Johanna Botta discusses MMT, the airlines and reporting on FedEx’s results in Before & After from Refinitiv.
Modern Monetary Theory, or MMT, has been on the lips of many economists for a few years now. But has the Coronavirus pushed the reality of MMT into the spotlight? MMT is an economic theory that hypothesizes that a government should print money to expand spending up to the point of detrimental inflation.
In the current situation, with the market in a sudden and severe bear market territory, many workers and small business owners in financial crisis are calling for a huge fiscal response from governments worldwide. And, well, why shouldn’t they issue more debt at historically cheap levels to help the economy? That’s the question that MMT doesn’t back away from. And the answer from MMT proponents is, of course, spend and just print more money.
In traditional economics, the notion of printing money to solve a country’s problems is almost universally regarded as a bad idea. Yet MMT proposes that money creation ought to be a useful economic tool, and does not automatically devalue the currency, lead to inflation or economic chaos. And so here we are on the verge of economic chaos as it stands, wouldn’t now be a good time to find out if it works?
The major caveat of MMT, of course, is that inflation would be bad, but if the job market collapses, as most experts assume, that would alleviate the pressure. What we might find is that if MMT works in this particular crisis, then the chorus for it to be a regular phenomenon will only grow.
One advocate of MMT is Bernie Sanders. Sanders is being advised by Stephanie Kelton, an economics professor at Stony Brook University who is probably the most famous proponent of Modern Monetary Theory. The necessity of a public funds response to the economic hit has even the most hardcore-free market proponents questioning the limitations of helicopter money.
The airlines are in a very bad spot right now. Consider American Airlines that when in 2015 posted a $7.6 billion profit compared to about $500 million in 2007 and less than $250 million in 2006. This prompted CEO Doug Parker to say in 2017;
I don’t think we’re ever going to lose money again.
If only he were right. Then along comes Coronavirus, which overnight collapsed international travel and severely reduced all domestic flights. And now we find ourselves in a real moral conundrum. Should the taxpayers of the United States bail out the major airlines? How can a company with such a nice period of earnings in the last decade squander all that cash? Buybacks!
American Airlines blew most of its cash on a stock buyback spree. From 2014 to 2020 in an attempt to increase its earnings per share, American Airlines spent more than $15 billion buying back its own stock. It managed to, despite the risk of the proverbial rainy day, to shrink its cash reserves. As of this March, they are now in debt over $30 billion with a market cap of $6.6 billion.
FedEx beat their subdued earnings numbers handedly. Their EPS came in at $1.41 versus $1.27, and revenue came in at seventeen point five billion dollars versus sixteen point eight two billion. They did, however, suspend the outlook for the remainder of 2020 due to Coronavirus uncertainty. At first, the stock rallied up 7.4% to 102 a share in the aftermarket trading, only to face a reality of S&P futures, which were lock-limit down the next morning, pulling the stock below the previous day’s close of 94.96 By more than 2%.
The report is the perfect example of the sign of our times. A good report for past performance on really dour expectations with no visibility into the future. This results in investors simply having no real edge in pricing the security and defaulting to the broader whims of the markets. We’ve said economic numbers have stopped mattering, perhaps the same can be said for earnings.