Daily updates on climate change and the global economy.

Economy 27 June 2018 – global debt danger

Too much debt; too few toolsGlobal debt danger:

“Anyone doubting that there is a material risk that that the next global economic recession will be of the more severe than normal variety has not been paying attention to the massive build up in global debt levels over the past decade.

“Nor have they been paying attention to the unusually low interest rates at which all too much of this debt has been issued.

“That experience should have taught us that it is precisely this combination of high debt and credit risk mispricing that has the potential to cause real financial market strain when credit eventually reprices to historically more normal levels…

“If such a repricing were indeed to occur, we would, in Warren Buffet’s phrase, find out which of the financial institutions had been swimming naked by having over-lent to corporations of dubious quality at interest rates that were far too low to compensate them for default risk.

“Sadly, there is little that the world’s central banks can do to dial back the global credit bubble that they have created by their many years of ultra-easy monetary policy and massive balance sheet expansion.”


“The risk of a global trade war is rising. That could sink the US economy into a recession, bringing an end to the second-longest expansion in American history.”


“President Donald Trump is on the verge of escalating his trade war with China. By the end of this week, the Trump administration is expected to release details of plans to restrict Chinese investment in American businesses and block the ability of US businesses to sell some high-tech products to China.”


“Chinese stocks sunk into a bear market Tuesday, and analysts expect losses to deepen as concern over China’s economy, yuan weakness and a trade feud with the U.S. continue to rattle investors.”


“There may be as many as 64 million empty apartments in China. Many people buy the properties as an investment with no intention of ever moving in. Author says ghost cities show growth is driven by debt in China.”


“Iran’s capital has been racked by protests this week over a plunge in the value of the country’s currency, the rial. Crowds at one point shut down Tehran’s sprawling Grand Bazaar, an economic center and a place where the 1979 revolution gained footing.”


“UK Annual house price growth slowed to a five-year low in June, a closely-watched index revealed this morning.”


“France’s… consumer confidence index dropped to 97 in June from 99 in May… this was the weakest score since August 2016, when it marked the same 97.”


“The ranks of hedge fund managers expecting impending market chaos are growing. Greg Coffey, the former star manager at Moore Capital Management who started trading at his own firm this year, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management’s Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients.”


“The S&P 500 Financials Index fell for the 12th straight day Tuesday, the longest losing streak on record. Coming into the year, many cited the tax overhaul and a rising rate environment as reasons for banks to rally. Instead, they’ve endured pressure from a flattening yield curve. The losses also come ahead of the final phase of the Federal Reserve’s annual stress tests and waning consumer confidence.”


Read yesterday’s ‘Economy’ thread here.

Economy 26 June 2018 – Iran collapsing

Economic protests in Iran

Iran collapsing under the weight of inadequate oil prices, impending US sanctions, water scarcity et al:

“Since last December’s nationwide protests, the authorities in Tehran have been warning Iranians against staging demonstrations that could turn Iran into “another Syria.” Events of the past few weeks, however, showed a different danger looming for Iran, that of becoming “another Venezuela”.

“A stormy session of the Iran Chamber of Commerce and Industries in Tehran on Sunday put the focus on fears of economic meltdown accelerated by threat of tougher sanctions coming from Washington in August…”


“The price gap between Bahrain’s U.S. dollar conventional and Islamic bonds has widened to record levels, indicating a sharp disagreement between global investors and regional institutions over the country’s ability to avoid a funding crunch.”


“Tunisia reached a $2.8 billion loan deal with the IMF last year but agreed-upon reforms have failed to take shape. As in Jordan, Tunisia has faced public outcry when attempting to implement IMF-backed measures. Tensions escalated in January after the implementation of the government’s 2018 budget…”


“The Canadian dollar has dropped roughly 6% against the US dollar this year on the back of a widening divergence in short-term interest rates and economic growth trends. The headline GDP growth rate in Canada has already decelerated for three consecutive quarters.”


““People didn’t have the money to go out … Here in Rio state we have lots of civil servants, and they weren’t paying the civil servants. So how is someone going to go out to consume culture? “It’s sad. The other day I was passing through Lapa … and I couldn’t believe it … It was empty: five years ago it would never have been like that.””


“The value of private equity exits in the UK plunged by more than 55 per cent in the first half of the year, new figures show.”


““There is no Brexit dividend for our industry,” Michael Hawes, chief executive of the Society of Motor Manufacturers and Traders, said.”


“German business confidence dipped again in June, a closely watched survey said Monday, as fears of a damaging transatlantic trade war and political infighting darken the economic outlook.”


“The gloom is deepening for Chinese stocks. The benchmark Shanghai Composite slid into bear market territory on Tuesday, closing more than 20% below its recent high in January. The index fell 0.5% on the day.”


“The slide in the yuan exchange rate over recent days comes as global investors start to vote with their feet, no longer viewing China as a “safe haven” impervious to trouble sweeping other emerging markets… The China currency scare two years ago ended when the Yellen Fed came to the rescue and suspended its tightening cycle, buying precious time for the Chinese authorities to restore control and launch a fresh mini-boom. The circumstances are entirely different today. The US is closer to overheating. The Powell Fed is more hawkish. The Trump Treasury will not lift a finger to help this time.”


“The Wisconsin-based motorcycle firm announced on Monday it would shift production of motorcycles intended for European consumers out of the United States, hoping to avoid European Union retaliatory tariffs. Those were applied last week in response to Trump’s own tariffs on steel and aluminum. For motorcycles, the European bloc raised its 6% tariff to 31%. That will make each bike about $2,200 more expensive to export, Harley-Davidson said.”


Read yesterday’s thread here.

Economy 25 June 2018 – world debt spirals

World debt spirals:

Markets rattled“World debt ratios have spiralled to record levels during the era of super-easy money and markets are showing telltale signs of late-cycle excess, leaving the international financial system acutely vulnerable to a jump in borrowing costs.

“Any reversal in our fortunes could be “quick and sharp”, says the Bank for International Settlements, the global watchdog based in Switzerland and the scourge of dissolute practice…

“Governments are running low on monetary and fiscal ammunition needed to fight fresh shocks or to cope with recession… The rising US dollar threatens to set off a sudden liquidity squeeze and a rash of capital flight from emerging markets, now 60 per cent of the global economy and big enough to engulf the old world if unfolding events are mishandled.

“Banks have higher capital ratios and are safer than in 2007 but the risk has rotated to pension funds, insurers and asset managers overseeing $US160 trillion ($215 trillion) of global wealth – including $US45 trillion of shadow banking – now clustered in “crowded trades” with narrow exits. Any one of these scenarios could trigger a crisis. They might well combine.

“Global debt has risen from 179 per cent of GDP on the eve of the Lehman crisis to 217 per cent as emerging markets are sucked into the leverage sump…

“The emerging market debt ratio as a whole has jumped by 63 percentage points in a decade. There are already signs that the financial cycle is turning in several of these countries, including China. A long hangover awaits…

“World asset markets are already stretched. The BIS said credit spreads were “at or below” levels last seen just before the global financial crisis. The reality is that governments have little left in the arsenal if a recession were to hit soon. The BIS has long argued that central banks boxed themselves into a corner during the era of inflation targeting, letting asset booms run unchecked but then intervening massively to prevent the bust…”


“Bank for International Settlements (BIS) said there were already signs that “the ratcheting up of rhetoric” was weighing on investment. It comes as Donald Trump steps up hostility with some of the US’s key trading partners and allies, raising fears of a full-blown trade war.”


“President Donald Trump issued a stark warning to the United States’ trading partners on Sunday, calling on global economies to end to all protectionist barriers, or face a new round of retaliatory measures.”


“U.S. President Donald Trump’s talk of 25% tariffs on cars has Japan’s government and automakers scrambling to avoid a potential $21 billion blow, with little diplomatic leverage or room to shift highly globalized production networks to America.”


“China and the European Union vowed to oppose trade protectionism and unilateralism, saying those actions could push the world into recession in an apparent rebuke to the U.S.”


“A slew of negative factors — from the trade war with the U.S. to the risk of a credit crunch — has weighed on China’s financial markets in recent weeks. The Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, while the speed of the yuan’s descent is blindsiding analysts.”


“China’s central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.”


By some estimates, [real estate] accounts (directly and indirectly) for as much as 30 percent of [China’s] gross domestic product… Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31 percent to nearly $202 per square foot. That’s 38 percent higher than the median price per square foot in the U.S., where per-capita income is more than 700 percent higher than in China.”


“At a central bank conference in Portugal this week, the US Federal Reserve chairman said the case remains strong for more US rate increases – which means trouble ahead for those countries borrowing in dollars.”


“I see an emerging market meltdown is happening in real-time…”


“Trade finance has been stagnant globally for some time, especially after the 2008 financial crisis.”


“”Clouds are gathering over the German economy,” whose industrial engine “began sputtering at the start of the year,” said Ifo macroeconomics chief, Timo Wollmershaeuser. Growth slowed to 0.3% between January and March, half the rate recorded in the previous quarter.”


“After rallying a bit in 2009, [Deutsche Bank’s stocks] recently hit a substantial new low of $11.00… That’s down 91.5% from its all-time high. This, again, only topped a by a few large banks in Italy. It’s a clear sign of trouble for Germany’s flagship bank, and will almost certainly go under in the coming years if it’s performing this badly now.”


“Lenders use repurchase agreements — known as repos — to massage down their assets as reporting dates approach, typically as quarters end, the Bank for International Settlements said in its Annual Economic Report. The practice boosts leverage ratios — the ratio between capital and so-called leverage exposures — allowing banks to report them as being in line with regulatory requirements, it said.


“In reality, this hard-fought agreement is unlikely to restore Greece’s debt to sustainable levels in the long term – nor does it demonstrate anything like a meaningful commitment to European solidarity. On the contrary: The creditors’ rejection of a formal debt write-down means that Greece’s total debt load remains stuck at a staggering 180 percent of GDP, with the agreed extension of loan maturities merely pushing the problem further down the road.”


Read the previous ‘Economy’ thread here.

Economy 20 June 2018 currencies collapse

“Over the past few weeks, half a dozen countries around the world have seen their currencies collapse in the worst sell-off in more than 5 years.

“The big picture: Since the global financial crisis in 2008, many “emerging markets” (countries in the middle of the global pack in per capita GDP) saw huge growth because of a few important things: the European and U.S. central banks were practically giving away free money, which many investors threw into fast-growing (riskier) economies; global trade was humming along, helping lower-wage countries that export manufactured goods; and oil prices were generally low, a problem for petro-states but a good deal for most other countries which import the stuff. Now, all of those things are changing.

“The US is raising interest rates, which means investors are pulling money out of emerging markets; trade wars loom, making people uncertain about what they can export, to whom, and at what price; and oil prices are on the rise. All of this is creating trouble for emerging markets whose social and political vulnerabilities have been papered over by favorable external winds.”


“For the rand, Ramaphoria is over. The currency slumped as much as 2% against the dollar on Tuesday to its weakest level in more than six months — when Jacob Zuma was still president. It has unwound all the gains it made after Cyril Ramaphosa took over as ANC leader in December.”


“The Brazilian central bank is likely to hold interest rates at an all-time low on Wednesday despite a currency sell-off, though it may take a more hawkish tone in its policy statement.”


“Emerging markets are struggling to keep pace with rising global interest rates and heightened trade tensions, which are creating more uncertainty in the world, Indonesian Finance Minister Sri Mulyani Indrawati said… “That can create an environment for the global economy to have a downside risk.””


“…while [Indonesia] boasts some of the last great swaths of tropical rainforest anywhere in the world, it has also been razing them at rates exceeding the deforestation of the Brazilian Amazon. Similarly, Indonesia has some of the richest marine fishing areas of any country, yet trails only China in the amount of plastic waste that it dumps into the ocean. And though it spans an area a fifth of the United States, much of its economic activity and more than half its population is concentrated in a single island the size of North Carolina.”


“Capital Economics on June 18 revised its Turkey forecasts, noting that the sharp slowdown expected in the country now seems to be materialising.”


“”The crisis hit the area [the suburbs of Piraeus, Greece] so hard that no one throws out food any more,” he tells Al Jazeera. “That’s why you don’t even see people digging in dumpsters here.””


[Italy’s] size, along with the political havoc created by the recent formation of a populist-led government, have added to the risk, Lloyd Blankfein, CEO of Goldman Sachs, said Tuesday in an interview at the Economic Club of New York. In their first two weeks in power, Italy’s new leaders sparked a dispute with France over immigration and threatened to scupper a landmark European Union trade pact with Canada.”


“The trade dispute between the US and China escalated on Tuesday, with a senior Trump official accusing China of “theft” and Beijing accusing the US of blackmail. The news roiled global stock markets as investors feared that escalating tensions could trigger an international trade war.”


“[China] could stop honoring US intellectual property rights. “This would be hugely costly to US corporations, especially if they began to export items, like prescription drugs, to the rest of the world,” writes Baker. “This would likely violate WTO rules, but I suspect China will care about violating WTO rules as much as Trump does.” That is, not much.”


“…even with many central banks now on the path to more normal policy settings, [Larry] Summers said interest rates are unlikely to return to historically normal levels before the next recession. That means they’ll be unable to respond with the level of force necessary to effectively address the slump.”


“Big banks are skirting the rules on the sale of the complex financial instruments that helped bring about the 2008 financial crisis, by exploiting a loophole in federal banking regulations, a new report says. The loophole could leave Wall Street exposed to big losses, potentially requiring taxpayers to once again bail out the biggest banks.”


Read yesterday’s ‘Economy’ thread here.

Economy 19 June 2018

“President Donald Trump threatened to escalate the trade fight with China into an all-out trade war on Monday, promising to impose massive tariffs on Chinese goods unless Beijing reverses course on its own trade actions.

“Trump directed the US Trade Representative’s office to begin drawing up a list of $200 billion worth of Chinese goods to hit with a 10% tariff, dwarfing the size of previous trade actions against China.

“”Therefore, today, I directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent,” Trump said. “After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced.””


“U.S. stocks are hurting Monday, but emerging markets continue to bear the brunt of global uncertainty as a new trading week begins… A strengthening U.S. dollar also means emerging markets will have to spend more money to handle dollar-denominated debt.”


“The Buenos Aires stock exchange plummeted more than 8.0 per cent on Monday, pulled down by sharp declines in energy and bank shares amid market volatility as Argentina seeks support from the IMF.”


“South Africa’s rand fell to 6-1/2 month lows early on Tuesday as US President Donald Trump threatened new tariffs in an escalating tit-for-tat trade war with China, hitting sentiment in emerging markets.”


“Manila, Philippines — Renewed fears of a possible trade war between the US and China again took its toll on the local financial market as foreign exchange and stock trading succumbed to new lows yesterday.”


“A 200 basis-point increase in interest rates could spark a sharp rise in the proportion of emerging market corporate debt issues at risk of default, with Brazilian and Indian firms most vulnerable, a report from McKinsey Global Institute showed.”


“The Canadian dollar weakened to a nearly one-year low against its U.S. counterpart on Monday… as global trade tensions weighed on stocks and investors worried about Canada’s trade feud with the United States.”


“The Shanghai Composite Index slid almost 5 percent after U.S. President Donald Trump threatened to slap tariffs on another $200 billion in Chinese imports. Beijing said it would take “strong” countermeasures if new levies are issued.”


“The Chinese authorities have orchestrated an arms-length rescue for the giant aviation and investment group HNA, heading off a fresh liquidity crunch for one of the world’s biggest debtors. The move came as the People’s Bank of China announced that it was setting up a special “financial risk tracking unit” to monitor local and international conditions after a surge in the number of corporate defaults in the country.”


“Foreign governments pulled back their purchases of longer-term U.S. debt as trade tensions escalated around the world.”


“The cost of insuring Bahrain’s sovereign debt against default is at an historical high, amid continuing concerns over the country’s ability to tap international markets to stave off a potential financial crisis.”


“An elephant at a zoo in Venezuela is believed to have starved to death after years of not being fed properly. Photos of a gaunt Ruperta have been released as she was confirmed dead aged 48 after collapsing at Caracas zoo. The elephant has become a symbol of Venezuela’s deepening economic woes.”


“A growing number of US hedge funds specialising in distressed debt are raising money in anticipation that the next economic downturn will punish companies that have borrowed record amounts since the financial crisis.”


“Recently, Fasanara Capital, a London-based asset management fund, predicted a full-on crash ahead, citing increasing frequency of value-at-risk shocks — or swift market corrections — as an indication of fragility for global markets… The fund was not alone in pointing out that today’s stock market is the most overvalued on record — more so than in 1929, 2000 and 2007.”


Read yesterday’s ‘Economy’ thread here.

Economy 18 June 2018

“At the end of May, the International Monetary Fund launched its global debt database. For the first time, IMF statisticians have compiled a comprehensive set of calculations of public and private debt, country by country, constructing a time series stretching back to the end of the second world war . It is an impressive piece of work.

“The headline figure is striking: global debt has hit a new high of 225% of world GDP, exceeding the previous record of 213% in 2009. So, as the IMF points out, there has been no deleveraging at the global level since the 2007-08 financial crisis. In some countries, the composition of debt changed, as public debt replaced private debt in the post-crisis recession, but that shift has mostly stopped…

“…the numbers do tend to support the hypothesis that the so-called debt intensity of growth has increased: we seem to need higher levels of debt to support a given rate of economic growth than we did before…

“We must hope, therefore, that the Basel-based capital requirements imposed by the various US banking regulators are adequate. So far, the ratios have not been cut, though other deregulatory initiatives, proposed by Trump appointees in the relevant agencies, are in the works…”


“The British Chambers of Commerce has cut its UK growth forecast for 2018, warning the economy faces its weakest year since the financial crisis.”


“The Bank of England is expected to hold interest rates steady at its latest monetary policy meeting this week with debate raging among economists as to whether the UK economy is ready for another rate hike.”


“Rising interest rates in the Eurozone – which will have an impact in Ireland – could pose a threat to Irish mortgage holders in the early years of their home loans. Already there are signs that interest rates are on the way up over the next few years which could leave those homeowners on fixed rate mortgages facing hefty monthly increases as their fixed rate term matures.”


“What marks Italy out as a smouldering source of debt crisis is that, unlike Japan, the United States and the UK, Italy does not have the ability to issue debt, nor to redeem it, in a currency that it issues. Nor does it have control of its own interest rates. This puts it in just about the worst of all possible positions. Indeed, it is in a similar position to many emerging market countries that, in the past, have been forced to borrow in dollars.”


“Egypt on Saturday increased fuel prices by up to 66.6 percent to meet an International Monetary Fund (IMF) loan deal and push the implementation of economic reform plans, the Oil Ministry said in a statement.”


“Earlier this week Saudi Arabia, the United Arab Emirates and Kuwait offered $2.5 billion in aid for Jordan to ease its economic crisis following a wave of anti-austerity protests, according to Saudi state media.”


“Affordable housing in India is a corner of finance that’s expanding almost 40 percent a year, and even more for some hyperactive lenders. The borrowers are subprime, their collateral is of dubious value, financiers’ cost of capital is rising, and yet the government is whipping up a home-buying frenzy. Investors beware. You’ve seen similar stories play out before; this one, too, isn’t likely to end well.”


“A falling tide lowers all boats, it seems. Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 — withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year, according to data compiled by Bloomberg.” 


“Dislocations, and maybe bankruptcies, do seem possible as Emerging Market economies raise interest rate spreads on dollar debt to compete with a surge in American credit. Mr Patel says that the “giant sucking sound” of capital flowing into America will be accompanied by a sudden stop in the world economy, unless the Fed abandons its plans to reverse quantitative easing by shrinking its balance sheet.”


“Argentina sought to inject some confidence back into its beleaguered currency and calm markets on Friday after the peso plunged more than 6% against the US dollar, leaving it at a record low.”


“The balance sheets of three of Canada’s leading commercial banks in Barbados may take a billion-dollar hit as a result of the suspension of loan payments to foreign lenders.”


“The bull market in highly leveraged US companies could be coming to an end. For most of the decade since the financial crisis, shares in companies with weak balance sheets performed much better than the stocks of their stronger peers, according to Goldman Sachs strategists. But that trend has started to change recently…”


“China is set for a sharp slowdown in the coming months as credit dries up and Donald Trump’s trade war threatens to damage confidence. The slowdown is expected to be widespread, after worrying figures ­released this week revealed that investment, consumption and exports all cooled last month.


“As the Trump administration imposes tariffs on allies and rivals alike, provoking broad retaliation, global commerce is suffering disruption, flashing signs of strains that could hamper economic growth. The latest escalation came on Friday, when President Trump announced fresh tariffs on $50 billion in Chinese goods, prompting swift retribution from Beijing.

“As the conflict broadens, shipments are slowing at ports and airfreight terminals around the world. Prices for crucial raw materials are rising. At factories from Germany to Mexico, orders are being cut and investments delayed. American farmers are losing sales as trading partners hit back with duties of their own…”


Read Friday’s ‘Economy’ post here