Feb 18, 2021

Axios Markets

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🚨 Situational awareness: Apollo Global Management announced it has brought on former SEC chair Jay Clayton as lead independent director following the announced resignation of former CEO Leon Black. (Reuters)

đź’‰ Trivia: Onesimus, an enslaved African, introduced a method of inoculation in the U.S. used in Africa that stopped the spread of an epidemic. His method preceded the work of English physician and scientist Edward Jenner, who is credited with pioneering the concept of vaccines, by 68 years. His method of inoculation stopped the spread of what disease?

1 big thing: Global debt soars to 356% of GDP

Reproduced from Institute of International Finance; Chart: Axios Visuals

The world's debt-to-GDP ratio rose to 356% in 2020, a new report from the Institute of International Finance finds, up 35 percentage points from where it stood in 2019, as countries saw their economies shrink and issued an ocean of debt to stay afloat.

Why it matters: The increase brings numerous countries, including the U.S., to extreme debt levels, well beyond what economists have called untenable in the past.

  • Nonfinancial private sector debt alone now makes up 165% of the entire world's economic output.

What they're saying: "The upswing was well beyond the rise seen during the 2008 global financial crisis," IIF economists said in the report.

  • "Back in 2008 and 2009, the increase in global debt ratio was limited to 10 percentage points and 15 percentage points, respectively."

By the numbers: Global debt increased to $281 trillion last year, with total private and public sector debt rising by $24 trillion in the 61 countries IIF follows.

  • That rise accounts for more than a quarter of the $88 trillion increase in debt that has been accumulated over the past decade.
  • Government debt accounts for 105% of global GDP, up from 88% in 2019, rising by $12 trillion in 2020 or nearly triple its $4.3 trillion increase in 2019.
  • Debt in the financial sector rose by more than 5 percentage points to 86% of GDP in 2020. This was the largest increase since 2007 and the first annual increase since 2016.

Why the debt matters: While worries about significantly pushing up inflation and borrowing costs have not come to pass, slow growth and diminishing returns have, and the world's already high debt levels look to be inhibiting economic growth and threaten to hold back a full recovery from the pandemic in the long run.

  • Further, almost all of the debt issued in 2020 was to deal with present circumstances rather than to invest in forward-looking projects or growth, making future investments in such projects more difficult and potentially more costly.

Where it stands: The CBO projected U.S. GDP growth over the next 10 years will be largely below 2% (with the notable exclusion of 2021), and that annual budget deficits will increase.

  • The federal debt is set to exceed the size of the economy this year for only the second time since the end of World War II and grow to 107% of GDP by 2031.
  • That projection was made without including President Biden's proposed $1.9 trillion stimulus package.
2. Catch up quick

The homeownership rate for Black families is nearly 30 percentage points lower than that for white families, according to a new data analysis by the National Association of Realtors. (Axios)

The White House said the proposed $15 minimum-wage hike may not make it through Congress as part of the $1.9 trillion stimulus bill. (Bloomberg)

The SEC is considering whether to require more transparency of short selling following the GameStop frenzy — a task it was intended to undertake following the 2010 Dodd-Frank reform bill but never did. (WSJ)

Billionaire Citadel CEO Ken Griffin and Robinhood CEO Vlad Tenev will call on Congress to shorten the time required for stock trades to settle, with Griffin pushing for one day and Tenev arguing for real-time settlement, according to testimonies released ahead of their appearances. (Axios)

3. January retail sales see third-biggest gain ever
Data: Investing.com; Chart: Axios Visuals

January's U.S. retail sales report showed a 5.3% gain, the third-largest month-over-month increase on record, trailing only the booming numbers seen in June and July, as states opened up after nationwide shutdowns because of the coronavirus pandemic.

No cap: January's big number was more impressive because it was 7.4% higher than in January 2020, whereas on a year-over-year basis both June and July's reports were below their commensurate 2020 figures.

Why it matters: The blowout reading — retail sales have averaged a 0.3% month-over-month gain over the life of the report and economists had predicted a 1.1% rise — shows that U.S. consumers were incredibly active in January and that they largely spent rather than saved their stimulus checks.

  • That flew in the face of the significant increase in Americans' savings rates last year and surveys that showed more people would put their checks away or use them to pay down debt than spend them.

The big picture: The retail sales report also suggests that Americans may be in better financial shape than previously believed and have more confidence in the economy — or in the government to deliver more benefits.

  • "The 2021 growth numbers have significant upside potential," Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA, said in a note to clients.
  • "Consensus GDP forecasts for 2021 were already at 2.9% and 4.9% for Q1 and the full year, respectively, and street forecasters are already upgrading their growth forecasts on this major surprise print. We will be upgrading our own GDP forecast, too."

Why you'll hear about this again: Goldman Sachs economists wasted no time upgrading their forecast, predicting the U.S. economy will grow 7% this year with the unemployment rate falling to 4.1% and core PCE inflation rising to 1.85% by year-end.

  • The Atlanta Fed’s GDPNow tracker on Wednesday predicted the economy will grow at a 9.5% seasonally adjusted annual rate in the first quarter, up from a 4.5% estimate a week ago.

Yes, but: The report could pour cold water on some policymakers' appetites for another major fiscal spending package, which many argue is necessary to support the economy.

  • "These numbers suggest the current fiscal policy setting is already over-calibrated, and the Biden proposal currently being debated is at least double current policy," Ricchiuto argued.
  • "While the labor market and certain sectors of the economy are being held back by Covid and related government restrictions, overall, the spending data does not support the notion of an economy suffering from insufficient aggregate demand as we typically understand it."
  • "The economy is suffering from an acute Covid problem, not a general demand problem."
4. New U.S. data show rising demand and rising prices

Retail sales were the big story on Wednesday, but the January readings of U.S. industrial production and producer prices also provided important insights into the economy.

Industrial production rose by 0.9% month over month, following a downwardly revised 1.3% gain in December, and is rapidly approaching levels seen before the pandemic.

  • However, the growth in production was well below the growth in retail sales, suggesting that either the increase is coming entirely from inventory reductions or exports.
  • The pickup in U.S. imports and Chinese exports in recent months suggests it is the latter, and combined with supply constraints and bottlenecks in Asia could weigh on overall U.S. growth.
  • U.S. capacity utilization has bounced back from its pandemic lows but is still at its lowest rate since February 2017.

The Producer Price Index rose 1.3% last month over December, the biggest gain since December 2009 when the government revamped the series. Producer prices rose 1.7% over January 2020 — strongly beating expectations of a 0.4% month-over-month gain and 0.9% annual gain.

Be smart: Taken together, the data tell a story of demand returning but supply not quite keeping up, meaning prices rise.

Thanks for reading!

Trivia: Onesimus, an enslaved African, introduced a method of inoculation in the U.S. used in Africa that stopped the spread of an epidemic. His method preceded the work of English physician and scientist Edward Jenner, who is credited with pioneering the concept of vaccines, by 68 years. His method of inoculation stopped the spread of what disease?

Answer: Smallpox.