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Jan 22, 2019

Analysis | The Finance 202: Davos elite aren't Trump fans anymore

By Tory Newmyer

For President Trump, who favors traveling where he’s wanted, the decision to skip the World Economic Forum is looking like a good one.
Corporate elites gathered in Davos are newly anxious — and pointing fingers at Trump, as his trade wars and government shutdown pile pressure on wobbly global growth. 
My colleague Heather Long, reporting from the Swiss conclave, writes the mood is “noticeably more somber” as “fresh evidence pours in that businesses and consumers are losing faith in the global expansion.” To that point:
  • The International Monetary Fund just trimmed its global growth forecasts for this year and next, pointing in part to ongoing trade hostilities between the United States and China
  • A new survey of 800 CEOs from around the world found they ranked a recession as their top external concern this year, when it barely merited a mention last year (they ranked it 19th). And threats to trade rank second. 
  • In its own survey of chief executives, PwC recorded a “record jump in pessimism,” as 30 percent of the 1,300 it polled projected a decline in global GDP growth this year, up from just 5 percent last year.
  • And consumer confidence in the United States has gone soft, reaching a low point in Trump’s presidency. 
More from Heather:
“Today growth is decelerating, especially in China and Germany, Trump’s tariffs are starting to bite and the U.S. government is in the midst of the longest ever shutdown, which is starting to have a serious impact on the economy. As the economy slows, it’s easier for it to be knocked off track, many economists say... The IMF urged world leaders, especially Trump and Chinese President Xi Jinping, to de-escalate trade tensions to alleviate that major uncertainty weighing on growth.”
The gloom in Davos marks a comedown from last year’s event, where Trump arrived to find once-skeptical global business chiefs positively giddy in the wake of his $1.5 trillion tax cut. “I promise you, we are going to be sitting here in a year and you all will be worrying about inflation and wages going up too high,” JPMorgan Chase CEO Jamie Dimon said at last year’s conference.
Not exactly. And other Davos mandarins who formed a chorus last year predicting Trump’s tax cuts would unleash boom times, with the U.S. leading the way, now face a reckoning.
While slashed corporate tax rates appear to have over-performed for big businesses — making up nearly half of a 24 percent bump in profits for the S&P 500 last year, according to Bloomberg Opinion’s Stephen Gandel — there's little evidence they are powering broader-based growth.
Even before the shutdown, the Fed last month cut its forecast for GDP growth this year to 2.3 percent, from 2.5 percent in September. Wages have indeed been climbing, but the dip in consumer confidence points to widespread jitters over stock market gyrations, a weakening housing market, and the shutdown.
"We’ve very clearly moved in terms of investor sentiment from the Trump bump euphoria surrounding tax cuts and deregulation to fears of a Trump slump," Citigroup chief global political analyst Tina Fordham tells Bloomberg News.
Washington isn’t the only source of uncertainty clouding the global picture. Europe is its own mess. With the ongoing crisis over Brexit roiling the U.K., British Prime Minister Theresa May made like Trump and skipped Davos; so did French President Emmanuel Macron, who has been confronting anti-government riots in the heart of Paris.
And China on Monday reported its growth last year slowed to a 28-year low — and some economists believe the country’s actual performance may be significantly worse than Beijing’s official numbers indicate. Trump celebrated the news:
China posts slowest economic numbers since 1990 due to U.S. trade tensions and new policies. Makes so much sense for China to finally do a Real Deal, and stop playing around!
— Donald J. Trump (@realDonaldTrump) January 21, 2019
He has his own troubles. The shutdown is now entering its fifth week. If it extends for another, which by all indications it will, the damage to the U.S. economy will total about $6 billion, more than what Trump is demanding for a border wall, according to an estimate by S&P Global U.S. chief economist Beth Ann Bovino.
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Commuters exit the Wall Street subway station near the New York Stock Exchange. (Bloomberg)
Investor cash grab threatens rebound. WSJ's Michael Wursthorn: "Investors are increasing their cash holdings at the fastest pace in a decade, highlighting doubts about the durability of the stock market’s early 2019 rebound. Assets in money-market funds, which are generally used as a proxy for net new cash flows, have grown by more than $2 billion this month... That comes on top of the $190 billion investors added to the funds in the final three months of last year, their biggest deposit since 2008. The moves are pushing up cash allocations in investment portfolios for the first time since 2011, with investors’ exposure rising off their lowest levels ever, according to a Goldman Sachs analysis."
They're bracing for a recession. "About three quarters (73%) of investors expect a recession within the next two years, according to a survey of 260 professional money managers and analysts done late last year by Boston Consulting Group. In 2017, just over half (53%) thought a recession was coming," writes Paul La Monica of CNN Business. "Investors are most nervous about market valuations and central bank policies. Nearly two-thirds (64%) of the bearish investors said that current stock prices were making them worried and about half (48%) said interest rate levels concerned them."
Yet this year has started with a bang. NYT's Matt Phillips: "Stocks have staged a remarkable turnaround in the early days of 2019, rebounding after an end-of-the-year tailspin that was fomented by fears of recession in the United States. Three straight weeks of gains in the new year on Wall Street have erased nearly all of 2018’s losses. It’s the best start to a year since 1987... The difference is an abrupt change in tone from the Federal Reserve. This year began with repeated public assurances from Fed officials that they were sensitive to concerns about the economy and would be patient and flexible as they decided whether to raise interest rates."
— Brexit 2.0 referendum on tap? Bloomberg News's Thomas Penny: “The U.K.’s main opposition party is backing a plan that would open the door to a second European Union referendum, bringing the prospect of stopping Brexit a step closer. Labour leader Jeremy Corbyn proposed a series of votes in Parliament on options for how the U.K. can avoid an economically damaging no-deal Brexit. One of these choices is a new national referendum. It is the first time the Labour leader has put his name to a proposal in Parliament preparing a path for a new public vote. Corbyn’s backing for the move is highly significant: As leader of the official opposition, he is almost certain to get a chance to put his plan to a vote in the House of Commons on Jan. 29.”
Trump and the stock market. Don't miss this interactive graphic from the New York Times charting the stock market's rise, fall and tentative rise again over the last two years, and how Trump's moves in office have shaped its run.
This week's forecast: More stalemate. The Post's Jeff Stein and Erica Werner: "Congress takes up legislation in coming days to reopen the federal government after a new offer from [Trump], but divergent efforts in the House and Senate look destined to go nowhere, leaving hundreds of thousands of federal workers facing a second missed paycheck at week’s end with the impasse no closer to resolution.
"The Senate, led by Majority Leader Mitch McConnell (R-Ky.), will take up a proposal announced by Trump on Saturday to trade temporary protections for young undocumented immigrants and others for $5.7 billion the president is seeking for his border wall... But Democrats have rejected the plan, so it appears unlikely to garner the 60 votes necessary to advance. The House, led by Speaker Nancy Pelosi (D-Calif.), will pass a series of spending bills that would reopen portions of the government that have nothing to do with the wall... But the House legislation is dead on arrival in the Senate, where McConnell has made clear he will not advance any spending bills Trump won’t sign."
Some movement toward a deal? Horizon Investment's Greg Valliere, in his morning note, says the outlines of an agreement could be emerging: "Both parties are still dug in publicly, but in private there's some movement on two key issues – the Democrats could accept funding for a border barrier, and the Republicans could bend further on the issue of protection for the so-called 'Dreamers.' To paraphrase a classic Winston Churchill quote, now we're just arguing over the details."
TSA agents are staying home. The Post's Ashley Halsey and Michael Laris: "The number of Transportation Security Administration agents who failed to show up for duty Sunday hit a record 10 percent, meaning long waits for travelers at checkpoints at several airports, including Minneapolis and New Orleans. The union that represents the TSA workers, the American Federation of Government Employees, has warned since the federal shutdown began that its employees are among the lowest salaried on the federal pay scale and simply may be unable to afford to continue to work without pay. At some airports, community groups have set up food banks for federal workers; at others, airport food vendors have donated meals."

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Chinese President Xi Jinping. (AP Photo/Bullit Marquez)
U.S.-China talks stumble on IP issues. Bloomberg's Shawn Donnan and Jenny Leonard: "The two sides have so far made little progress on the issue any deal Trump strikes with China may ultimately be judged on: ending what the U.S. has dubbed as decades of state-coordinated Chinese theft of American intellectual property. That stands in contrast to movement on other fronts that has lifted stocks in recent sessions, including a Bloomberg report on Friday that China offered a path to reducing its trade surplus to zero by 2024... The next round of talks is scheduled for Jan. 30-31, when [Xi's] top economic emissary Liu He will visit Washington.
"China’s alleged IP theft and its related practice of forcing foreign companies to hand over technology to gain access to its market formed a large part of the agenda for the three days of early-January talks. Yet the discussions amounted more to an airing of grievances than constructive negotiations, according to participants and others briefed on the talks."
This won't help. A new report says China is racing ahead with its Made in China 2025 plan, WSJ's Bob Davis and Lingling Wei report: "Two influential U.S. business groups have issued a report detailing how China is moving ahead with a technology policy set to be a key point of contention in the U.S.-China trade talks that resume next week in Washington. In a joint report to the U.S. Trade Representative, the U.S. Chamber of Commerce and the American Chamber of Commerce in China say Beijing’s ambitious plan to become a global technology leader is being widely implemented, casting doubt on efforts by Chinese officials to play down its significance.
"There is evidence of 'a deep, concerted and continuing effort' by provincial officials to pursue the central government’s Made in China 2025 plan, which seeks to make China a leader in electric vehicles, aerospace, robotics and other frontiers of manufacturing, the two business groups say."
China's slowdown puts trade pressure on Xi. The Post's Anna Fifield: “Although the trade war is not the main reason for last year’s slowdown, it is not helping. 'The economy is a much bigger problem for Xi Jinping than the trade war. The last thing he wants is a bunch of angry people protesting because they’ve lost their jobs,' said Andrew Collier, managing director of Orient Capital Research, a Hong Kong-based consultancy."
Xi urges political stability in unusual meeting. Bloomberg News: Xi "stressed the need to maintain political stability in an unusual meeting of China’s top leaders -- a fresh sign the ruling party is growing concerned about the social implications of the slowing economy. Xi told a 'seminar' of top provincial leaders and ministers in Beijing on Monday that the Communist Party needed greater efforts 'to prevent and resolve major risks,' the official Xinhua News Agency said... Although Xi has issued similar warnings, including in February 2018, Monday’s statements contained signs of greater urgency. "

The United States will soon make a formal request for the extradition of Huawei's chief financial officer, according to the Canadian government, marking the next step in a case that has set off a geopolitical storm.

American Express won approval to set up a network, but rivals China UnionPay, Alipay and WeChat Pay have gobbled up the market.
Jeanne Whalen and Gerry Shih

Brian Moynihan, chief executive officer of Bank of America Corp. (Christopher Goodney/Bloomberg)
BofA's Moynihan: More bank mergers ahead. Bloomberg: "Bank of America Corp. Chief Executive Officer Brian Moynihan predicted another round of consolidation in the U.S. that could lead to the emergence of a new competitor. The Charlotte, North Carolina-based lender, which controls about 13 percent of the U.S. retail banking market, came together through the merger and acquisition of hundreds of companies, Moynihan said on a panel at the World Economic Forum in Davos, Switzerland. This sort of thing could happen again, as there are still thousands of banks operating across the U.S., he said."
Companies going public try to work around SEC shutdown. WSJ: "The monthlong government shutdown is forcing some companies to seek alternate routes to go public because the main markets regulator is unable to green-light IPOs. With Democrats and Republicans no closer on Monday to ending the impasse, biotechnology companies Gossamer Bio Inc. and TCR2 Therapeutics Inc. have been exploring a little-used workaround that would let them begin trading without the usual U.S. Securities and Exchange Commission signoff, according to people familiar with the matter. The move involves changing language in an IPO filing to make it automatically effective after 20 days. It is legal, and the SEC reminded companies after the shutdown began that the option was available."
France fines Google $57 million. NYT's Adam Satariano: "After European policymakers adopted a sweeping data privacy law last year, the big question was how regulators would use their newfound authority against the most powerful technology companies. In the first major example, the French data protection authority announced Monday that it had fined Google  50 million euros, or about $57 million, for not properly disclosing to users how data is collected across its services — including its search engine, Google Maps and YouTube — to present personalized advertisements. The penalty is the largest to date under the European Union privacy law, known as the General Data Protection Regulation, which took effect in May, and shows that regulators are following through on a pledge to use the rules to push back against internet companies whose businesses depend on collecting data.

J.C. Penney sales are falling, senior executive slots remain vacant and the strategy keeps changing—leading analysts to ask: Is it too late for a turnaround?

A Tokyo court rejected an offer that the fallen Nissan chairman hire private security guards and surrender all of his passports.

Kathy Kraninger, director of the Consumer Financial Protection Bureau. (Andrew Harrer/Bloomberg)
CFPB to axe underwriting provision from lending rule. The American Banker's Kate Berry: "The Consumer Financial Protection Bureau is expected to eliminate underwriting requirements in a highly anticipated revamp of its payday lending rule, according to sources familiar with the bureau’s proposal.The CFPB in October signaled its interest in 'revisiting' the ability-to-repay provisions in the 2017 small-dollar lending rule issued under former Director Richard Cordray.
"But sources familiar with the agency's thinking say the CFPB — now led by Trump appointee Kathy Kraninger — has concluded the best approach is to remove those provisions altogether. Under the current rule, which has not yet gone fully into effect, lenders must verify a borrower's income as well as debts and other spending, to assess one's ability to repay credit while meeting living expenses."
From The New Yorker:
Rep. Alexandria Ocasio-Cortez (D-N.Y.) made her second appearance on The Late Show with Stephen Colbert and talked up her proposal for a 70 percent top marginal tax rate:

SNL mocked Trump's approach to the shutdown:

Source: The Washington Post

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