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“Just over a year ago, the ECB and the Fed were on the path of gradually reducing their massively expanded balance sheets, and the Fed was increasing interest rates from levels first adopted in the midst of the global financial crisis…

“A year later, all of these measures have been reversed… the Fed and the ECB cleared a path for many interest-rate cuts around the world, producing some of the most accommodative global monetary conditions on record

“By allowing financial markets again to dictate monetary-policy changes, both the ECB and the Fed poured more fuel on a fire that has been raging for years. Financial markets have been driven from one record high to another, regardless of the underlying economic fundamentals…”

https://www.project-syndicate.org/commentary/fed-ecb-captured-by-financial-markets-by-mohamed-a-el-erian-2020-01


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The disconnect between financial markets and the ‘real ‘economy is reflected in the expectations of investors:

“Investors are sending a contradictory message. They’re optimistic about financial markets in 2020, but think the economy is likely to enter a recession. Among investors, 58% say a recession is likely in 2020, while only 5% expect a decline in the stock market.”

https://fortune.com/2020/01/09/investors-survey-2020-recession/


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And of CFO’s:

“Chief financial officers at big U.S. companies entered 2020 on a cautious note, with almost all anticipating an economic slowdown against the backdrop of an overvalued stock market, according to a survey released Thursday.”

https://www.cnbc.com/2020/01/09/deloitte-cfos-say-economy-is-going-to-slow-stock-market-overvalued.html


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Meanwhile, in the ‘real’ economy:

U.S. rail volumes kicked off the new year by continuing a monthslong slump, with traffic down 5.1% compared with the same period a year ago. U.S. rail volumes totaled 414,014 carloads and intermodal units for the first week of the year that ended on Jan. 4, according to the Association of American Railroads.”

https://www.benzinga.com/news/20/01/15100601/us-rail-traffic-starts-off-new-year-in-a-slump


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Average UK household debt hit a record high of £14,450 last year as more families borrowed “just to scrape by,” new research suggests.

“Total debt excluding mortgages reached £407bn in the third quarter of 2019, up 31% on levels reached during the financial crisis in 2008…”

https://uk.finance.yahoo.com/news/household-debt-reaches-record-highs-000141622.html


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Mark Carney has dropped a hint that interest rates could be cut soon to boost the British economy

“Interest rates remain close to the lowest levels on record more than a decade on from the 2008 financial crisis, when central banks around the world were forced to reduce borrowing costs and unleash quantitative easing.”

https://www.theguardian.com/business/2020/jan/09/bank-of-england-governor-mark-carney-hints-at-imminent-interest-rate-cut


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A senior Bank of Italy official warned on Thursday that a number of smaller banks, especially in the country’s disadvantaged south, were at risk of going out of business…

““We need to avoid a traumatic exit of these banks from the market. It’s not an easy challenge. Such banks are all over Italy but the south faces a situation… that is particularly difficult,” she said.”

https://uk.reuters.com/article/uk-italy-banks-popolare-di-bari-bank/bank-of-italy-warns-a-number-of-the-countrys-smaller-banks-are-at-risk-idUKKBN1Z813E


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It has been a cold, hard winter for Italian government debt. The country has been the euro zone’s worst performer; for the first time its bonds are yielding more than their Greek equivalents with maturities longer than three years.

“Italy’s is the only European bond market whose yield spread has widened compared to the struggling German benchmark over the past three months.”

https://www.bloomberg.com/opinion/articles/2020-01-10/there-s-a-40-billion-reason-to-avoid-italy-s-government-debt


“With inflation stuck at around one percent and no prospect of it reaching “close to” two percent any time soon, the ECB has increasingly called on national governments in the eurozone to do their part by loosening fiscal policy.”

https://www.europeanceo.com/finance/european-central-bank-struggles-to-bring-its-numbers-to-heel/


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When China’s bond issuers run into trouble, investors face an increasingly tough task in extracting any returns. Bond defaults across the world’s second-biggest economy are rising, with more borrowers failing either to repay creditors’ initial investments, or make regular interest payments…

“For many bond investors, the struggle to get paid is becoming too costly, deterring investment at a time when increasing numbers of stretched borrowers need to keep creditors on side.”

https://www.ft.com/content/09dda1e4-31e8-11ea-9703-eea0cae3f0de


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Emerging market borrowers’ growing appetite for capital market debt has increased the risks of a shock triggering a financial crisis, the World Bank has warned.

“Debt taken on since 2010 by borrowers in emerging and developing economies has surged by 54% to a record $55tr compared with previous periods…”

https://www.globalcapital.com/article/b1jtr8wgwjyfx9/record-debt-pile-leaves-emerging-markets-vulnerable-to-shock


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The Japanese economy is apparently in a recession already, credit research firm Teikoku Databank Ltd. said in a survey report Thursday.

“In the survey, the diffusion index for business sentiment among Japanese companies fell 1.1 points from the previous month to 42.5 in December last year, down for the third straight month.”

https://www.nippon.com/en/news/yjj2020010901046/japan-already-in-recession-private-survey.html


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The fear is that central banks will not have enough tools to fight the next recession…

“The trouble is that today across the rich world short-term interest rates are still close to or below zero and cannot be cut much more, depriving central banks of their main lever if a recession strikes.”

https://www.economist.com/leaders/2020/01/11/monetary-policy-will-not-be-enough-to-fight-the-next-recession


Read the previous ‘Economic’ thread here and visit my Patreon page here.

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