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Eurozone Collapse: V-Shaped Recovery Mirage Is Gone
Eurozone Collapse: V-Shaped Recovery Mirage Is Gone
Eurozone Economy Collapses 3.8% in the first quarter, the worst on record. Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).
Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video.
EUROZONE COLLAPSE
The V-Shaped Recovery Mirage Is Gone.
https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 @YouTube
What LaCalle says about the Eurozone also applies to the US.
What’s Next for America?
For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?
No V-Shaped Recovery
Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.
Simply put, a quick return to business as usual is not in the cards.
Inflation or Deflation?
Meanwhile, the debate over inflation or deflation continues.
Will it be Inflation or Deflation?
If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.
Rate of Contraction Exceeds the Global Financial Crisis
Rate of Contraction Exceeds the Global Financial Crisis
The US is suffering the fastest deterioration in operating conditions for over 11 years.
Markit reports Output Contracts at Fastest Pace in Survey History amid COVID19 pandemic .
Key Findings
- Flash U.S. Composite Output Index at 27.4 (40.9 in March). New series low.
- Flash U.S. Services Business Activity Index at 27.0 (39.8 in March). New series low.
- Flash U.S. Manufacturing PMI at 36.9 (48.5 in March). 133-month low.
- Flash U.S. Manufacturing Output Index at 29.4 (46.5 in March). New series low.
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 27.4 in April, down from 40.9 in March, to signal the fastest reduction in private sector output since the series began in late-2009.
Services companies registered the steepest rate of decline in the survey’s history, while manufacturers recorded the sharpest fall in sales since the depths of the financial crisis in early-2009.
The cancellation and postponement of orders led firms to reduce their workforce numbers at a rate far exceeding anything seen previously over the survey history at the start of the second quarter.
Chris Williamson, Chief Business Economist Comments
- “The COVID-19 outbreak dealt a blow to the US economy of a ferocity not previously seen in recent history during April. The deterioration in the flash PMI numbers indicates a rate of contraction exceeding that seen even at the height of the global financial crisis, with jobs also being slashed at a rate far exceeding anything previously recorded by the survey.”
- “The large swathe of non-essential business that has been shut down temporarily amid efforts to contain the virus means the blow has been most heavily felt in the service sector, and especially for consumer facing companies in the recreation and travel industries. Those companies still actively trading meanwhile reported the steepest drop in demand seen since data were first available, and are also struggling against twin headwinds of staff shortages and supply chain delays.”
…click on the above link to read the rest of the article…
As Unemployment Claims Rise, So Do Missed Mortgage Payments
As Unemployment Claims Rise, So Do Missed Mortgage Payments
Over 22 million people have filed for unemployment benefits in the past 4 weeks. Many struggle with payments.
Black Knight reports More than 2.9 Million in Forbearance, 5.5% of All Mortgages
Key Details
- As of April 16, more than 2.9 million homeowners – or 5.5% of all mortgages – have entered into COVID-19 mortgage forbearance plans
- This population represents $651 billion in unpaid principal and includes 4.9% of all GSE-backed loans and 7.6% of FHA/VA loans
- At today’s level, mortgage servicers would be bound to advance $2.3 billion of principal and interest payments per month to holders of government-backed mortgage securities on COVID-19-related forbearances
- Another $1.1 billion per month in lost funds will be faced by those with portfolio-held or privately securitized mortgages
Forbearance Totals
Payment Forbearance Under Cares Act
On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) into law. A provision of the CARES Act allows borrowers with federally backed mortgages to request temporary loan forbearance for up to 180 days. Borrowers also have the right to apply for an extension of another 180 days of forbearance.
Once a borrower requests hardship forbearance due to the COVID-19 pandemic, the act requires the servicer to offer a CARES Act forbearance.
Pitfalls
Forbes warns of Mortgage Forbearance Pitfalls.
John Ulzheimer, an Atlanta-based credit expert formerly of FICO and Equifax, warns of a potential balloon payment.
“If the lender or servicer demands that you pay back the deferred amount all at once or in an otherwise expedited manner, that could be impossible for the borrower.”
Unfortunately, having a mortgage servicer ask for a “balloon” payment once your forbearance period ends is a very real possibility. Borrowers from multiple national banks have reportedly been informed of the need to repay any delayed payments in a lump sum at a future date.
Three Things Not to Do
…click on the above link to read the rest of the article…
Hyperinflationists Come Out of the Woodwork Again
Hyperinflationists Come Out of the Woodwork Again
CoinDesk asked me to share my opinions on the chance of hyperinflation. My thoughts are below.
From CoinDesk
Hi Mish,
I am working on an article for CoinDesk about recent fiscal and monetary splurge by governments and central banks across the globe and the impact on gold and bitcoin. As I see, a majority of analysts and economists are calling for hyperinflation and rally in gold.
Could you please share your take?
Thanks
CoinDesk
Matter of Definitions
Before there can be a rational debate on anything, people must agree on definitions.
I believe most people would accept this definition: Hyperinflation is the complete collapse in currency against every other asset.
Pick a currency, say the US dollar. To bet on hyperinflation and be correct, the dollar would have to go nearly worthless vs the Euro, the Pound, the Yen.
Alternatively, 50% in a single month would quality. Professor Hanke defines Hyperinflation as a 50% Currency Collapser in a Month.
Q: How likely is that?
A: Close to zero.
Replay Discussion
Curiously, this is a replay of my 2010 article Williams Calls for “Great Hyperinflationary Great Depression”.
Williams is John Williams of Shadowstats. He was not alone. Here is a snip changing the name Williams to “Hyperinflationsists” in the first word of these four points.
- Hyperinflationists focus on money supply, ignoring credit although credit is far more important.
- Hyperinflationists ignore numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are.
- Hyperinflationists ignore US gold holdings, the largest in the world.
- Hyperinflationists ignore the massive influence of consumer attitudes and bank attitudes towards lending.
To expect the US dollar to go to zero vs the Euro, Yen, Food, gold, Yuan, etc., was then and is now pure silliness.
…click on the above link to read the rest of the article…
50,000 New Coronavirus Infections Per Day in China
50,000 New Coronavirus Infections Per Day in China
Prof. Neil Ferguson, Vice Dean Faculty of Medicine, Imperial College in London, estimates 50K new infections per day.
Please consider the following video by Prof. Neil Ferguson.
10 Key Video Points
- 50,000 new cases a day in china
- Infections doubling every 5 days
- Death rate is still unknown
- China likely to peak in March
- Epidemic peak is still a month away
- It will be very hard to control this epidemic the say way we did with SARS 15-20 years ago
- Cases are always underestimated
- Death delays are as long as three weeks
- Reported deaths outside China are not reassuring because of delays
- We still don’t know the full effects
Tweet on Containment Strategies
Building on @ChristoPhraser et al’s work, @coreypeak‘s model examining the impact of disease dynamics on the relative benefits of symptom monitoring v quarantine seems relevant for thinking through #nCoV2019 containment strategies. https://www.pnas.org/content/114/15/4023.abstract …
Jim Bianco’s Latest Update
…click on the above link to read the rest of the article…
“Made in China” Economic Hit Coming Right Up
“Made in China” Economic Hit Coming Right Up
Economic contagion due to the coronavirus is underway. Hyundai halted production. Sony, Apple, and Ford issued warnings.
If you can’t get parts, you can’t build cars.
And due to a coronavirus-related manufacturing halt in China, Hyundai to Shut Down Some Production.
Hyundai, the world’s fifth-largest carmaker, announced Tuesday that it was suspending production lines at its car factories in South Korea, one of the first major manufacturers to face severe supply-chain issues because of the coronavirus.
Many auto plants in China have already shut down because of the virus, including factories run by Hyundai, Tesla, Ford and Nissan. Hyundai plants in South Korea would be the first to shut down lines outside of China, and comes as Hyundai has ramped up production in China over the past two decades.
Economic Contagion
The Wall Street Journal comments on China’s Economic Contagion
More than 20,000 coronavirus cases have been confirmed worldwide—an eight-fold increase over the last week—and experts say hundreds of thousands may not yet have been diagnosed. Two dozen or so countries have reported cases, and many have restricted travel from China to limit the contagion. Companies are evacuating employees from China.
U.S. manufacturers such as Ford, Apple and Tesla have temporarily halted production. One-sixth of Apple sales and nearly half of chip-maker Qualcomm’s revenues come from China. So do 80% of active ingredients used by drug-makers to produce finished medicines. Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings.
China’s GDP growth was already almost certainly lower than the official figure of 6%, and it is likely to fall by a third or more.
…click on the above link to read the rest of the article…
Recession Arithmetic: What Would It Take?
Recession Arithmetic: What Would It Take?
David Rosenberg explores Recession Arithmetic in today’s Breakfast With Dave. I add a few charts of my own to discuss.
Rosenberg notes “Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened twice outside of a recession.”
Here is the chart he presented.
Fixed Investment, Imports, Government Share of GDP
Since 1980 there have been five recessions in the U.S.and only once, after the dotcom bust in 2001, was there a recession that didn’t feature an outright decline in consumption expenditures in at least one quarter. Importantly, even historical comparisons are complicated. The economy has changed over the last 40 years. As an example, in Q4 of 1979, fixed investment was 20% of GDP, while in 2019 it makes up 17%. Meanwhile, imports have expanded from 10% of GDP to 15% and the consumer’s role has risen from 61% to 68% of the economy. All that to say, as the structure of the economy has evolved so too has its susceptibility to risks. The implication is that historical shocks would have different effects today than they did 40 years ago.
So, what similarities exist across time? Well, every recession features a decline in fixed investment (on average -9.8% from the pre-recession period), and an accompanying decline in imports (coincidentally also about -9.5% from the pre-recession period). Given the persistent trade deficit, it’s not surprising that declines in domestic activity would result in a drawdown in imports (i.e. a boost to GDP).
So, what does all of this mean for where we are in the cycle? Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened two other times outside of a recession. The first was in the year following the burst of the dotcom bubble, as systemic overinvestment unwound itself over the course of eight quarters.
…click on the above link to read the rest of the article…
Jim Bianco Says This Is QE, Like Y2K
Jim Bianco Says This Is QE, Like Y2K
In contrast to Hussman, Jim Bianco, at Bianco Research says the Fed’s repo actions are QE.
Earlier today I posted, Hussman Sides with Powell: It’s Not QE4.
If Hussman convinced you the Fed was not conducting QE, I will give you a chance to change your mind again.
“Not QE” Looks a Lot Like Y2K
This is a guest post by permission from Jim Bianco
Jim Bianco at Bianco Research says “Not QE” Looks a Lot Like Y2K
We would argue the special lending facility that started in late 1999 to support the feared Y2K computer glitch offers a historical analogy to the current period.
Stories 20 years ago sound like they are describing what is happening today:
Dow Jones News Service – (December 28, 1999) CASH IS FLOWING LIKE CHAMPAGNE FOR Y2K
The volume of cash that the Federal Reserve has temporarily given to banks to avert potential Year 2000 strains is rising to dizzying levels. Including nearly $20 billion it gave to the banking system in the form of term “repurchase” agreements Monday, the Fed has almost $100 billion in hard currency loans outstanding to banks. That’s the most money lent out through repurchase agreements ever, said Peter Bakstansky, spokesman for the New York Federal Reserve. For some perspective, the Fed had $23 billion in outstanding “repos” in December 1998, and around $9 billion in December 1997.
The Y2K special lending facility had a similar effect on the Fed’s balance sheet. It was also done for “plumbing reasons.”
And, as the [Champagne] story points out, the Fed supplied record amounts of repo never before seen at the time.
…click on the above link to read the rest of the article…
France Grinds to a Halt in Massive Strike
France Grinds to a Halt in Massive Strike
Hundreds of thousands of lawyers, teachers, students and air-traffic controllers protest pension Macron’s pension reform
Cities Paralyzed
French president Emmanuel macron is back in the hot seat over reform proposals. Over 800,000 protesters have taken to the streets in a Massive Strike that has paralyzed cities.
Cities across France were paralyzed by a massive public transport strike against a planned overhaul of France’s pensions system, in a test of President Emmanuel Macron’s resolve to modernize the economy.
Trains, including the high-speed line between Paris and London, subways and buses were severely curtailed if not halted altogether. Hundreds of flights were canceled. Many schools, and nurseries remained closed, while several museums, including the Louvre, said parts of their collections might not open. Even the Eiffel Tower was closed.
About 806,000 protesters—including lawyers, teachers, students and air-traffic controllers—hit the streets across the country, according to the French interior ministry. Unions warned the strike could last days and become one of the biggest in France in over two decades.
Mr. Macron wants to extend the number of years that people are required to work before collecting their pensions—now set at 43 years—rather than raising the age of retirement of 62 years old for all workers. That retirement age remains lower than in most other OECD group of rich nations. Under the plan, some people retiring before 64 could receive a lower pension.
Mr. Macron also wants to consolidate France’s 42 different retirement plans—and their special benefits—into one universal system that he says would be more fair. Civil servants, in particular, fear they may lose advantages they have compared to private sector employees.
Yellow-Vest Movement
Recall that the yellow vest protests went on for months.
On December 10, 2018 I wrote Macron Attempts to Placate Yellow Vest Protesters With Free Money.
…click on the above link to read the rest of the article…
The US Wanted a Coup in Bolivia: Like Magic, It Got One
The US Wanted a Coup in Bolivia: Like Magic, It Got One
Bolivia’s President Evo Morales was ousted in a coup. What happened?
Military Coup
The US wanted Leftist President Evo Morales gone.
Guess what? He’s gone.
The Guardian reports Many Wanted Morales Out. But What Happened in Bolivia was a Military Coup.
On Sunday the head of Bolivia’s military called on Evo Morales to resign from the presidency. Minutes later Morales was on a plane to Cochabamba where he did just that. These facts leave little doubt that what happened in Bolivia this weekend was a military coup, the first such event in Latin America since the 2009 military coup against Honduran president, Manuel Zelaya. (The 2012 and 2016 impeachments of Paraguay’s Fernando Lugo and Brazil’s Dilma Rousseff are widely viewed as “parliamentary coups.”)
The mainstream press has bent over backwards, and tied itself in more than a few tangled knots, to avoid drawing this conclusion. The Wall Street Journal celebrates Morales’ ouster as a “democratic breakout.” The New York Times is characteristically more circumspect, hemming and hawing about how “the forced ouster of an elected leader is by definition a setback for democracy” but might also “help Bolivia restore its wounded democracy.” This head-spinning rhetoric does not prevent the Times from swiftly dismissing left-of-center politicians’ “predictable” claims that what happened was a coup.
It is hardly surprising that conservative governments and powerful media outlets applaud Morales’ ouster and dismiss the claim it constitutes a coup. More surprising is that leftist commentators, including Raquel Gutiérrez and Raul Zibechi, have taken a similar stance. Zibechi attributes Morales’ fall to a “popular uprising.”
Morales’ Illegitimacy
…click on the above link to read the rest of the article…
Pondering the Collapse of the Entire Shadow Banking System
Pondering the Collapse of the Entire Shadow Banking System
What’s behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.
Shadow Banking
- The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
- It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
- The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.
The above from Investopedia.
Hey It’s Not QE, Not Even Monetary
Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It’s Not Monetary.
Let’s recap before reviewing excellent comments from a couple of valued sources.
The Fed keeps increasing the size and duration of “overnight” funding. It’s now up $120 billion a day, every day, extended for weeks. That is on top of new additions.
Three Fed Statements
- Emergency repos were needed for “end-of-quarter funding“.
- Balance sheet expansion is “not QE“. Rather, it’s “organic growth“.
- This is “not monetary policy“.
Three Mish Comments
- Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
- Hmm. Historically “organic” growth was about $2 to $3 billion.
- Hmm. Somehow it takes an emergency (but let’s no longer call it that), $120 billion “at least” in repetitive “overnight” repos to control interest rates, but that does not constitute “monetary policy”
…click on the above link to read the rest of the article…
What the Hell is the ECB Doing?
What the Hell is the ECB Doing?
Danielle DiMartino poses an interesting question regarding the ECB. I have a set of answers.
What is the ECB Doing?
I started thinking about that question weeks ago.
I have a set of answers and even started writing this post before DiMartino brought it to the forefront.
There are only two answers. One of them is very unsettling.
- Ignorance
- On Purpose
Occam’s Razor
Occam’s razor is a principle from philosophy. Suppose there exists two explanations for an occurrence. In this case the one that requires the least amount of assumptions is usually correct. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation.
Occam’s Razor typically eliminates most conspiracy theories. It’s not that conspiracies don’t happen, but that simpler solutions are far more likely.
My corollary to the theory is very easy to understand: If stupidity is one of the possible answers, it is the most likely answer.
I am a normally a big fan of Occam’s Razor.
But this is so bizarre that I have my doubts.
Importantly, this may not be a conspiracy at all. Mario Draghi can easily be acting alone.
My Lead Question
How stupid can things get before one starts believing something else is in play?
I had already been thinking about that question when not only did ECB president Mario Draghi further push interest rates into negative territory but he also said it was a good idea for the ECB to think about MMT.
Shocking ECB Dissent
Dissent at the Fed happens all the time. It is rare at the ECB. The ECB builds a consensus and it is typically unanimous.
…click on the above link to read the rest of the article…
Powell “Not Forecasting a Recession”
Powell “Not Forecasting a Recession”
In a speech today in Zurich Switzerland, Jerome Powell stated the Fed is not forecasting a recession.
YouTube Video of Zurich Conference
The Fed has never forecast a recession, even after they have started.
It reminds me of Bernanke’s denials on the housing bubble.
No Comment on Trade?
1st and 3rd appear a bit opposing.
Everything’s Fine
The Economy is great. The only thing adding to “uncertainty” is the Fake News!
Accurate Reader Comment
“Not only has the Fed never forecast a recession they’ve never forecast a crash or bubble. But that hasn’t stopped them from telling us we don’t have a bubble or crash on the horizon.”
Lagarde Praises Negative Rates, Study Shows They Reduce Lending
Lagarde Praises Negative Rates, Study Shows They Reduce Lending
Incoming IMF chief Christine Lagarde says negative rates have helped Europe more than they’ve hurt. I disagree.
The nearly always wrong Christine Lagarde is wrong once again.
Today she claims Negative Rates Have Helped Europe More Than They’ve Hurt.
The next head of the European Central Bank, Christine Lagarde, appears to be as much of a fan of negative interest rates as the current chief, Mario Draghi.
European banks have complained about the impact on profitability, but even there the current managing director of the International Monetary Fund defended the move.
“On the one hand, banks may decide to pass the negative deposit rate on to depositors, lowering the interest rates the latter get on their savings,” she wrote. “On the other hand, the same depositors are also consumers, workers, and borrowers. As such they benefit from stronger economic momentum, lower unemployment and lower borrowing costs. All things considered, in the absence of the unconventional monetary policy adopted by the ECB – including the introduction of negative interest rates – euro area citizens would be, overall, worse off.”
Negative Rates Actually Cut Lending
Research shows Negative Rates Actually Cut Lending.
Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.
According to research from the University of Bath, central banks charging commercial banks to hold excess cash reserves have actually decreased lending. That’s because the additional costs reduce banks’ profit margins, leading to a drop in loan growth.
“This is a good example of unintended consequences,” said Dr. Ru Xie of the university’s School of Management, one of the study’s authors. “Negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability.”
…click on the above link to read the rest of the article…
Barron’s Nonsensical Idea: Cut Rates Like Mad to Avoid Recession
Barron’s Nonsensical Idea: Cut Rates Like Mad to Avoid Recession
Barron’s writer Matthew Klein proposes to stop the recession by cutting interest rates like it’s 1995.
Klein says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.
One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.
So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders…
Absurd Notion
The rest of the article is behind a paywall, but I can tell you with 100% certainly Klein’s notion is absurd.
Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt or other fundamental problems.
Those problems will not not go away if the Fed “cuts rates like 1995” or even like 2008.
If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.
Not even negative rates can stop recessions.
The Eurozone, especially Germany, has negative rates. Yet, it’s highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).
Monetary Madness
As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.
Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?
Stop recession for how long? Zero months? Six months? And at what expense?
What Then?
Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.
And if that doesn’t work?
…click on the above link to read the rest of the article…
