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Chinese Debt Could Cause Emerging Markets to Implode

CHINESE DEBT COULD CAUSE EMERGING MARKETS TO IMPLODE

The novel coronavirus has brought the world economy to a grinding halt. Global growth is set to fall from 2.9 percent last year into deep negative territory in 2020—the only year besides 2009 that this has happened since World War II. Recovery will likely be slow and painful. Government restrictions to prevent the virus from resurging will inhibit production and consumption, as will defaults, bankruptcies, and staffing cuts that have already produced record jobless claims in the United States.

But not all countries will bear the pain of the global recession equally. Low-income countries suffer from poor health infrastructure, which inhibits their ability to fight off the coronavirus, and many of them had dangerously high debt levels even before the pandemic necessitated massive emergency spending. Foreign investors are now withdrawing capital from emerging markets and returning it to the rich world in search of a safe haven. As a result, countries such as South Africa, Kenya, and Nigeria are seeing their currencies plummet in value—making it difficult, if not impossible, for them to service foreign loans.

Faced with the threat of financial ruin, poor countries have turned to multilateral financial institutions such as the International Monetary Fund and World Bank. The IMF has already released emergency funds to at least 39 countries, and by the end of March more than 40 more had approached it for help. The World Bank has fast-tracked $14 billion for crisis relief efforts. Yet even as they offer extraordinary amounts of aid, the IMF and World Bank know that these sums won’t be nearly enough. For that reason, they called on Group of 20 creditor nations to suspend collecting interest payments on loans they have made to low-income countries. On April 15, the G-20 obliged: all of its members agreed to suspend these repayment obligations through the end of the year—all members except one, that is.

…click on the above link to read the rest of the article…

The World Is Awash in Oil, False Assurances, Magical Thinking and Complacency as Global Demand Careens Toward a Cliff

The World Is Awash in Oil, False Assurances, Magical Thinking and Complacency as Global Demand Careens Toward a Cliff

This collapse of price will manifest in all sorts of markets that are based on debt-funded purchases of desires rather than a warily prudent priority on needs.

Since markets are supposed to discover the price of excesses and scarcities, it’s a mystery why everything that is in oversupply is still grossly overpriced as global demand slides off a cliff: oil, semiconductors, Uber rides, AirBNB listings and many other risk-on / global growth stories are still priced as if pre-Covid-19 demand was still guaranteed.

Punters are still buying semiconductor stocks based on out-of-touch projections that are the equivalent to counting the number of fairies on the head of a pin, ignoring the fundamental reality that very few people actually need a new mobile phone, vehicle, laptop, refrigerator, etc.

It boils down to confidence and certainty. People pursue what they desire but don’t need when they’re brimming with confidence in the future, bolstered by an animal-spirits euphoria that their income and wealth will continue rising–a sense of certainty anchored by a belief that their economic world is essentially without risk.

When confidence dissipates and is replaced by fear and uncertainty, desires lose their luster and needs take precedence. When you’re afraid of getting a deadly virus or losing your livelihood, status symbols and frivolous spending no longer top the agenda.

Yet the entire risk-on / global growth story is based entirely on desires not needs. The vast majority of demand isn’t for a pressing need, it’s for euphoric aspirational consumption, spending intended to make the buyer larger than they really are, in their own self-image and in the image they present to the world in the brands they display, the cafes they dine in, etc. etc.

…click on the above link to read the rest of the article…

OECD Sees Global Growth At Decade-Low As WTO Warns Of “Doomsday Scenario”

OECD Sees Global Growth At Decade-Low As WTO Warns Of “Doomsday Scenario”

Global growth is quickly plunging to levels not seen since the financial crisis as the risk of long-term stagnation has developed, according to the OECD’s latest Economic Outlook.

The world economy is expected to grow at a decade-low of 2.9% this year and remain in a subdued range of 2.9% to 3% through 2021. Global GDP has quickly decelerated from peaking at 3.5% in 2018.

The Paris-based policy forum warned that several years of escalating trade disputes between the US and China have resulted in a synchronized global downturn that has pushed down global growth to alarming levels, not seen since the last financial crisis. 

The fragility of the world has led to a cycle of vulnerability where a global trade recession could be imminent or has already arrived. 

 “The alarm bells are ringing loud and clear. Unless governments take decisive action to help boost investment, adapt their economies to the challenges of our time and build an open, fair and rules-based trading system, we are heading for a long-term future of low growth and declining living standards, “OECD Secretary-General Angel Gurría recently said.

OECD warns that China, the driver of global growth the bailed everyone out during the last financial crisis, might not be able to stimulate the global economy this time around as trade tensions soar and a rebalancing of the Chinese economy continues. 

China will accept sub 6% GDP in 2020, as it’s likely Beijing will not turn on its massive credit spigots anytime soon. 

China’s credit growth slowed more than expected in October to the weakest pace since at least 2017 as a continued collapse in shadow banking, weak corporate demand for credit, and seasonal effects all suggest that a rebound in the domestic and global economy aren’t likely in the near term. 

…click on the above link to read the rest of the article…

“Close To A Standstill”: IMF Warns Global Growth Will Be Cut To Lowest Since Lehman

“Close To A Standstill”: IMF Warns Global Growth Will Be Cut To Lowest Since Lehman

Don’t expect any good news next week when the IMF holds its annual meeting and releases its latest World Economic Outlook report due on October 15.

According to the IMF’s new head, Bulgarian Kristalina Georgieva, the monetary fund will again cut its growth forecast for both 2019 and 2020; as a reminder back in July, the IMF again cut its projection for 2019 GDP growth to 3.2% this year and 3.5% next year, its fourth downgrade since last October, and the lowest since the financial crisis amid ever-escalating trade war. In fact, according to Georgieva, who apparently was brought in to take the blame for Lagarde’s disastrous legacy, global trade growth “is close to a standstill”, which last time we checked was 0%.

It means we are about about to have a new entry in the “worst since Lehman” category.

By now it is no secret to anyone that everyone – global institutions, economists and investors – have blamed the U.S.-China tariff war as the main reason for slowing global growth (and catalyst behind upcoming QE). The trade tensions have partly caused manufacturing to tumble and weakened investment, creating a “serious risk” of spillover to other areas of the economy like services and consumption, Georgieva said on Tuesday according to Bloomberg.

“The global economy is now in a synchronized slowdown,” she said, noting that the fund estimates that 90% of of the world is seeing slower growth. This is a huge change to the global economy from two years ago, when growth was accelerating across three-quarters of the globe in a synchronized upswing.

 …click on the above link to read the rest of the article…

OECD Slashes Global Growth Outlook, Warns Germany Already In Recession

OECD Slashes Global Growth Outlook, Warns Germany Already In Recession

In one of the most downbeat forecasts on the global economy that we’ve seen so far this year, the Paris-based organization of wealthy nations known as the OECD – the Organization for Economic Cooperation and Development – warned that the global economy is heading toward a recession, and that governments aren’t doing enough in terms of fiscal stimulus to try and boost the economy. 

“Escalating trade policy tensions are taking an increasing toll on confidence and investment, adding to policy uncertainty, weighing on risk sentiment in financial markets, and endangering future growth prospects,” the OECD said.

The advocacy for fiscal stimulus follows reports that Germany is considering a “shadow budget” to bolster public investment as Europe’s economy slides.

“Our fear is that we are entering an era where growth is stuck at a very low level,” said OECD Chief Economist Laurence Boone said. “Governments should absolutely take advantage of low rates to invest in the future now so that this sluggish growth doesn’t become the new normal.”

After cutting all of its forecasts from four months ago, the OECD now sees global growth slipping below 3% to 2.9%. 

Of course, this pattern of cutting GDP forecasts is nothing new.

The OECD became the latest to warn about the global economy, after the Fed, the ECB and the PBOC have all eased policy to try and bolster growth in recent weeks. But the OECD is convinced that without government stimulus, the global economy is headed for a protracted downturn.

Manufacturing has born the brunt of the economic slowdown thanks to the tit-for-tat trade war between the US and China, while the services sector has proved unusually resilient so far. But the OECD warned that “persistent weakness” in industry will ultimately weigh on the labor market, dragging down household incomes and spending.

 …click on the above link to read the rest of the article

2019 Headwinds Are Getting Stronger

2019 Headwinds Are Getting Stronger

In 2017, every prominent economic forecasting entity was shouting from the rooftops about “synchronized global growth.” This was a reference to the fact that not only were certain economies growing, but they were all growing at the same time.

Chinese GDP growth had come down but was still substantial at 6.85%. U.S. GDP growth was posting solid gains of 3.0% in the second quarter of 2017 and 2.8% in the third quarter. Japan and Europe were not growing as quickly as the U.S. and China, but growth was still accelerating from a low level.

Synchronization was a big part of the story. Growth was not isolated and episodic. Growth was fueling more growth in what seemed to be a sustainable way. The world economy was firing on all cylinders.

Then in 2018 the global growth story came screeching to a halt. Japanese growth went negative in the third quarter of 2018. Germany also went negative. Chinese growth continued its drop (6.5% in the third quarter) instead of stabilizing.

The U.K slowed partly because of confusion around Brexit. French growth slid amid riots triggered by a proposed carbon emissions tax. Australian home prices declined precipitously because export orders from China dried up and Chinese flight capital slowed to a trickle due to Chinese capital controls.

The U.S. economy held up fairly well in 2018, with 4.2% growth in the second quarter and 3.5% growth in the third quarter. But much of that growth was inventory accumulation from foreign suppliers in advance of proposed tariffs.

That inventory growth will likely dry up once the tariffs are either imposed or abandoned early this year. Fourth-quarter growth in the U.S. is currently projected at 3.0%, continuing the downtrend from the second quarter.

What happened?

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“Jarring” FedEx Outlook Cut Suggests “Severe Global Recession”

FedEx shares tumbled 7% after what Morgan Stanley called a “jarring” cut to its annual forecasts, suggesting global growth is slowing far more than most expect, and prompting expectations of an “uber-dovish hike” by the Fed.

The global logistics bellwether slashed its outlook just three months after raising the view, reflecting an unexpected and abrupt change in the company’s view of the global economy amid rising trade tensions between the U.S. and China. Not only were the cuts were deeper than the Street expected according to Morgan Stanley analyst Ravi Shanker, but everyone is pointing to the following comment from the press release: “Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term.”

Needless to say, with little in terms of warning, Morgan Stanley was shocked by the magnitude and severity of the cut, and suggested that this implies a “severe global recession” is unfolding:

“We recognize that global growth has slowed but we are very surprised by the magnitude of the headwind, which is what might be seen in a severe recession,” Shanker wrote. “We believe global growth concerns are also likely to get worse before they get better next year, which could mean more of a drag on FY20 EPS.”

Quoted by Bloomberg, Shankar also said that the Express unit is also likely to remain an overhang, Shanker said, as FedEx management didn’t provide an outlook for fiscal 2020 or its timeline for improving the cargo airline, which has been hit by worsening economic conditions in Europe.

FedEx shares tumbled 7% on Wednesday morning, the lowest intraday price in about two years and the 10th decline for FedEx in 11 days.

…click on the above link to read the rest of the article…

Market crash? Another red card for the economy

Market crash? Another red card for the economy

A few months ago I wrote this article at the World Economic Forum called “A Yellow Card For The Global Economy“. It tried to serve as a warning on the rising imbalances of the emerging and leading economies. Unfortunately, since then, those imbalances have continued to rise and market complacency reached new highs.

This week, financial markets have been dyed red and the stock market reaction adds to concerns about a possible impending recession.

The first thing we must understand is that we are not facing a panic created by a black swan, that is, an unexpected event, but by three factors that few could deny were evident:

  1. Excessive valuations after $20 trillion of monetary expansion inflated most financial assets.
  2. Bond yields rising as the US 10-year reaches 3.2%
  3. The evidence of the Yuan devaluation, which is on its way to surpass 7 Yuan per US dollar.
  4. Global growth estimates trimmed for the sixth time in as many months.

Therefore, the US rate hikes – announced repeatedly and incessantly for years – are not the cause, nor the alleged trade war. These are just symptoms, excuses to disguise a much more worrying illness.

What we are experiencing is the evidence of the saturation of excesses built around central banks’ loose policies and the famous “bubble of everything”. And therein lies the problem. After twenty trillion dollars of reckless monetary expansion, risk assets, from the safest to the most volatile, from the most liquid to the unquoted, have skyrocketed with disproportionate valuations.

(courtesy Incrementum AG)

Therefore, a dose of reality was needed. Monetary policy not only disguises the real risk of sovereign assets, but it also pushes the most cautious and prudent investor to take more risk for lower returns. It is no coincidence that this policy is called “financial repression“. Because that is what it does. It forces savers and investors to chase beta and some yield in the riskiest assets.

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We Have Entered The Zone When Yields Trigger Market Selloffs

With payrolls now in the rearview mirror and nothing too outlandish revealed in the generally goldilocks data, traders have resumed contemplating the one question that is on everyone’s mind: how much higher (and at what pace) will rates rise before stocks are slammed?

To be sure, the recent spike in US yields – driven by a combination of very strong US growth data, sturdy equity gains, rising oil prices and improving global growth expectations – and the dollar can extend in the near-term, but as UBS points out, only as long as risk tolerates this (another key aspect is the recent speed of yields increase, which “might become problematic”): naturally, once rates rise high enough there will be a capital reallocation out of stocks and into bonds. The question, of course, is what is  “high enough.”

Alternatively, US yields could rise further, if global growth firms up and ex-US yields rise independently – and also if the neutral rate (r-star) is seen as rising in tandem with yields – but in that case the dollar rally would come to an end. Which is why, to UBS long term, US yields are likely to peak in the 12 months ahead “and the higher we go from here the closer we get to that peak – at least levels-wise.”

But the biggest question whether US yields keep rising will depend on whether risky assets tolerate the spike. Earlier this year, UBS looked at the uptick in US yields and subsequent equities sell-offs of at least 5%. What the Swiss bank found is that the more gradual the rise, the higher the threshold to generate equity pain, and inversely the faster the move higher – and the latest episode has seen a 40bps move higher in just over a month – the more acute the equity reaction.

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Beware The Zombies: BIS Warns That Non-Viable Firms Are Crippling Global Growth

Ten years after central banks unleashed a period of record low interest rates, the central banks’ central bank is warning that this may not have been the smartest move.

In the latest quarterly review from the Bank of International Settlements, the Basel-based organization that oversees the world’s central banks warned that decades of falling interest rates have led to a sharp increase in the number of “zombie” firms, rising to an all time high since the 1980s, threatening economic growth and preventing interest rates from rising.

Zombie firms are defined as companies that are at least 10 years old, yet are unable to cover their debt service costs from profits, in other words the Interest Coverage Ratio (ICR) is less than 1x for at least 3 consecutive quarters. These types of companies, which first gained attention in Japan decades ago and have since gained prevalence in Europe and, increasingly, the United States.  According to a second definition, a requirement for a “zombie” is to have comparatively low expected future growth potential. Specifically, zombies are required to have a ratio of their assets’ market value to their replacement cost (Tobin’s q) that is below the median within their sector in any given year.

According to authors Ryan Banerjee and Boris Hofmann, zombie firms that fall under the two definitions are very similar with respect to their current profitability, but qualitatively different in their profitability prospects, which may be a function of how central banks have “broken” the market.  Graph 1 below shows that, for non-zombie firms, the median ICR is over four times earnings under both definitions. As the majority of zombie firms make losses, the median ICRs are below minus 7 under the broad measure and around minus 5 under the narrow one, so this is hardly a surprise.

…click on the above link to read the rest of the article…

Why Global Growth Hit A Wall: China Credit Growth Continues To Slow

QUICK TAKE: In short, our thesis is that city-level and regional macroprudential tightening policies in China currently will render economic growth in 2Q18, but more importantly 2H18, dismal; we believe this will spread to emerging markets, rendering the “global coordinated growth” bulls out of sync with reality. This, we believe, in turn, will weigh on metals prices, pushing many of the commodity pundits (i.e., Jeffery Gundlach) to reassess their bullishness. As this happens, we expect  steel/bulk exports out of China to rise (as profitability domestically falls with weakening domestic demand) pushing global bulk commodities prices lower.

Exhibit 1: China Total Credit Growth versus Bank Asset Growth, %Y/Y


Source: Peoples’ Bank of China (PBOC), Vertical Group.

Exhibit 2: It Appears Emerging Markets are no Longer “Feeling the China Love”


Source: Bloomberg, Vertical Group.

So how do things look at this juncture? Well, below we highlight the key takeaways from China’s April 2018 data dump. However, in short, looking at the below data in aggregate, we believe our thesis remains firmly intact; furthermore, in checks “on the ground” in China this week, we learned that the Consensus among domestic traders is that steel prices in China have “peaked” for the year as of this week.

GROWTH INTERNALS. As detailed below, while Y/Y industrial production growth edged higher to +6.9% in April 2018 (from +6.8% in March 2018), the all-important Fixed Asset Investment metric in China hit lows not seen in nearly two decades (at +7.0% Y/Y for April 2018 vs. +7.5% Y/Y in March 2018), while retail sales also dipped lower in the month of April at +9.4% Y/Y (vs. +10.1% Y/Y in March 2018). At risk of stating the obvious, at the margin, this suggests to us that China’s key growth internals are indeed slowing.

Exhibit 3: Growth Internals – China (FAI, Industrial Production, & Retail Sales)

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Synchronized Global Growth is Ending: Shocks Come Next

Economic pleasant surprises are in the past, as is the buildup of the balance sheet. The future is deleveraging.

Alarm bells are ringing. No one cares. By now, everyone knows stock only go up.

For those in tune with other ideas, Financial Times writer Stephen King suggests the Global Economy is Due for a Downswing.

Jim Bianco at Bianco Research comments on synchronized growth in his report Concerted Economic Growth is in Jeopardy of Ending.

Summary

Less than 50% of the world’s economies are now producing economic data surprises. Realized economic data following suit in the months to come would remove the tailwind of ‘concerted economic growth’ for risk assets and central banks. Emerging markets may be first on the list to experience higher volatility.

Comment

We have all been discussing ‘concerted global economic growth’ since early 2017 as a tailwind to risk assets and central bank policies. The chart below shows the percentage of the world’s economies producing economic data surprises (orange line) and above-average data changes (blue line) since 2004.

Over 90% of economies were indeed posting realized data changes at above-average growth rates in mid-2017. However, reported data has slowed its ascent over the past month led by the Eurozone and Canada. The percentage of economies with upside surprises has fallen to 44%, which has been a leading indicator for actual data changes like payrolls, industrial production, and durable goods orders. Above-average data changes have also rolled over to 67%. A break below 50% would mean ‘concerted economic growth’ should no longer be proclaimed.

Economic Misses

The next chart offers the median returns by major asset classes after the percentage of economies growing above-average falls below 60%. The impact is not immediate, but higher volatility and drawdowns do ensue over the following months.

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Global Growth? Retail Sales Flop in US, UK, Canada, Germany, Australia

Consumers unexpectedly threw in the towel in 5 countries but the central banks and the IMF insist everything is fine.

On February 14, I noted US Retail Sales Dive, Negative Revisions Too. This will impact both 4th quarter and first quarter GDP estimates.

On February 22, Bloomberg reported Canadian Retail Sales Drop Unexpectedly.

“Receipts fell 0.8 percent to C$49.6 billion in the last month of 2017, Statistics Canada reported Thursday. It was the biggest monthly decline since March 2016. Economists were expecting no change during the month.”

On February 16, the Financial Times reported UK retail sales figures disappoint. The results were positive but barely.

“The volume of retail sales grew by 0.1 per cent month-on-month, far below analysts’ expectations of 0.5 per cent growth in January, according to a poll from Thomson Reuters. On the year, sales were up by 1.6 per cent, from 1.4 per cent, far below expectations for a 2.6 per cent rise.”

On January 31, Reuters reported German Retail Sales Unexpectedly Fall in December.

Given the Fed’s outlook and increasing expectations of four rate hikes plus tapering in the US, tapering in the EU, and rate hikes in the UK, such reports must be meaningless.

Also note the IMF made a “Brighter Forecast” for the global economy in January. When has the IMF ever been wrong?

Weekly Commentary: The Grand Crowded Trade of Financial Speculation 

Weekly Commentary: The Grand Crowded Trade of Financial Speculation 

Even well into 2017, variations of the “secular stagnation” thesis remained popular within the economics community. Accelerating synchronized global growth notwithstanding, there’s been this enduring notion that economies are burdened by “insufficient aggregate demand.” The “natural rate” (R-Star) has sunk to a historical low. Conviction in the central bank community has held firm – as years have passed – that the only remedy for this backdrop is extraordinarily low rates and aggressive “money” printing. Over-liquefied financial markets have enjoyed quite a prolonged celebration.

Going back to early CBBs, I’ve found it useful to caricature the analysis into two distinctly separate systems, the “Real Economy Sphere” and the “Financial Sphere.” It’s been my long-held view that financial and monetary policy innovations fueled momentous “Financial Sphere” inflation. This financial Bubble has created increasingly systemic maladjustment and structural impairment within both the Real Economy and Financial Spheres. I believe finance today is fundamentally unstable, though the associated acute fragility remains suppressed so long as securities prices are inflating.

The mortgage finance Bubble period engendered major U.S. structural economic impairment. This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities. Moreover, it had become a global phenomenon that demanded a coordinated central bank response.

Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.”

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The Abnormality of Oil

Oil barrelsAhmad Al-Rubaye/Getty Image

The Abnormality of Oil

At the 2017 Abu Dhabi Petroleum Exhibition and Conference, the consensus among industry executives was that oil prices will still be around $60 per barrel in November 2018. But there is evidence to suggest that the uptick in global growth and developments in Saudi Arabia will push the price as high as $80 in the meantime.

LONDON – Writing about oil prices is always risky. In a January 2015, I suggested that oil prices would not continue to fall, and even predicted that they would “finish the year higher than they were when it began.” I was wrong then; but I might not be wrong for much longer.

I recently spoke at the massive Abu Dhabi Petroleum Exhibition and Conference (ADIPEC), which is a kind of Davos for oil-market participants. While there, I caught the tail end of a discussion among senior oil executives who all agreed that at this time next year, crude oil will still be around $60 per barrel, as it is today.

I was about to be interviewed by the CNBC reporter Steve Sedgwick, to whom I said, “That would be a first. Oil prices hardly moving in a year?” Needless to say, Sedgwick began the interview by telling the audience what I had said, and quizzed me on why I disagreed with the others.

Before I get to my explanation, let me state the usual caveats. Forecasting oil prices is inevitably a fraught endeavor; in fact, it makes forecasting currency markets look easy. When I completed a doctorate on oil markets in the late 1970s and early 1980s, I had already concluded that trying to guess oil prices is a waste of time and energy. Later, when I was at Goldman Sachs, I was often amused to see commodity analysts in my research group struggling to cope with the usual chaos of oil-price developments.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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