Daily updates on climate change and the global economy.

Economy 14 June 2018

Predictions make fools of us all but if the Fed pushes forward with two more rate rises this year I suspect we will have our Global Financial Crisis 2.0:

“The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

“In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 per cent to 2 per cent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signalled it would tolerate inflation above its 2 per cent target at least through 2020.

““The economy is doing very well,” Fed Chairman Jerome Powell said in a news conference after the rate-setting Federal Open Market Committee released its unanimous policy statement after the end of a two-day meeting…”


“”U.S. non-financial corporate debt hit a post-crisis high of 72% of GDP: At around $14.5 trillion in 2017, non-financial corporate sector debt was $810 billion higher than it was a year ago, with 60% of the rise stemming from new bank loan creation. At present, bond financing accounts for 43% of outstanding debt with an average maturity of 15 years vs. the average maturity of 2.1 years for U.S. business loans. This implies roughly around $3.8 trillion of loan repayment per year. Against this backdrop, rising interest rates will add pressure on corporates with large refinancing needs.””


My analyses indicate that the underlying dynamics of the [US] unemployment situation remain exceedingly worrisome… various aspects of lending growth and related measures have shown a marked slowing in the growth rate… The level and growth rates of wages and household earnings continue to be (highly) problematical… many other indicators discussed on this site indicate economic weakness or economic contraction.”


“Global trade is showing signs of slowing… The U.S. dollar has strengthened considerably, turning in a headwind for emerging market economies… Sales growth has been slowing… Geopolitical tensions and policy concerns, particularly around tariffs, have sent shockwaves of volatility back into the markets…”


“Markets welcomed the International Monetary Fund’s (IMF) $50 billion rescue stabilization package last week, which seems to be stabilizing the [Argentine] peso. But the financial umbrella will be costly.”


“A two-month national survey to track migrants showed 442,462 Venezuelans without visas, stamped passports or temporary permission to remain had arrived over the 15 months. Another 376,572 arrivals did have legal permission.”


“Moody’s downgraded Gabon’s sovereign debt rating for the second time in 12 months to Caa1, citing liquidity pressures which are making debt repayment tougher.”


“The steep rise in [Kenya’s] debt means a looming increase in debt servicing obligations, including interest and principal repayments…”


“The one-month Hong Kong interbank offered rate (Hibor) rose 2 basis points to 1.60 per cent on Thursday, its highest level since 2008. Three-month Hibor was up for a seventh straight day to 2.01 per cent. The increase in Hibor rates shows that it was getting harder and costlier for banks to obtain funds in the interbank market…”


“China’s economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data on Thursday pointing to a broad slowdown in activity in May. The data, which showed the slowest investment growth in over 22 years, “was all shockingly weak by Chinese standards,” economists at Rabobank said…”


“The default [of China Energy Reserve and Chemicals Group] has spurred some investors to reassess risks with Chinese firms that had previously been seen as solid bets…”


“Household leverage may have peaked, house prices are falling, and credit conditions are tightening. The combination of the three should have all of us asking: what next [for Australia]?”


“The European Central Bank will debate on Thursday whether to end its huge asset purchases by year-end, in what would be its biggest step towards dismantling crisis-era stimulus credited with pulling the euro zone economy out of recession.” [Let us hope they postpone]


“Industrial production in the eurozone fell more sharply than expected in April, resuming its 2018 decline.”


“The DIW economic institute has slashed its growth forecast for Germany due to an unexpectedly weak start to 2018 and risks from abroad including concerns about Italy’s new government and the escalating trade conflict with the United States.”


“Banks in major European economies could be severely hurt by political developments in Italy given their exposure to Italian debt, with France’s lenders leading the potential losses. Recent political turmoil in Italy has increased the borrowing costs for the euro zone’s third-largest economy, but it has also raised questions about potential contagion to other countries.”


Read yesterday’s economy post here.

Economy 13 June 2018 Turkish central bank

“The Turkish central bank managed to halt the free-fall of the country’s currency last week with a sharp rise in interest rates. But the move failed to stop the free-fall of Turkey’s equity market and – far more dangerous – the collapse of the credit quality of Turkey’s banks…

“Turkey’s Istanbul 30 stock market index meanwhile has fallen by 35% in US dollar terms since August 29, 2017. Its most vulnerable lender, Halk Bank, lost 63% of its US dollar value in the same period and now trades at 40% of book value.

“Turkey’s banks are shut out of world capital markets, and the country is hard put to raise the US$50 billion in new hard currency it needs to finance a current account deficit running at around 6% of GDP. Turkish businesses have about US$300 billion in foreign currency debt, and the cost of servicing it has nearly doubled in local-currency terms due to the lira’s depreciation since 2015. The banks will have trouble rolling over their existing short-term borrowings in hard currency, and trouble collecting loan payments from customers crushed by the collapse of the lira….

“During the past two years, the short-term debt of Halk Bank and Garanti Bank, combined, has risen four-fold, from about 20 billion lira to 80 billion lira…

“What happens next probably is what happened to Greece during its financial collapse. Its largest financial institution, Alpha Bank, borrowed massively in the short-term market. When the crisis hit, Alpha couldn’t roll over its debt and had to repay its short-term loans. Its stock now trades at around 35% of book value, about the same as Halk Bank.

“When Greek credit collapsed, the economy shrank by 25%. In Turkey’s case, a 10%-20% overall economic contraction is quite possible. The political consequences of an economic disaster of that magnitude are hard to fathom…”


“Jordan faces huge economic challenges, with many refugees from Palestine, Iraq and Syria in the country. With few natural resources Jordan has long been dependent on outside benefactors including the United States and the European Union.”


“As real US interest rates and the dollar have risen, investors have been pulling money from emerging markets. There has been about $10bn of outflows from EM debt and shares over the past six weeks, according to analysts at Bank of America Merrill Lynch. Portfolio managers are detecting vulnerabilities in several Asian countries, including India and Indonesia… the amount of Chinese corporate debt sold in dollars has risen sharply and is now above the 2014 peak.”


“[China’s] property sector remains a risk with household loans accounting for more than half of the credit extended.”


“Malaysia’s king has offered to take a pay cut as the country grapples with a surprise national debt of $251 billion. Yang di-Pertuan Agong XV Sultan Muhammad V said he will take a 10% cut to his salary and emoluments through until the end of his reign in 2021 in response to an outpouring of donations from Malaysian citizens to help pay off the country’s national debt.”


“Since 2014, when Venezuela descended into a political and economic crisis, 15 airlines have ceased operations to and from Caracas, leaving the city––and the country––in a deepening state of aviation isolation. Maiquetía’s terminal frequently goes without air conditioning, power, or running water; fears of crime in the city and in the airport itself have caused some remaining carriers to send flight crews to other cities rather than having them stay overnight in Caracas.”


“Last week, the Barbados government attempted to preserve the liquidity of its international currency reserves, which have dwindled to $220 million, by suspending payments to international creditors.”


“Consumer spending is more than 70% of [US] GDP. A toxic consequence of the Fed’s money printing and near-zero interest rate policy over the last 10 years is the artificial inflation of economic activity fueled by indiscriminate credit creation… The real fun begins as many of these households begin to default. In fact, the delinquency and default rate, in what is supposed to be a healthy economy, on subprime credit card loans and auto debt already exceeds the delinquency/default rate in 2008.”


“The suicide rate in the United States has risen 1.5% a year since 1999, according to data released by the Centers for Disease Control and Prevention (CDC)… The rise has been significant nationally and in 44 of 50 states. In 25 states, the suicide rate rose more than 30% between 1999 and 2016, the CDC reported in its Morbidity and Mortality Weekly Report.”


“UK wage growth fell short of expectations in April, raising further doubts over whether the Bank of England will raise interest rates this summer.”


“German investor confidence weakened in June as sluggish economic demand and fears over the new Italian government exacerbated global trade tensions to drive business outlook to its lowest ebb in nearly six years, research group ZEW said on Tuesday.”


” any further significant outflow from Italy could raise Germany’s creditor balance well beyond the highly politically sensitive EUR 1 trillion mark. If that were to occur, there would be little appetite in Germany to engage in the large-scale bailing out of a country that flagrantly flouted the eurozone’s rules of the game… the last thing that Italy can afford is a major pick-up in capital flight that could bring on a full-blown Italian banking crisis.”


“More than a dozen of the world’s biggest banks have slipped into a bear market, highlighting risks to the global economy even as equity indices reach new highs and the Federal Reserve prepares to raise interest rates… The synchronised dips were a sign of global financial stress, said Ian Harnett, managing director of global strategy at Absolute Strategy Research in London, who this week used the data to send out his first “Black Swan” alert since 2009.”


Read yesterday’s economy post here.

Economy 12 June 2018

“Escalating trade tensions are posing an increasing threat to the global economy, the head of the International Monetary Fund has warned.

“”The clouds on the horizon … are getting darker by the day,” IMF Managing Director Christine Lagarde said at a news conference in Berlin on Monday.

“”The biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating” she said.

“Her comments follow the acrimonious end to the G7 summit in Quebec this weekend in which President Donald Trump attacked Canadian Prime Minister Justin Trudeau over trade…”


“President Donald Trump’s shortened stint at the G7 summit threw the international trading order into chaos and most likely put the US on the path to a trade war.”


“If the Fed raises rates again next week which it will, then it will be the seventh rate hike. The cumulative effect of all those rate hikes has not been felt yet but it eventually will (there’s a lag of six to nine months) and it will slow the economy as consumers spend less…”


“Sales of the riskiest subprime auto bonds in theare on pace for a record year, according to Barclays plc.”


“The fight against inflation and falling asset values in emerging markets is probably not defeated yet…The bottom line is that while EM problems haven’t seemed to hurt the broader, global economy yet, it is worth watching in order to avoid another 2015-style disruption.”


“Five year credit-default swaps that hedge against a drop in the value of Mexico’s sovereign debt have soared as the July 1 presidential election nears.”


“…lots of financial institutions around the world hold significant positions in southern European debt issues… One of the major holders of European debt is Deutsche Bank, the leading German financial institution… Too big to fail does not mean too big to fall, and in the world of European financial institutions, this is likely to be an issue over coming months. We should not discount the potential for contagious price issues for even the strongest financial institutions in the United States and around the world.”


“The British economy is showing the greatest signs of stress since the eurozone crisis and fears of a double-dip recession six years ago, as worrying reports show the steepest fall in manufacturing output and the greatest degrees of pessimism among employers since 2012.”


“French regulators said Monday they would toughen banks’ capital requirements to mitigate the risks of a future credit crunch, an early sign of tighter borrowing conditions emerging across Europe.”


“Australia’s east-coast property bubble is showing signs of deflating at a faster clip as home-lending data recorded the longest losing streak in almost a decade. Housing finance fell 1.4 percent in April, the fifth straight monthly drop and the longest stretch of declines since September 2008, when Lehman Brothers Inc. collapsed…”


“They warn that the unprecedented asset price bubble engineered by G7 central banks is a ticking time bomb that is ready to burst, after seven years of near zero interest rates and speculative excesses in bonds, stocks and real estate…

“Here is the dilemma: G7 central bank’ policy normalisation is the only option consistent with their mandate and with a return to the rules of a market economy. But when G7 Central Banks eventually exit from their unconventional policies, they will contribute to the bursting of the asset price bubbles engendered by their monetary experiment.

“This could well be the worst financial crisis ever experienced, as the level of debt and the artificial level of asset prices have no precedent.”


Read yesterday’s economy post here.

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.