31% from the fourth quarter. (Axios)
  • SoftBank is in talks with investors to add as much as $15 billion more to its $100 billion Vision Fund. (Bloomberg)
  • JPMorgan Chase CEO Jamie Dimon detailed the bank's health and new initiatives for 2019, but also sounded very presidential in his CEO letter, laying out proposed fixes for health care, infrastructure, immigration and more. (Axios)
1 big thing: Extreme debt is rewriting the rules of economics

Illustration: Aïda Amer/Axios

The world appears to be at a debt inflection point where traditional rules no longer apply.

Driving the news: Following a substantial increase of $21 trillion in 2017, debt accumulation rose by just $3.3 trillion in 2018, bringing "the global debt mountain to $243 trillion," the Institute of International Finance reported this week.

Why it matters: While economic orthodoxy holds that high levels of debt lead to higher interest rates, that correlation — like many others — is unraveling in the post-financial-crisis era.

  • "Many commentators might suggest that interest rates are low because central banks have made them low," David Page, senior economist at AXA Investment Managers, tells Axios. "Actually, it's the other way around. Central banks have had to lower rates as much as they have because the natural rate of interest has fallen" as a result of the growing debt.

The big picture: Over the past 10 years the money supply has increased significantly and wealthy businesses have used the wellspring of free cash to buy back shares and acquire rivals to inflate their stock price and reward executives.

But real wage growth has been flat in developed countries and largely capped in developing nations. That has meant a growing number of people have to take on more debt to finance the increasing cost of middle class necessities like a mortgage, medical bills and college tuition.

  • Both the increase in debt and lower interest rates "are symptoms of grander issues such as slowing population growth, an aging population and therefore an easing of economic growth rates," says Lou Brien, rates strategist at DRW Trading.

What it means for the market: The traditional tools of monetary policy by central banks no longer function as they once did.

  • "Central banks have cut interest rates in many places to 0% or negative levels and the economies are not accelerating," Robert Tipp, chief investment strategist at PGIM Fixed Income, tells Axios.
  • "Why are people not borrowing money at zero? Either they don't have anything to do with it or they are overly indebted."

The increased debt also means it takes lower interest rates to slow the economy. With a mountain of debt already accumulated, few can afford the 4% or 5% interest rates of the past, AXA's Page says.

Bonus: "The global debt mountain"
Expand chart

Adapted from Institute of International Finance; Chart: Andrew Witherspoon/Axios

While the world is slowing its debt binge, that's largely thanks to China and other emerging markets. Debt accumulation in emerging countries fell to its slowest pace since 2001, IIF found.

Conversely, U.S. total debt grew by $2.9 trillion to more than $68 trillion in 2018, the largest annual increase since 2007. General government debt accounted for more than 40% of the increase.

However, debt rose at a slower pace than overall economic growth, pushing the U.S. total debt-to-GDP ratio to 326%, its lowest level since 2005.

2. The war on Lyft has begun

Investor blowback against Lyft has been fast and furious since the stock debuted last week.

What's happening: Seaport Global analysts Michael Ward seared the company with a scathing "sell" recommendation on its third day of trading, notching a $42 target — $26 a share lower than its price at the time.

  • Short sellers have now joined the fray, with 12.4 million shares shorted at a value of $856 million, making the newly public company the 27th most shorted large U.S. stock. Short sellers have clamored to "rent" Lyft shares, paying an average of 101.40% borrow fee to bet against it. That's the highest fee of any domestic stock with more than $50 million of short interest, according to data from S3 Partners.
  • Carl Icahn sold his roughly 2.7% stake in the company, worth around $550 million based on the IPO price, before the company went public, the Wall Street Journal reported.

The bottom line: The stock opened well above its IPO price of $72 on the first day of trading, but has fallen by more than 20% from its first trade price.

Go deeper: Don't count on driverless cars to fix Lyft's profitability struggles

3. Pound shows traders weren't worried about a no-deal Brexit

Photo: Dan Kitwood/Getty Images

The British pound has barely moved on major Brexit headlines over the past week, holding between $1.30 and $1.32 against the dollar. On Wednesday, it edged up just 0.2% during North American trading hours after Parliament approved a cross-party bill to block a no-deal Brexit by a single vote, an outcome many feared could lead to mass instability in Britain and Europe.

  • Sterling last stood just shy of $1.32, up 0.1% on the day.

Flashback: As I wrote back in January, the market has long priced out the risk of a no-deal Brexit and continues to trade right around where it was right after the June 2016 referendum.

4. Active managers barely deliver in Q1

The S&P 500 finished positive for a fifth straight day, equaling the longest winning streak in 2 months, and is coming off the best first quarter since 1998 and the best quarter overall since 2009. Active managers haven't been able to do much better than the index.

Driving the news: Data from Bank of America Merrill Lynch shows just 39% of large cap active managers outperformed their benchmarks in Q1. The average large cap fund returned 13.7% in the first quarter, barely edging the S&P's 13.1% and lagging the Russell 1000 by 31 basis points.

  • "March was a particularly bad month for large cap funds, with just 34% of funds outperforming their benchmarks vs. 47% through February," analysts wrote in a note to clients. "Quant funds underperformed even more, with just 21% beating the Russell 1000."

Mid-cap managers were the biggest laggards, with only 26% beating their respective benchmarks in the first quarter. This follows a rough 2018 for active mid-cap fund managers during which just 30% of funds outperformed, BAML analysts said.

Watch this space: In a separate note, BAML analysts noted the lack of real-money equity buyers in the first quarter.

  • Despite a strong first quarter, hedge funds were the only net buyers of stocks, with the exception for corporations buying back their own shares.
  • Buybacks are up 34% from 2018's first quarter, according to their data.
5. Very small businesses cut back
Screenshot of Bloomberg reporter Joe Weisenthal's Twitter feed, showing trends in very small business hiring.

U.S. companies added the fewest workers in March since late 2017 as construction and manufacturing cut jobs, ADP private payrolls data showed Wednesday.

Private payrolls increased by 129,000, missing economist estimates of 173,000, and there was notable weakness for small businesses.

While small businesses overall added 6,000 net jobs, firms with fewer than 20 workers cut almost 9,000 jobs last month, the first back-to-back drop in 8 years.

Small businesses in the goods-producing sector lost 8,000 jobs in March.

Go deeper: The March 2019 ADP Small Business Report