04 May Weekly Economic Report CW19-2020
Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios.
Note: Views very obviously mine.
1. Will Swedes reach herd immunity and move forward to a better position in comparison to other countries?
Life is important. Life must be always in the center, but as exposed in different scenarios, was it possible to approach this crisis from a different perspective? Will Swedish have a better post-COVID economy overall?.
Senior scientist Johan Giesecke reconfirms that Stockholm will achieve herd immunity by mid-May. “People are not stupid. If you tell them what’s good for them..they follow your advice. You don’t need laws, you don’t need police in the streets.”
2. United Nations: The coronavirus pandemic could result in between 420 million and 580 million more people, or 8% of the global population, living in poverty, a study by the United Nations University has found.
This crisis is taking people by the millions under the poverty line. People all over the world will have a hard time not only making ends meet but surviving due to the humongous impact on the economy pandemic has had.
In Italy the mafia has started offering ‘financial instruments‘ to those not covered either by banks or the government, as Roberto Saviano tells on his article:
According to Italian anti-mafia sources, the Camorra has also started providing loans – but not at its usual high interest rates – of between 50% and 70%. Demand for loans is so high in this period that it is still profitable to offer competitive rates, even lower than those offered by the banks.
3. The World Bank predicts global remittances will fall by 20% this year
Source: World Bank, Migration and Development Brief 32
The lockdowns globally have forced neighborhood shops that provide remittance services to close or cut open hours, making the normal money transfer routes inaccessible. These shops are not categorized as essential services in most countries as the amount of money going through them do not make up a large share of the economic activities of the remittance-sending countries, according to Dilip Ratha, the lead economist for migration and remittances at the World Bank.
A reduction in the flow of money received on the ‘peripheral’ countries may lead to government insolvency, lack of income puts pressure on social and relief programs. Remittances in the majority of cases come to ‘rescue’ governments and help households to make ends meet.
Less money received from abroad has been in the past the roots of uprising movements. After the 2008/2009 crisis Arab Spring took place, overthrowing presidents at an astounding pace.
4. Oil and commodity prices continue at low levels
Red dots represent fully loaded oil tanker ships «stranded» at sea due to no global demand for oil – approx cost per day per ship is $30,000/-. (https://twitter.com/subnut)
It is highly probable that contracts due in May will go to extremely low levels or even negative, the capacity of storage is full and a myriad of ships still sit in the sea, waiting to discharge their load.
Even though this is mainly referred to as WTI prices, all ‘oil baskets’ are correlated. Countries like Saudi Arabia, Nigeria, or Venezuela that depends almost entirely on oil revenue will have a hard time trying to balance their budgets.
The red arrow indicates prices soaring originated on China’s import of oil as a continuous process of expanding its economy. It created a commodity ‘bubble’ that popped in 2008 due to the Subprime crisis.
To find a parallel situation regarding oil prices in the past, we have to go back to the ’70s, just before the Yom Kippur war. It was indeed a different world back then, the impact of Coronavirus is more significant than we can predict, not only in economic terms but in concerns to oil producers’ political stability.
Graph from the article: Oil and commodity prices are where they were 160 years ago
5. Are we in the presence of an asset bubble?
I think certainly we are, and when it pops, it will collapse the stock and credit market because this amount of leverage is unsustainable.
Which companies will be saved from the coming tsunami, those who are sitting on cash, with the capacity to keep income flowing, not susceptible to significant disruptions at least not originated in purchase preferences changes. Examples of them are the food industry, transportation, utilities, hi-tech with a high top line, and low production costs.
The graph illustrates what is called the Buffet Indicator which is mainly used to calculate how’s the stock market in relation to the GDP. In the current situation, it is over 120% – 140%, meaning that it would take one year and a couple of months for the economy to match the value of the sum of capitalizations.
The Stock Market is Significantly Overvalued. Based on the historical ratio of total market cap over GDP (currently at 132.3%), it is likely to return -0.4% a year from this level of valuation, including dividends. (Source: https://www.gurufocus.com/stock-market-valuations.php)
This is taken from GoldSilver.com YouTube Channel
6. After COVID-19, who wins and who loses?
Main Street may never be the same: The survey reveals the extent to which that small business boom has not just been stopped by the coronavirus but may forever be changed by it: 72% of all small business owners say the outbreak is likely to have permanent effects on the way they run their business.
Who’s losing here, and why?
- Informal and blue-collar workers – no salary or income during the lockdown. Machines will replace up to 70% of the low skilled workforce.
- Small brick and mortar businesses – Internet took over, no way of competing in terms of tax and sunken costs.
- Business with cashflow issues – they are not likely to be bailed out. No experience or connections to get assistance or completing the requirements for applying to a rescue plan.
- Citizens in general – we were kept in our houses. Not only at the beginning but for almost two months. Once governments advance on limiting our lives, it is difficult to make them retreat.
- Hi-Tech firms – Almost exclusively.
- Bailed out companies – Again. No surprise here.
*Note: I’m against bailing out process in general. Bankruptcy laws should be applied to those troubled companies instead of giving them money, created out of thin air.
7. From Project Syndicate: Biodiversity or Bust.
Illnesses transmitted from animals are more prevalent than ever. A 2017 peer-reviewed study found that 75% of emerging infectious diseases affecting humans, such as West Nile virus, Ebola, SARS, and Lyme disease, are zoonoses, or illnesses caused by pathogens that have jumped from animals.
In 2018, the French government adopted a policy to stop importing products linked to deforestation – such as palm oil, beef, and wood – by 2030, and it has established a cap on biofuels derived from raw materials that contribute to deforestation. Instead of the usual blame game, policymakers chose a collaborative approach with exporting countries, including the use of development aid, to encourage them to switch to biodiversity-friendly production methods. The strategy also includes a plan for “zero deforestation” public procurement and labeling requirements to help consumers make better choices.
At this point, there are fewer and fewer people denying the relationship between environmental damages made by humans and pandemics. A virus that comes from an animal or an insect specie that overtakes new areas due to the change in planet temperature.
We have to resolve our dichotomy, either we understand that always-profitable business and ever-growing economies are achievable situations but at the expense of devastating the planet or we accept that we can keep having a Business-as-Usual scenario but with lower short term benefits.
In Jørgen Randers words, ‘It is profitable to let the world go to hell’, and he continues:
‘I believe that the tyranny of the short term will prevail over the decades to come. As a result, a number of long-term problems will not be solved, even if they could have been, and even as they cause gradually increasing difficulties for all voters.’
8. Are we going greener? Answer: not as fast as originally planned.
Often, amidst the renewable energy hype, we tend to forget that the vast majority of the energy comes from non-renewable sources. Correlation between economic growth and energy consumption is positive and, in some cases, close to 1.
We must try not to be fooled by wishful thinking, the only way that we can move forward on preserving the nature and having a prosperous life under the current system is to reduce our consumption in general.
Impulsing growth in non-intensive in energy activities. Such as developing local supply networks. No all of them will be profitable or comparable to previous solutions, but it is the only way to achieve both sustainability and keeping our economic systems running.
9. Another one from Project Syndicate, The Coming Greater Depression of the 2020s, Nouriel Roubini’s forecast.
Just wanted to point out a few ideas Nouriel Roubini exposes on his article:
The policy response to the COVID-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.
How will countries deal with massive deficits? Perhaps, resetting the system? I think there will be one major scenario, governments under the pressure of growing waves of unemployed people will propose significant increases on wealthy people and companies, investments and banking system.
That might end up paralyzing the economy, but, on the contrary, raising taxes to middle-class workers, entrepreneurs, and small companies exclusively might spark the flame of instability.
With millions of people losing their jobs or working and earning less, the income and wealth gaps of the twenty-first-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.
COVID outbreak has opened Pandora’s box, subtle changes that were occurring before the virus appearance are reinforced. Why not plan a factory or service without workers, maybe with a minimum human installed capacity? What prevents businesses from starting from scratch and think about how it would be to compete in the future?
Think about this, if a company stays afloat during this stop, and is capable of getting back on track, it would be surviving to the most significant disruption ever known under this economic model on which we live.
Countries will have a growing number of permanently unemployed people—those incapable of multiple reasons to keep up with the technology and its proxies.
10. From Harvard Business Review: Why stock buybacks are dangerous for the economy?
The final article is about what I think is the scam of the decade.
How are big companies allowed to inflate their way up through buying their shares? It is indeed legal, but is it morally acceptable?
Many companies I admire, including Apple, have taken that path. In that particular case, they’re not asking for a bailout. They sit on a pile of cash ready to be used and getting back to the new normality.
What happens to those that have underinvested in its infrastructure, vehicles, or kept wages low and bought back their shares to increase their price artificially? What about that? What about making people believe that the stock market mimics reality and painting a prosperous future scenario when, in fact, the typical worker doesn’t get any option of participating in that process?
Look at this graph:
From the article:
Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.
This ‘financial engineering process’ is one the roots of inequality, a reality that ends up mining the system and the capacity of the majority of people to prosper. It’s not about opportunities is about of bring those who have the talent, invest in M&A, R&D, develop new products, conduct new ways of doing business instead of hoarding all that vast amount of money under the figure of dividends and buybacks.
Should the government jump in and forbid buybacks, I don’t think so. Should it be regulated in some way? No, no at all. What I suggest is to change the mindset, to understand that this model is not sustainable, and at some point, it will revert into massive riots on which resembling 1789’s France, some may lose their head for not being smart enough.