Nov 15, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

🚨🧳 I'll be taking the next couple weeks off, but I leave you in the hands of Courtenay Brown and managing editor Jennifer Kingson. They'll be handling all your Axios Markets needs until I'm back on Dec. 2.

What's happening: I'm headed to Lisbon for a bit to escape this frigid New York City air. Wish me luck and send me all your Portugal tips - (Note: I speak Portuguese fluently, but it's Brazilian Portuguese; I once tried talking to a Portuguese woman and ... as coisas não deram certo.)

Situational awareness: The U.S. retail sales report for October will be released at 8:30, with economists expecting 0.2% growth after a negative reading in September. (CNBC)

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1 big thing: Maybe the debt does matter

Illustration: Aïda Amer/Axios

The world's debt is rising to unprecedented levels. While politicians and the general public have seemingly lost interest, capital markets are beginning to show signs of strain, financial experts say.

Driving the news: Global debt surged by $7.5 trillion in the first half of the year, hitting a new record of more than $250 trillion, according to data released Thursday from the Institute of International Finance.

  • The world's debt has now risen to 320% of what it produces, the highest level ever recorded — and IIF economists say they see "no sign of a slowdown."
  • They expect the global debt load to exceed $255 trillion by the end of the year.
  • The U.S. budget deficit rose 34% in October from a year earlier, and the U.S. and China are leading the debt binge with more than 60% of the world's total, IIF notes.

What's happening: It’s all starting to add up, experts say.

  • U.S. government debt auctions this year have been strained.
  • The systemically important repo market that banks use for cash buckled in September, necessitating hundreds of billions of dollars of cash infusions from the Fed.
  • The government is exploring reintroducing 50- and 100-year bonds to alleviate stress in the debt markets.

Threat level: While these are hardly mainstream economic indicators, the recent troubles in U.S. capital markets "may be an early warning of a digestion problem," Catherine L. Mann, global chief economist at Citi, said during last month's National Association for Business Economics meeting.

The big picture: "This is the longest expansion in history, but it is also the weakest and part of that is the extremely high debt," Liz Ann Sonders, chief investment strategist at Charles Schwab, tells Axios.

  • "The effect may be a subtle crisis over time, like we have seen with just a depressing pressure on growth," she adds.

Be smart: Even Fed chair Jerome Powell, who has been consistently upbeat and focused almost exclusively on the strengths of the U.S. economy, was dour in his assessment of current U.S. debt levels.

  • “The federal budget is on an unsustainable path, with high and rising debt,” Powell told the Joint Economic Committee Wednesday. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”
  • “I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth.”
Bonus: And maybe inflation isn't dead
Expand chart

Reproduced from Institute of International Finance; Chart: Axios Visuals

As I wrote back in February, the main reason the debt has been such a non-issue is that inflation in the U.S. and most industrialized countries has stayed persistently low.

However, more fund managers and economists are increasingly saying they're worried that may not hold.

What they're saying: The main factors holding down inflation, at least in the U.S., are technology and income inequality, says David Kelly, chief global strategist at JPMorgan Asset Management. That's been helped by the U.S.-China trade war, which has damaged business sentiment and investment, holding down demand.

  • "You’ve got this increasingly unequal distribution of income that is preventing aggregate demand from getting too high."
  • "You can’t change the information technology but if you do push up aggregate demand you could suddenly have a rush of inflation."

What to watch: Kelly also sees the unequal growth of assets in relation to the growth of the real economy as keeping inflation contained. But that could change.

  • "We’ve been avoiding that right now because the ownership of the assets is so tilted towards upper-income individuals who don’t spend them."
  • "But the day that those assets get spent, or people think they’re going to get spent, or you have MMT or big tax cuts for the poor, things are going to get sticky," Kelly says.
2. Catch up quick

Hong Kong's government expects the city's economy will shrink by 1.3% this year, the first contraction since the global financial crisis. (Bloomberg)

White House economic adviser Larry Kudlow said negotiations with China for a "phase one" trade agreement were coming down to the final stages, but were "not done yet." (Bloomberg)

Amazon said the Pentagon's decision to award a potential $10 billion cloud computing contract to Microsoft "contained clear deficiencies, errors, and unmistakable bias." (CNBC)

Ousted CEO and Uber co-founder Travis Kalanick has dumped almost a third of his shares, more than $700 million worth, since last week. (MarketWatch)

3. Walmart drinks Amazon's milkshake
Expand chart
Data:; Chart: Axios Visuals

Investors took profits on Walmart's stock after its stronger-than-expected earnings report Thursday, but the outlook remains bright as the world's largest retailer again showed growth in sales as it has in every quarter for five years straight.

The big picture: "A 41% gain in e-commerce sales, up from the second-quarter’s 37%, was especially notable," WSJ's Justin Lahart writes.

  • "And that gain compares favorably with third-quarter online sales growth of 21% at Amazon. There was some concern that Amazon’s shift to free one-day delivery for its Prime members might weigh on Walmart’s online sales growth, but so far that doesn’t appear to have happened."
4. America's largest milk producer is 2019's 100th default

Dean Foods, the largest dairy company in the U.S., filed for bankruptcy this week, bringing the total number of global corporate defaults this year to 100.

The big picture: Despite having one of the fastest growing economies in the industrialized world, the U.S. has accounted for 70% of companies defaulting or seeking bankruptcy protection in 2019, according to the latest corporate default tally from ratings agency S&P.

  • Colorado-based manufacturer APC Automotive Technologies also went into default along with Delaware's Dura Automotive Systems, Pennsylvania-based retailer Destination Maternity Corp., and one "confidential issuer," S&P notes.

What they're saying: "The U.S. makes up the overwhelmingly largest percentage of this year's default tally," says Sudeep Kesh, head of S&P Global Credit Markets Research.

  • "The global 12-month trailing speculative-grade default rate has increased in 2019, to 2.3% in September from 2% in January, largely due to an increase in U.S. defaults," the report adds.

Of note: Bankruptcy-related defaults have increased this year, reaching a global total of 28 — already the second-highest number of bankruptcy-related defaults since 2009.

  • The oil/gas and retail/restaurants sectors lead defaults in the U.S. with 16 and 13, respectively.
5. States expand Google probes

The multistate antitrust probe into Google will expand beyond the advertising sector to its search and Android businesses, CNBC reports.

Why it matters: Google is already facing investigations into potentially monopolistic behavior on many fronts, and the expansion of the states' probe will further widen the scrutiny, Axios' Margaret Harding McGill writes.

Driving the news: The states investigating Google plan to write up civil investigative demands for information on search and Android, according to the CNBC report.

  • The Texas-led probe began with a focus on online advertising, though Attorney General Ken Paxton said in announcing the inquiry, "Right now it's about advertising, but the facts will lead where they lead."
  • The Justice Department, which is also investigating Google, is reviewing the competitive dynamics around personalized advertising, antitrust division chief Makan Delrahim said during a House Judiciary antitrust subcommittee hearing Wednesday.

Flashback: Google disclosed in September that the Justice Department has requested information on prior antitrust investigations in the U.S. and elsewhere.

  • The FTC closed a probe into Google's search practices in 2013 without taking legal action.
  • Google referred a request for comment to a blog post from September that indicated the company expected the states to seek information.
Dion Rabouin