Stock markets are caught in a “rational bubble” that threatens to pop if the economy fails to catch up with record-breaking valuations, one of the world’s top market experts has warned.“
“There will be “serious and widespread unintended consequences” if global output fails to return to pre-virus levels, warned Mohamed El-Erian, chief economic adviser at Allianz and president of Queens’ College Cambridge. There is “no doubt” that company valuations have become “massively disconnected” from the economy, he said.”
Even as we deal with the economic problems of the pandemic, there’s another crisis looming: our national debt. “The problem in the US is our debt isn’t the “good” kind of debt.
“Our debt continues to rise without promise of repayment, and a majority of tax dollars are spent on mandatory spending. The debt crisis is not going away…”
The trans-Atlantic gulf in fiscal stimulus has widened into an immense chasm. The Great Decoupling of 2020-2022 is accelerating.“
“America is letting rip with relief and recovery spending on a scale unseen since Franklin Roosevelt’s war economy. Europe risks repeating its post-Lehman error, reverting to the EU’s default policy of austerity and Ordoliberal debt brakes.”
Eurostar is on track for a financial collapse that risks cutting off a vital link to the Continent as the pandemic subsides, business leaders and MPs have warned the Chancellor. “
“Rishi Sunak is also this weekend facing public calls to bail out the Channel Tunnel operator…”
The UK’s aviation industry risks collapse without “urgent” government support, industry groups have warned following the latest travel curbs.“
“From Monday all travel corridors to the UK will be scrapped to prevent any further spread of the new strains of coronavirus.”
More than 220 UK coach operators have gone under since the start of the pandemic with many owners losing their homes as well as their businesses.“
“‘The Government is ignoring us – it’s like we don’t exist,’ says Raymond Wilkinson, owner of Longstaff Travel. ‘We’ve just been turned down for the latest grant as apparently we’re not hospitality or leisure but we just can’t continue losing money like this.’”
UK Banks will charge businesses up to 35 per cent interest on Rishi Sunak’s emergency Covid loans within weeks, The Mail on Sunday can reveal.“
“Data seen by this newspaper shows lenders have used the Chancellor’s flagship £19billion loan fund to saddle businesses with ‘usurious’ rates, which come into effect this spring.”
Brexit and COVID-19 have thrown another spanner in the works for the UK car industry as several factories have been forced to limit or shutter production.“
“Parts shortages and ports delays have already caused issues for the automotive industry, now Jaguar, Land Rover, Nissan and Vauxhall are all curbing activity supply chain issues are ironed out.”
Audi will delay the production of some of its high-end cars because of the “massive” shortage of computer chips that is sweeping across the automotive industry, its chief executive said.“
“The luxury car marque, part of the Volkswagen group, has put more than 10,000 workers on furlough because the chip shortage has slowed its production lines…”
“Shock Brexit charges are hurting us, say small British businesses: Levies to cover the increase in red tape, VAT and customs declarations are hitting trade to the European Union.”
Tens of thousands of protesters marched across France to denounce a security bill that would restrict the filming of police and posting of images on social media, something critics say would impact the ability to document cases of police brutality.“
“Protesters are also against the use of ramped-up surveillance tools such as drones and pedestrian cameras.”
Several thousand people held an unauthorised protest in Amsterdam on Sunday against a national lockdown to slow the spread of the coronavirus pandemic, before being dispersed by riot police.“
“The protesters gathered on a square in front of the Rijksmuseum and Van Gogh Museum art galleries, carrying signs reading “Freedom: stop this siege” and chanting “What do we want? Freedom!”.”
Italy’s Prime Minister Giuseppe Conte faces two key confidence votes in parliament this week as his political survival hangs by a few ballots.“
“The political crisis rocked Italy just as the country is struggling to contain a second wave of the coronavirus pandemic and facing its worst recession since World War II.”
“Italy forecasts its debt to soar to a new post-war record level of 158.5% of gross domestic output (GDP) this year, surpassing the 155.6% goal it set in September, a government source told Reuters on Saturday.”
The European Central Bank is threatening to impose additional capital requirements on banks that continue to ignore requests to rein in risk in the booming leveraged loan market.“
“Policymakers are increasingly frustrated by the lack of action to tighten risk controls in the market at some European lenders, which they fear could lead to repayment problems if interest rates rise.”
A surge in state investments has helped lift the Chinese economy from the effects of Covid-19, but likely has worsened one of its deepest weaknesses: low productivity. “Beijing has pulled off a robust economic recovery since early last year, when authorities locked down much of the country to combat the coronavirus epidemic.
“But the rebound has been unbalanced. It relied heavily on government expenditures and state-sector investments, while private spending remained weak.”
“China’s property developers have a mountain of international debt to refinance this year, and tight lending conditions are raising the risk of defaults.”
China has threatened a ‘counterstrike’ against Australia after Canberra condemned Beijing’s mass arrest of 55 politicians and activists in Hong Kong.“
“Foreign Ministry spokesman Lijian Zhao, who has a fake image of an Australian soldier holding a bloody knife to a child’s throat pinned to the top of his Twitter account, said anyone who gets in the way of China’s affairs would suffer.”
Despite the cold, weekly protests continued in Jerusalem on Saturday calling for the Israeli Prime Minister to step down over corruption charges.“
“Demonstrators gathered at a square in the city near Benyamin Netanyahu’s official residence. For seven months the protesters have been calling for the PM to resign.”
Riots and violent clashes between Tunisian police and protesters broke out on Sunday in the capital Tunis and several other cities for the second consecutive day, while security forces arrested dozens of young people.“
“The disturbances came as the country faced an unprecedented economic crisis and a nationwide lockdown imposed since Thursday as part of efforts to rein in surging coronavirus infections.”
“With N3.3 trillion budgeted for debt servicing in the assented 2021 budget, Nigeria is poised to spend about a quarter (24.3 per cent) of the entire N13.6 trillion budget on debts… This followed a trend that has been in place since 2016.”
Indebted Zambia has appointed communication firm Highgate Advisory Ltd as it negotiates with creditors to restore its debt to sustainable levels, Secretary to the Treasury Fredson Yamba said.“
“Zambia, Africa’s second-largest copper producer, is seeking debt relief from its creditors after missing a $42.5 million bond coupon payment in November, becoming Africa’s first pandemic-era sovereign default.”
Costa Rica’s latest effort to address a nearly $40bn debt crisis threatens to rekindle anti-austerity protests across the Central American nation, experts say, as the government began talks on Monday with the International Monetary Fund (IMF)…“
“The government had been preparing an agreement with the IMF last year, but the terms for that deal were quickly rescinded after thousands of people demonstrated for weeks.”
Guatemalan security forces have clashed with hundreds of Honduran migrants and asylum seekers travelling in a caravan bound for the United States…“
“Guatemala’s officials said as many as 9,000 migrants and asylum seekers have entered the country since Friday.”
Guatemalan families mourn death of children as hunger spreads:“
“Residents of the indigenous Mayan village, La Palmilla, and other parts of a region known as the Dry Corridor sunk deeper into poverty last year when economic damage wrought by droughts and two devastating hurricanes was compounded by the coronavirus lockdown.”
Stimulus Doesn’t Always Stimulate – Pushing On A String: “With artificial stimulants, such as certain drugs, there is an expectation of desirable positive effects from its use.
“Over time, the positive effects of the stimulus become muted and lose their potency. It takes higher doses and more frequent use of the stimulus to create the same original results…
“Also, over time, the cumulative negative effects of the stimulus take their toll.”
You can read the previous ‘Economic’ thread here. I’ll be back tomorrow with a ‘Climate’ thread.
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‘There is “no doubt” that company valuations have become “massively disconnected” from the economy, he said.” ‘
I found ‘this’ that may be of interest?
“If you separate out the top
06:22 five or six stocks from the US equity market and just look at how the other 490- something stocks
06:28 behave, they look, in some ways, more like the euro stock index, right? So they’ve been flat-ish
06:34 for the past decade or so, whereas the top five, six, seven, stocks have really lifted the whole
06:39 index. So if you separate those super companies out, there’s less of a difference in some ways.”
Thanks, James! I must confess I am no expert in stocks but I think we can say that the value of stocks has been artificially inflated by central bank interventions since 2008. There is too much corporate debt sloshing around and buybacks, often funded by corporate bonds, have been constituting too much of the demand for shares.
This is not to say that I foresee a near-term crash, even though for the reasons I outline in my ‘about the economy’ section I see the “real” economy as even weaker and more vulnerable than most pundits. I can see a scenario where valuations remain elevated for a while longer – but what goes up must come down.