“The financial crisis of 2008 was no ordinary crisis. It brought the U.S. banking system to its knees, destroyed millions of jobs, and nearly caused the break-up of the Eurozone. And this is just a short list of the damage it caused. Given how bad it was, it may have been reasonable to expect that we would now have a system in place to prevent another debacle. But ten years have passed and the idea that we have learned our lessons seems at best quaint and at worst laughable.
“One of the most basic lessons not learned is that a massive buildup of debt tends to end in a serious financial crisis. Even a small liquidity event that gets in the way of rolling over higher and higher amounts of debt eventually brings down the whole edifice.
“In the aftermath of the 2008 crisis, a river of ink was spilled to condemn the runaway debt spiral that led to it. It is remarkably ironic, then, that as we crawl out of ten painful years of struggle and recovery, even the most outspoken fiscal hawks of that time now seem unconcerned that debt is growing apace once more.
“Corporations everywhere took advantage of interest rates at all-time lows, borrowing as much as they could in the last few years. Many companies in the U.S. used the proceeds to buy back their own stocks.”
“What 2008 should teach us, if anything, is that we could all show a little more humility.”
“…financial globalisation makes the world vulnerable to U.S. monetary and fiscal policy. From time to time, the U.S. unleashes a flood of dollars at low rates. The world laps up the cheap finance. Then, the U.S. raises interest rates. Other economies find themselves staring at huge debt repayments… The present crisis in emerging economies highlights how vulnerable emerging markets are to the vagaries of American economic policy.”
“…the yield this year made it to a higher level than at any point in the last 6 years… These charts seem to offer technical analysis confirmation for those economists who are predicting that further rate hikes are in store just ahead and perhaps again later in the year.”
“Frustrated by the government’s recent arbitrary interventions in the markets, many businesspeople have taken their wealth and investments to other countries. Similarly, many of the highly skilled and educated people the Turkish economy depends on are leaving Turkey in droves.”
“South African policy makers may be about to consider whether to follow counterparts from Russia to Turkey and raise interest rates — even when the country is battling a recession… The South African Reserve Bank is contending with a currency that’s lost 17% to the dollar this year…”
“U.S. President Donald Trump’s trade battles and the accumulation of global debt to pre-financial crisis levels are among factors that will drive a major reset of the world economy in the next two to three years, according to the head of the world’s biggest long-haul airline.“We have some extraordinary geopolitical forces at play,” Emirates President Tim Clark told attendees at an aviation event in the Indian Ocean nation of Mauritius…”
“There are only two times in the history of this century where we had debt crises in which interest rates hit zero. And in both of those times, the Central Bank had to print money and go to a different type of monetary policy, which we call quantitative easing, and to buy financial assets. And that drives up, in both of those cases, the value of those financial assets and produces a recovery, but it drives interest rates down to zero or near zero, where they are around the world.
“And that buying, in this case $15 trillion of financial assets, has pushed up financial assets and driven the interest rates down to zero, so it’s caused asset prices to rise. It’s also caused populism, more populism. Because that process creates a gap between the rich and the poor. Those that have more financial assets see those asset prices go up… If you look at, right now, the top 10%, the top one tenth of 1% of the population’s net worth is equal, about, to the bottom 90% combined. That’s very similar to the late ’30s when we had that stimulation and so on.”
“The trade war between the United States and China just got a lot bigger after both sides announced their broadest waves of tariffs yet. The latest exchange of fire means the two economic superpowers will soon have imposed tariffs on more than $360 billion of goods. And analysts say the battle is likely to get worse, even as China starts to run low on ways to retaliate.”
“According to McKinsey world debt increased by $72trn during 2007-17 and one-third of that increase was in China. Much of that extra Chinese debt was in local government and in businesses. One-third of the Chinese corporate debt relates to the construction and real estate sectors. That in itself might cause warning signals: economic convergence between East and West could imply China is now imitating some of the features of the western economies prior to the crash of 2007-9… Contagion could also occur through the banking sector – some UK banks have made large loans in China.”
“Recently, though, there has been a big spike of failures in two areas. One is “wealth management companies,” or WMCs. These are unofficial-sector lenders who promise savers a rate of return much greater than that provided by official banks… As the defaults spiked this year, popular anger rose, and the government quickly shut down and dispersed protests in major cities… So rather than let this surge of defaults continue and let the chips fall where they may (and let public anger keep rising), the government has asked its four big “distressed asset managers” to step in and shore up the WMC and P2P sectors.”
“Former White House economic advisor Gary Cohn said President Donald Trump will work with Congress to pass a massive debt-fueled infrastructure bill if Democrats take control of the House of Representatives in November.”
“Ten years after the financial crisis, the Pew Research Center has asked people in 27 countries—representing two-thirds of global GDP—how they feel about their home economies and the future. The results are distressingly bleak.”
“As the trade war between China and the U.S. hits a boiling point, investors are taking their dimmest view of the global economy since the height of the European debt crisis. The tariff tensions aren’t the only thing bothering market pros: They also see rising risks from both a general slowdown in China as well as central banks finally shutting off the monetary spigots after years of ultra-accommodative policy.”
Read yesterday’s ‘Economy’ thread here.
China has a huge debt-problem and a net energy problem, as its own energy production is dwindling. The last thing it needs is a full-blown trade war… “The trade war with China began in earnest Monday.
“In announcing a wave of tariffs on $200 billion worth of Chinese imports, President Trump said in a White House statement that his administration had concluded that “China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts. These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.”
“The statement said that the tariffs, which take effect September 24, would initially be 10 percent, but would rise to 25 percent at the beginning of the year, giving U.S. companies time to adjust their purchases. However, a senior administration official told Reuters over the weekend that Trump is likely to announce the new tariffs as early as Monday…
“It’s hard to see China caving to the U.S. demands when, as one official told the Wall Street Journal, Trump “has a gun to their heads.””
“China has no choice but to retaliate against the latest round of U.S. tariffs in order to safeguard its rights and interest in a free trade world, the country’s Commerce Ministry said in a statement on Tuesday.”
“Coming back to the US economy, while President Trump’s tax cuts have helped fuel the stock markets, trade war fears are taking a toll on investors’ sentiments. One casualty has been the synchronized global growth that some observers were touting.”
“…the poor rupiah has been put into the emerging market meat grinder. It has reached depths not seen since 1998. But, are the causes of the fall of the rupiah the same as they were in 1997-1998? In a word, “no.” … the recent plunge of the rupiah represents a collapse in confidence. And, as John Maynard Keynes stated in The General Theory: “The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention.” Once lost, confidence is hard to regain.”
“Turkey’s economic crisis is now hitting hospitals. Çapa and Cerrahpaşa Hospitals, both teaching hospitals and part of Istanbul University, are just two healthcare facilities now struggling to pay health workers and retain staff. Doctors at Çapa Hospital went on strike last week after they failed to receive supplementary payments for the past month.”
“Egypt canceled a treasury bond auction on Monday, its third such move in as many weeks, as foreign investors cut their exposure to the country’s debt at a time of weak appetite globally for emerging market assets… “The finance ministry has been canceling the bond auctions for the past few weeks due to higher yields than they are willing to accept,” said one banker at an Egyptian bank.”
“South African President Cyril Ramaphosa urged businesses to place a moratorium on job cuts as his administration tries to contain the fallout of a recession and institutes measures to reignite growth. The continent’s most-industrialized economy contracted 0.7 percent in the second quarter, after shrinking 2.6 percent in the previous three months…”
“In Argentina, prices are soaring, unemployment is high and the currency, the peso has lost half its value so far this year. Inflation rate is now at 34.4 percent – one of the highest in the world. For the indigenous population, already historically neglected by the state, the effects of the crisis are magnified.”
“The economy of this Central American nation [Nicaragua] has been undermined by the five months of social unrest, initially triggered by protests against a reform of the social security system in April, which grew and led to demands for the resignation of President Daniel Ortega and Vice President Rosario Murillo, his wife.”
“Dominic Raab has insisted that the EU must compromise in the Brexit talks as the European council president, Donald Tusk, warned that the “catastrophe” of a no deal scenario was “still quite possible”. In an interview with continental European newspapers, the UK’s Brexit secretary said it was the EU’s time to move on its red lines, and that warm words would not suffice with so little time left until Brexit day.”
“Fouskas warned: “Italy is already in recession. It has been having zero percent growth for several years now, an unmanageable debt spiral…
“Italy faces the predicament of either brushing off the ECB rules of austerity and monetary discipline and inflate, the consequence being exit from the EMU; or deepen the austerity process and follow a path similar to that of Greece.
““Both paths are catastrophic for both Italy and the EU, especially the Italian people. Globally, too, the consequences will be catastrophic. Italy may well insert itself into those forces that undermine and eventually undo the process of globalization altogether…”
“But if extreme valuations by itself won’t bring this bull market to an end, what might end it? The biggest, fundamental problem right now is the extreme debt levels… we also have to look at the entire world as global debt levels have been growing… Especially dangerous are the extreme amounts of governmental debt… Italy would be a …country many investors are terrified of as it could run into serious trouble… Since 2007, corporate debt has increased more than 2.7 times… the high debt levels pose a systemic risk and as problems emerge, it is highly likely these will spread like a wildfire and can’t be contained.”
“..debts seem bigger than the ones that triggered the crisis 10 years ago… What is more worrying is that most likely the solutions adopted in 2008 would not be effective for the coming crisis. There would be no time to revive or pause the banking methodology. Interest rates are too low for the central banks to use facilitating credit to reinforce the economy.”
““Covenant-lite” deals are booming among leveraged loans, a sort of subprime debt often employed in corporate acquisitions. So far in 2018, they have constituted an estimated 34 per cent of all issuance by dollar value. That’s the largest share in at least a couple decades, with the exception of 2017. The lack of caution has coincided with the ascendance of Donald Trump to the presidency.”
“The average pay for Wall Street employees, when adjusted for inflation, jumped 13% last year to the highest level since the 2008 financial crisis and the third highest on record, according to a report released Monday. The average salary, including bonuses, for New York City–based securities-industry employees rose 13% to $422,500, the Office of the New York State Comptroller said.”
“The next US bear market is likely to be caused by a spike in 10-year Treasury yields and would risk setting off a $10 trillion crash in US household assets… “When the next recession comes, it is going to be deeper and last longer than in the past. We don’t have any strategy to deal with it,” Feldstein, a former chairman of the White House Council of Economic Advisers, said, adding that the heads of the economy lack emergency tools to recover in the event of a severe recession.”
“Interest rates could be stuck near rock-bottom levels for years to come as economists fear the economic cycle is already turning, with the recent global growth spurt showing signs of losing momentum.
“Ten years on from the financial crisis and growth may now be coming to an end, leaving the world’s central bankers short of ammunition, should they need to prop up their economies once again.
“Higher oil prices, rising US interest rates and the trade war have all combined to sap growth, indicating rates might need to be cut once more, according to economists.
““Global growth has shifted to a lower gear,” said economists at BNP Paribas.”
Read yesterday’s ‘Economy’ thread here.
Highly leveraged growth is not true growth. Our ‘recovery’ is borrowed from a fantastical future of bountiful prosperity.
“As a profession, economists are absolutely hopeless at forecasting recessions… When a weather forecaster says a hurricane is imminent, the public does well to take notice. When an economic forecaster gives a similar warning, the chances are that it is already too late…
“Put simply, the cure for the Great Recession was for central banks to slash interest rates and to increase the supply of money by buying bonds from the private sector in the process known as quantitative easing. Debt levels in the private sector fell for a while as households and companies retrenched but have subsequently started rising again. Low interest rates were designed to provide incentives for investors to seek out riskier assets, which is what they have done.
“Money has flooded into emerging markets, where yields are juicier because the risks are higher. Turkey, where the central bank raised interest rates to 24% last week, is one example of what can happen in a world of footloose capital. Speculative money comes in from abroad. It finances a construction boom and drives up the exchange rate.
“Eventually, the trade deficit starts to balloon and inflation starts to rise. At that point, the speculators take fright and the exodus of capital triggers a fall in the exchange rate. At that point, the central bank has to raise interest rates to punitive levels to defend the currency and recession becomes inevitable.”
“Ten years after the financial crash that hit Western countries 10 years ago, triggering recessions, many of the scars on Britain’s economy have yet to heal – despite more than eight years of growth… Wages in inflation-adjusted terms are no higher today than they were in 2005.”
“The International Monetary Fund has warned that a “no-deal” Brexit on World Trade Organization terms would entail substantial costs for the UK economy… It said challenges in getting a deal done were “daunting” and warned against further UK interest rate rises.”
“The UK housing market is grinding to a halt as sales last month fell to their weakest August level in five years. Just 79,000 sales were completed in the month, down by 4pc on the year according to data from LSL Property Services and Your Move. Prices eked out a 0.1pc increase on the month, the first rise since March… This means house prices are rising more slowly than the cost of living, which rose 2.5pc in the 12 months to July.”
“Europe’s biggest debt collector says an increase in volumes in Sweden and Norway could be an early indication that households are starting to struggle paying off their consumer loans after debt burdens swelled to records. Volumes under Intrum AB’s existing credit-management services contracts in the two countries, in which it collects money from non-paying clients of financial institutions, grew by more than 15 per cent in the first half of the year.”
“A bird’s-eye view of Italian banking problems shows that most of them were direct consequences of the government debt crisis, the supply-side credit crunch that followed, and the downturn in the economy. A negative loop further depressed the performance of the economy and, in turn, affected the quality of the credit portfolio of banks… The next recession may hit before Italy adequately addresses remaining vulnerabilities.”
“Sudan’s President Omar al-Bashir on Sunday appointed a former finance official as central bank governor, a day after a new cabinet was sworn in and tasked with curbing soaring inflation and a shortage of foreign currency… The central bank has been grappling with an acute shortage of foreign currency at a time of hyper-inflation that touched almost 68 percent in August. The Sudanese currency has plunged, trading on Sunday at 42 pounds to the US dollar on the black market, compared with the official rate of 28.”
“Nigeria’s National Bureau of Statistics (NBS) says that the country’s inflation rate for the month of August rose to 11.23 percent,The NBS said in the report for the CPI for the month of August, released on Friday in Abuja that the figure represented a 0.09 percent point higher than the 11.14 percent inflation rate recorded in July 2018.”
“Argentina is struggling to shore up its peso, which has more than halved in value despite punitive interest rate rises to 60%. Other currencies have been caught in the slipstream, with India’s rupee plumbing record lows and South Africa’s rand, Russia’s rouble and Brazil’s real losing 15-20% this year so far. Signs are appearing that months of market turmoil are starting to take the toll on real economies…”
“South Korean households saw their debts increase sharply with per-person debt expected to top 30 million won ($26,700) this year, data showed Sunday… Bank of Korea Gov. Lee Jue-yeol has said the total amount of household credit is still at a high level and is expanding at a faster pace than that of household income. “It is hard to deny that the financial imbalance is getting wider and wider due to a lower interest rate,” he said earlier. “It is necessary to prevent a further imbalance and make efforts to ease it.””
“Economic troubles in emerging markets and the ongoing trade war between the United States and China could potentially increase the risk of the next financial crisis, according to the chief executive officer at South Korea’s sovereign wealth fund.”
“China will not be content to only play defense in an escalating trade war with the United States, a widely read Chinese tabloid warned, as President Donald Trump was expected to announce new tariffs on $200 billion in Chinese goods as early as Monday. Beijing may also decline to participate in proposed trade talks with Washington later this month if the Trump administration goes ahead with the additional tariffs…”
“Dozens of officials in central China’s Hunan province have been punished for illegal debt accumulation for their local government, the Ministry of Finance (MOF) has revealed. The punishments come amid rising concern over the deteriorating finances of some areas in the province that have caused breakdowns in local government operations, including, in one case, the failure to pay civil servants’ salaries.”
“China’s main Shanghai Composite index fell to its lowest close in nearly four years on Monday as reports said U.S. President Donald Trump would unveil new tariffs on $200 billion of imported Chinese goods this week. The Shanghai Composite index dropped 1.1 per cent to 2,651.79 points, its worst close since Nov. 27, 2014.”
“Ten years after Lehman Brothers collapsed, high-octane products like those which led to the destruction of the American banking giant are making a comeback… Those linked to this effort have included former bosses from failed bank Northern Rock, Adam Applegarth, and Lesley Sewell. Guy Batchelor, former senior vice president at Lehman’s european mortgage division…
“Some 80pc of the junk-rated, or below investment grade loans, are regarded as having light touch conditions, more than triple the level seen in 2006-2007, according to Moody’s. Meanwhile experts have warned that the financial sector remains “brittle”.”
Read the previous ‘Economy’ thread here.
Global debt has risen from $84 trillion at the turn of the century, to $173 trillion at the time of the 2008 financial crisis, to $250 trillion a decade after Lehman Brothers Holdings Inc.’s collapse:
“In many ways, all the talk about global central banks beginning a “great unwind” of their extraordinary monetary stimulus is positively quaint.
“After all, how can officials from the Federal Reserve to the Bank of Japan even pretend to know how to reverse what they’ve done over the past decade? I’m speaking specifically about propping up financial markets with easy money and allowing the world’s debt burden to balloon to almost $250 trillion.
“They kept interest rates at or below zero for an extended period — probably too long, if they’re being honest with themselves — and used bond-buying programs to further suppress sovereign yields, punishing savers and promoting consumption and risk-taking. Global debt has ballooned over the past two decades: from $84 trillion at the turn of the century, to $173 trillion at the time of the 2008 financial crisis, to $250 trillion a decade after Lehman Brothers Holdings Inc.’s collapse…
“This is the post-Lehman legacy. To pull the global economy back from the brink, governments borrowed heavily from the future. That either portends pain ahead, through austerity measures or tax increases, or it signals that central-bank meddling will become a permanent fixture of 21st century financial markets.”
[…or it signals that the entire edifice of modern finance is inherently unstable and on the verge of collapsing under the weight of its own contradictions.]
“A decade after the collapse of Lehman Brothers sparked a plunge in markets and a raft of emergency measures, strategists at the bank have created a model aimed at gauging the timing and severity of the next financial crisis. And they reckon investors should pencil it in for 2020.”
A popular prediction today:
“The leverage in many emerging markets and some advanced economies is clearly excessive. Commercial and residential real estate is far too expensive in many parts of the world. The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather. And as forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019.”
“When emerging markets run into trouble, the trouble can keep getting worse until the Federal Reserve rides to the rescue. But what if the Fed never shows up?”
“Turkey‘s central bank has raised its key interest rate to 24% in a dramatic bid to control rocketing inflation and prevent a currency crisis. Ignoring calls for restraint from President Recep Tayyip Erdoğan, the bank raised its main short-term rate from 17.5% following weeks of pressure from international investors. Financial markets have grown increasingly concerned that Turkey is in danger of adding its name to the list of countries seeking a rescue loan from the IMF.”
“Consumer prices in Argentina rose at their fastest pace in August since the nation’s statistics agency regained credibility in 2016, another sign that South America’s second-largest economy is heading for a recession this year… Prices rose 34.4 percent compared to a year ago, according to data published Thursday.”
“Some Asian countries have been hit hard by the selloff of emerging market assets, with their currencies plunging in value against the US dollar. The situation has stoked fears that Asia is on the verge of facing another financial crisis like the one seen during 1997-98. The Indonesian rupiah has slumped to its lowest level since the Asian financial crisis in the late nineties… But the worst performing Asian currency this year has been the Indian rupee.”
“Inflation is putting poor children at risk of malnutrition, a children’s rights group said Thursday, as it sought the passage of a bill that seeks to provide health and nutrition services for the underprivileged. In a statement, Save the Children Philippines said the rising prices of goods have “put millions of children at risk of malnutrition as more poor families experience hunger.””
“China will not buckle to U.S. demands in any trade negotiations, the major state-run China Daily newspaper said in an editorial on Friday, after Chinese officials welcomed an invitation from Washington for a new round of talks… “The Trump administration should not be mistaken that China will surrender to the U.S. demands. It has enough fuel to drive its economy even if a trade war is prolonged,” the newspaper said in an editorial.”
“Investment in factories, railways and other projects in China so far this year grew at its slowest pace in more than a quarter-century, pointing to challenges in government efforts to arrest an economic slowdown.”
“Ten years ago, China shielded itself from the global financial crisis with a wall of stimulus. Facing U.S. President Donald Trump’s tariff onslaught, that feat of self-preservation looks much harder to repeat. The simple reason is that even if President Xi Jinping’s government were to conclude that the economy needed massive spending to keep growth on track, he is hamstrung by China’s huge debt.”
“Debt stalks Africa once again. Over the past six years sub-Saharan governments have issued $81bn in dollar bonds to investors hungry for yield. Piled on top of this are murkier syndicated loans and bilateral debts, many to China and tied to big construction projects… Consider Zambia. In 2012 this southern African country could borrow more cheaply than Spain. Now bond yields have jumped above 16%, suggesting that investors fear that it will default…”
“…not everything is rosy in this credit-fuelled affair. Kenya is the third biggest borrower from China in Africa and the strain of the mounting debt is showing. In fact, public outcry is still reverberating following the Jubilee government’s widely unpopular decision to impose a 16 per cent levy on petroleum products to fund the ballooning budget deficit. China has been on a massive lending spree, gifting it an iron grip on Kenya and other African countries that collectively owe the Asian giant more than Sh20 trillion.”
“Ten years from the global financial crisis of 2008, the links between public debt and banks still remain, Peter Wuffli, the former CEO of UBS, told CNBC on Friday. Wuffli said that remains a major risk for Europe.”
“Italian bonds declined for the third day amid reports that Finance Minister Giovanni Tria threatened to quit over the country’s budget negotiations, and after an auction of government debt drew weaker demand. The minister’s offer to resign followed pressure from the Five Star movement over a proposal to fund a basic income for the poor, newspaper La Stampa reported Thursday, and comes as the nation risks a stand-off with the European Union over fiscal deficit rules.”
“The governor of the Bank of England has warned the cabinet that the impact of a no-deal Brexit could be as catastrophic as the financial crisis that crippled the UK economy a decade ago. During a special cabinet meeting on Thursday to discuss preparations for the UK crashing out of the union, Mark Carney told Theresa May and her senior ministers of the potentially dire economic consequences of leaving on poor terms.”
“Ratings agency Fitch said on Thursday that it saw a growing risk of a bitter and economically damaging Brexit that could lead to a further downgrade of Britain’s sovereign credit rating.”
“British households would face a renewed squeeze on living standards from a no-deal Brexit that could tip the country into recession, according to a report. Issuing a stark warning for Britain that crashing out of the EU without a deal next year would have widespread ramifications, the credit ratings agency Moody’s said the risks to the British economy had “risen materially” in recent months.”
Read yesterday’s ‘Economy’ thread here.
“A leaderless world is sleepwalking towards a repeat of its near meltdown in late 2008 and early 2009 because it has failed to remedy the causes of the financial crash of a decade ago, former prime minister Gordon Brown has warned.
“Britain’s leader during the period when the collapse of the US investment bank Lehman Brothers put every major bank at risk, said that after a decade of stagnation the global economy was now moving into a decade of vulnerability.
“Speaking to the Guardian at his home in Scotland, Brown delivered a scathing analysis of how the big problems of 2009 remained unresolved and said that much tougher action was needed to prevent wrongdoing by bankers…
“We are in danger of sleepwalking into a future crisis,” Brown said when asked to assess the risks of a repeat of 2008. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.”
“The former prime minister, who lost the 2010 election following Britain’s longest and deepest recession of the post-war era, said there was less scope to reduce interest rates than was the case a decade ago, no evidence that finance ministries would be allowed to cut taxes or increase public spending, and no guarantee that China would be as active in providing stimulus.
““The cooperation that was seen in 2008 would not be possible in a post-2018 crisis both in terms of central banks and governments working together. We would have a blame-sharing exercise rather than solving the problem.
“In the light of the trade war launched against Beijing by the US, Brown doubted that China would be as cooperative a second time. “Trump’s protectionism is the biggest barrier to building international cooperation,” he said…
“He said the global economy still lacked an early warning system and a system for monitoring financial flows so that it was possible to tell what had been lent to whom and on what terms. “We have dealt with the small things but not the big things,” he said…
““It is very difficult to say what will trigger it [the next crisis] but we are at the latter end of the economic cycle where people take greater risks. There are problems in emerging markets… In an interconnected world there is an escalation of risks. We have had a decade of stagnation and we are now about to have a decade of vulnerability.”
““In the next crisis a breakdown of trust in the financial sector would be mirrored by breakdown in trust between governments. There wouldn’t be the same willingness to cooperate but rather a tendency to blame each other for what’s gone wrong.
““Countries have retreated into nationalist silos and that has brought us protectionism and populism. Problems that are global as well as national and local are not being addressed. Countries are at war with each other on trade, climate change and nuclear proliferation.””
You may recall:
“Damian McBride quoted Mr Brown as saying: “You don’t understand…If the banks are shutting their doors, and the cashpoints aren’t working, and people go to Tesco and their cards aren’t being accepted, the whole thing will just explode… It’ll be anarchy. That’s what could happen tomorrow. I’m serious, I’m serious… We’d have to think: do we have curfews, do we put the Army on the streets, how do we get order back?””
“Stockpiling by businesses ahead of Brexit will make a mini-recession in the UK “almost inevitable” next year, according to the head of a UK think tank… Stockpiling is expected as businesses look to guard against the possibility of a no deal Brexit, which would see the UK crash out of the EU without a deal on future trade agreements.”
“Despite measures to bolster the banking system, Bank of England governor Mark Carney says history teaches us that no one can rule out another financial crisis.”
“Profits at the John Lewis Partnership have fallen to almost zero in the first half of the year as its department store chain matched discounting “extravaganza days” by rivals. John Lewis Partnership chairman Sir Charlie Mayfield said the retail sector was facing “challenging times”. Its results, which include Waitrose, showed profits for the six months to 28 July sank 99% from last year to £1.2m.”
“Ireland is closer to the next downturn than it is to the start of the last financial crisis in 2008 and the country’s economy is still vulnerable, the deputy governor of the Central Bank has said – “Even as the sun is shining today, there are clouds on the horizon. One can hope that future storms are not as severe as the last one, but storms there undoubtedly will be.””
“While some number of analysts have pointed to China and its indebted system as the next crisis point, others have suggested that high-levels of global debt that currently stand at a record $247 trillion will be the kicking point; unrealistic stock prices as well as emerging economies have also been cited as potential starting points for the next crisis.”
“Since the Federal Reserve began raising interest rates in December 2015, markets have been skeptical the Fed will actually follow through with its forecasts, since the Fed has backed away at signs of trouble for the economy and markets. Futures markets still project low odds for more than one rate hike on the fed funds rate, while the Fed forecasts three. Reversing course from quantitative easing might create issues no one has foreseen.
“”We just don’t know over time if there’s something that could tip the apple cart,” said Diane Swonk, chief economist at Grant Thornton.”
“Corporate debt in the U.S. is now higher than it’s ever been… “The real biggest problem lies, if I’m looking at the U.S., I look at debt-to-cash ratios, and I take out the top ten companies,” Steve Blitz, chief U.S. economist at TS Lombard told CNBC’s Squawk Box Europe on Wednesday, noting his exclusion of highly capitalized companies like major tech and pharmaceutical firms who are well-stocked to service their debts.”
“Bethany McLean, author and CNBC contributor, says fracking companies haven’t proven that they can produce cash flow and have incurred a lot of debt, which isn’t good for shareholders.”
“Auto sales in Canada fell by its sharpest level in nearly two years at 3.6% year-over-year (y/y) in July followed by a 1.6 y/y contraction in August, a new report from Scotiabank says, which marked the sixth consecutive month of y/y declines… “…rising interest rates may be restraining big-ticket purchases by Canadian households,” Scotiabank said.”
“Thousands of Argentines are staging a demonstration to protest recent government austerity measures and demand solutions to the country’s economic crisis. Demonstrators led by labor unions gridlocked traffic on some of the main avenues of Argentina’s capital Wednesday. Some protesters cooked stews in big pots and offered them to passers-by to dramatize growing poverty levels.”
“South Africa’s Reserve Bank will leave interest rates unchanged at 6.50 percent next week, 25 of 26 analysts predicted in a Reuters poll, after recent data showing the economy unexpectedly slipped into recession earlier this year… However, emerging market currency mayhem will likely prompt the Bank to switch to a hiking cycle in early 2019, the poll taken in the past three days showed.”
“Although official statistics haven’t been released, immigration advisors in the country say the numbers of Iranians who have decided to start a new life elsewhere has jumped significantly. And for many, that next home is Turkey… those willing to make the move will be trading one troubled economy for another.”
“Filipinos queuing for hours to buy cheap rice from the government. Families eating fewer meals a day to save money. Locals venting their anger against President Rodrigo Duterte on social media.These are the images and stories that have dominated media coverage in the Philippines after inflation soared to more than 6 percent in August.”
“Several new milestones have been reached in the past several days alone. Last Friday, the rupee, India’s currency, breached the 72 mark against the US dollar for the first time – a fresh all-time low – while the Russian rouble dropped to its weakest level since March 2016. On Tuesday, Hong Kong’s equity market slipped into bear market territory, dragged down by the rout in technology stocks and concerns about China’s slowing economy.”
“When Malaysia canceled two large-scale infrastructure projects backed by China last month, Prime Minister Mahathir Mohamad said he was afraid the country could go bankrupt. As leader of a government that has tried to crowdfund its $250 billion of debt, that seems to be a reasonable concern… As Bloomberg Opinion columnist Shuli Ren recently wrote, “China’s shaky domestic economy may mean that it’s no longer politically viable for Beijing to keep being so generous.””
“When U.S. President Donald Trump fired the first salvos in his trade war with China, the market for hauling bulk commodities that power the Asian country’s economy responded with a surprising surge. Now shipowners are losing their swagger. Rates to haul iron ore and coal on 1,000-foot Capesize ships plunged by 39 percent since reaching their 2018 peak in early August. Fourth-quarter hedging contracts dropped 11 percent from their high last month.”
“…manufacturing output growth continued to run at one of the weakest rates seen over the past two years, stymied by a further near-stagnation of global trade flows. Global export orders barely rose for a fourth consecutive month in August. Furthermore, in a sign of weakness spreading beyond the export sector, August also saw worldwide service sector… registering one of the softest performances seen over the past two years.”
Read yesterday’s ‘Economy’ thread here.
World stocks fall: “Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world’s developing economies.
“The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions.
“Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments.”
“It’s a losing streak investors haven’t seen since 2002. The benchmark MSCI Asia Pacific Index fell for a tenth consecutive day on Wednesday, extending its recent decline to about 5 per cent and bringing the loss in value to almost US$700 billion this year.”
“…there is a chain of potential contagion that could give markets more of a scare than they’ve felt so far, warns Satyajit Das. The global economy isn’t exactly in the best shape; and as we discovered a decade ago, markets are linked in ways that can surprise investors: “If EM stresses persist, then advanced economies face additional credit tightening, exacerbating the reductions in liquidity underway and potentially transmitting price shocks.””
“As the sell-offs in Turkey and Argentina spread to other emerging markets, doubts that developed markets can retain their immunity are getting louder. JPMorgan Chase & Co. says the vulnerability of mature markets to contagion emanating from developing nations hinges on Asia’s economic resilience. At ING Groep NV the risk is that monetary tightening in many emerging economies could eventually crimp growth and have a knock-on impact for advanced economies.”
“The crisis in Argentina and the sharp devaluation of the local currency are putting pressure on businesses that trade with the South American country – Brazilian companies in special. A J.P. Morgan report analyzing quarterly reports from publicly traded companies show Brazilian businesses as the ones most affected by the Argentinian financial crisis.”
“Brazilian equities and currencies slumped on Tuesday after an opinion poll on the presidential election showed leftist candidates gaining ground while market-friendly centrists did not. Traders had bet that a market-friendly candidate would emerge from the pack to win in October. A Datafolha opinion poll released Monday night underlined that the window for such a development is rapidly closing.”
“A U.S. official has accused Venezuela’s President Nicolas Maduro of “rapacious corruption” and operating “a kleptocracy” on a rarely seen scale that includes embezzling from the state-owned oil company and stealing from a government program created to feed millions of hungry people.”
“South Africa’s rand weakened on Tuesday as emerging market currencies lost ground with further deterioration in United States and China trade relations subduing demand for risk assets.”
“Stalled high-rises, homeless retirees and “Ponzi schemes”: a promised economic revival [in Turkey] is evaporating.”
“Pakistan, which is facing a financial crisis and may need a bailout, has added half of its power generating capacity in the past five years with Chinese help but a weak distribution network means companies and households are still bereft of electricity. Prime Minister Imran Khan faced immediate complaints after he was elected premier by lawmakers last month when the nation’s largest city Karachi was hit by an all-night blackout.”
“South Korea’s unemployment rate rose to an eight-year high in August as mandatory minimum wages rose, worsening economic policy frustrations for President Moon Jae-in whose approval rating is now at its lowest since inauguration.”
“Chinese auto sales fell in August for the second successive month, as market saturation and weak consumer confidence combined to slow the world’s biggest car market. Vehicle sales fell 3.8% to 2.1 million last month, the government-backed China Association of Automobile Manufacturers said on Tuesday. That followed a 4% drop in July.”
“Those hoping that U.S.-China trade tensions will disappear when President Donald Trump leaves office should think again, according to economist Tyler Cowen. Those tensions are here to stay and the world must prepare for a new paradigm in global trade, the professor of economics at George Mason University in the United States told the annual CLSA Investors’ Forum in Hong Kong on Monday.”
“The intensifying trade war between China and the United States could “shock” emerging markets that are already in danger, the head of the International Monetary Fund said in an interview published on Tuesday (sept 11). As a result, crises in Turkey and Argentina could spread, IMF managing director Christine Lagarde told the Financial Times.”
“On the tenth anniversary of the financial crisis, CNBC’s Brian Sullivan reports how [US] corporate debt has crept its way back up to levels seen back then.”
Read yesterday’s ‘Economy’ thread here.