Daily updates on climate change and the global economy.

Economy 11 June 2018

“With a single tweet from Air Force One, Donald Trump torpedoed weeks of painstaking diplomacy and drove a wedge deeper between the US and the G7 countries that traditionally consider themselves Washington’s closest allies.

“The US president suddenly withdrew on Saturday night from the joint communiqué that Justin Trudeau, the Canadian prime minister, had brandished as the central achievement of the Group of Seven summit in Quebec.

“Mr Trump coupled the move with a highly personalised attack on Mr Trudeau. He called the prime minister “dishonest and weak”, and hinted that he was preparing to slap more tariffs on America’s northern ally in addition to punitive steel and aluminium duties already in place on EU countries, Japan, Canada and Mexico.

“Emmanuel Macron, France’s president, tweeted that the US faced a “united front” at the Canada meeting and found itself “isolated”…

“The fractious tone was set even before the summit started, as Mr Trump told reporters in Washington that he wanted Russia to rejoin the group — anathema to his counterparts, given their tattered relations with Vladimir Putin and Russian interference in western elections….

“Mr Trudeau described the US steel and aluminium tariffs on Canada as “insulting” at his end-of-summit press conference and vowed not to be “pushed around” — the comments that enraged Mr Trump as he flew to a nuclear summit in Singapore….

“EU countries already anticipate intensifying trade tensions, as they prepare retaliatory tariffs for the steel and aluminium duties and as Mr Trump puts Europe on notice that increased taxes on car imports may be next.

I think even the Germans have had their eyes opened now,” said the European diplomat, referring to Berlin’s greater readiness than other European capitals to strike a trade deal with Mr Trump. “There was a hope that we could de-escalate this and start talking in a constructive way about what we can do. But after this performance I don’t see much hope even for that.”


“Are brewing exchange rate and debt crises in Argentina and Turkey localised events without broader implications? Or are they early warning signs of deeper fragilities in bloated global debt markets that are being exposed as the US Federal Reserve continues to normalise interest rates?”


“A rout in emerging-market assets has sparked concerns that the turbulence could spread from distant corners of the world to the U.S. and elsewhere.”


“Speaking from his empty shop there, the 32-year-old Gutierrez says he and other sellers are feeling a sharp economic pinch from [Nicaragua’s] upheaval, which he says “every day is going to get worse.”


“Nearly 30 years after declaring Polio eradicated in Venezuela, the first case of the disease has been reported in the country as it reels from an economic crash crippling its healthcare system.”


“Brazil has fallen into its worst recession on record and public services have largely been put on hold until October’s general election. With jailed former president Luiz Inácio Lula da Silva barred from running, right-winger Jair Bolsonaro currently tops the polls.”


“Saudi Arabia will host a regional summit to discuss the ongoing economic crisis in Jordan, where a proposed income tax rise recently triggered some of the largest protests in years.”


“Bar a miracle all economic indicators point in the direction of a deepening economic and financial crisis. Sanctioning Iranian oil and financial transactions would serve a severe blow to Tehran.”


“[South Korea has experienced its] deepest fall in employment since 2008 global crisis… Firms raise prices at faster rate despite easing cost inflation.”


“Finland has been a net borrower for the past ten years, with central government debt almost doubling since a low in 2008. Over that period, the Nordic nation lived through what policy makers dubbed “a lost decade” as the decimation of key industries — paper and consumer electronics — erased 100,000 jobs in an economy the size of Oregon.”


“Higher oil prices are expected to cause a rebound in UK inflation, adding to expectations that the Bank of England will carry out the rate hike it delayed in May in the coming months.”


“Italy’s new populist government will refuse to let a humanitarian boat carrying more than 600 refugees and migrants dock at any of its ports and has asked the tiny Mediterranean country of Malta to open its doors to the vessel, according to media reports.”


“As [auto] loan growth slows, [US banks] and other lenders have been tinkering with loan terms in an effort to gain more consumers. They are originating a greater share of loans with repayment periods of more than five years and, in some cases, extending loans to consumers who are stretching further to afford their purchases.”


The four horsemen:

“1. Oil price spike.

2. Fed interest rate spike and yield curve inversion.

3. Fiscal spending cutbacks by the national government.

4. Forward earnings dropping.”


“In the glut of cheap and easy money generated in the wake of the crash [of 2008], it has been the well-off, asset-rich and super-wealthy elite who have capitalised most as financial markets rocketed, while the cost of recovery has largely fallen on the unemployed, the less-well-off, lower-earning taxpayers and pensioners as fiscal austerity and debt deflation have taken their toll on growth and government finances. The burden should have been spread far more equitably.

“We are not out of danger yet…”


Read Friday’s economy post here.

Economy 8 June 2018

“Judging by the continued jitters in Italy’s government bond market, which has suddenly become the most closely watched gauge of investor sentiment, last week’s panic over the formation of the first populist and Eurosceptic government in a leading European economy was justified.

“More worryingly, Italy’s political crisis has exposed the vulnerability of Europe’s banks which – unlike their US peers that were recapitalised and subjected to rigorous stress tests soon after the global financial crisis erupted – remain saddled with non-performing loans (NPL) worth around €1 trillion (US$1.17 trillion) and have been forced to grapple with negative interest rates, which have eroded their already weak profitability.

“Confidence in Europe’s banking sector has once again been undermined by the “doom loop”, a self-reinforcing and highly contagious cycle of financial stress stemming from banks’ large holdings of government bonds, resulting in weak banks and risky sovereigns dragging each other down during periods of market turmoil…

“Even Italy’s own central bank governor warned that the country “was a few short steps away” from losing “the asset of trust”.

“While there are plenty of other potential triggers for the next crash, ranging from the pitfalls of unwinding years or ultra-loose monetary policy to a sudden re-emergence of concerns about China’s economy, the scope for Italy’s banking woes to rapidly become a systemic threat to the global economy is considerable, despite efforts over the past several years to “de-risk” Europe’s banking sector…

“Combine Italian populism with the end of quantitative easing and a vulnerable banking sector, and it is once again Europe that is sowing the seeds of the next financial crisis.”


“The [UK] high street has recorded its worst year-on-year May performance for 12 years despite the royal wedding, warm weather and two bank holidays, figures show.”


“…while economic collapses aren’t good for anyone, it’s everyday Americans who are left particularly exposed, their very livelihoods threatened. If Main Street’s lagging recovery from the most recent financial crisis is any indication, they will be playing catch-up for years…”


“As the Fed continues to press forward hiking rates into the current economic cycle, the risk of a credit related event continues to rise. For all the reasons currently prognosticated that rising rates won’t affect the “bull market,” such is the equivalent of suggesting “this time is different.” It isn’t.”


“U.S. government debt prices rose on Thursday as investors pivoted toward safer assets amid growing concerns about emerging market risk.”


“A sharp drop in Brazilian stocks and its currency stoked a decline in emerging-market assets Thursday, as concerns over trade tensions and a rising dollar reverberated around the world.”


“Argentina and the International Monetary Fund reached a three-year, $50 billion loan agreement Thursday, which is subject to IMF executive board approval. Why it matters: Argentina requested IMF (International Monetary Fund) assistance last month after the peso currency plunged, threatening the country’s ability to pay off its debt amid high inflation and anemic growth.”


“Venezuela has been named the least secure country in the world for the second year in a row, as the once-prosperous country struggles to recover from the worst economic crisis in its history.”


“”Addressing the banking sector balance sheet issues and improving the performance of particular public sector banks is a very important issue for India to support investment and its inclusive growth agenda,” IMF Spokesman Gerry Rice told reporters at his bi-weekly news conference.”


“Chinese policymakers have been focused on a deleveraging campaign, with total social financing, a measure of credit growth, decelerating to 10.5% year-on-year in April, the slowest reading since 2005. The main driver of that slowdown has been a contraction in off-balance sheet lending. That in turn has helped drive an increase in corporate bond defaults…”


“[Japan’s] Gross domestic product shrank 0.6 percent on an annualized basis in the first quarter, according to revised data released on Friday, as a weaker reading of private consumption offset a stronger one for capital investment. That missed the median forecast of economists.”


“Emmanuel Macron has called on other members of the G7 to stand up to Donald Trump’s trade policies in the face of what he described as the threat of a new US “hegemony”.”


Subscription only – but I agree with the sentiment.


Read yesterday’s economy post here.

Economy 7 June 2018

“Debt contagion in Argentina and Turkey is spreading to other countries. There is now concerns over a “high” concentration of risk in Lebanon, Columbia and South Africa which could spread further through the global economy…”


“Turkey’s main stock index dropped to the lowest level in dollar terms since the global financial crisis in 2008 after a sell-off in the lira and concerns about economic stability persisted.”


“Most of the people on board the boat that sank on Sunday were Tunisians trying to escape unemployment and an economic crisis that has gripped the North African country since the toppling of autocrat Zine El-Abidine Ben Ali in 2011.”


“Protests have erupted in Amman and other Jordanian cities in recent days over rising prices and IMF-backed austerity measures including a new tax bill aimed at reducing the country’s chronic deficits. The crisis has already seen the replacement of the country’s prime minister and a call by Jordan’s King Abdullah for a review of the controversial draft tax law.”


“Franklin Templeton Investments has cut back its debt holdings in Bahrain, citing the “very serious” threat that the cash-strapped nation will experience an economic crisis in the next 12 months if financial aid from neighbors doesn’t come through.”


““We believe many market watchers have overestimated the rate of progress” in credit tightening, Bedford’s note said. “A meaningful re-balancing of [China’s] banking sector will be a long, drawn out process.””


“Nearly 4 million adults in the UK have been forced to use food banks due to ”shocking” levels of deprivation, figures have revealed for the first time.”


“German factory orders unexpectedly dropped for a fourth month in April, raising the prospect that an economic slowdown at the start of the year may be worsening.”


“If one adds the Bank of Italy’s Target 2 liabilities to the Italian public debt total, the public debt to GDP ratio rises to 160%, taking that ratio to its highest level in over 100 years. Sadly, there is every reason to expect that Italy’s Target 2 balance will worsen in the months ahead as the unsettled Italian political situation encourages capital flight. Another reason to think the Italian official public debt numbers are understated is they do not take into account the likely cost of government support for the country’s troubled banking system.”


“The Fed is “gradually entering a new world when rates are at 2 percent,” nearing zero on a real basis and approaching where they are no longer felt to be stimulating economic activity, said Thomas Costerg, senior U.S. economist at Pictet Wealth Management. The last time rates moved into positive real territory on a sustained basis was the spring of 2005 when the Fed began tightening rapidly after a period of arguably too-lax monetary policy, ending just months before the start of the 2007-2009 financial crisis.”


“…after the major banks lowered interest rates and started to print money, investors rushed to find higher returns. They moved toward risky investments and relatively volatile markets [junk bonds]… according to the Securities Industry and Financial Markets Association (SIFMA), between 2009 and 2017, $2.4 trillion worth of high-yield bonds were issued. In the previous nine years, junk bond issuance was just around $849.2 billion.”


“According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that’s been seen just twice before: during the halcyon days of 1997’s tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later.”


Yesterday’s economy post is here.

Economy June 5 2018

brazilian protesters“A nationwide trucking strike over fuel prices in Brazil finally came to an end last week after 10 days of chaos in which roads were blockaded, South America’s biggest economy suffocated, and the CEO of Brazil’s state-controlled oil company was forced to resign.

“Supplies are back in the shops, and trucks back on the roads. And yet, things are far from normal.

“Brazilians were spooked by the ease with which the truckers brought the country to its knees, and by their calls for “military intervention” – a euphemism for a military coup.

““This strike showed that the country has extreme fragilities,” wrote economic commentator Miriam Leitão in her blog for O Globo newspaper.

“But instead of looking for ways to prevent it happening again, Brazilians are digging into entrenched positions…

“Amid a growing sense that Brazil is adrift, a poll by the Datafolha polling institute found that 87% of Brazilians supported the strike – but rejected tax rises or spending cuts to pay for the fuel subsidies that eventually resolved it.

“The cash-strapped conservative government of Michel Temer found the money by cutting investment elsewhere, including for health and education – a move likely to increase social tension in a country where poverty is on the rise.

“…sensitivity has been drowned out in an atmosphere of increasing polarisation.

Left and right hurl insults at each other over social media like rival supporters at a soccer game. Meanwhile, economists are slashing their growth forecasts for an economy only just limping out of recession.

““The strike and calls for military intervention are a wake-up call,” said Ilona Szabó, co-founder of Agora! (Now!), a new centrist group propagating “evidence-based public policies”. Szabo argued that too many people are looking for simplistic solutions to complex problems.

““Brazilians are crying for change but it’s not yet clear that they are prepared to put the public interest in front of private gain. Instead of rolling up their sleeves and building a common project they are clamouring for a saviour, a strongman, who can deliver the country from ruin,” she said.”


“The guerrilla group has been present along the Venezuelan-Colombian border for decades, but there are indications that the Marxist-inspired rebels are growing stronger and more brazen as they capitalize on the general chaos and security breakdown in Venezuela.”


“The financial crisis in Turkey continues with the Turkish lira (TL) having lost over 20% of its value against the US dollar and euro since the beginning of 2018… The situation is further aggravated by the fact that the country has an alarming currency account deficit. The currency deficit has now reached the point where Turkey is finding it difficult to get additional international credit in US dollars, which in turn leads to a difficulty importing oil.”


“Discussing the economic crisis in Algeria, Benchicou said that the regime has brought the country [Algeria] to “its knees” in the past two decades, adding that the national currency continues to devalue to the point of becoming “funny money.””


Jordan protests

Protesters demonstrate outside the prime minister’s office in Amman late on June 2, as security forces stand on alert.

“The biggest protests in years in Jordan brought down the country’s prime minister and his cabinet Monday… Jordan’s education minister Omar Razzaz, a Harvard-educated economist, has been appointed the new prime minister and will name a new cabinet. It will be up to him to defuse a crisis over a tax plan — for Jordanians, the last straw in a long list of burdensome austerity measures imposed in the midst of the country’s economic crisis.”


“Nikos, 36, said that he had moved back in with his parents in a bid to cut down on expenses in order to keep his small business afloat.”


“The U.S. high-yield market has grown larger and riskier since the financial crisis. Issuers of debt have the whip hand as buyers compete to gain an allocation in the face of surging demand from collateralized loan obligations and retail funds. Companies are emboldened to seek ever-weaker covenants and are taking advantage of the current conditions to borrow more at lower margins. It’s as if the financial crisis never happened and the lessons from it are ancient history.”


“The US derivatives regulator is planning to cement a threshold at which swap dealers become regulated, a move that would exclude smaller companies from rules that would be subject to tougher supervision.”


“…the Trump administration argues that the cost of not responding to China’s “unfair trade practices — including dumping, discriminatory non-tariff barriers, forced technology transfer, over capacity, and industrial subsidies —” is more costly than the economic hit of tariffs. As long as that viewpoint holds sway in the White House, the trade war will move forward.”


“Global gross domestic product (GDP) growth could take a hit to the order of around one percent if tariff threats escalate into a trade war, S&P Global’s chief economist forecast Monday.”

[nations like Brazil cannot afford to lose any growth]


Haikou city“China’s debt crackdown is a key risk to the country’s economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said.”

[again, what will this mean for nations like Brazil?]


“The fund will be run by Alberto Gallo, a popular investment bank strategist turned hedge fund manager, and will attempt to buy the equivalent of doomsday insurance through investments in credit, fixed income and equities which profit when those markets plummet or gyrate with unusual violence.”


Read yesterday’s economy post here.

Economy June 4 2018

“Could it be that Europe is facing yet another existential crisis, six years after financial meltdown threatened the eurozone’s collapse?

“This week the third- and fourth-largest economies in the eurozone — Italy and Spain — experienced political earthquakes. Italy will now have a government of insurgents with little faith in the “European project.” Spain will have and odd coalition united only in ousting the unpopular conservative Prime Minister Mariano Rajoy. Spanish voters likely face their third election in three years.

“Back in 2012, Europe had its “PIGS” problem (Portugal, Ireland, Greece, Spain): toxic banks, overwhelming debt and chronic budget deficits. Now it has the “PHIGS” of 2018: Poland, Hungary, Italy, Greece and Spain.

“Today the challenges are more complex and diverse — but they have common roots in a growing popular disenchantment with the political mainstream.”


“…the long-term costs of remaining in a club [the Euro] dominated by inherently deflationary, German-dictated rules might tempt Italians to leave. That decision could come in the midst of another global financial crisis, recession, or asymmetric shock that pushes several fragile countries out of the euro at the same time.”


“A run on government bonds is particularly dangerous. Bonds are loans — IOUs — and Italy’s debts are gigantic: they amount to almost a third more than Italians produce in a year. So there are vast quantities of Italian government bonds in circulation, many held in banks. If their value falls, it can trigger a financial crisis that extends far beyond Italy’s borders.”


“German Chancellor Angela Merkel has ruled out debt relief for Italy.”


“”The good times for illegals is over — get ready to pack your bags,” he [Italy’s new Interior Minister] said Saturday at a rally in Italy’s north.”


“At least 47 people died and 68 others were rescued after their migrant boat sank off Tunisia’s southern coast, according to the country’s defence ministry.”


“”[Greek] Banks have no room for complacency, because the NPL [non-performing loan] rate has to go further down,” he added.”


“In the eight years since London began sharply curtailing support for local governments, the borough of Knowsley, a bedroom community of Liverpool, has seen its budget cut roughly in half.”


“If the US barriers continue to cause friction while at the same time achieving results, the dollar will continue to become stronger, and bring a potential crisis in emerging countries – namely the problem of high debt – to the surface. This is a problem of great concern.”


“A crisis that has hit some emerging markets risks spreading through the world economy, according to a global investment trade body. Many countries are increasingly vulnerable to economic shocks following the debt sell-off which has hit Argentina and Turkey.”


“In 2017, the largest exodus of millionaires from a nation came out of Turkey at a staggering 12 percent, signalling a looming financial crisis headed for Turkey , writes Ruchir Sharma in an article he penned for the New York Times.”


“Turkish inflation hit its highest level since November following a slump in the national currency’s value.”


“This is the eighth upward revision on petrol, diesel and kerosene prices, and third on aviation fuel [in Nepal] in the last six months.”


“”It’s not easy to ensure the macro-economy is stable and the inflation rate is below 4 percent when the oil prices in the global market are soaring,” Phuc told a government meeting.”


“Philippine inflation likely accelerated for the fifth straight month in May, a Reuters poll showed.”


““It is hard to put a precise time frame on when China will start to see the deleveraging of the real economy, but at some point it looks inevitable,” said Brian Coulton, chief economist at Fitch. “The scenario analysis we have undertaken suggests that, when it does occur, it will be a process that will be a significant drag on growth.””


Read Friday’s economy post here.

Economy 1 June 2018

wall street“The U.S. has been engaged in a trade war with China for the last two months. But now the trade war has gone global. From tomorrow, June 1st, Canada, Mexico and the EU will face 25% tariffs on steel exports to the U.S. and 10% tariffs on aluminium.
“The move caused further turmoil on markets already unsettled by Italy’s political crisis. The Dow Jones industrial average dropped 260 points, and the S&P 500 and Nasdaq also fell, by 0.7% and 0.3% respectively. Shares of companies likely to be affected by tit-for-tat responses, such as Harley-Davison, the iconic motorcycle manufacturer, and automobile manufactures on both sides of the Atlantic, also fell. The Euro, Mexican peso and Canadian dollar all dropped versus the dollar, though the Euro recovered in later trading.”

“With President Trump’s incredibly foolhardy decision Thursday to impose tariffs on steel and aluminum from Canada, Mexico, and the European Union, the probability grows of an economic crash this fall. When the likely crash hits (I predict late-October), this nation will be psychologically ill-equipped to handle it. Get ready for rough times. The crash is likely because both public and private-sector debt levels are too high; assets are overvalued; wage pressure soon will massively increase.”


“A stronger dollar is reviving memories of a turmoil and stress that could be triggered by huge debt obligations of emerging markets.”


turkish bonds“Turkish banks are learning that all good things come to an end. After piling on corporate loans only a few years ago, lenders are now facing a surge in demand from companies seeking to reorganize debt repayments.”


“Over the past 10 days, Brazil has sometimes seemed a country on the brink of an apocalypse. Usually traffic-clogged highways around Sao Pãulo have been deserted, gasoline stations emptied, and food supplies to supermarkets have dwindled. For lack of poultry feed, there has been a gruesome cull of 100m chickens. There has even been wild talk of a military coup.”


“The Tabung Harapan Malaysia (THM) fund – otherwise called the Hope Fund – to contribute to settling the national debt has collected RM7 million (S$2.35 million) in 24 hours, said Malaysia’s Finance Minister Lim Guan Eng. Asked whether the fund would affect confidence in the economy of the country, he told a press conference on Thursday (May 31) that “if people want to show their patriotism by donating, we welcome it”.”


“…along with China’s growing economic footprint in the world of trade has come an equally large impression in the world of investment. In other words, China has become a significant creditor nation, lending money overseas… China, like the West in the 1980s, will simply find itself counter-party to an awful lot unserviceable debt, and in no position to enforce its claims.”


“Spain’s government was on the brink of collapse Thursday as opponents of Prime Minister Mariano Rajoy appeared to have mustered enough support to oust him in a parliamentary no-confidence vote stemming from a corruption scandal.”


“Salvini and Luigi Di Maio, Five Star’s leader, are both committed to remaking the E.U.’s economic treaties and introducing expansionary tax and spending policies. Both of these things will place them on a collision course with the authorities in Brussels, Berlin, and Frankfurt. And at this stage, neither side seems likely to back down.”


italian bonds“Italian bonds may have bounced off this week’s stunning losses, but some of the biggest investors say the worst isn’t over.”


“Although Italy’s politics are a byword for crisis they still managed to rattle investors this week. But even more shocking to some was the sudden evaporation of liquidity in the country’s bond market.”


“This week, it emerged that in Europe, banks are giving up their primary dealership roles in dealing European government bonds. This issue threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money.”


“A US subsidiary of Deutsche Bank has been added to a federal list of institutions with weaknesses serious enough to threaten their survival, a black mark that threatens efforts by its new chief executive to turn around the struggling German lender.”


“Financial institutions ANZ, Deutsche Bank and Citigroup will be prosecuted on criminal cartel charges, Australia’s consumer watchdog says. The allegations concern arrangements for the sale of A$2.5bn (£1.4bn; $1.9bn) worth of ANZ shares in 2015.”


“On May 30th, I accurately measured Venezuela’s annual inflation rate, and for the first time, it breached 25,000%, and today, May 31st, it sits at 27,364% (see chart below). That’s more than double the IMF’s year-end inflation forecast, and there are still seven months left to go until year-end.”


And it’s adios, Rajoy:


Read yesterday’s economy post here.