Oct 30, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Quick note: I included a photo from the Center for Consumer Freedom in yesterday's newsletter that I labeled a "PSA." My longtime readers know that many of my headlines are not to be taken literally, but I think some folks were confused.

  • To be clear, CCF is a lobbying group paid to help the fast food and meat industries, and its paid advertisements in newspapers are part of that work. I should have been more clear in identifying that. Still, the larger point of the item — that fake meat is not healthy and no one seems to care — remains true.

Situational awareness:

  • College athletes can be allowed to profit from their name, image and likeness, the NCAA ruled Tuesday. (CNBC)
  • A Boeing manager "implored" top brass to stop production of the 737 Max over safety concerns before the first of two fatal crashes that led to the jet’s worldwide grounding, a top House lawmaker said. (Bloomberg)
  • Beyond Meat stock fell more than 20% Tuesday as more than 75% of the company's shares hit the market, sending the stock's price down 65% from its July peak. (CNBC)
  • AT&T's HBO Max will cost subscribers $14.99 a month and launch in May. (Reuters)

(Today's Smart Brevity count: 1,280 words, 5 minutes.)

1 big thing: Americans are loading up on subsistence debt
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Reproduced from Bloomberg using Census Bureau and BLS data; Chart: Axios Visuals

Lower- and middle-income households in the U.S. are just starting to feel the benefits of the economic recovery as wage growth has picked up over the last year, but many are still struggling because the pace of wage gains has not kept up with expenses.

Why it matters: As a result, more Americans are taking on debt in the form of personal loans, which are now outpacing credit cards and auto loans as the fastest-growing debt category in the U.S., according to data from credit reporting firm Experian.

  • Personal loan balances rose to $305 billion in Q2 2019, an increase of 12% year over year, and double the growth of credit card debt, the next-highest category.
  • The average personal loan balance has risen to $16,259. Balances of $30,000 or more have increased 15% compared to five years ago, and balances of $20,000 to $25,000 have grown 10%, Experian's data shows.

What's happening: Many consumers are taking on the debt through online installment loans, which hold longer payoff times than notorious payday loans, "but often the same sort of crippling, triple-digit interest rates," Bloomberg notes.

  • "If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession."
  • "In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. ... And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan," per Bloomberg.

The intrigue: The increase in lending is also the result of fintech products, which have more than doubled their market share of unsecured personal loans from 22.4% in 2015 to 49.4% in 2019, Experian says.

  • Many companies offer lower-cost alternatives to payday loans, but others are running much the same shtick.
  • Online installment loans have managed to avoid many of the regulations payday lenders have been subject to by extending payback time and increasing the amount of the loans. However, the fees are often just as high, meaning borrowers simply have more time to dig themselves into debt.

The big picture: "In the past, personal loans were often considered a last resort for people trying to escape debt," Experian's Matt Tatham wrote earlier this month. "But since financial technology firms, or fintechs, began flooding the market in recent years with unsecured personal loan offers, personal loan balances have surged."

2. Happy Fed Day!

Fed Chair Jerome Powell has not been one to disappoint markets and is unlikely to do so today when the Fed announces its October policy decision today.

  • The Fed fund futures prices show investors see a 98% chance the Fed cuts U.S. interest rates to 1.50%—1.75%.

The intrigue: Asset prices will likely be little moved after the release of the Fed's rates decision, because all eyes will be on the statement and press conference.

  • The Fed funds rate shows there is little expectation of another rate cut in December, but traders do see at least one more cut in 2020, with a greater than 50% likelihood of it happening by April.

Of note: The U.S. Treasury yield curve has steepened significantly this month, with yields on the 3-month and 1-month T-bills falling back below the 10-year note. Both curves had been inverted for the better part of the last five months.

What to watch: Before the Fed decision, ADP’s private jobs data is out at 8:15am ET, and third quarter U.S. GDP arrives at 8:30am.

3. There's a growing gap in consumer confidence
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Data: The Conference Board; ; Chart: Axios Visuals

The Conference Board’s consumer confidence index dipped slightly in October, but showed a notable decline in the survey's future expectations component and a growing divergence between respondents' views of their current situation and their expectations for the future.

By the numbers: Expectations fell 0.9 points during the month and have dropped by 17.5 points from their 2019 peak in July, Pantheon Macroeconomics chief economist Ian Shepherdson says in a note.

Why it matters: "The trend now probably is declining — not surprising given the ongoing trade war and specifically the August 1 announcement of tariffs on consumer goods."

  • "We expect slowing payroll growth gradually to depress consumers’ sentiment through the late fall and winter, but it’s hard to expect it to plunge as long as the stock market is resilient and gas prices are low."

But, but, but: Another consumer sentiment survey from online survey research company Morning Consult shows just the opposite.

  • They show increasing expectations of the future with "statistically significant weekly increases" in all measures of future expectations, but stagnant views on the present as consumers "adopted a gloomier view of their current financial conditions."
4. Tesla is doing exactly what both bulls and bears say it is
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Data: Investing.com; Chart: Axios Visuals

Tesla’s third-quarter revenue fell by $2 billion, or almost 40%, in the U.S., a regulatory filing released Tuesday showed, the company's first drop in more than two years.

  • However, sales outside the U.S. jumped, with China sales growing 64% to $669 million.

The big picture: Tesla is sacrificing sales of its higher priced vehicles and in higher value markets like the U.S. to focus on growing its low-cost Model 3 and increasing market penetration in China.

  • Critics say this will destroy Tesla's thin profit margins, while Tesla bulls argue it will boost scale and make the company a household name worldwide.
  • The stock has risen more than 30% this month, but is less than 2% higher than its price at the start the year.

What they're saying: “Musk & Co. are laser-focused on Europe and China for growth, while domestically, core demand is fading relative to other regions,” Wedbush analyst Dan Ives told CNBC, adding that U.S. growth will remain more challenging going forward.

Yes, but: Analysts at Roth Capital on Tuesday downgraded Tesla shares to sell, calling the company's margins "unsustainable." They note that the Q3 filings shows warranty adjustments and other one-time items were "a large driver of perceived strength" in Tesla's Q3 earnings report that resulted in the stock's big gains.

5. Moody's warns of more downgrades, defaults and a longer downturn

Ratings agency Moody’s warned Tuesday that bond and credit investors are taking on more risk and making more sacrifices in safety and compensation than they have in the past.

Two of the most prominent findings were that "credit quality continues to deteriorate" and that "investors have lost more control over debt terms and credit protections."

"[S]everal of our industry outlooks have turned negative, including global manufacturing, chemicals, autos, auto parts, steel and coal. Given the already existing proliferation in low ratings, downgrades and defaults could pick up without a recession."
"Moreover, it is likely the next downturn will last longer. One of the primary reasons is because the Federal Reserve’s ability to administer quantitative easing has shrunk meaningfully in this ongoing low rate environment. We continue to track trends across the credit markets, with our proprietary metrics largely pointing to a slow shift toward rising risk. Stay tuned."
6. Manufacturing and coal are not being made great again

There was more bad news Tuesday for two U.S. industries President Trump pledged to bring back — coal and manufacturing.

Details: Murray Energy, the third largest U.S. coal producer, announced it had filed for bankruptcy.

  • Later in the day, a report from the Commerce Department showed manufacturing now represented the smallest share of U.S. GDP it has since at least 1947.

Why it matters: Murray is the latest in a string of coal sector bankruptcies — the fifth this year, with dozens more expected to reach at least selective defaults by year-end, according to S&P Global — that underscores how power markets are moving away from coal in favor of natural gas and renewable energy.

  • The decline in manufacturing follows a consistent pattern, but has been exacerbated by the president's trade war, which has sent the industry into a recession and caused significant job losses in the sector.

Context, per Axios' Ben Geman: Coal, which once provided well over half of U.S. electricity, is at around 25% of the power mix today and it's slated to be 22% next year, according to Energy Department data.

  • The industry's woes also signal how the Trump administration's plans to prop up coal-fired power plants have yet to come to fruition.
Dion Rabouin

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