October 21, 2021
☀️ Good morning and welcome back to Markets!
🚨 Situational awareness: Former President Trump is SPAC-ing … he says he’ll launch a new social media network, and already has a plan for it to go public via SPAC.
✉️ Today's newsletter is 1,230 words, 5 minutes.
1 big thing: Stonks lose their appeal
That sucking sound you hear is the outflow of meme-chasing dollars from the stock market, Axios' Felix Salmon writes.
Small investors have taken money out of stocks for four successive months, per data shared exclusively with Axios, after putting in unprecedented sums during the meme winter of early 2021.
Why it matters: The caravan has moved on. The dream of getting rich quick still lives, but today it's more often found in the world of crypto, NFTs or even sports betting than it is in the stock market.
By the numbers: Market research firm Cardify has a panel of roughly 500,000 users who let it see the monies flowing in and out of their bank account. Out of those users, 30% have put money into places like Robinhood or Fidelity that facilitate stock market investing, while 4.6% have put money into crypto companies like Coinbase.
- In January, those investors put $37 million into the stock market, while withdrawing just $19 million. In September, by contrast, investments totaled $16 million but withdrawals reached a record $26 million.
- Crypto investments peaked at $10 million in May, when there were $3 million of withdrawals. As of the fall, the money continues to pour into the asset class, with $5 million of inflows against $2 million of outflows in September.
- Caveat: Not everything is being counted perfectly. Robinhood, for instance, is tagged as a way of investing in traditional markets even though it also offers crypto. And Cash App isn't counted in either category, even though it offers investments in both.
The big picture: The "boredom markets hypothesis" holds that a lot of stock market activity at the beginning of this year was a function of small investors being stuck at home and not having anything better to do with their time (or their money).
- Today, those investors are vaxxed and enjoying a much fuller social life; there are also many new suitors for their gambling dollars.
The bottom line: The money still entering the stock market is much more likely to be for long-term investment, compared to the fast money that flowed in at the beginning of this year and is now flowing straight back out.
2. Catch up quick
Exxon Mobil’s new board is considering nixing some oil and gas projects in an effort to limit carbon emissions and return more cash to shareholders. Though oil and gas prices are at multiyear highs, it takes years for these types of projects to pay off. (WSJ)
China’s property sector debt problems may be worse than investors have estimated. Private bonds issued by offshore shell companies, which developers began utilizing after Beijing clamped down on corporate debt levels, have emerged as a new area of concern. (Reuters)
PayPal is in talks to buy Pinterest, the social media platform with a $40 billion market value, in a deal that could provide the payments giant more avenues into the customer shopping experience. (WSJ)
3. Signals of October job growth
Polling for the Morning Consult/Axios Inequality Index suggests that as the Delta variant ebbed over the last month, job security improved for lower-income Americans.
- As a result of the improving environment, the Inequality Index this month declined to its lowest point since April — reversing a significant spike in September.
Why it matters: The sharp reversal shows that “the impact of the Delta variant on the economy was largely acute rather than chronic,” John Leer, Morning Consult chief economist, tells Axios.
- High-frequency data like this and others that Morning Consult has analyzed imply that more individuals are going back to work — and that the October employment report might show more job growth than the disappointing figures of the last two months.
The details: The share of workers earning less than $50,000 a year expecting to experience a loss of employment income in the next four weeks fell to 14.9% in October from 16.8% in September.
- Adults in the same category who lacked savings to cover basic expenses for one month fell by more than 3 percentage points to 27.7%.
The bottom line: “Continued improvements in income inequality will depend on labor market tightness,” Leer says. “Should reported labor shortages translate into increased leverage for lower-wage workers, wage growth at the bottom end of the income spectrum will likely continue to outpace inflation and boost relative living standards.”
4. A milestone in ditching Libor
The bank loan market is in the process of scrapping Libor, the benchmark rate that it’s used seemingly forever. That process was moving along pretty slowly — until now.
- The success of that deal has already opened the door for JPMorgan to bring at least two more loans to market that use a similar interest rate structure, sources tell Axios.
Why it matters: It may sound mundane, but the problem of transitioning from Libor to an alternative benchmark has occupied scores of regulators, bankers and investors for untold hours over the last decade.
- If implemented sloppily, the process has the potential to create chaos in the corporate and mortgage lending markets — and cost both borrowers and lenders money.
Threat level: Regulators earlier this year set Dec. 31 as the last day that Libor can be referenced in new floating-rate loans, a category that currently includes trillions in debt.
- Although market participants have known all year that this day was coming, as of a few months ago, little had changed in the institutional loan market — and a handful of alternative rates were fighting for prominence.
State of play: “The Walker & Dunlop deal is a good first step in migrating the markets to the same place,” says Roberta Goss, co-head of the bank loan and CLO platform at Pretium.
How it works: The new Walker & Dunlop loan is tied to the SOFR (secured overnight funding rate) benchmark, an overnight rate. That’s a fundamental difference from Libor, which has a yield curve (more on that here).
The bottom line: “Someone needed to be first. We now have [a structure] … so it's up to the market if this becomes the standard,” a leveraged finance banker tells Axios.
5. Carmakers rush to build EV batteries
Almost every week, another major automaker announces a billion-dollar-plus investment in battery manufacturing, and with it, thousands of new American jobs, Axios' Joann Muller reports.
Why it matters: Eyeing President Biden's climate agenda, carmakers are racing to create a domestic battery supply chain to support their aggressive rollout of electric vehicles by the end of the decade.
- They want to avoid another crisis like the current semiconductor shortage, which forced them to slash vehicle production because they can't get enough computer chips from Asia.
Driving the news: This week, Toyota and Stellantis (Chrysler and Jeep's parent) joined the chorus of automakers planning to build giant battery factories in North America.
- The moves follow other U.S. battery manufacturing commitments, by Ford and General Motors, as well as Korean battery suppliers SK Innovation and LG Chem.
- For now, these moves are ahead of demand. But forecasters predict the EV shift will occur quickly as more plug-in models are introduced and governments increase requirements for zero-emissions vehicles to fight climate change.
- When those pieces fall into place, the world's carmakers are likely to be in an all-out war to secure battery metals and other materials needed to produce them.
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