Mar 22, 2019

Axios Markets

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Situational awareness:

  • Pinterest has sped up the timing of its IPO and is preparing to make the filing public as early as Friday to list shares on the NYSE in mid-April. (WSJ)
  • The European Council has given the U.K. a short Brexit extension to April 12, expecting Prime Minister Theresa May's deal to be approved by Parliament. (Axios)
  • Boeing jets in Ethiopia and Indonesia lacked features that could have helped detect the erroneous readings some believe are connected to the crashes, because the company charged extra for them. (NYT).
  • "Facebook could be on a path to replace the U.S. dollar as the global reserve currency," says Ted Livingston, CEO of messaging platform Kik (and clearly an Axios Markets reader). (Medium)
1 big thing: Tough times in farm country

Illustration: Aïda Amer/Axios

The booming economy isn't touching all corners of the country, and farmers in particular are facing a very different economic reality than the strong growth and low unemployment rate that's often touted, Axios' Courtenay Brown reports.

  • Driving the news: America's farmers are living through the worst economic crisis in almost 30 years, driven by low commodity prices, trade war pressures and record flooding.

The deterioration of rural fortunes can be seen most acutely in Wisconsin, where dairy farms closed at a rate of 2 per day last year. The state's dairy industry accounts for half of the state's "critical agricultural sector ... generates $43.4 billion a year in economic activity ... and supports 413,500 jobs or 11.9% of the state's employment," according to the Wisconsin Policy Forum.

  • "For a lot of farmers, this has been a gut check. Are we going to tough this thing out, or are we going to get out?" Chris Pollack, a fourth-generation dairy farmer, tells Axios.

Downturns in farming are normal and almost expected. The worst in recent history was the farm credit crisis in the 1980s, with low commodity prices and sky-high interest rates. At the height of that crisis, there were almost 6,000 farmers who filed for bankruptcy. There were 498 in 2018.

What's different this time is farmers have seen declining commodity prices for years. And the trade war, which caused less demand for commodities from foreign buyers, has made it more painful (despite $7.7 billion so far in aid from the Trump administration). Extreme weather conditions, like the record flooding seen in the Midwest, have added another layer of uncertainty.

  • "Farmers are structured to ride these waves out, but when the waves are this long they can't ride that out," says Steven Deller, a professor of agricultural and applied economics at the University of Wisconsin-Madison.

By the numbers: Farm profitability was $63 billion last year, the second lowest in the past 10 years, according to the American Farm Bureau Federation.

  • Overdue loan payments for farmers with loans from the Agriculture Department's Farm Service Agency hit the highest level in 9 years in January.
  • Rod Hebrink, CEO of Compeer Financial, which lends to farmers in Illinois, Wisconsin and Minnesota, says the company hasn't seen a significant uptick in loan delinquencies, "but there's stress out there, no question."

"When [farmers] go to the banks, they are leery and hesitant to lend," Deller, the professor, says. "If farmers are at the end of their rope, [banks] make loans but they make loans at rates that are unfavorable to the farmer."

Go deeper

2. The best house in a bad neighborhood
Expand chart
Data:; Chart: Naema Ahmed/Axios

Currency traders are having trouble deciding which of the world's major Western economies is in the worst shape. They have been selling the U.S. dollar, euro and British pound intermittently as various central banks signal their next steps.

What's happening:

  • Traders sold the euro and bought the dollar after the European Central Bank lowered its euro zone growth forecast and announced it would resume its TLTRO stimulus program on March 7.
  • They sold the dollar after the Fed cut its U.S. growth forecast and announced further rate hikes this year were unlikely on Wednesday.
  • Yesterday traders sold the British pound after the Bank of England kept rates on hold and May's latest Brexit deal was rejected, setting up a more likely no-deal divorce from the EU. It was sterling's worst day against the dollar this year.

However, none of the moves have stuck. Sterling reversed most of its more than 1% loss from Thursday overnight after news of the EU's Brexit extension.

What's next? Analysts tell Axios they largely expect the dollar to reap the benefit of uncertainty as the U.S. has higher interest rates than most major economies, which means traders benefit from the "carry trade" by holding it.

  • The dollar's rate against the euro and pound make up nearly 70% of the dollar index's value.
3. "An environment that is spectacularly indebted"
"The central banks, all their models are broken. All their models would suggest they would have done so much more in terms of interest rate hikes by now, but in fact they’re seeing that we’re not getting the inflation.
"We're operating in an environment that is spectacularly indebted and the main feature that has come out of that, along with the aging demographic, is a very, very, very, very low neutral interest rate.
"That's why Japan's at zero, Sweden's negative, the euro zone is at zero, Australia, New Zealand are at 1–2% with their high population rate and all these countries are decelerating [in growth]. There's a massive amount of debt and that may be contributing to an incredibly low neutral level of interest rates."
— Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income
4. Filling out the Fed board

President Trump is considering conservative pundit Stephen Moore and former Godfather's Pizza CEO Herman Cain for the two vacant seats on the Federal Reserve's board, Bloomberg's Saleha Mohsin and Jennifer Jacobs report.

  • Mohsin and Jacobs note that Moore is a good friend of White House economic adviser Larry Kudlow and "blamed the Fed for slowing the economy while championing Trump's policies in a March 13 [Wall Street] Journal column that he co-authored."

Moore is the founder of the conservative Club for Growth and previously served on the Journal's editorial board. He was an adviser on Trump's campaign and "helped write its economic agenda."

Cain ran for president in 2012 but ended his campaign after multiple allegations of sexual assault and harassment, and has also been a vocal advocate for Trump.

  • "Cain last September co-founded a pro-Trump super-political action committee, America Fighting Back PAC, which features a photo of the president on its website and says: 'We must protect Donald Trump and his agenda from impeachment.'"
5. Brazil, Bolsonaro and the Bovespa

Brazilian President Jair Bolsonaro attends a joint news conference with President Trump at the White House. Photo: Chris Kleponis-Pool/Getty Images

Brazil's last 3 presidents have not fared well.

  • Luiz Inacio Lula da Silva, who led the country until 2010, is in jail on corruption and bribery charges.
  • Dilma Rousseff served until 2016 when she was impeached and removed from office.
  • Michel Temer, who replaced her and served until 2018, was arrested and charged with leading a "criminal organization" that diverted 1.8 billion reais ($475.6 million) in funds yesterday.

Driving the news: Brazil's benchmark Bovespa stock index fell by nearly 4% following news of Temer's arrest, but ended the day just 1.34% lower. The country’s 10-year bond yield rose 4 basis points to 8.76% and the real currency ended little changed at 3.79 per dollar.

Why it matters: The country's stock market has largely shaken off political turmoil as investors continue to believe in a widely unpopular pension reform current President Jair Bolsonaro has backed in an effort to repair Brazil's highly overleveraged and underfunded budget.

  • Brazil's main bourse has more than doubled the performance of the S&P 500 since Rousseff's powers were suspended in May 2016, and a recent Reuters poll showed traders expect the Bovespa to rise 36.5% in 2019.
  • It has risen less than 7% so far.

Yes, but: Investors' faith is being tested as Bolsonaro, a fascist, is fast losing popularity. The president's approval rating has declined significantly since he took office in January, falling most recently to just 34%, according to a poll by Ibope.

  • The clock is ticking for the pension reform to be approved on the government's timeline. Council of the Americas reports that a survey by Metapolítica shows that to pass on time, the pension reform would have to be the fastest constitutional amendment in the history of Brazil's Congress.