19 May Weekly Economic Report CW21-2020
Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios. Views very obviously mine.
1st section: Europe [Articles 1, 2 and 3]
2nd section: US [Articles 4 and 5]
3rd section: Developing world [Articles 6 and 7]
4th section: Energy market [Articles 8 and 9]
5th section> Future scenarios [Article 10].
From the article:
The announcement was a major move for Italy as it seeks to reopen its tourism industry and salvage some of the summer vacation season.
Italy became the epicenter of the coronavirus in Europe in late February, enacting one of the world’s strictest coronavirus lockdown.
Is it too late for countries to receive tourists in this 2020, travelers seems not to be open to visit places that have been under a widespread Coronavirus contagion. In Spain, 50% of people have canceled vacation plans in 2020.
Knowing that we’re entering into a once-in-lifetime depression. Are tourists in the position of spending as much as they were used to? I think they’re not.
Monetary injections from the governments sponsored by the ECB might try to return confidence and liquidity, but in the end, it is a matter of disposable income, which is its lowest level since the ’30s.
From the article:
Economically, the new common sense is that Keynes is back. The government is having to spend, borrow, print money and extend its reach in ways unparalleled in peacetime in order to prevent mayhem. But Keynesianism is more than this – it is an entire body of thought about the way a capitalist economy functions. It goes far beyond doing all that it takes to head off a slump.
They need surefooted government that seeks active involvement of workers and citizens in decision-making to ensure the right calls are made and are widely owned.
Britain soon confronts a potential sovereign debt crisis given the scale of its deficits, made worse, although officials are too politic to acknowledge this truth even in confidential papers, by the prospect of a no-deal Brexit
It has to signal a readiness to raise taxes as a necessity, even to breaking its manifesto commitments, across the board: the country is in no mood for more austerity.
Of necessity the debt will have to be converted into shares, in turn converting the government from lender to part owner – in effect creating a kind of sovereign wealth fund.
Will Keynesianism help us in getting the economy back on track? Understood as running deficits to stimulate demand, deepening treasuries, and corporate bonds purchasing programs?
What if is precisely state intervention through monetary policy responsible for artificially inflating bubbles, such as the real estate prices?
Are governments capable of bailing out the majority of underwater businesses in exchange for part owning them? Is this feasible? Are we interested as a society in 1. Having a bigger government, 2. Putting breaks to innovation by having a bureaucrat as a shareholder?
From the article:
“We have to see that Chinese companies, partly with the support of state funds, are increasingly trying to buy up European companies that are cheap to acquire or that got into economic difficulties due to the coronavirus crisis,” the German MEP said. “We have to protect ourselves.”
Shielding EU companies from Chinese investors is important, as Beijing becomes “the strategic competitor for Europe that represents the authoritarian model of society.
“I am making it clear that countries like Italy or Spain must not use the billion-dollar aid from the reconstruction fund … to fill their budgetary gaps or to pay out pensions,” the 47-year old said. “We need strict controls to ensure that the money is spent properly.”
Is this the right time to limit foreign investment? Or is it time for thinking of it as a geostrategic factor that could change the reality of our countries regarding their political and social equilibriums?
Is the free flow of money one of the signs we’re entering on a deglobalization era?
The truth is that after depressions, when systems morph into something new and unexpected, it won’t heart any if Europe starts thinking if shareholder compositions of EU-based companies could threaten the liberal model democracy on which the union is based.
From the article:
Last week, the Treasury shocked the world when it announced that in the current quarter (the 3rd of the fiscal year), the US will need to sell a mindblowing, record $3 trillion (pardon, $2.999 trillion) in Treasurys to finance the US money helicopter.
And since it is just a matter of time before Congress has to pass yet another fiscal package which will be at least another trillion dollars, and up to $3 trillion if the Democrats get their wish, one can say that Guggenheim’s projection of over $5 trillion in debt issuance this calendar year will be wildly conservative.
Now here’s the thing: as Deutsche Bank recently showed, so far this new debt avalanche was entire monetized exclusively by the Fed, whose debt purchasing operations have been far greater than the net Treasury issuance.
As Goldman writes overnight, putting the problem in its proper context, «Central banks have been purchasing sovereign bonds at a rapid pace (Exhibit 1), faster than past QE programs in most cases. These purchases are occurring against a backdrop of a surge in fiscal deficits, which will require enormous amounts of additional sovereign supply to finance them.»
Money Helicopter [FED] > Treasuries = Imbalance
Globally the 80% of contracts, insurances, debt, investment, and other financial instruments are denominated in US dollars, creating ‘room’ for this humongous amount of newly issued money.
There is a significant concern about how this injection will be absorbed by a system that has stopped working.
Will it accelerate the recovery, or is it going to be like gasoline to the inflation flame?
Note: these numbers don’t even include the treasuries required for financing the deficit.
From the article:
The coronavirus outbreak upended markets in March, and the Federal Reserve said on Friday that the financial system had exacerbated that turmoil and warned that highly indebted businesses remained a vulnerability that could hurt the broader economy.
“While the financial regulatory reforms adopted since 2008 have substantially increased the resilience of the financial sector, the financial system nonetheless amplified the shock, and financial sector vulnerabilities are likely to be significant in the near term,”
“Economic activity is contracting sharply, and the associated reduction in earnings and increase in credit needed to bridge the downturn will expand the debt burden and default risk of a highly leveraged business sector,”
“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse or financial system strains re-emerge,” the Fed warned.
2008-2009 Recession, measures were taken to avoid system fragility. Those measures helped to keep banks steady while Coronavirus hit the market in March/April, but Fed states there’re ”vulnerabilities are likely to be significant in the near term.”
How ambiguous could a situation be? Not to mention that a significant shock on the supply side that leads to a shutdown of the economy can bring a massive wave of credit defaults not only corporate but in Real Estate.
Is the Fed in the capacity of supplying the system not only buying treasures and corporate bonds but also bailing out potentially in risk banks? [Chapter 11, what is it?].
What are we missing here? If there’s no need for the system to produce to keep growing, let’s print our way out of depression.
From the article:
Government measures to limit the spread of COVID-19 continue to affect household access to food in urban and rural areas across the region… Movement restrictions and social distancing measures have widely reduced poor households’ sources of income, especially among those who rely on income sources in the informal sector. Further, remittances from the United States and Europe have declined.
In Central America, a forecast of average precipitation from May to August is most likely to overcome short-term rainfall deficits and favor an average Primera harvest in August/September… Poor rainfall performance is delaying agricultural activities…
In Haiti, the socio-political situation remains calm but unpredictable, while inflation continues to be the long-term driver of high food prices. Crisis (IPC Phase 3) and Stressed (IPC Phase 2) outcomes continue to be driven by high food prices and exacerbated by the indirect impacts of COVID-19 on market functioning, remittances, and household income.
Political instability in developing countries → Migration.
Political instability in developing countries → Proliferation of gangs, illegal activities.
Political instability in developing countries → Failed states.
Are we convinced that Coronavirus depression is something we can attack from an ‘each’ country perspective? How likely is that after a couple of years, systemic problems go back to bite us?
Remittances are reaching all-time lows and monetary flows that help weak governments stay in power because if they had to cover what people received from abroad, there would be thousands of protests each year in Central America, Southeast Asia, or Africa.
Or is China’s Development Bank coming at the rescue?
From the article:
The developing world is on the cusp of its worst debt crisis since 1982. Back then, three years had to pass before creditors mounted the concerted response known as the Baker Plan, named after then-US Treasury Secretary James Baker. This time, fortunately, G20 governments have responded more quickly, calling for a moratorium on payments by low-income countries.
…”The crisis currently engulfing the emerging and developing world is unprecedented. More than $100 billion of financial capital has flowed out of these markets – three times as much as in the first two months of the 2008 global financial crisis”…
[In 1982] …”Debts were written down. Bank loans were converted into bonds – often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners” – subsidies that collateralized the new securities and enhanced their liquidity”…
- High unemployment rates.
- High rates got submerged economy.
- Higher interest rates (compared to US, EU).
- Non-industrialized economies.
- Low level of specialization.
Result: LA countries will have to negotiate how to get funds to cover trade and capital imbalances, in a hard-to-deal-with market. Getting financed will come under the figure of highly tailored conditions in lenders’ favor.
What’s the most probable scenario: Inflation and exchange controls. Some exceptions, like Chile or Colombia, might be seen as references for the rest of the region.
From the article:
Driving in the United States and Europe is picking up a little. Refineries in China are buying more oil as that country’s economy reopens. Saudi Arabia and Russia ended their price war and slashed production, and American oil companies are decommissioning rigs and shutting wells.
All those developments have helped push up oil prices modestly in recent weeks. On Friday, U.S. oil futures climbed more than 7 percent to nearly $30 a barrel, which is just enough for some of the best oil wells in the United States to break even.
The International Energy Agency expects gasoline demand in the United States this month to be down 25 percent from last May. While that is hardly good news for the oil industry, it is a big improvement from the 40 percent decline in April.
Multiple recovery curve shapes have been mentioned, V, U and, L. But, last week I’ve heard there’s a new type, ‘the swoosh recovery’, resembling Nike’s logo.
Chances are that recovery won’t be fast, continuous, and somehow defined. It is likely that we will alternate ups and downs until we wither solve whole systems predicaments or until substituting the current model for something different (which can take years to achieve).
To me, this type of headlines is more wishful thinking, kind of news that is not supported by overall analysis but to minor changes in prices due to even smaller changes on the demand side.
Demand will rise but it will have a ceiling, which is people’s capacity to consume. If there’s not disposable income available, there will be no boost on the demand whatsoever.
From the article:
The Commodity Futures Trading Commission has warned that as the expiry date for the June West Texas Intermediate contract approaches, the chances of extra price volatility have increased. The regulator told brokers, exchanges, and clearing houses that «they are expected to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing.»
There are some early signs that demand for oil may be on the mend, too, with gasoline production rising last week and inventories falling by 3.5 million barrels. Storage space for crude, however, remains constrained due to the sheer size of the overhang on a global scale. This means that a second selloff is a very real possibility and a temporary slide of WTI below zero is also possible.
Price volatility again in May contracts → is economic activity recovering as expected? Or is it only wishful thinking? Is it more like an L or a Nike Swoosh?
Changes in society’s way of life will be translated into less dependency on energy sources, in specific fossil fuels. Understood as minimum car use, fewer flights, and less industrial activity due to a slump on the demand?
3/4 of our energy supply (before Corona) came from fossil fuel. Either we decrease its use due to demand destruction (not for the sake of the environment), or we come up with the same model of society, on which to recover previous activity levels we will end up consuming more carbon emitters fuels.
From the article:
Unlike 2008, this is a crisis of the real economy, as both supply and demand are taking massive hits in an unprecedented amount of time. But just as important is the continuing threat posed by the coronavirus. For all the talk of us reaching “peak” coronavirus cases, this is not going to be a “peak” in the style of Mount Fuji—steep ascent, a sharp peak up top, followed by a steep descent.
There are plenty on unknowns, but for my money, I’d say it’s years before the U.S. unemployment rate falls back down below 10 percent.
We should really be concerned about middle-income and developing economies in a coming global depression given that they have even less resources, less resilient healthcare infrastructure, much larger populations and much more unsustainable debt.
To avoid the worst of what’s to come, we need better global cooperation. Maybe starting to use the term “depression” will begin focusing minds in the right direction. And if we play our cards right, maybe we could avoid a “great” depression and just get a middling one instead.
Are politicians responsible enough to admit that locking down societies following the Chinese model of dealing with the virus has been a complete disaster? In the beginning, it was feasible to think we had to ‘stop life’ to understand how the virus acted. But then, weeks passed, and under the excuse of flattening the curve, the economy entered on hibernation mode, which is no more than ‘value destruction mode.’
For the sake of keeping life above the economy, they have caused precisely the contrary, to jeopardize life by posing multiple risks on the countries they rule. Debt creation, rampant unemployment, and nationalism exacerbation. Now, the industrial fabric has to be recovered, and hundreds of companies bailed out in different sectors.
In the end. who’s going to pay for it? The usual suspects, workers, and small/medium size companies.