Apr 26, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Uber could be worth as much as $84 billion when it goes public: the company plans to offer 180 million shares priced between $44 and $50 per share. (Axios)
  • Companies that make up more than two-thirds of China’s $7.5 trillion equity market will announce earnings in the coming days, ahead of the April 30 deadline. (Bloomberg)
  • Japan's factory output fell at the fastest pace in nearly 5 years, stoking concerns the economy may contract in the first quarter. (Reuters)
  • Cryptocurrencies shed $10 billion in value after the New York attorney general accused stablecoin company Bitfinex of covering up an $850 million loss of customer funds. (Axios)
1 big thing: Global economic whiplash!

Aïda Amer/Axios

There are two contradictory and ultimately irreconcilable stories playing out in the global economy right now.

  • Stocks are rising and investors have publicly become very bullish, but bond and currency markets are showing worry about the prospects for economic slowdown or even a recession.

What's happening: Both the market exuberance and trepidation can be traced back to the Federal Reserve's flip-flop on whether to raise interest rates.

The Fed was on pace to normalize policy this year by raising the cost of borrowing money to a level above inflation, and withdrawing the stimulus program that has it buying and holding trillions of dollars in U.S. bonds on its balance sheet.

  • But Chair Jay Powell and policymakers at the Fed have completely reversed course — announcing that not only were they done raising rates, but they would continue the bond buying program (at a lower level) for the foreseeable future.

Why it's bad: Analysts say the Fed's U-turn shows that the world's top economic minds see danger.

  • Global growth is slowing to a halt in much of Europe and Japan; and Canada, Australia and New Zealand may be headed into a recession this year.
  • Global debt markets also are littered with risky loans. Consumer debt is now increasingly held outside of banks, including lots of mortgage debt, credit card debt and student loan debt, that has grown to a pile bigger than the housing bubble was before the financial crisis.
  • Central banks and international aid institutions like the IMF are issuing warnings and writing down growth expectations around the globe.
  • The U.S. Treasury yield curve inverted in March, a historically accurate recession indicator, and the dollar and Japanese yen have been strengthening, a sign of fear and uncertainty in the market.

Why it's good: The Fed's rethink looks to be doing exactly what it was designed to do.

  • U.S. stocks are roaring, touching new all-time highs, joining a global rally in equities.
  • U.S. GDP expectations for the first quarter have jumped from near zero to more than 2.5% in about a month and a half.
  • China's economic data has improved and investors are starting to see signs that global trade has bottomed and is poised for a comeback.

The change in monetary policy has split analysts' opinions:

  • "I'm nervous," Lee Ferridge, head of multi-asset strategy at State Street, tells Axios. "I'm still concerned that we've reacted to the Fed hold without thinking, 'Why did the Fed switch?'"
  • "The global economic recovery will persist for another few years," Jim Paulsen, chief investment strategist at the Leuthold Group, says in an email. "We have full-out policy support from almost every corner of the globe without a single major economy in recession."

Be smart: Many fund managers are genuinely bullish on the U.S. economy and stocks, but buying trends haven't showed it. Rather than adding high-risk stocks or diving into emerging markets, as has typically been the case during times of increased confidence, asset managers are selling stocks or staying neutral, data shows.

In fact, asset managers at major firms like BlackRock, UBS, Goldman Sachs and even private equity giant KKR are encouraging caution and moderation.

  • "The path of least resistance for risk assets may be higher in the short term," BlackRock's Global Chief Investment Strategist Richard Turnill wrote in a recent note to clients, "but we advocate more carefully balancing risk and reward in portfolios."

Reality check: The dirty little secret of this year's stock market rally is that it has been fueled by share buy backs rather than real-money investors buying. But that's now starting to change.

The bottom line: There's no perfect answer here. U.S. economic data has been mixed since the Fed's reversal and more investors have come to the conclusion that they did the right thing. But at some point the global economy will have to stand on its own, without artificially low interest rates and trillions in stimulus from central banks. The big question is how far away we are from that point.

2. Italian stocks aren't letting a recession hold them back
Expand chart
Data: FactSet; Chart: Axios Visuals

Italy's back-to-back economic contractions to end 2018 put the country in recession and its stock market, like most of Europe suffered. Things aren't looking to get much better this year, as country has a projected growth rate of 0.1%.

But since Dec. 27, Italy's benchmark FTSE MiB has been on a tear, rising to bull market territory and outperforming broader European stocks and the S&P 500. (The S&P 500 hit its lowest point on Dec. 24 and the FTSE MiB hit bottom on Dec. 27.)

It's been a rally based on relief, says Joseph Trevisani, senior analyst at FX Street who just returned from a trip to Venice.

  • "Statistics have been a bit better than expected, or more accurately not as bad as feared. Domestic politics are tilting a bit to the League, which is viewed as more business friendly than the 5 Star, with which it shares power."

Most important to the bounceback, Trevisani says, "the Italians are clearly optimists."

3. The difficulty with predicting GDP
Expand chart
Data: Atlanta Fed and New York Fed; Chart: Axios Visuals

Even the world's top economists, using nothing but economic data releases can't even come close to an agreement on what today's U.S. GDP print will be.

The intrigue: The New York and Atlanta Fed both have GDP forecast tools that plug various readings into a framework in order to provide a rolling estimate of what quarterly GDP is expected to be. Both central bank regional branches insist the forecasts don't reflect opinion or input from the economists, "just the data."

Two major differences between the forecasts:

  • The New York Fed's model factors in the previous quarter's data while Atlanta's does not.
  • The Atlanta Fed's model uses only certain economic data while the New York Fed's factors in every economic release on a sliding scale of importance.
4. The challenge to icon Milton Friedman
Milton Friedman in 1986. Photo: George Rose/Getty

When hedge fund CEOs, presidential candidates and college professors shout that something is wrong with capitalism as practiced, they are — unwittingly in most cases — attacking a long-deceased, 800-pound gorilla in the economy, Axios' Steve LeVine writes.

  • Nineteen years after his death, Nobel laureate Milton Friedman — a 5-foot-tall University of Chicago economist — continues to exert a dominant hold on public opinion with his stark call for a stripped-down, profit-making-only role for business.
  • But the Friedman Doctrine, as some call it, is under threat as Americans attempt to make sense of the anger in the roiled U.S. heartland, beset by hollowed-out cities, bankrupt pension plans, and decades of flat wages.

What's happening: In recent months, hedge fund billionaire Ray Dalio, BlackRock CEO Larry Fink, numerous Democratic presidential candidates and others have called for a more socially minded corporate America. But if Friedman were alive, he, with mighty certainty, would have some choice words in response.

  • Friedman's thinking was best boiled down in a 1970 essay in the NYT magazine in which he called a business focus on social outcomes "pure unadulterated socialism."
  • Writing amid the public turmoil flowing from the Vietnam War and attacks on corporations, he said businessmen who embrace social responsibility were "unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."
  • The sole duty of a corporation was not to get involved with social good, but "make as much money as possible while conforming to their basic rules of the society."

Over the subsequent years and decades, Friedman's philosophy became orthodoxy, visible in tax law, accounting standards, business school curricula, and deep-seated corporate and societal attitudes. "There is a 'before-Friedman' and an 'after-Friedman' when it comes to corporate social responsibility," said Jennifer Burns, a professor at Stanford and the author of a forthcoming biography of Friedman.

Go deeper: Read the full story from Steve in Axios Future.

Dion Rabouin