Category: General

by JC Parets

In current markets, there was a huge party that got busted in February. But not to worry. There is a new fiesta in the making as we speak. It’s in the gold mining space. Full margin. And if everybody’s gonna be there, we oughta get there first.

So far, we’ve only wanted to own the very best miners with the highest momentum and relative strength readings, like Newmont, for example. But these were the exceptions, not the rule. Now that the Gold Mining Index has broken out, we can expand our horizons and approach the whole space from a broader bullish perspective.

Click on Charts to Zoom In

43 is next, but ultimately I think we get all the way back to 62 and those epic 2011 highs.

The way I tried to explain it to a friend of mine this week was that Gold Miners have organized a killer party: Caterers, band, open bar, magicians, the whole thing. They went all out for this.

What I mean by that is, this party took a long time to plan. You can’t just send out invites and put all this together over night. This is a process. You need like a party planning committee and stuff to do this right.

In fact, this party took almost a decade to organize. We know a lot of people who got tossed around in that mess this whole time, while everyone else was having fun elsewhere. NOW, we’re the ones that show up, a little fashionably late, looking good and refreshed, and ready for a good time.

What’s important to remember here through, is that when you arrive to this party, that you understand who’s already here. There are folks who look like they just went through war. They’ve been organizing this party for so long and have lost so much, both monetarily and emotionally, that they’re punch drunk at this point. They don’t know the difference. They’re not seeing clearly. What’s another keg stand or couple of shots at this point?

This is what it looks like if you were one of these early arrivers over the past decade. You missed out on all the fun at the house down the block.

Party At The Golden Moon Tower

Now on a weekly basis, we’re witnessing things that couldn’t happen – actually happen.

April 20 – Bloomberg (Catherine Ngai, Olivia Raimonde, and Alex Longley): “Of all the wild, unprecedented swings in financial markets since the coronavirus pandemic broke out, none has been more jaw-dropping than Monday’s collapse in a key segment of U.S. oil trading. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory — minus $37.63 a barrel.”

For posterity, the latest numbers on U.S. monetary inflation: Federal Reserve Assets expanded $205 billion last week to a record $6.573 TN. Fed Assets surged $2.307 TN, or 56%, in just seven weeks. Asset were up $2.645 TN over the past 33 weeks. M2 “money” supply surged $125bn last week to a record $16.870 TN, with an unprecedented seven-week expansion of $1.362 TN. M2 inflated $2.329 TN, or 16.0%, over the past year. Institutional Money Fund Assets (not included in M2) jumped $123 billion last week. Over seven weeks, Institutional Money Funds were up $845 billion. Combined, M2 and Institutional Money Funds jumped a staggering $2.207 TN over seven weeks ($100bn less than the growth of Fed Assets).


There are these days three critical international Fault Lines – Europe, the emerging markets and China – that were demonstrating heightened fragility even prior to the pandemic’s catastrophic blow. Europe – with its structurally weak economies, fragile banking systems, social and political instability, and vulnerable euro currency regime – is a precarious Fault Line. In particular, COVID-19 is absolutely clobbering Europe’s own internal Fault Line. Spain and Italy trail only the U.S. in global infections. European ministers met again Thursday in an attempt to cobble together some type of agreement for an EU COVID stimulus package.

Italian yields rose five bps this week to 1.84%. There’s more to the story. Yields traded as high as 2.27% in Wednesday trading, up 48 bps in three sessions to the high since global markets were “seizing up” back on March 18th. Heading into Thursday’s EU emergency meeting, yields were up across Europe’s periphery. At Wednesday’s trading highs, a three-session surge had yields up 37 bps in Spain, 36 bps in Portugal, and 50 bps in Greece.

April 23 – Associated Press (Lorne Cook and Raf Casert): “European Union leaders agreed Thursday to revamp the EU’s long-term budget and set up a massive recovery fund to tackle the impact of the coronavirus and help rebuild the 27-nation bloc’s ravaged economies, but deep differences remain over the best way to achieve those goals… But the leaders did agree to task the European Commission with revamping the EU’s next seven-year budget — due to enter force on Jan. 1 but still the subject of much disagreement — and devise a massive recovery plan. While no figure was put on that plan, officials believe that 1-1.5 trillion euros ($1.1-1.6 trillion) would be needed.”

April 23 – Bloomberg (Birgit Jennen): “German Chancellor Angela Merkel called for a Europe-wide economic stimulus program to be financed by the European Union’s budget, making a national appeal that helping partners would be good for Germany. ‘A European growth program could support an upswing over the next two years, and we’ll work for that,’ Merkel said in a speech to the lower house of parliament in Berlin… ‘We want to act quickly in Europe, and we of course need instruments to be able to quickly deal with the effects of the crisis in all member states.’ She urged German lawmakers to move fast to make a planned 500 billion euros ($540bn) in EU spending available as soon as June 1.”

EU ministers, once again, kicked the can down the road – which spurred an immediate decline in periphery yields. Who will pay for massive – Trillion plus – stimulus spending plans – other than the ECB? Italy came into this crisis with national debt-to-GDP approaching 140%. In a likely scenario of GDP contracting 10% – and with debt surging at least 20% this year and growing rapidly again next year – it’s not long before Italy is facing an unmanageable 200% of GDP debt load. Conservative estimates have Portugal government debt expanding to 146% of GDP this year and Greece to 219%.

Italy’s weak coalition government is arguing for the EU to issue system-wide “coronabonds,” then employing these funds for grants to troubled nations. Germany, the Netherlands, Austria and other “northern” nations remain adamantly opposed to debt mutualization.

The Conti government is warning EU officials that Italy cannot handle a surge in debt issuance – and will not put its citizens through Greek-style austerity and debt restructuring.  I view Germans and Italians sharing a common currency as unsustainable over the longer-term. I have expected hardship that would accompany the piercing of the global Bubble to again place European monetary integration at risk. Italy’s deteriorating circumstance risks sparking public support for exiting the euro.

April 24 – Bloomberg (Alessandra Migliaccio): “Italy’s credit grade was left unchanged by S&P Global Ratings, which said the nation’s diversified and wealthy economy, net external creditor position and low levels of private debt partly offset the drag from high public leverage. The BBB rating is still just two notches above junk, and S&P kept its negative outlook, which means the risk of a downgrade remains. The country’s financial position has been severely weakened by the cost of dealing with the coronavirus… The country’s rating could be lowered if the ratio between government debt and gross domestic product ‘fails to shift onto a clearly discernible downward path over the next three years, or if there is a marked deterioration in borrowing conditions that jeopardizes the sovereign’s public finance sustainability,’ S&P said.”

COVID-19 will hasten the loss of confidence in myriad institutions. The rating agencies will not go unscathed. Italy investment-grade? Only massive ECB purchases have kept debt service costs manageable. And who would purchase Italian bonds today if not for the unstoppable ECB backstop? What are the ramifications for the ECB loading up on such unsound debt?

The euro traded down to almost 1.07 vs. the dollar in Friday trading – near one-month lows. A euro breaking lower on heightened concerns for periphery debt and euro zone integration would only add fuel to the dollar’s upside dislocation. The dollar index was back above 100 this week. With king dollar already benefiting from the U.S.’s competitive advantage in fiscal and monetary stimulus, an additional push from a euro crisis would place only more pressure on faltering EM currencies (including the renminbi).

The Brazilian real’s 6.2% drop this the week increased y-t-d losses to 27.8%. Brazil’s local currency bond yields surged 167 bps this week to 8.77%. Dollar-denominated yields surged 40 bps to 5.04%, the high since March 19th. Brazil’s Credit default swap prices surged 78 bps to 368 bps, the high since March 31st – and only 14 bps below the closing high from March 18th. Brazilian stocks sank 5.5% in Friday’s selloff, increasing y-t-d declines to 34.9%. Ominously, Banco do Brasil sank 15.6% this week, boosting 2020 losses to 54%. Banco Bradesco fell 14.5% (down 48.5% y-t-d). Brazil as an EM crisis Fault Line?

April 24 – UK Guardian (Dom Phillips): “Brazil’s government has been plunged into turmoil after the resignation of one of Jair Bolsonaro’s most powerful ministers sparked protests, calls for the president’s impeachment and an investigation into claims he had improperly interfered in the country’s federal police. In a rambling televised address…, Brazil’s embattled president denied claims from his outgoing justice minister Sérgio Moro that he had sought to appoint a new federal police chief in order to gain access to secret intelligence reports… ‘Sorry Mr Minister, you won’t make a liar of me,’ Bolsonaro declared… Moro’s bombshell allegations sparked pot-banging protests and an immediate outcry among Brazil’s political class, with Brazil’s prosecutor-general Augusto Aras requesting supreme court permission to launch an investigation. ‘Moro’s testimony … constitutes strong evidence for an impeachment process,’ tweeted Flávio Dino, the leftist governor of the northeastern state of Maranhão.”

This week’s EM currency weakness wasn’t limited to Brazil. The Mexican peso sank 5.1%, with y-t-d losses up to 24.2%. The Colombian peso was down 2.5%, the South Korean won 1.4%, the Hungarian forint 1.4%, and the South African rand 1.2%. Notable y-t-d EM currency declines include the South African rand’s 26.5%, Colombian peso’s 19.0%, Russian ruble’s 16.9%, Turkish lira’s 14.7%, Chilean peso’s 12.5%, Hungarian forint’s 10.4%, Indonesian Rupiah’s 10.0%, Argentine peso’s 9.9% and Czech koruna’s 9.7%.

EM booms were a central facet of the global bubble, thriving from a confluence of overheated domestic credit systems and booming Chinese demand and credit excess, along with unparalleled leveraged speculation and international inflows.

In past cycles, international speculative flows would gravitate freely into EM booms, only to eventually be trapped by collapsing currencies, illiquidity and capital controls – come the arrival of the bust. After the most protracted of booms, I believe a historic bust has commenced. The shocking precision of COVID-19 strikes on the susceptible – this week in Brazil.

Collapsing EM currency and bond prices were key aspects of March’s “seizing up” of global markets. Central bank policy measures – including the Fed’s expanded international swap arrangements – along with the global rally have somewhat stabilized “developing” markets. Yet EM remains the global financial system’s weak link. EM has added unprecedented amounts of debt during this long cycle, too much dollar-denominated. Widespread debt restructuring and defaults seem unavoidable.

EM now faces a very difficult road ahead. “Hot money” outflows have commenced, currencies have faltered, and bond markets have turned unstable. Acute financial and economic fragilities have begun to surface.

Importantly, EM central banks lack the flexibility to employ monetary stimulus to the extent enjoyed by the major central banks. Liquidity injections risk exacerbating outflows and currency crises, at the same time stoking inflationary pressures and bond yields. Sinking EM currencies and bond prices then incite panicked “hot money” outflows, dislocation and financial crisis.

To make a bad situation worse, aggressive stimulus by the Fed bolsters U.S. Treasuries and securities markets, drawing international flows to king dollar. The stronger dollar then further pressures EM currencies and stokes de-risking/deleveraging dynamics.

EM has entered what I expect will be a deep multiyear downcycle, with far-reaching market, financial, economic, social and geopolitical ramifications. Emerging market economies, certainly including China, played a powerful role as the “global locomotive” pulling the world out of the previous crisis period. They will now act as a major economic drag – and a Fault Line for global financial crisis.

By George Friedman apr21 2020

A recession is an essential part of the business cycle. Among other things it culls the weaker businesses and redistributes capital and labor for better uses. It is painful but necessary and it ends as it began, as a function of a healthy economy.

Depressions are not economic events; they are the result of exogenous forces such as wars or disease. Depressions are not a necessary culling but a byproduct of the savage destruction of these external forces, which not only disrupt but destroy vast parts of humanity and decency, along with the economy. Therefore, the question of whether we are now in a depression or recession is not an academic question but the single most important question that humanity faces. We will recover from a recession. We will recover from a depression as well, but it will take much longer and involve far more pain.

Depressions are economic events not created by economic forces. Therefore, measuring the depth of a depression by economic measures alone is insufficient. The measure of a depression is the extent to which it will destroy the hopes and dreams of a generation, making what had been in easy reach inconceivably far away, and taking successful people and reducing them to penury. Like many things, the face of depression is readily recognized even if it is difficult to quantify. Among other things, if for example an economy were to contract by 30 percent, recovering from that by, say, a 4 percent growth rate would not be a triumph but a confirmation that we would be beginning to climb out of depression.

The United States emerged from its last depression in World War II, so it has been almost a century since we have experienced one, and the one that we experienced arose from war and was solved by war. World War I created a massive depression in most of Europe. Germany was particularly savaged by the Treaty of Versailles, but Britain, Russia and Poland were also wrecked in different ways. The cause of the depression was that over four years at least 20 million Europeans, for the most part the next generation, had died. For four years the economy was focused on building weapons and ammunition. Shell-shocked soldiers came home to shell-shocked nations, an industrial plan irrelevant to anything but war, and the thanks of their fellow citizens. They did not come back to the futures they had imagined, but then those who did not go to war had their futures shattered as well.

Economists like to point to periods during the 1920s when the economy grew, but sporadic growth does nothing to affect my definition of depression. The term “lost generation” came about to refer to the cynical intellectuals who arose in the 1920s, but it more accurately describes, for example, the soldier who had hoped to own a shoe store but now found himself in a country where shoes were no longer bought but only mended.

This was not unique to any one country, save the United States, which fought for only a year and came home to a country able to produce the engines of war and the men who manned them, and all the food that could be imagined. For the most part their dreams were kept alive, for a while. But the persistence of the European depression meant that the U.S. could not resume its role as exporter. Instead, Europeans who had jobs at lower wages than the Americans undersold American products in the U.S. Washington’s response was a tariff on European goods that changed the structure of global trade, and added the United States to the list of casualties. I won’t trouble you with the details of the American depression. One of the characteristics of the greatest generation was that, having gone through the depression, they saw World War II as their great hope.

Depressions become a political event. There are those who do well in such times and want to preserve the depression. There are others too rich or poor to know that there is a depression underway. And there are those politicians who either invoke ancient ideology irrelevant to the moment, pretending to know what to do and figuring that no one will notice that they don’t, and a few who know that in a crisis the people will rally to those who actually care and plan.

One of these latter politicians was Lenin. Russia was utterly shattered. The leaders didn’t care. Lenin did and knew what to do. He famously said that you can’t make a pie without breaking the crust. To speed things up, he ordered bakeries to bake only crusts for breaking, forgetting the pie. But there was little to be done with Russia.

In Germany, a leader emerged who recognized that unemployment was the heart of the problem and presented fascism as the solution, along with something vital: someone to blame. He nationalized the economy while leaving business in place, and nominated the Jews as the villains, to wild applause.

These are the people who come out of depressions. The successful are monsters; the decent can’t control the forces that depressions unleash. Roosevelt’s New Deal helped some but didn’t change the reality. World War II offered the greatest stimulus package of all time. Depressions create desperate people hungry for everything — above all, some hope for a future. Hitler and Lenin were one kind of leader; Roosevelt and the other European leaders were another kind. In the end, the solution was not found by the Federal Reserve but the military.

World War II did not end the depression, save for in the United States. Europe was once again in depression. China and Japan were ruined. When I was a child, the words “Made in Japan” brought laughter and the expectation of cheap and trashy goods. The solution came because the Americans feared the Soviets and created aid packages for allies and the right to sell cheap goods to the U.S. The skilled workers of Eurasia were either led into a generational depression by the Soviets or into recovery by the Americans. Again, depressions and the possibility of war went hand in hand.

The coronavirus crisis has similarities to war. The state mobilizes the people heedless of consequences. The workforce, or a large part of it, is diverted from its work. Schools are closed. Most of all, we are afraid. Even the question of how the virus began has hints of retaliation assigned to it. The enemy is death, in this case from the virus. We duck and cover, and in a war, the rule is that there is no price too high to be paid for victory.

But victory in war and victory against the coronavirus are very different. This leads us to ask what victory in this case should look like. The virus should go away, on its own or from a vaccine. And the world should return to what it was. Yet the problem of war and depression is that the world doesn’t go back to what it was. It is very different, and in its mildest form it causes the survivors to change their dreams — but most important they will still have dreams. They will not have to abandon their right to dreams.

So those are the questions of the moment. First, will the virus be defeated or go away? If it remains, will we accept the permanence of the new disease or will we conduct a war that will transform the world in unknown ways? Second, is this like the depression after World War I, a global crisis? We Americans do not control how the world will react to the choice we have made, and decisions by Canada or Italy could affect how we live.

For what it is worth, I don’t think we have reached the depression point. I don’t think the numbers show it yet, and the despair of depression is not here yet. But some part of the world may have reached that point, and depression spreads its claws. The urgency on vaccines and openings I think reflects a sense of fear of reaching the breaking point, but as I have written in my book about the United States, we are a uniquely inventive people, and this is in the end a technical problem.

Still, it is useful to bear in mind the past. When we look at the first half of the 20th century, the economy was a prisoner of war, and contrary to the histories of the time, it was not economic theory that defined things. But the political systems made the decision on the price to be paid, and the price was enormous in terms of death. In all of this equation, the dark reality is that solving this without accepting death will be difficult — unless the medical profession has an emergency mode.

Recession and Depression

I think it is way to early to take a call based on fundamentals but if you get some help from capital flows and technical analysis you get more inputs for decision making.

Today I had a discussion on state of markets with Neppolian of Jade Finance and Management Advisors LLP

Summary

I feel now Corona and Crude will no more act as fear factors or reasons for any ensuing fall . Corona and Crude oil are HISTORY. We should not focus on them anymore.

Could there be any other  lurking Blackswan ….possible and we can remain open about them.

Technically markets are at levels both price wise and time wise (faster retracement in half the time of fall). They should  start weakening from coming week ideally.  We can remain with bear case till then.

However if they don’t start falling from coming week, then we should be prepared for more melt up in markets. We must slacken our bear case. On a non technical basis,  am very very clear that all the money printing that has happened across the globe (excluding India) is inflationary by nature….and equities should do good in an inflationary environment along with gold.

I feel markets can now only come down purely based on technical reasons or if the world has under printed to not fully cover the economic impact.

My view is if the world is moving towards either inflation or reflation then the most money will be made in cyclicals like metals, industrials etc.

I also feel industry facing banks should do better than retail customers facing banks

Chemical and Fertilizer stocks should do better than FMCG

Disclaimer: This is not an investment advice. Please do your own do diligence by “Watching CNBC” before you take any investment decisions

what an interview…..Louis interview with Macro voices covers everything .

1000 litres of milk at 1 euro

2009-2019 china giving first world infrastructure at 3rd world price leading to deflation

2020- massive wave of deglobalisation leading to rising inflationary pressure

This interview took place when may contract for oil was collapsing in negative territory… so listen to it live

https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/833-all-stars-102-louis-vincent-gave-charting-a-path-toward-post-covid-macro-reality

Excerpt from IMF report

Highlights:

• Emerging markets (EMs) have experienced unprecedented portfolio outflows in Q1:2020. The COVID-19 pandemic, the oil price collapse and a sharp deterioration of the economic outlook have fueled a precipitous pullback of nonresident portfolio flows. EMs have seen $96bn of outflows since 21st Jan, equivalent to 0.4% GDP of EMs, making this sell-off episode the largest reversal since the GFC . The speed of reversal is also particularly notable, posing challenges for countries with large external financing needs. Outflows have been initially concentrated in Asian equities but have since accelerated across most countries and extended to bond funds (hard currency funds in particular), making this episode the most broad-based since GFC . Within different investor categories, available data indicates that retail-oriented funds have faced large outflows .

• Within the EM bond funds, active funds have experienced most of the outflows ($38bn in March), while passive funds have seen more modest pressures so far ($10bn). The recent pickup in outflows from passive funds may also reflect the action by benchmark-driven investors (BDI) due to a series of sovereign rating downgrades by global agencies in March. In particular, South Africa has been downgraded to junk status by Moody’s. Analysts expect BDI-driven outflows to range between $3-5bn, noting that the economy has already seen $3bn debt outflows year to date, on top of $6.2bn in the last two years. Mexico has been downgraded to BBB rating by S&P. Analysts are now focused on Moody’s rating (currently at A3 with a negative outlook) and the potential for Pemex to become a sub-investment-grade credit. As discussed in the GFSR, BDIs have grown significantly in last few years and are increasingly more sensitive to external shocks. Portfolio flows, which had been highly volatile in 2019 due to trade-related uncertainties, had started to recover late last year through January for most countries, before coming to a sudden stop in February – making it the worst month since 2010.
• Looking at the broader EM capital flows (ex. China), the latest available balance-of-payments data show a decline in both inward and outward FDI and bank flows in the second half of 2019 (Charts 9 and 10). FDI to EMs (ex China) moderated to about 2 percent of GDP in Q4, from about 2.3 percent in the four preceding quarters and 2.5 percent in the last 10 years – reflecting EM growth downgrades and business uncertainty. The aggregate current account surplus of EMs (ex. China) has eroded over the last three quarters, though net capital flows have been supported by a steady decline in resident outflows . Reserve accumulation trends have diverged across economies, with Latam countries coming under pressure (Brazil and Colombia continued to intervene through March), while India and Russia built up reserves through 2019 .

• Net capital flows to China had started on a strong note in 2019 but have moderated over the last few quarters. The flows have been driven by a sharp rise in resident outward investment in the second half of 2019. Non-resident portfolio flows have been relatively stable, with inflows associated with China’s inclusion in global benchmark indices (IMF blog) partly offset by outflows related to trade uncertainty and EM-wide pressures . PBOC has shifted from buying reserves in Q1 to selling reserves through 2019.

Global capital markets are not pricing in the growing likelihood of rising EM corporate defaults.

Scott minerd via
https://www.guggenheiminvestments.com/

Despite the massive programs that have been swiftly put in place by central banks and fiscal authorities around the world, global capital markets remain extremely fragile. After a long cascade of negative shocks to the global economy, yet another lurks on the horizon. Many investors in the United States and elsewhere have yet to focus on the vulnerabilities faced by emerging market (EM) countries and corporations. Proof of investor complacency is clearly evidenced in the largest emerging markets bond exchange-traded fund (ETF). Currently, that ETF yields just 5 percent, not much higher than it yielded at the beginning of the year.

Investors seem to ignore the fact that while the global economic shutdown is synchronized, the spread of the virus is not. Daily new cases of COVID-19 are growing rapidly in EM countries (excluding China and Korea) as they begin to decline in parts of the developed world.

COVID-19 Cases Rising in the Emerging Markets

Source: Guggenheim Investments, Bloomberg. Data as of 4.10.2020.

The emerging markets soon will be hit very hard by the global pandemic. The pandemic will be followed by goods and food shortages, and social unrest. Before the virus hit them directly, EM countries had already been adversely affected by falling commodity prices and the economic impact of the shutdown in China and other parts of the developed world. Most EM countries have very weak healthcare systems, nowhere near enough hospital beds and respirators, crowded cities and slums, and large numbers of workers in the economy who are paid daily wages or work in the informal economy and can’t work remotely. For many EM countries, this pandemic will quickly escalate from a health crisis to a humanitarian crisis, and ultimately to a solvency crisis. Political stability will be the last domino to fall.

The current mispricing in the face of these challenges and the systemic risk that they pose to global markets is happening despite an unprecedented surge of capital flight from emerging markets. The outflows of hot money capital—equity, debt, currency, loans, trade credits—are weighing on foreign currency reserves holdings, as countries intervene to defend currency pegs, dampen volatility, prevent a spike in the local currency value of foreign currency obligations, and deter further capital outflows as a result of currency depreciation.

Capital Flight Weighing on EM FX Reserves

Source: Guggenheim Investments, IIF, Haver. Data as of 4.10.2020.

The total debt of EM governments and corporations as a percentage of gross domestic product (GDP) is significantly higher than it has ever been. Collectively it stands at over 180 percent, up from 110 percent during the Asian debt crisis. In recent months, many EM countries—such as Brazil, South Africa, Argentina, Ukraine, Nigeria, and Indonesia—have seen some market pressures reflected in widening credit default swaps (CDS) and cash bond spreads, in addition to currency depreciation.

Emerging Markets Are Highly Vulnerable in this Environment

Emerging Market Debt to GDP (Corporate + Government)

Source: Guggenheim Investments, IIF. Data as of 9.30.2019.

One of the most disturbing aspects of emerging market debt is the record amount of dollar-denominated securities that have been issued by EM corporations during the past decade. This contrasts with the Asian debt crisis, when it was sovereign borrowers and banks that were unable to access hard currency to service debt and fund large current account deficits.

My biggest concern is that this crisis will be much deeper and more prolonged than people anticipate, which leaves a lot of space for another shoe to drop in the global financial crisis. A default or debt restructuring in the emerging markets will likely lead to an increase in borrowing costs just as their economies are contracting. Like in the United States, EM countries will engage in fiscal stimulus, which will cause fiscal deficits to balloon. Borrowing costs in most of these countries have already been rising over the course of the last month or so, and at some point, the debt will become prohibitively expensive. Rising borrowing costs will limit the fiscal flexibility needed to address the public health and economic crises in these countries.

Just as in the United States, EM countries will look to their central banks to monetize the debt, but monetary policy space is also constrained. Rich countries can drop helicopter money on their economies with relatively little consequence, but EM monetary and fiscal solutions will further weaken their currencies, making access to dollars even harder for corporations that are also experiencing a slowdown in cash flows. In time, EM corporate defaults will rise, adversely affecting the ability of other borrowers from the developing world to get access to credit in the global financial markets.

EM Currencies Have Been Battered by COVID-19, With More Pain to Come

Year-To-Date Currency Performance Versus the U.S. Dollar

Source: Guggenheim Investments, Bloomberg. Data as of 4.10.2020.

Multilateral institutions like the International Monetary Fund (IMF) were very effective during the Asian crisis because they were able to funnel dollars to governments that needed help when their local currencies collapsed, conditional on countries pursuing needed economic reforms. This time, however, it will be harder for the IMF to reach the entities in need of assistance because it doesn’t directly interact with EM business communities. The IMF will need to work with EM governments to build the infrastructure enabling corporate borrowers to obtain foreign currency, including dollars, as needed. Stabilizing economies and balance of payments dynamics will be much more challenging in light of the sudden stop in economic activity caused by COVID-19.

The scale of action required at this time is far greater than any of us would have contemplated even a few weeks ago. The global contraction in output will be very similar to the contraction during the second world war when a significant percentage of output was wiped out due to the destruction in Europe. Easily a 20 percent decline in the approximately $10 trillion in GDP outside G20 countries will result in a demand gap of about $2 trillion that will need to be filled to keep these economies functioning at their current levels. By comparison, in the United States we have about a $22 trillion economy, so the estimated 10–15 percent contraction in GDP will mean that a demand gap of about $2 trillion to $3 trillion will need to be offset with government stimulus.

Global capital markets are not pricing in the growing likelihood that defaults by large corporate borrowers in emerging markets will rise, which will set up another cascade of market events like the downward trajectory we saw in 1997.

Currently, the demand gap in the United States is being partially filled by aggressive fiscal and monetary policy. But it will be a challenge to fill the demand gap in emerging markets. I believe it will take a coordinated effort on the scale of Bretton Woods to develop a monetary infrastructure that will enable emerging market countries to manage through this and future crises. The IMF and World Bank, which were established at Bretton Woods, are well-situated to play a leading role in this effort, but they will need the rich countries of the developed world to coordinate and provide the resources. This is a huge challenge, not least because growing nationalism in various parts of the world, the rise of China as a geopolitical counterweight to the United States, and domestic fiscal strain at home will result in even less willingness to engage in international policy coordination.

In the short run, policymakers—including the IMF, which holds its Virtual Spring Meetings this week—are already discussing possible steps to address this looming problem. Some solutions have been tried in past sovereign debt crises, to varying degrees of effectiveness, while others are new ideas. For example, details are being worked out on an arrangement for the G20 countries to offer relief on bilateral loan repayments to 76 of the world’s poorest nations. It is a start, but this kind of debt moratorium will likely need to be expanded. Other possible remedies for addressing an EM debt crisis include governments and other supranational agencies providing credit enhancement and loan guarantee programs for corporate borrowers, or expanding the IMF’s Flexible Credit Line (FCL) to meet the demand for crisis-prevention and crisis-mitigation lending.

Fragile credit markets will be supported by the right policy measures, but the more important beneficiaries of these programs are the people of the developing world. They are at the mercy of a rampaging pandemic and an economic system that is not prepared to cope with it. The spread of the coronavirus is showing us how our interconnected world renders us all vulnerable to common health and economic risks. If policymakers in China, Europe, Japan, and the United States are well-informed about how damaging a collapse in the developing world would be, not only to themselves but to the rest of the G20, there would be greater support for building a framework to help stabilize and rebuild from the devastation we are about to experience.

Scott Galloway@profgalloway

Lenin said nothing can happen for decades, and then decades can happen in weeks. Yes, a pandemic pulls the future forward, and there’s a lot to learn. Another phenomenon that forms rain clouds of perspective is, wait for it … death. Or, specifically, being close to it.

My father is approaching 90, recently divorced (for the fourth time), and spends his days watching replays of Maple Leafs games and abusing Xanax. His affinity for Xanies is a feature, not a bug, since at the end of your life “long-term effects” lose meaning. He’s near the end, exceptionally intelligent, and high. In sum, he’s my Yoda.

Our calls are mostly me yelling short questions (“HOW ARE THE LEAFS LOOKING FOR NEXT YEAR?”) and waiting for something profound in return. Occasionally he delivers.

“You must unlearn what you have learned!”

Just kidding, Yoda did actually say that. But when I asked him what he thinks makes America different, he said:

“America is a terrible place to be stupid.”

That’s why he immigrated here. A pillar of capitalism is you can’t reward the winners without punishing the losers. I worry our government has been co-opted by the wealthy and is focused on protecting the previous generation of winners, even if it means reducing future generations’ ability to win. Aren’t we borrowing against our children’s prosperity to protect the wealth of the top 10, if not 1, percent?

read more below

https://www.profgalloway.com/capitalists-or-cronyists?utm_source=newsletter&utm_medium=email&utm_campaign=NMNM20200410

Doug Noland 11th April

Sitting at the dinner table, our eleven-year old son inquired: “If a big meteor was about to hit the earth, how much money would the Fed print?” I complimented his sense of humor. Yet it was a sad testament to the historic monetary fiasco that will haunt his generation.

Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by the end of the year.

M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did during the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.

There was a sordid process – rather than a specific date – for When Money Died. But it’s dead and buried. There are a few things that should remain sacrosanct. Money is absolutely one of them. Money is special. Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy. Society trusts Money – and with that trust comes great responsibility and risk.

Analysis I read some years back on the Gold Standard resonates even more strongly today: Limiting the capacity for inflating its supply, the structure of backing Money with gold worked to promote monetary and economic stability. Yet just as critical were the officials, bankers, businesspeople, market operators and common citizens all adhering to norms and behaviors fundamental to sustaining the monetary regime and resulting Sound Money.

In particular, there was a crucial corrective dynamic that would emerge as a system began to stray from monetary stability. Recognizing that policymakers (fully committed to the regime) would be employing measures to defend stability, market participant behavior in anticipation of policy moves would tend to reinforce stability. For example, if market participants expected officials to respond to credit and speculative excess with tighter policies, markets would exhibit a self-correcting dynamic (reduced lending and risk-taking) prior to the adoption of restrictive policy measures.

I’ve been an avowed naysayer of this global experiment in unfettered global finance for more than 25 years. We have witnessed a unique period in financial history. Never before has the world operated without limits to either the quantity or quality of “money” and Credit. Global finance moved to a massive ledger of electronic debits and credits virtually divorced from real economic wealth – debit and credit entries backed by little; and little holding back the creation of Trillions of additional new “money.” Credit is inherently unstable, and this new “system” early on proved highly destabilizing.

As degraded private Credit turned increasingly unstable, government-based “money” (central bank Credit and government debt) was employed in expanding quantities in repeated attempts to bolster waning market confidence. Witnessing the extent governments were willing to go in post-Bubble reflationary measures, just about 11 years ago I began warning of the unfolding “global government finance Bubble.”

Early on in the Bubble reflation, I warned that QE would distort markets and fuel asset price Bubbles. I would repeatedly get similar pushback: “Doug, how is it possible for QE to be distorting the markets when these Fed liabilities are just sitting (inertly) within the banking system? How can Federal Reserve “money” be in two places at once?”.

Recent weeks have offered a rather straightforward example of the mechanics. When the Fed creates new liabilities (Rothbard’s “money out of thin air”) to purchase Treasuries (along with MBS, corporate bonds, bond ETFs, municipal debt and, going forward, junk bonds and “main street” loans), these “immediately available funds” flow into the banking system where they are exchanged for bank deposits (new bank deposit liabilities matched against an asset “reserves at the Fed”). Some of these deposits will flow immediately into the money markets, especially to institutional money funds after Federal Reserve market purchases from the institutional investor community. It is certainly no coincidence that M2 plus Institutional Money funds have increased $1.81 TN in five weeks as Fed Credit inflated $1.82 TN.

Questions following Chairman Powell’s April 8, 2020, speech, “COVID-19 and the Economy”:

David Wessel, Director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institute: “The Fed has cut interest rates to zero – you’ve bought hundreds of billions worth of Treasury bonds and mortgages; you’ve launched an alphabet soup of lending programs – including some new ones today for state and local governments and mid-sized businesses – that you say could lend up to $2.3 TN dollars. Is there any limit to how much money the Fed can create – how much it can lend – without having some unwelcomed side effects – like inflation or asset price Bubbles?

Powell: “These programs that we’re using – under the law we do these…, as I mentioned in my remarks, with the consent of the Treasury Secretary and with fiscal backing from the Congress through Treasury, and we’re doing it to provide Credit to households, businesses, state and local governments, as we are directed by the Congress. And we’re using that fiscal backstop to absorb any losses that we have. And what we’ve been doing is looking for places that are very important to the real economy – things that really affect people’s lives and economic output – and where Credit to those parts of the economy has broken down… That’s essentially what we’re doing. And we can keep doing that as long as those needs arise. Our ability to do that is, really, limited by the law. We have to find unusual and exigent circumstances. The Treasury Secretary has to agree. And we are using this fiscal backdrop. But there are really no limits to how much we can do other than it must meet the test under the law as amended by Dodd Frank.”

Wessel: “Isn’t there a risk that with all of this money coming out of Congress – the money and lending – that we’ll end up with something that we don’t like, as in more inflation than we’d like or asset Bubbles?”

Powell: “Inflation has been an interesting phenomenon. Back 12 years ago, when the financial crisis was getting going and the Fed was doing quantitative easing, many people feared that the increases in the money supply, as a result of quantitative easing asset purchases, would result in high inflation. Not only did it not happen, the challenge has become that inflation has been below our target. So that is – globally the challenge has been inflation below target. Honestly, it is not a first-order concern for us today that too high inflation might be coming our way in the near-term. Far from it. These are programs that we’re developing at a high rate of speed. We don’t have the luxury of taking our time the way we usually do. We’re trying to get help quickly to the economy as it’s needed. I worry that in hindsight you will see that we could have done things differently. One thing I don’t worry about is inflation right now.”

The Fed Chair ducked the “asset Bubble” question – twice. AP: “Wall Street Caps Best Week Since 1974 on Fed Stunner” – and in only four trading sessions. Bloomberg: “U.S. Junk Bonds Rally Most in Two Decades with Fed Now a Buyer.”

There are important reasons why the Federal Reserve (and central bank generally) traditionally limited purchases to T-bills. Any central bank purchase outside of money-like instruments will impact its price along with market perception of safety. And the farther a central bank goes out the risk spectrum the greater the distortion. A popular high-yield ETF (HYG) surged 12% this week with the Fed announcing it would begin purchasing some junk bonds, a glaring example of a distorted market diverging from underlying fundamentals. And the greater the divergence, the more destabilizing the eventual collapse back to reality.

In stark contrast to gold standard dynamics, contemporary markets move only further away from stability in anticipation of only more vigorous policy inflationary measures (unsound “money” promoting the opposite of self-correcting market dynamics).

Dr. Bernanke argues that had the Federal Reserve recapitalized the banking system early in the downturn, the U.S. would have avoided the Great Depression. I have posited the key issue was not replacing some finite quantity of depleted bank capital – but rather a much greater amount of ongoing system-wide Credit required to sustain maladjusted financial and economic structures following the historic “Roaring Twenties” Credit inflation.

Non-Financial Debt (NFD) expanded $2.485 TN in 2019. This was the strongest Credit growth since 2007’s record $2.521 TN, and 42% above average annual NFD growth over the previous decade. Asset markets (stocks, bonds, corporate Credit, residential and commercial real estate, etc.) have never been so inflated. The Fed, the Trump administration and Congress are determined to immediately reflate the U.S. economy and asset markets back to where they believe are sound and sustainable levels.

This will prove a Herculean endeavor. The Fed’s aggressive liquidity measures and resulting market recovery have created a precarious dynamic whereby badly distorted and inflated markets will require persistent liquidity support. Never have such incredible “money” creation operations been used only weeks from record stock prices and economic boom conditions. I believe to sustain recovery of such an economic structure will require unending massive fiscal deficits. Regrettably, there’s no end in sight to today’s reckless monetary inflation – consequences of this Scourge of Inflationism to unfold over months, years and decades.

I worry greatly about exacerbating already threatening inequality (a consequence of When Money Died). One of the cruelest aspects COVID-19 is how hard it is hitting our minority and poorer communities. The Fed will create Trillions and Washington will spend Trillions more, and large segments of our population will undoubtedly have issues with how all this “money” was allocated. The Fed knows better than to be in the allocation game – Credit, “money” or otherwise. And I doubt their new “Main Street” program will absolve the Fed of responsibility in the eyes of the general population. The Fed now “owns” these dreadfully unstable markets – placing its institutional credibility – and trust in “money” – in peril.

When Money Died globally…

April 9 – Reuters (Judy Hua and Kevin Yao): “New bank lending in China rose sharply to 2.85 trillion yuan ($405bn) in March, with total social financing hitting a record, as the central bank pumped in more liquidity and cut funding costs to support the coronavirus-ravaged economy… New loans in March far exceeded market expectations of 1.8 trillion yuan and were three times more than February’s 905.7 billion yuan. That nudged bank lending in the first quarter to a record 7.1 trillion yuan, beating a previous peak of 5.81 trillion yuan in the first quarter of 2019… Household loans, mostly mortgages, rebounded sharply to 989.1 billion yuan in March from a net decline of 413.3 billion yuan in February… Corporate loans almost doubled to 2.05 trillion yuan from 1.13 trillion yuan the previous month. Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, quickened to 11.5% in March from a year earlier and from 10.7% in February.”

I’m left to ponder how the Chinese renminbi would trade in this environment against a sound U.S. dollar. First quarter Chinese Bank Loans of $1.008 TN were up 22% from Q1 2019 – a truly incredible expansion in the face of collapsing economic activity. Total Q1 Aggregate Financing was up 29% y-o-y to an amazing $1.574 TN. In a number difficult to fathom, Chinese M2 “money supply” surged $2.720 TN, or 10.1%, over the past year to $29.382 TN.

Fed and PBOC “money” notwithstanding, global financial conditions have tightened. Borrowers, stung by job losses, collapsing demand and risks unforeseen, will add debt more cautiously going forward. Lenders, shocked by the prospect of massive defaults across business lines, will extend Credit more cautiously. Unappreciated risks associated with myriad sophisticated financial structures have been exposed. Moreover, confidence in central banks’ capabilities has been shaken. Even in the face of massive central bank liquidity injections and market support, I still believe the risk vs. reward calculus for global leveraged speculation has been fundamentally altered. If this is correct, the Fed’s balance sheet will be getting a whole lot bigger as it continues to struggle mightily to sustain unsustainable market Bubbles.

I often highlight how the “Terminal Phase” of Credit Bubble excess experiences an exponential rise in systemic risk, with ever-expanding quantities of increasingly risky Credit. I fear we’ve commenced the “Terminal Phase” of monetary inflation, with systemic risk now rising parabolically. When Money Died.

http://creditbubblebulletin.blogspot.com/2020/04/weekly-commentary-when-money-died.html