| | | | | | | Presented By ProEdge, a PwC Product | | | | Axios Markets | | By Sam Ro ·Jun 30, 2021 | | Today's newsletter is 1,213 words, 4.6 minutes. 💬 of the day: "Buying stocks isn't only for the big players."- Megan Thee Stallion | | | | | | 1 big thing: If the Fed stopped buying mortgages |  Data: S&P CoreLogic Case-Shiller; Chart: Axios Visuals With home prices surging, some Federal Reserve officials have made the case for the central bank to back out of the mortgage securities market. Why it matters: The Fed has been purchasing $40 billion worth of mortgage-backed securities (MBS) each month in an effort to keep interest rates steady and bond markets very liquid. The big picture (depending on who you ask): Ending MBS purchases could hinder the housing market causing prices to fall, or ending the MBS purchases wouldn't do much to prices because they weren't specifically targeting that market in the first place. What they're saying: The Boston Fed's Eric Rosengren warned to the FT that "boom and bust cycles" in housing threaten the rest of the economy, reiterating his earlier statements that the mortgage market didn't need the Fed. - The Dallas Fed's Robert Kaplan and the St. Louis Fed's James Bullard agree.
- Allianz chief economic adviser Mohamed El-Erian is more blunt, telling Axios, "It is very difficult to argue with any foundation that this red-hot housing market needs continued support in the form of monthly Fed purchases of mortgage securities."
- "The benefits of the Fed maintaining its purchases are more than offset by the costs and risks, be it to the functioning of the housing market or to financial stability and the wellbeing of the overall economy."
Between the lines: While some argue the Fed risks instability down the road, long-time Fed watcher Matthew C. Klein argues that these purchases are why there isn't more financial instability today. - "The Fed's mortgage bond buying isn't targeting the housing market specifically, but interest rate volatility more generally," Klein tells Axios. "The Fed is effectively absorbing interest rate volatility on its own balance sheet."
The intrigue: SGH Macro Advisors economist Tim Duy argues that if MBS purchases aren't intended to specifically juice housing, then ending those purchases shouldn't disproportionately affect home prices. So, an attempt to address the "bad optics" of high home prices may fail because prices may not fall. What's next: Most economists expect the Fed to announce its plan to taper its purchases of MBS and Treasury securities by the end of the year, perhaps as soon as the Jackson Hole symposium in late August. |     | | | | | | 2. Catch up quick | | President Biden is considering an executive order to direct regulators to tighten oversight of big business, sources say. (WSJ) Chinese ride-hailing company Didi has priced its IPO at $14 per share, giving it a market value of $67 billion. (WSJ) Business leaders across the country are doing whatever they can to push lawmakers to pass the $1.2 trillion infrastructure deal. (Axios) Warren Buffett says the pandemic's impact on the economy is not yet over. (CNBC) | | | | | | | | 3. Jobs are easy to find |  Data: The Conference Board; Chart: Axios Visuals Just because many Americans are out of work doesn't mean they can't find a job. Why it matters: Labor shortages continue to hold back economic growth as virus fears, child care issues, and extra unemployment insurance benefits keep workers on the sidelines. Reality check: Lots of Americans aren't complaining. - A record 54.4% of consumers say jobs are "plentiful," according to a new Conference Board report.
- Meanwhile, just 10.9% say jobs are "hard to get."
- The difference between those two numbers, aka the labor market differential, is at a record 43.5%.
The big picture: "Significantly this indicates that people know the jobs market is strong thereby confirming that it is the lack of workers willing or able to fill demand, which is holding back jobs growth," ING economist James Knightley wrote. | | | | | | | | A message from ProEdge, a PwC Product | | Align skills and culture with the changing nature of work | | |  | | | | Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product. | | | | | | 4. Why the U.S. is so friendly to monopolies |  | | | Illustration: Aïda Amer/Axios | | | | The United States is the best major country in the world to be a giant private-sector monopoly. That's one message sent by Judge James Boasberg of the Federal District Court in D.C. on Monday, when he tossed out an FTC antitrust lawsuit against Facebook, Axios' Felix Salmon writes. Why it matters: There are deep structural reasons America's laws-based antitrust system finds it incredibly hard to hobble monopolists, especially ones that give their products away free. - Monopolistic behavior has to be found to be illegal by a judge in a court hearing — and there's a very good chance that the judge will subscribe to Robert Bork's antitrust doctrine, under which consumer harm needs to be shown in the form of higher consumer prices.
What they're saying: "Numerous hard-wired differences between the European and American enforcement regimes make it very difficult for U.S. antitrust enforcement agencies to emulate their EU counterparts," wrote antitrust experts Gregory Werden and Luke Froeb in an article in 2019. - In 10 different areas, they found it much easier to crack down on large monopolies in Europe than in the U.S.
Be smart: The Chinese government finds it easier still. A single request from the Chinese Communist Party will normally get it exactly what it wants. The big picture: European antitrust measures are decided by politicians; in the U.S. it's up to judges. - Antitrust is seen in Europe as regulation — an ongoing effort by the government — rather than enforcement, which first requires a finding of illegal behavior.
Our thought bubble, from Sam: U.S. regulators have a poor track record of successfully going after big companies for alleged antitrust violations, and the markets get this. On the other hand, it's usually more serious when the E.U. probes a company or China threatens a ban. Foreign regulators seem to be far more effective at bringing the hammer down on U.S. companies. The bottom line: The American system is largely built on the premise that large corporations are a good and healthy part of society unless proved otherwise. Europe — and even China — are much less likely to believe that. | | | | | | | | 5. A giant market selloff would be totally normal |  Reproduced from FactSet; Chart: Axios Visuals History says the stock market could be due for a big selloff. Why it matters: Historically, bull markets rarely happen in the form of a smooth line, up and to the right. And so, long-term investors shouldn't be surprised to see a period of poor returns. By the numbers: The S&P 500 bottomed on March 23, 2020, which means we're three months into year two of the bull market. - Since 1945, the average bull market saw a max drawdown — or its largest peak-to-trough selloff — of 10% during year two, according to BMO Capital Markets.
- These drawdowns ranged from down 5.1% to 16%.
- Since March 23, 2021, the S&P has seen a max drawdown of just 4%.
What they're saying: "Look at last year at this time," LPL Financial's chief market strategist Ryan Detrick tells Axios. "We were in the midst of a five-month win streak, yet saw millions of people lose their jobs." - "The stock market is all about the future and all of that bad news was priced into the pie."
- "Year two is the opposite, as stocks sport weaker returns, while the economy is actually much stronger. But again, much of the recovery is priced into things, so it is harder for stocks to surprise to the upside."
Yes, but: "The good news is the second year of every single bull market since World War II has seen the S&P 500 climb higher," Detrick wrote in a note. - The average year two generated a strong 12.6% return.
| | | | | | | | A message from ProEdge, a PwC Product | | Align skills and culture with the changing nature of work | | | | | | | | Readying the enterprise for the future typically includes investment in new technologies. But it also requires ensuring your organization has the right skills to make the most of these technologies. Read the guide from ProEdge, a PwC Product. | | |  | | It'll help you deliver employee communications more effectively. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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