Daily updates on climate change and the global economy.

Economy 28 Sept 2018 cold turkey for junkie economy

The junkie economy will freak out when you take its methadone away, unsurprisingly:

“On Wednesday, the U.S. Federal Reserve hiked its benchmark interest rate by a quarter-percentage point to 2% – 2.25%, which is the highest level since April 2008. As rates continue to climb off their post-Great Recession record lows, market participants and commentators are showing almost no signs of fear as the stock market is hitting records again and complacency abounds.

“Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different….

“When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment [in other words, malinvestments]….

“Though it can be difficult to tell precisely which investments or businesses are malinvestments in a central bank-distorted economy, a quote by Warren Buffett is extremely applicable: “only when the tide goes out do you learn who’s been swimming naked.” For the purpose of this discussion, “the tide going out” refers to rising interest rates. The mass failure of malinvestments in an economy as interest rates rise typically results in recessions or banking/financial crises.”


One such malinvestment is the fracking industry, which had in aggregate, from mid-2012 to mid-2017, negative free cash flow of $9 billion per quarter, and which has been propped up by over-ambitious equity issuance and artificially low interest rates.


Or it could be the various property bubbles that have been inflated around the world:


“Washington rewrote the rulebook for Wall Street after the 2008 financial crisis, but dangerous lending is still eluding regulators. Take Bomgar Corp., which just lined up $439 million in loans. The deal marked the software company’s third trip to the debt markets this year. By one estimate, Bomgar’s leverage could soon spike to 15 times its earnings, raising questions about whether the firm could ever pay it off.”


“Investor confidence is at its lowest level in more than five years, and is weakest in North America, according to a US bank. State Street’s Global Investor Confidence Index (ICI) gave a score of 88.3 for September, below the neutral score of 100. This is down 5.7 points from 94.0 in August and is the lowest measure since March 2013.”


“The odds of a recession in 2019 are large and growing, according to a pair of veteran market watchers quoted by Barron’s. They see interest rate hikes by the Federal Reserve and rising trade tensions as the main catalysts for a downturn.”


“Hyman Minsky, a much-neglected economist, warned about the psychology of the business cycle. His concerns focused on what happens next after a prolonged period of stability: people fall into the trap of believing that calm will persist indefinitely. In a sense, stability becomes a kind of bubble itself.”


“A measure of global trade weakened this month, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead. DHL cited “rising political tensions” for the slump in its trade barometer, as the tariff battle between the U.S. and China escalated.”


“A widely watched private survey of China’s factory activity is expected to show further slowdown in the manufacturing sector’s growth in September, as the country’s trade dispute with the U.S. escalates.”


“Eurozone manufacturers grew less upbeat about their prospects in September, as French businesses saw a slowdown in new orders and pared back production expectations. Consumer confidence also weakened, largely as a result of a gloomier assessment of the economic outlook in France, where growth slowed sharply in the first six months of the year, and Spain.”


“Nearly two-thirds of businesses have yet to do any risk assessment of a no-deal outcome in the Brexit negotiations as “Brexit fatigue” sets in, the British Chambers of Commerce has found. Adam Marshall, the director general of the BCC, said: “Too many businesses across the UK are still not ready for Brexit. Many smaller firms don’t have the capacity to scenario plan, don’t think they’ll be affected or have simply switched off from the process altogether.”


From the cynical British standpoint, this is helpful because it removes focus from Brexit and onto the overall viability of the EU, and helps strengthen the struggling £ relative to the Euro.

“The Italian government agreed to a 2019 budget deficit target at 2.4% of GDP on Thursday night in a move that was celebrated by leaders but could bring the heavily indebted country into conflict with the European Union.”


“IL&FS’s defaults have highlighted the risk of a sharp growth slowdown in the world’s fastest growing major economy, as lenders pare their exposure to the shadow banking space, or what are called non-banking finance companies (NBFCs) in India.”

As per yesterday’s feed, India’s growth has been propped up on excessive and shaky debt and has not provided a commensurate increase in employment, so calling it robust is a stretch.


“Turkey’s economic confidence index has taken a nosedive to its lowest level in nearly 10 years, the Turkish Statistical Institute revealed on Thursday.

“Economic confidence index decreased by 15.4% compared to previous month decreasing from 83.9 to 71 in September.”


“Drug gangs and addicts are a common scourge in the Villa Zavaleta slum in Buenos Aires, where even before the recent economic crisis brought them to their knees, the 1,200 families faced a daily struggle just to eat.

“Rubbish and excrement fill the streets where a dog chews on a cow’s jaw bone and a drugged woman staggers about.”


“Thousands in the capital Harare have been infected by [cholera]… The rise in prices of basic goods, coupled with persistent fuel shortages, has revived fears of economic collapse from hyperinflation that occurred in 2008…

“Recently, [President] Mnangagwa acknowledged Harare’s water is contaminated with raw sewage.”


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Economy 27 Sept 2018 world economy on shaky ground

“The world economy remains on shaky ground a decade after the 2008 financial crisis, with trade wars a symptom of a deeper malaise, according to UNCTAD’s Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion.

“While the economy has picked up since early 2017, growth remains spasmodic, and many countries are operating below potential, states the report. This year is unlikely to see a change of gear.

The world economy is again under stress,” UNCTAD Secretary-General Mukhisa Kituyi said. “The immediate pressures are building around escalating tariffs and volatile financial flows but behind these threats to global stability is a wider failure – since 2008 – to address the inequities and imbalances of our hyperglobalized world…”

“With downside risks increasing and financial fault lines widening in several countries, the report sees economic storm clouds gathering.

“Today’s $250 trillion debt stock – 50% higher than at the time of the crisis – is three times the size of the global economy. Private debt, particularly corporate debt, has been behind this surge in borrowing but without stimulating business investment – a disconnect that spells trouble ahead.

“Even as advanced economies have not done enough to rebalance the global economy, there are concerns that their “normalizing” monetary policies could send new shock waves through capital and currency markets, with a vicious economic spiral in more vulnerable economies already looking possible…”


“An “explosion” in corporate and household debt across the developing world since the financial crisis has left some of the world’s poorest countries with little protection against Donald Trump’s trade wars and a slowdown in global growth.”


“The report [showing that China’s household debt has reached a record high] comes amid rising concerns over China’s debt-fuelled spending in the wake of the global financial crisis…”


“Despite direct orders from Beijing to cut leverage, China’s local governments continued to create illegal debt this year in part to offset the impact of the trade war with the United States, according to the National Audit Office… However, any attempt to clamp down on local government debt could also adversely affect financing for local infrastructure projects, a key part of the central government’s plan to stabilise the economy amid the trade war with the United States.”


“Congress spokesperson Manish Tewari claimed the company was on the verge of bankruptcy and warned if that happened it would have a domino effect and “far reaching consequences” oon the country’s economy. “This could be termed as the ‘Lehman Brothers moment of India’, as the collapse of Lehman Brothers in United States led to the ‘great economic meltdown’ of 2008…Something similar is happening in India today,” he said, warning that “the Indian economy may plunge into a very deep crises”.”


“…a raft of reports of firms like Commonwealth Bank, NAB, ANZ and Westpac issuing dodgy financial advice, life insurance and fraudulent mortgages forced a reluctant business-friendly government to call for a Royal Commission late last year. Since then, a series of hearings involving almost 10 000 submissions and more than 100 witnesses has stunned even hardened observers. They included accounts of NAB staff accepting cash-stuffed envelopes… while staff at Commonwealth Bank —Australia’s largest firm —charged fees to customers who had died up to a decade before.”


“Expanding what was already the largest bailout in its history, the International Monetary Fund said it will raise Argentina’s $50 billion credit line to $57 billion in an attempt to stem a crisis that has roiled Latin America’s third-largest economy. The revised standby agreement, which still needs approval from the executive board, is “aimed at bolstering confidence and stabilizing the economy,” IMF Managing Director Christine Lagarde said Wednesday in a joint statement with Argentine Economy Minister Nicolas Dujovne.”


“There are several reasons why the [UK] housing market is slowing down, particularly in the capital. Extra taxes on landlords, tighter lending restrictions and high prices have put off would-buyers in recent years, while last month’s rise in interest rates must also be factored in by buyers.”

[Brexit anxiety not helping either]


“EU leaders last week rejected British Prime Minister Theresa May’s proposals for post-Brexit trade, standing firm on their position that the plan would undermine their cherished single market. “The British made their choice, that’s fine. Excuse me to say so brutally, but there are more important things for us than the future of the United Kingdom. It’s the future of the European Union,” Le Maire told a small group of foreign journalists on Tuesday.”


“Rents in Spain are soaring post-crisis, fuelling concerns of a new “bubble” in a country still traumatised by the collapse of its housing sector….

“…more and more Spaniards are having trouble paying their rising rents, with many forced to move, particularly in Madrid and Barcelona, as they struggle on low salaries or benefits.”


“Contemporary Italian society is awash in resentment and fear, and this mindset is an obstacle to economic growth, Italy’s Center for Social Investments Studies said in a statement on Wednesday… The think tank attributed this mindset to the poverty of young families headed by individuals under 35, whose average income is 15 percent lower and whose personal wealth is 41 percent lower than the national average.”


“The Federal Reserve raised U.S. interest rates for the third time this year, in a bid to prevent inflation from surging as President Donald Trump’s tax cuts fuel economic growth. The central bank’s monetary-policy committee, led by Chairman Jerome Powell, raised rates by 0.25 percentage point to a range between 2% and 2.25%, according to a statement Wednesday.”


Possible causes of the next crash:

1.) Interest Rates Jump – “Risk-taking and leveraging have exploded. Interest rate increases that are faster than expected could push down stocks and commodities and trigger a domino effect.”

2.) Certifiably Crazy World Leaders with Their Finger on the Trigger – “The threats posed by countries like North Korea and Iran are very real… and very unpredictable.”

3.) Cyber Attacks and Disruptions to the Power Grid – Attacks by countries like China, North Korea, Russia, and Iran are becoming more common and more debilitating.

4.) Emerging Markets in Distress or Chaos – “Countries from Turkey to Argentina and South Africa are experiencing market and currency plunges, along with interest rate and recession woes which could spread to other countries.”

5.) China Could Crack – China has so far weathered the threats of a trade war and a rising But a real-estate crash or defaults of local government-owned financing vehicles could be the breaking point and would impact our economy.

6.) Trump Might Be Impeached – Although he would likely stay in office, confidence in the bull market that really took off when Trump got elected could be undermined.

7.) Very Tight Labor Market – An incredibly tight labor market has resulted in 911 emergency call centers not being able to get enough people to answer the phones. And prisons are now training inmates to be coders. What could possibly go wrong with that?


“Climate change could punch huge holes in bank balance sheets and trigger panic on a scale similar to the 2008 crisis, the Bank of England has warned… Thirty per cent of banks dismiss climate change as a corporate social responsibility issue rather than treat it as a financial risk and only 11 per cent are taking action in the long-term interests of the firm. The findings came from a survey of 90 per cent of the British banking sector, representing £11 trillion of assets.”


Read yesterday’s ‘Economy’ thread here and, if you’ve just backed a winning horse or perhaps cleverly invested in the US stock market thereby indirectly benefiting from a decade of central bank stimulus, why not show me a little love via my Patreon account?

Economy 26 Sept 2018 Sino-US relations crumble

“Relations between the US and China are crumbling rapidly. Against a backdrop of an escalating trade war between the two countries, Washington has continued to push Beijing’s buttons on flashpoints, stoking fears on whether Donald Trump’s end goal is aimed at containing China.

“On Monday, the US began taxing $200 billion in imports from China, the biggest round of tariffs to take effect in the trade conflict. The US also approved a $330 million arms sale to Taiwan, an island nation China claims sovereignty over whose ties with the US have long concerned Beijing.

“Just last week, Washington ordered Chinese state media to register as foreign agents and slapped sanctions on the Chinese military for buying weapons equipment from Russia. And over the summer, the US barred China from participating in the biennial Pacific Rim military exercises.

“Washington’s reasoning runs the gamut – rebalancing bilateral trade, targeting Russia with China as mere collateral damage – all falling under Trump’s line of “America First.” But the quick succession of these changes has worried Beijing that the ultimate end is about arresting China’s growth and influence at the very moment it seeks to make a splash on the world stage…”


“The [US] federal government could soon pay more in interest on its debt than it spends on the military.”


“History shows us that Emerging Markets often are the “canary in a coal mine” that tips the market’s hand that there are real concerns about the global economy. In turn, these concerns can lead to investors “voting with their feet” and eventually taking all global equity markets down… The eventual decline in the S&P 500 will be more than just another “correction” or “bear market” by the time it is done.”


“The president of Argentina’s central bank has resigned amid negotiations with the International Monetary Fund (IMF) to bail the South American country out of its volatile economic crisis.

“Luis Caputo abruptly quit on Tuesday after just a few months in the position, with a statement from the bank saying it was for “personal reasons”.”


“Shops across Argentina were shuttered and the streets in the capital, Buenos Aires, were quiet on Tuesday after the country’s largest union called a 24-hour strike to protest President Mauricio Macri’s handling of the economy, which has been racked by runaway inflation. Argentina’s main agricultural port of Rosario was closed by the strike, as were public transport services and private freight shippers, unions said.”


“Nearly 13 million [Brazilians] – or more than the entire population of Greece – are out of a job, with the unemployment rate hovering between 12 percent to 14 percent since 2016. As a result, unemployment is among voters’ top concerns ahead of next month’s election. The desperate search for work amid a string of political graft scandals and rising violence has soured the mood, polarizing debate and distracting from the country’s underlying fiscal challenges.”


“U.S. President Donald Trump suggested on Tuesday that Venezuela’s leader Nicolas Maduro could be easily toppled in a military coup as his administration slapped the socialist president’s inner circle with fresh sanctions.

“Trump declined to respond to questions about whether a U.S.-led military intervention in the crisis-stricken country was possible, saying he doesn’t reveal military strategy.”


“The business cycle in South Africa, where the economy entered its first recession in almost a decade in the second quarter, is in its longest downward phase since records started in 1945. It entered a 58th straight month of declines in September, central bank data showed Tuesday. The regulator monitors about 200 indicators representing economic processes such as production, sales, employment and prices to determine the direction of the trend.”


“The monetary policy committee of the Central Bank of Nigeria says the economy’s exit from recession may be under threat. While reading out the outcome of the two-day meeting of the committee to reporters on Tuesday, Godwin Emefiele, CBN governor, said: “The Committee was concerned that the exit from recession may be under threat as the economy slowed to 1.95 and 1.50 per cent in Q1 and Q2 2018, respectively.”


“The Gaza Strip’s economy is in “free fall”, a report from the World Bank warned on Tuesday, calling for urgent action by Israel and the international community to avoid “immediate collapse”. According to the report, Gaza’s economy contracted by 6 percent in the first quarter of 2018. The report also stated that the unemployment rate is now over 50 percent – and stands at more than 70 percent among Gaza’s youth.”


“Under President Recep Tayyip Erdogan, this country embarked on a building spree that remade its urban skylines and public infrastructure, often making life easier for average Turks. The booming economy, which relied heavily on borrowing from foreign banks, grew last year by a robust 7 per cent, according to the International Monetary Fund. Now the frenzy is crashing to a halt as Turkish companies’ heavy foreign debts come due and the boom’s excesses surface.”


“The US sanctions will have a serious impact on Iran in 2018-19, pushing its economy into recession for two consecutive years due to a drop in oil exports, forecasts a new report released on Tuesday… Unemployment in Iran could rise to above 14 per cent, Iradian said, adding that the sharp depreciation of the rial has made imports, particularly intermediate and capital goods, very expensive in local currency, leading to cancelling contracts and a drop in industrial production.”


“India’s stellar economic growth of the past two decades may not have meant much for its citizens. “Employment generation has remained weak, and India has struggled to convert high rates of economic growth into good jobs, particularly for its educated youth,” a report by the Bengaluru-based Azim Premji University’s Centre for Sustainable Employment has said. Even as GDP growth rates have risen, the relationship between growth and employment generation has grown weaker over time, the report said. This gap has increased even further over the years.”


“For the most hawkish central banks in Asia, Thursday’s choice is less about whether to raise interest rates than by how much. After Turkey and Russia surprised with strong policy action this month, the focus shifts to Indonesia and the Philippines this week as emerging markets struggle to contain a rout in their currencies. Pressure is building with the U.S. Federal Reserve expected to tighten monetary policy again on Wednesday, adding to risks of capital outflows.”


“Germany’s BDI industry association said on Tuesday it had lowered its 2018 growth forecast for Europe’s largest economy…

“…citing weaker demand for German goods due to increased business uncertainty and U.S. President Donald Trump’s trade policies.”


“Denmark has bolstered defenses against shocks to its financial system after a risk-assessment body said the sector’s stability could be threatened by the Danske Bank money laundering scandal. Danske Bank’s CEO resigned last week after an inquiry revealed that 200 billion euros ($235 billion) of payments had been moved through its Estonian branch over a period of eight years, many of which the bank said were suspicious.”


“Delays of only half an hour at UK ports and the Irish border would risk one in 10 British firms going bankrupt, according to a report laying bare the severe risk to the economy from no-deal Brexit. According to the Chartered Institute of Procurement and Supply, failure to reach a deal with Brussels before March could trigger massive queues of trucks at British borders from a vast increase in paperwork and checks to clear customs.”


Read yesterday’s ‘Economy’ thread here.

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Economy 25 Sept 2018 a knife to China’s throat

“The United States is putting “a knife to China’s neck” on trade issues, a senior Chinese official has said, as the two sides struggle to find a way to end a months-long standoff over trade.

“A day after both sides heaped fresh tariffs on each other’s goods, vice-commerce minister Wang Shouwen said the resumption of talks on the matter depended on the “will” of the US.

“US tariffs on $200bn worth of Chinese goods and retaliatory taxes by Beijing on $60bn worth of US products kicked in on Monday as the trade dispute between the world’s two biggest economies escalated, unnerving global financial markets.

“China also accused the United States of engaging in “trade bullyism”, and said Washington was intimidating other countries to submit to its will, according to a white paper on the dispute published by China’s state council, or cabinet, on Monday.

“Asian shares were broadly down on Tuesday amid nervousness on markets about the ongoing dispute…”


“The US could start to sell short the stocks of Chinese firms listing on the US markets – that is, bet that they will fall in value – and use the media to exaggerate weaknesses in the Chinese economy, the report warned. This could put significant downward pressure on those stocks…

“The US could also encourage – and even pressure – US firms to exit their investments in China. The US may target the highly leveraged segment of China’s economy to do damage to China’s financial and property markets, triggering a financial crisis.

“The currency market could also take a beating if the US were to take financial positions reinforcing expectations that the yuan would continue to weaken against the US dollar. Such a tactic would likely trigger funds to rapidly move into “safe haven” assets, causing a sell-off in Chinese assets, real estate in particular. This, in turn, could produce massive capital outflows that would cause a systemic crisis in China’s financial system, the report warned.”


“China is building a nationwide system to monitor the income and expenditure of local governments in a bid to control debt, the official China Daily reported on Tuesday, citing finance ministry officials. As China steps up infrastructure spending in a bid to offset the economic impact of trade frictions with the United States, it has vowed to minimize financial risk and prevent local governments from taking on too much debt.”


“North Eastern Electric Power Corp., an Indian state-run power generator, planned to raise 3 billion rupees ($41.3 million) selling bonds. It couldn’t manage 5 percent of that amount, prompting it to scrap the sale on Monday.

“Three Indian companies have pulled 58 billion rupees ($800 million) of debt sales this month, the most in at least a decade, according to data compiled by Bloomberg.”


“Leader of the Opposition in the National Assembly Shehbaz Sharif on Monday came down hard on the Pakistan Tehreek-e-Insaf (PTI) government’s economic policies, saying the “flag-bearers of change” have dropped an ‘inflation bomb’ on people in the form of ‘mini-budget’… The former Punjab chief minister also took the government to task for increasing the price of gas, saying it will prove to be detrimental for economy. “The masses will bear the burden of increase in the price,” he said.”


“Iran’s consumer price index increased from 116.2 to 134.6 or around 16% during the summer (June 22-Sept. 22).

“According to data provided by the Statistical Center of Iran, the second quarter’s inflation has been the biggest quarterly inflation that the Iranian economy has seen thus far, the Persian daily Donya-e-Eqtesad reported.”


“Business confidence among Turkish manufacturers tumbled to a nine-year low this month and two other measures of economic health also declined, data showed on Monday, reinforcing expectations of a downturn in the second half of the year. Once seen as a star emerging market, Turkey has been rocked by a sell-off in the lira, which has lost some 40 percent so far this year, stoking inflation and raising concerns about a wave of bad debts for banks.”


“Under a tight blockade by Israel and Egypt, the people of Gaza are well acquainted with suffering. Now the Trump administration will be compounding their suffering by cutting much needed financial aid. Staff at the United Nations Relief and Works Agency for Palestine Refugees in Gaza have gone on strike paralysing the impoverished region. America has blown a massive hole in the UNRWA budget. The agency as a result has resorted to online crowdsourcing for funds…

“In January of this year the Trump administration froze some $300 million of its $365 million in aid to the Agency. Finally, this September, the totality of US contributions were cut leaving millions of Palestinian refugees in the lurch.”


“Faki stressed that ceilings and red lines will be set for foreign debt in order to reduce [Egypt’s] borrowing. To save money, resort to loans should be restricted to only when absolutely necessary.

“He suggested selling off state lands and companies for this purpose, believing that this alone could save 1 trillion pounds ($55.6 billion) at the least.”


“Philippine leader Rodrigo Duterte suffered the biggest ratings slump of his presidency in the third quarter, an independent pollster said on Tuesday, amid signs of public unease about rising inflation and the cost of staple foodgrain rice.”


“In a provocatively titled video, “Will one phone call drop home prices by 80 per cent?”, Digital Finance Analytics founder Martin North, economist John Adams and PhD student Sean Quinn, who was in Ireland at the time, discussed what would happen here in a similar scenario [to GFC 1.0]. They debated whether, in the event of a major financial crisis, Australia should similarly agree to guarantee its banks — or let the whole system collapse and “reset”.”


“Flights could cease between the UK and the rest of the EU if Britain crashes out of the bloc without a deal, the government has said. In its latest set of “no deal” notices, the government said flights could be disrupted because the EU-issued aviation licences would not be valid and airlines would have to seek individual permissions to operate with respective states.”


“Apparently, investors believe that this boom is going to last, or at least that other investors think it should last, which is why they are bidding up stock prices in a dramatic response to the earnings increase. The reason for this confidence is hard to pin down, but it must be rooted in the public’s loss of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors… A bear market could come without warning or apparent reason…”


“Your blood should be boiling as you read this. It means that some CEOs are managing their companies’ buyback programs in order to increase their bonuses.

“[Companies are] using an ‘Accelerated Share Repurchases’ to goose earnings… As you might imagine, companies using ASRs to manipulate earnings are engaging in financial engineering for cosmetic purposes rather than promoting genuine long-term value for shareholders.


“The $37 billion in new supply of 2-year Treasury notes on Monday were sold at the highest yield at auction since June 2008 to the weakest demand since December 2008. Demand was lackluster despite low prices… The 2-year yield is a gauge of market expectations of interest-rate hikes.”


If it does go this high, demand destruction and popping debt bubbles mean it won’t stay there for long:

“Major oil trading houses are predicting the return of US$100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports. With Brent crude already jumping to an almost four-year high on Monday, that’s exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring the Organization of Petroleum Exporting Countries to raise production.”


Read yesterday’s ‘Economy’ thread here.

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Economy 24 Sept 2018 global crisis looms

The collective unconscious is roiled. Everyone intuits on some level that something big is brewing: “The 73rd United Nations General Assembly opens on Tuesday in New York with world leaders bracing for the next global crisis – and the rest of us uncertain about what they would do if it comes.

“Don’t be fooled by the fact that U.S. markets hit record highs this past week, that global growth remains steady, or that the Trump administration in its first two years has escaped any crisis of the sort that came with the 9-11 terrorist attacks of 2001, the 2003 Iraq War or the Lehman Brothers meltdown of 2008.

“In my many years of taking the global pulse around UN week, where more than 120 leaders will gather, I’ve seldom seen or sensed such uneasiness and uncertainty. I’ve never known a time when the potential sources of volatility have been so widespread geographically.

“The debate, hence, has become less about the likelihood of a crisis and more about what form it might take, with what severity it will strike, and whether world leaders will have the capacity to contain it.”


“The trade fight between the United States and China intensified Monday as the two economic superpowers hit each other with their biggest round of tariffs yet. The Trump administration imposed new 10% tariffs on $200 billion of Chinese goods just after midnight ET (noon in Beijing), spanning thousands of products… China retaliated immediately with new taxes of 5% to 10% on $60 billion of US goods such as meat, chemicals, clothes and auto parts. The moves are a significant escalation in the growing conflict between the world’s top two economies.”


“There’s a $6.3 trillion elephant in the room. And it just might cause the next recession. The last downturn was triggered by Wall Street and Americans accumulating too much debt — particularly in the sizzling housing market. A decade later, it’s Corporate America borrowing with gusto. Egged on by extremely low rates, US companies have piled on a record-setting $6.3 trillion of debt, according to S&P Global Ratings.”


“The country’s outstanding student loan balance is projected to swell to $2 trillion by 2022, and experts say a large portion of it is unlikely to ever be repaid; nearly a quarter of student loan borrowers are currently in a state of delinquency or default.

“Because of these loans, many Americans are unable to buy houses and cars, start businesses and families, save or invest.”


“China’s spiralling debt, a major concern for the slowing down of its economy, has risen to USD 2.58 trillion, a media report said Sunday.

“China’s local government debt balance stood at 17.66 trillion yuan (USD 2.58 trillion) by the end of August… Regarded as the “hidden debt”, the steady rise of the local government debt worries economists and regulators.”


“Surging interbank rates. A shock jump in the currency. Hong Kong’s decade-long liquidity party suddenly appears to be ending, and that can only be bad news for its expensive property market.

“The one-month rate known as Hibor rose 28 basis points on Monday, the most since December 2008…”


“The peso slumped to a 13-year low of 54.28 to the US dollar on September 17, bumping up the cost of imported food ingredients…

“This month, Duterte blamed the US President Donald Trump and the trade war with China for the inflation that has hit the Philippines. “Who started it? America!” Duterte said. “When America raised [tariff] rates and interest rates, everything went up.””


“Campaigning for Indonesia’s presidential election in April kicked off on Sunday, pitting incumbent Joko Widodo against a former military general in the race to lead the world’s third-biggest democracy…

“But his bid for a second term is facing headwinds over his economic record, with the Indonesian rupiah sitting at two-decade lows…”


“Inflation [in Japan] has stubbornly refused to tick up towards the bank’s two-percent target; growth has remained sluggish and the bank is stuck in neutral, without a major policy change in years. The bank is in “deadlock,” Shigeto Nagai, head of the Japan department at Oxford Economics told AFP. “They can’t tighten, they can’t ease further from here. They have to stick to the current policy but inflation will not rise,” added Nagai.”


“Infrastructure Leasing & Financial Services Ltd., an Indian conglomerate that has missed payment on more than five of its obligations since August, is seeking to raise more than 300 billion rupees ($4.2 billion) selling assets to cut debt, according to an internal memo seen by Bloomberg. The company, which has been categorized as a “systemically important” non-banking financial firm by the Reserve Bank of India, plans to sell 25 assets…”


“Iran’s Revolutionary Guards yesterday vowed “deadly and unforgettable” vengeance for the mass shooting at a military parade as Iran’s president blamed US-backed insurgents for killing 25 people in a hail of bullets… President Hassan Rouhani accused the US of inciting an unnamed ally in the Persian Gulf to carry out the attack… Mr Rouhani is on a collision course for US President Donald Trump, whose decision to quit the 2015 nuclear deal is, to Mr Rouhani’s mind, directly to blame for Iran’s crippling financial crisis.”


“Nandi Hills MP Alfred Keter has warned of a silent revolution in the country as a result of the ‘near collapse’ of the economy.

“Keter says the country, with the Sh 6 trillion debt and corruption cartels seizing most sectors of the economy, is literally bankrupt. In a statement, he blamed those in charge of the economy of living in denial and continuing to drive deep into more problems.”


“Zimbabwe faces a deepening economic crisis as hopes fade of a new wave of international investment and aid following historic elections in July…

“Majory Manjoro, a part-time currency dealer in Harare, said life had become unbearable. “Things are getting worse. Everything goes up [in price]. Those in authority need to make sure things get better,” Manjoro, 33, said.”


“”China equals Hitler” said the sign held up in the Zambian capital Lusaka by a protester opposed to Beijing’s tightening grip on the economy of the southern African nation…

“…his criticism echoes concerns shared by many across swathes of Africa and beyond, where some fear that China’s mega-projects risk leaving already fragile economies in even worse shape.”


“A Chinese navy hospital ship docked near Venezuela’s capital on Saturday as the OPEC nation’s deepening economic crisis garners the attention of the U.S. and other world powers.

“Defence Minister Vladimir Padrino was on hand to greet the People’s Liberation Army Navy’s ship, the Peace Ark, on its latest stop as part of the 11-nation “Mission Harmony” tour announced in June.”


“First went the chicken, then the sugar. Meat disappeared and bread soon after. Venezuela’s food shortages, skyrocketing prices and rampant crime made the decision for Veronica Garcia: She would find refuge in Buenos Aires. Instead, Garcia was greeted by Argentina’s currency crisis when she and her boyfriend, Miguel Nicorsin, arrived in late June.

“The peso is down 50% this year, inflation is climbing and the economy is sinking into recession.”


“There can be no doubt that the UK Prime Minister, Theresa May, suffered a hurtful humiliation in Salzburg, Austria this past week as the leaders of the other 27 European Union (EU) nations rejected her Chequers Brexit plan… Across the Eurozone the level of Debt:GDP stands at 86.7%. A far cry from the 60% limit that was established by the deeply flawed Stability and Growth Pact… Interest rates in the Eurozone have been fixed at 0.0% since March 2016 and there is no sense of conviction when the European Central Bank will be able to raise them again.”


“Germany, one of the world’s main maritime players, saw its commercial fleet shrink by a third over the past six years, becoming the biggest loser in a vicious industry slump that has reshaped global shipping…

“The contraction in German shipping stems from an unprecedented downturn over the past decade in which a glut of ships in the water, exacerbated by easy lending practices, pushed freight rates well below break-even levels.”


“Any increase in deficit spending that does not help boost structural economic growth could put Italy’s debt on an unsustainable course, the head of the Bank of Italy said… If budgetary expansion was accompanied by a fall in investor confidence, the impact on interest rates could be particularly marked, he said. The negative impact of this on economic growth (GDP) could put the debt-GDP ratio on “an unsustainable course”, he said.”


“Are we nearing another financial crisis? … the economic expansion is very mature, now about a decade old. Another downturn is only a matter of time. Global “synchronized growth” ended earlier this year, with emerging markets running into trouble. The U.S. is largely alone with robust GDP figures, and it is hard to believe that this rate of growth can be sustained with the expansion slowing elsewhere… The icing on the cake could be high oil prices… The stage is set for a downturn in the next year or two.”


“The US tariffs have already undermined global growth and weakened the WTO.

“In a world of cross-border supply chains and increasing interconnectivity, the unnecessary disruption to the iron and steel trade will result in less production not just in exporting countries, but also in the US. And the likelihood that other countries will retaliate makes the situation all the more dangerous.”


“The global economy could face a “relapse” of the crisis that rocked the world a decade ago, the Bank of International Settlements (BIS) warned in its annual report on Sunday, stressing that there would not be enough “medicine” available to treat the problem this time, AFP reported.

““Things look rather fragile,” BIS chief economist Claudio Borio told reporters. “There is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.””


Read the previous ‘Economy’ thread here.

Economy 21 Sept 2018 global growth has peaked

The OECD says that global growth may have peaked and says the outlook is less good now than it predicted in May:

[This article makes an important point but the suggestion that global growth will settle at a robust-sounding 3.7% next year flatters to deceive. In simple terms all growth is now predicated on, and enabled by, an historically unprecedented debt-bubble. GDP stats ignore this reality. Furthermore if we measure global GDP in US $ – and at the bottom of this thread I include an article by Gail Tverberg, explaining why this more accurately reflects economic reality – we can see that growth has not just peaked but stalled out entirely.]

“The west’s leading economic thinktank has warned that the expansion in the global economy may have peaked after cutting its growth forecasts for an array of rich and developing countries.

“In its latest update on the health of the world economy, the Organisation for Economic Cooperation and Development said the outlook for both 2018 and 2019 was less good than it had predicted in May.

“The Paris-based OECD called for immediate action to halt the “slide towards protectionism”, noting that trade tensions were already having an impact on confidence and investment.

“Britain has had its growth forecast shaved by 0.1 points in both years to 1.3% and 1.2%, respectively – with the OECD saying the squeeze on living standards was affecting consumer spending and uncertainty about Brexit leading to soft investment…

““The recent increase in risk spreads on Italian government bonds, and the associated decline in the equity prices of Italian banks, provide a demonstration of the pace at which continued vulnerabilities in the euro area can re-emerge,” the OECD said…

““Confidence has also eased and investment and trade growth have proved softer than anticipated. Business survey data point to slower growth in both advanced and emerging-market economies, and incoming new orders have eased, especially manufacturing export orders,” the interim economic outlook said.

“Recent problems in Argentina and Turkey have led to big cuts in the OECD’s growth forecasts…

“It warned… that the recovery since the recession of 10 years ago had been slow and only possible with an exceptional degree of stimulus from central banks. “A decade after the financial crisis, vulnerabilities remain in financial markets from elevated asset prices and high debt levels. Reforms have strengthened the banking system, but risks have shifted towards less tightly regulated non-bank institutions.””


“U.S. investors are keeping stock prices high as though the troubles in emerging markets were a world away. “But if you think financial contagion is ancient history, listen to Carmen Reinhart.”


“Turkey’s finance minister has lowered the country’s economic growth targets and promised to slash public spending by nearly $10 billion (€8.5 billion) as the country seeks to find a path out of a currency crisis…

“The Turkish lira has lost 40 per cent of its value against the dollar since the start of the year as investors have become increasingly fretful about the country’s economic health.”


“Egypt’s predicament is a reminder that although regional economic integration in the Middle East has never been particularly strong, which prevents some kinds of contagion, such as currency crises, the national economies of the region are connected in other ways.

“Poorer states are dependent on wealthier ones for oil and gas subsidies, direct financial support, and for the employment of millions.”


“Tunisia’s powerful UGTT union called a nationwide public sector strike for Oct. 24 to protest against what it called government plans to sell public companies, the latest tension with the government, which is under intense pressure. The country has struggled to fulfill donors’ demands to reform its economy and cut its budget deficit amid turmoil since the ousting of president Zine El-Abidine Ben Ali in 2011… the North African country is struggling with economic crisis and a ballooning budget deficit.”


“Although the US sanctions on Sudan were lifted in October 2017, creating much expectation in the general population that the economy would improve, the situation in the country has continued to deteriorate.

“According to the government, the inflation rate reached 64 percent, while experts say that in reality it could be as high as 100 percent.”


“The Namibia Statistics Agency (NSA) yesterday announced that quarter-on-quarter, the economy maintained the same pace of declining growth of 0.2%. This also means the contraction is worse than the -0,1% seen in the first quarter of 2018.

“The country has been in a recession since the second quarter of 2016.”


“The South African Reserve Bank held its key interest rate at a two-year low as the economy struggles through a recession and policy makers warned that investor sentiment toward emerging markets is a risk to the currency and adds to inflation pressures.

“The Monetary Policy Committee voted to hold the repurchase rate at 6.5 percent Thursday.”


“Inflation, now at a nine-year high of 6.4 percent and running above the central bank’s 2-4 percent target for the past six months, is eroding the purchasing power of Filipino consumers, the backbone of the Southeast Asian economy. The weaker peso, which fell to a 13-year low last week, is one major factor driving it. But even the families of the estimated 10 million overseas Filipinos who earn foreign currency are feeling the pinch as higher oil prices and heavy government spending are also pushing prices higher.”


“China’s growing economy has, over the years, disobeyed a range of economic laws. One of them is the Stein’s Law, according to which, something which cannot go on forever, will, eventually, come to a stop. China’s debt accumulation, however, does not seem to be slowing down… With the overwhelming nature of the threats the Chinese economy is facing, it seems rather sooner than later that the laws of economics will catch up, for the eventuality of which, China, and the whole world, should brace itself.”


“Donald Trump’s trade war is already harming global economic confidence and investment, and could soon hit jobs and living standards, top economists have warned.

“Goods directly affected by tariffs, such as Chinese washing machines sold in the US and American cars bought in China, have already been hit hard with prices jumping and sales tumbling.”


“The auto industry fears that President Donald Trump’s threat to place tariffs on vehicles coming into the U.S. could drive the economy into a recession, the head of the largest auto retailer in America said on Wednesday. “Everyone… in the automobile industry is freaking out around tariffs on automobiles,” Mike Jackson, chairman and chief executive officer of AutoNation Inc. said Wednesday.”


“It was left to Donald Tusk, president of the EU council, to deliver the coup de grace. The Chequers’ deal was unworkable because it undermined the integrity of the single market.

“And, by the way, its solution to the Northern Ireland border was just fantasy.”


“The 10-year anniversary of the Lehman Brothers bankruptcy has been met with a lot of reflection about how things have changed since the dark days of 2008. Craigs Investment Partners head of private wealth research Mark Lister said… the elephant in the room was the fact debt levels across the world were higher than they were in 2008.”


“Sheila Bair, former chair of the Federal Deposit Insurance Corporation, on Thursday warned that the economic recovery since the 2008 financial crisis has been largely driven by ballooning consumer and corporate debt, fueled by low interest rates.”


“Kolanovic doesn’t see potential problems until the second half of 2019 [but] a trade war with China, the speed of interest rate hikes and the unwinding of bond purchases by the Federal Reserve are factors that could change that timeline.

“Kolanovic notes that if markets fall by 40% or more, for example, the Federal Reserve may need to take drastic action to prevent a depression. This would mean the Federal Reserve could purchase equities or attempt to stimulate the economy through additional tax cuts.”


“World GDP in current US dollars is in some sense the simplest world GDP calculation that a person might make. It is calculated by taking the GDP for each year for each country in the local currency (for example, yen) and converting these GDP amounts to US dollars using the then-current relativity between the local currency and the US dollar.”


Read yesterday’s ‘Economy’ thread here.