Prime Minister Shinzo Abe’s cabinet approved about $130 billion dollars worth of new fiscal stimulus this morning, including cash payouts to low-income earners and increased infrastructure spending. It’s been a while since Japan was a trend-setter, but I’d keep an eye on this one. Calls for fiscal stimulus, income support and infrastructure spending are on the rise in many developed countries, including the U.S., and you should expect to see more in the months ahead.
The reasons are clear enough, but let’s review: 1) Monetary stimulus has reached the end of its rope: once interest rates turn negative they can’t go much lower. 2) Stagnant wages in developed countries, particularly for those without college educations, have led to increased inequality that is roiling politics in developed countries: witness Brexit, Trump, Sanders, etc. 3) Economic growth remains disappointing.
Bloomberg looks at the trend this morning with an article that begins “Was Larry Summers right after all?” The former Treasury Secretary (and reader of this newsletter – are you there, Larry?) has been pushing for fresh government spending to boost growth, arguing that it is needed to fight off “secular stagnation.” The story notes that Canada and South Korea are already rolling out fiscal stimulus. And increased infrastructure spending is one of the very, very few things that Hillary Clinton and Donald Trump agree on.
More news below.
• It’s a Merger! Tesla and SolarCity Reach a $2.6 Billion Deal
More than a month after Tesla Motors CEO Elon Musk first took steps toward a merger with SolarCity, the solar energy company where Musk is also chairman and the largest shareholder, the two sides finally have agreed on a $2.6 billion deal. The agreement calls for SolarCity stockholders to receive 0.11 share of Tesla for each SolarCity share, valuing the solar energy company’s shares at $25.83 each. Musk has maintained that he recused himself from the decision-making process after industry analysts expressed concerns that the merger would represent various conflicts of interest. SolarCity CEO Lyndon Rive, Musk’s cousin, was also reported to be among the executives who abstained from voting on the merger proposal. SolarCity now has a 45-day period to weigh other proposals before officially accepting the deal, which will allow Musk to offer customers a range of clean-energy products under one roof, from solar panels to electric cars and the lithium ion batteries they use. Wall Street Journal (subscription required)
• Global Stocks Suffer from Banking Woes, Weak Oil
Global stocks dropped for the second day in a row on Tuesday morning, as European banks slumped after stress tests failed to reveal enough industry improvement for investors. Germany’s Commerzbank helped weigh down European banking shares after the bank tossed its annual profit target while forecasting an earnings decline. Italy’s largest bank, UniCredit, also saw its shares drop amid investor anxiety over the industry. Meanwhile, oil prices climbed back over $40 per barrel, but remained weak due to ongoing global oversupply. And, Japan’s latest fiscal plans did not seem to impress investors, as Japanese bonds declined. Bloomberg
• Uber’s China Sale Still Needs Antitrust Regulator’s Approval
A potential $35 billion deal between leading Chinese ride-hailing service Didi Chuxing and Uber is not yet official, according to China’s commerce ministry, Mofcom, which said Tuesday it hasn’t received the required paperwork from the companies needed to approve such a merger. There had previously been some question as to whether or not the antitrust regulators would need to sign off on the deal, considering that neither company has so far turned a profit in China, with Uber’s Chinese unit suffering $2 billion in losses in the first half of 2016 alone. The deal would represent a bowing out by Uber in the Chinese market, where the startup has spent billions of dollars but struggled to gain footing in the competitive ride-hailing market. Reuters
• Warren Buffett Asks Trump for Decency, Tax Returns
Speaking at a rally for Hillary Clinton in Nebraska, billionaire Warren Buffett called out GOP nominee Donald Trump, challenging the real estate mogul and former reality TV star to release his tax returns before the November election, with Buffett promising to provide his own tax return. Buffett also offered a rebuke of Trump’s recent comments regarding the Muslim parents of a fallen American Army captain, asking his fellow billionaire, “Have you no sense of decency?” Meanwhile, as part of his stump speech for Clinton, Buffett also promised to provide transportation on Election Day to voters who otherwise would have had difficulty reaching the polls in support of the website Drive2Vote, which looks to arrange transportation for voters. Reuters
Around the Water Cooler
• Why Trumponomics Makes Sense to Voters
Most Americans might have a more favorable view of Donald Trump’s tax plan simply because of their fundamental opposition to the redistribution of wealth. A new study published Monday by the National Bureau of Economic Research found that between 50% and 90% of the 2,500 Americans surveyed by the study were against the idea of a system that redistributed wealth equally, even in a scenario where people’s incomes were a result of luck alone. In other words, if a majority of voters truly have a distaste for the government using the tax code to fight economic inequality, then they could be more likely to back Trump’s plan, which would not aim to disproportionately tax the wealthiest Americans and redistribute that wealth among the lower economic classes. Of course, that doesn’t mean that most Americans believe that wealth shouldn’t be more evenly distributed overall, but many just seem opposed to the idea of using taxes as the mechanism to do so. Fortune
• Oil Prices Make the Skies Friendlier for Travelers than Airlines
Fortune‘s Shawn Tully writes that America’s big airlines are currently suffering from declining revenues despite operating in a time when the skies are packed with travelers taking advantage of cheaper flights thanks to low oil prices. So, why aren’t the major carriers benefitting from cheap fuel, as well? One reason is that the bigger companies are busy taking their savings from cheaper oil and using them to compete with low-cost carriers in the sizable market for budget travelers. The result is that, while the Big Four airlines—American, Delta, United Continental, and Southwest—are spending billions of dollars less on fuel over the past year, those companies have still seen revenue decline, causing them to shed nearly 25% of their combined market value since March. Fortune
• Who’s to Blame for the Worst IPO Market Since the Financial Crisis?
It’s no secret that the IPO market has been underwhelming this year. In fact, 2016 has been the slowest year for U.S. initial public offerings since 2009, with 54 domestic IPOs raising only $11.5 billion in the year’s first seven months, compared to $22.9 billion, and more than double the initial offerings, over the same period last year. Private equity firms have become increasingly more likely to flip their company holdings to strategic investors instead of opting to go the public route, which would require them to test a market that has experienced quite a bit of volatility this year amid global turmoil and, most recently, the fallout from the U.K.’s decision to leave the European Union. Instead, companies are choosing to stay private, especially after seeing only two IPOs price above their initial ranges so far this year. Fortune
• Theranos Pulls “Bait-and-Switch”
In a much-hyped presentation at a medical conference on Monday, Theranos CEO Elizabeth Holmes had been expected to provide some scientific and regulatory details on her troubled blood-testing startup’s Edison machine. Instead, Holmes pitched a new technology—the “miniLab,” which Theranos says will perform blood diagnostics remotely—that has not yet been approved by the Food and Drug Administration. Holmes told attendees at the American Association for Clinical Chemistry (AACC) convention in Philadelphia that this is “the beginning of the next phase of the company, as we introduce our technologies to the world.” But, medical professionals in attendance were reportedly miffed that Holmes avoided providing further details on the Edison machine that Theranos had previously pitched as a revolutionary technology before the company ended up tossing out two years-worth of blood test results amid questions over the tests’ accuracy and Holmes received a two-year ban from operating a lab. Fortune