Global financial system implosion begins

[yield]

Japan lifts Tokyo's state of emergency, eyes fresh stimulus
May 25, 2020

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe lifted a state of emergency for Tokyo and four remaining areas on Monday after the number of infections fell across the country, but warned that it could be reimposed if the virus started spreading again.

The move meant that the whole country would now have the social distancing curbs loosened, after an initial lifting of restrictions for most areas on May 14.

Abe said that the total amount of stimulus from two economic packages would exceed 200 trillion yen ($1.86 trillion) but it would still take considerable time to get back to normal life while controlling infection risks.

TWO-FIFTHS OF GDP

To support an economy on track for its deepest slump in postwar history, the government is considering fresh stimulus worth 100 trillion yen ($930 billion), mostly comprising financial aid for companies, the Nikkei newspaper reported on Monday.

The package, to be funded by a second supplementary budget, would follow a record 117 trillion yen spending plan deployed last month.

Japan’s economy slipped into recession in the last quarter, and analysts expect another 22% contraction in April-June.

 

[redsquirrel]

Predictions of economists so of what worth who knows but useful to know what the enemy is saying
UK economy faces 5% annual deficit by 2024, say economists

While the Office for Budget Responsibility, the independent fiscal watchdog, and the Bank of England have predicted rapid recoveries from the current deep recession, a Treasury survey of independent economists suggests that the pandemic will leave lasting scars on the UK’s prosperity and public finances.
The forecasts expect a reasonable recovery but predict that gross domestic product will be 4 per cent lower in 2024 than they had expected back in February. In contrast, the OBR and BoE have published scenarios predicting little persistent damage to the economy, which are widely seen as painting an unreasonably optimistic picture.
Using the OBR’s ready reckoner tool with the independent forecasts, each 1 per cent drop in GDP raises the deficit by 0.7 per cent of national income, implying that borrowing will still be £134bn by 2024-25, the highest figure since 2011.
With Conservative MPs urging the chancellor not to raise taxes or cut public spending, the economists’ growth predictions will raise fresh questions over how Boris Johnson and his chancellor, Rishi Sunak, will finance the emergency measures taken to battle the pandemic.

And some interesting stuff re the views of Tories on a return to austerity

 

[kabbes]

That is an interesting difference of opinion. I think it also reveals another interesting difference of opinion between these nameless economists and traders. If the economy’s ability to generate income has been effectively knocked down by 5%, that should say something about the ability of private companies to generate profit, which in turn should say something about share price. It’s hard to derive that relationship directly (it depends on things like the level of capital typically employed and typical profit margins, which I don’t know), but the discrepancy between a predicted 5% hit to national output and an existing 20% reduction in share values seems quite stark. Somebody is being more pessimistic than the other.

 

[Idaho]

Traders and trading is inherently emotional and volatile. Good news is overbought and bad oversold. Add to that, investment houses, investment banks, etc, have huge, mind boggling amounts of money that is just for playing these markets. It has to go somewhere. They aren't going to say "fuck this, let's open up a nice little tea shop in the Cotswolds and semi retire".

Indeed the amount of money bouncing around for investment is only increasing as all major economies flood these markets with credit. This is why we have a dramatic 20% crash in march and a weird rally ever since, even though the news isn't getting any better.

 

[yield]

China's Weaker Yuan Fix Is the Real Cold War Salvo or Outline - Read & annotate without distractions
Bloomberg. John Authers May 26, 2020
Long article. Thought this bit was interesting.

To add to this, the conversation around the future for the global economy and financial system is ever more using the word “war.” It is in the title of two books published this month, both by respected authors with a long history in finance and academe. First, there is Capital Wars by Michael Howell, who established CrossBorder Capital Ltd. in London:

Readers can also sample Trade Wars are Class Wars by Matthew C. Klein (now a commentator for Barron’s and formerly a colleague at the Financial Times) and Michael Pettis of Peking University:

Both books are written by people whose prime interest is finance and the economy, rather than military history or wars. But both make clear that the current state of the global financial system does pose a threat to international peace. In this, they echo a rash of books over the last few years that drew comparisons between the U.S. and China and previous historic disputes when a rising power threatened an established hegemon, from Athens and Sparta through to Britain and Germany before the First World War. A great book by Harvard’s Graham Allison also put the word “war” in the title, with a strong suggestion that it was inevitable:

Very few assets could provide shelter from an outright war between the U.S. and China. Such an event would be a disaster for everybody. Because of this, direct military conflict between the world’s two biggest powers is unlikely — if not unthinkable.

That helps to explain why there there has been no big sell-off of stocks or commodities in the last few days (outside Hong Kong) as the U.S.-Chinese relationship has deteriorated. Sabre-rattling serves the leaderships of both countries, evidently. A war would not.

This might be too relaxed a response. The Covid-19 pandemic, which appears to have been mishandled by the administrations of both countries, amps up the tensions, and deepens dangerous imbalances within the global economy. Both the new books make clear that the root of the problem is that the U.S. and its dollar is no longer big enough to anchor the global financial system, but there is no obvious alternative. Instead, tensions within the two biggest economies are being expressed in conflict between them. Resolution can only come if both China and the U.S. get their own houses in order.

For Klein and Pettis, as their title suggests, the conflict is between the wealthy, who hold capital, and the rest. Exporting capital to China has worked out well for the wealthy of both the U.S. and China, badly for workers in China, and dreadfully for workers in the U.S. In a very provocative comparison, they say that the U.S. and the West almost voluntarily allowed themselves to fulfill the same role that the colonies played for the old European empires, providing a ready source of demand for exports from the mother country (China). Unless both countries find a politically viable way to reduce inequality, the fault lines between them will deepen further.

For Howell, the nature of the imbalance is different, although his theory appears consistent with that of Klein and Pettis. As he expresses it, the U.S. has an overdeveloped financial sector and an underdeveloped industrial sector, while China is the other way around. Fixing this involves risks and difficulty for those in power; China needs to financialize, so that it no longer needs to import American capital, while the U.S. needs to re-industrialize, so that it no longer needs to import cheap Chinese goods. It is very difficult for these things to happen unless they happen at once.

Spoiler: more text

Failing this, a “new Cold War” looms as one of the more likely and even sustainable solutions. The first Cold War didn’t impede some impressive growth in the West, and even for a time in the Soviet bloc, and never became a direct “hot war,” so this outcome isn’t necessarily disastrous.

Rather than a dollar-centric world, we could see a bipolar world, with China establishing some form of financial hegemony over Asia. This is the more or less explicit aim of China’s Belt and Road Initiative. Meanwhile the Federal Reserve now has a list of 14 other central banks with which it offers liquidity swaps. That list looks, in Howell’s phrase, a lot like an economic version of NATO. Natural U.S. allies such as Mexico, Brazil, Australia and New Zealand are included, as are Singapore and South Korea. China and Russia, to name but two, are not. The attempt is to isolate China.

Historically, such divisions over capital have led to wars (although Britain’s deciding to come under the U.S. umbrella without a fight is an exception). A new cold war, with two economic blocs that trade and invest ever less with each other, but can avoid bloodshed, wouldn’t necessarily be so bad.

Both leaderships might, however, aim for something better. Drastic measures by either nation to fix problems at home would help. Somewhat less drastic measures to cramp each other’s style are more likely, and won’t help. In the short term, as with so many things in life, what matters most is the economic impact of the virus. The risk is that the disease exacerbates the mismatch between the economies. And that looks possible.

Since China began to reopen, its manufacturing sector appears to have returned to trend rather more swiftly than its consumer sector. Looking at the way the country is using steel, for example its manufacturers appear to be back on track, as shown in this chart from Societe Generale SA’s cross-asset research:

Consumption is different. Retail sales are still running below their equivalent period of the year before, particularly in the catering sector, which finds it particularly hard to adapt to social distancing:

In catering, almost all stores have now reopened, but the number of orders is still significantly lagging:

The risk is that the coronavirus gives an incentive for China to keep pumping more out of its industry, and importing capital from the U.S., whose banking sector will be happy to provide it given lack of consumption at home. Whether it makes sense to call such a conflict a war over capital, or class, or trade, it would be damaging. For now, the coronavirus appears to have prompted both leaderships to take the easier alternative, and amp up confrontation. In the short term, markets might be able to continue to avoid the fight. In the longer term, meaning for long after there is a vaccine for the virus, it will be inescapable.

 

[kabbes]

Could be. On the other hand, it could be that once incidences peak, there will be a hell of a land grab and the whole thing will rebound almost as far as it collapsed. I don’t know any more anyone else. Put it this way though — when I get a chance, I’m getting into this market, not out. It’s my bet that in 18 months, it’ll be back up to at least 10% from its peak.

go for it, champ.

I don’t know why today I randomly thought of this 17 March conversation, but I did, so I thought I would check.

Since, March 17:

FTSE all-share up c. 25%
DAX up c. 40%
S&P 500 up c.25%
NASDAQ up c.35%
Nikkei 225 up c.30%

I think like Idaho says, the investment money might get liquidated for a bit but investors don’t want to just sit on cash and they’re desperate to get back in again. They were all as twitchy about the signs of upturn as they were for downturn.

Things are now still about 15% (ranging between about 5% and 20% depending on index) off peak (meaning that actually that prediction of getting back to 10% below peak within 18 months is looking highly likely at this point). That seems more consistent to me with the genuine lasting damage to the ability of companies to make profits across the market.

 

[Idaho]

Ive been lucky. I had all my pension in gilts for 2 years waiting for a crash. Lost out on 3% or so per year for 2 years, but it meant that I bought back in when the ftse 100 was at 5400. So I've done ok since.

I am expecting that the lifting of lockdown will be a "sell the news" event. I think the current uptick will be short lived. There were all kinds of structural weaknesses and issues in the world economy before covid which haven't got better. The EU is even more split north south than it was. Tensions between China and the US are worse and Brexit is still going to churn away eating up resources we don't have. The answer to all of this is a consensus amongst states to keep pumping money into the leaky mess.

I am not particularly optimistic about my pension, even though I made a lucky call. I think once the deflationary contraction has finished later this year (or maybe next), it's inflation all the way. So cash is the worst place to be.

 

[kabbes]

I have no illusions that I can personally play the market. I take the rather pessimistic view that capital is the house and the house always wins, so I just hold as diversified a spread of world equities as I can (albeit weighted to UK) for my own pension pot and add to it when I’ve got it. I figure that my clumsy attempts to time the investments will cancel out anyway and probably be worth less than the lost income from not having the dividends. As a system, it works okay — even following this crash, it’s all still worth a fair bit more than what I’ve actually put in. I’m sure it can be done better than I do it though.

 

[Idaho]

Timing markets is a matter of luck. But the longer the oscillation, the easier it gets. Predicting a market slump every 10 years or so is fairly easy. I was lucky in that various pension things were transferring at around the right time anyhow.

 

[yield]

I take the rather pessimistic view that capital is the house and the house always wins

Not having a go but free markets and price discovery? With nearly zero interest rates, relaxed capital reserve requirements for banks, £100s of billions of quantatitive easing.

Without price discovery what do all the numbers mean? Surely Earnings per Share will take a hammering?

As a system, it works okay — even following this crash, it’s all still worth a fair bit more than what I’ve actually put in.

The system the supports the asset classes of the rich?

Get this strange feeling that quantatitive easing is MMT gone wrong. Reindustrialising would be a better investment.

Much too over reliant on London and financial services. Especially if HSBC & Standard Chartered lose their privileges in HK.

 

[kabbes]

As a system for me to follow for investment in my pension, not as a social or economic system!

I hear what you’re saying about how the economic system itself is fucked and I don’t particularly disagree, but if there’s one thing I think is likely, it’s that the corporate sector will continue to make profits off the back of exploiting labour. Where those profits exist, there will be dividends and those dividends have a value as cashflow. In sure individual companies we’ll go bust but the FTSE all-share will carry on generating dividends one way or other at approximately the same rate, even if this year sees the baseline drop by 20% or so.

 

[yield]

As a system for me to follow for investment in my pension, not as a social or economic system!

As I said not having a dig.

Could make some trite comment about how we are what we do repeatedly. But that would make me a wanker.

We all do what we have to do to get by. Not that I don't worry about the lost potential with all those STEM graduates in finance.

I hear what you’re saying about how the economic system itself is fucked and I don’t particularly disagree, but if there’s one thing I think is likely, it’s that the corporate sector will continue to make profits off the back of exploiting labour. Where those profits exist, there will be dividends and those dividends have a value as cashflow. In sure individual companies we’ll go bust but the FTSE all-share will carry on generating dividends one way or other at approximately the same rate, even if this year sees the baseline drop by 20% or so.

For sure, the government has commited a lot of resources to make sure that the companies continue to issue dividends/ make money. That's absolutely clear.

I'd argue, that the resources would be better spent increasing industrial or productive capacity considering the current climate. I'm sure there are loads of factors I've not considered.

As far as I can see Quantitative Easing has shown that MMT is right. The Central Bank can make money out of nothing - while the velocity of money is slow - for counter-cyclical intervention without causing the feared hyperinflation.

Rather than raise the asset classes of rich, it could be used for fiscal spending to support the standards of living of the majority. How many millions are already on the payroll of the state?

 

[kabbes]

You’d be right to say we are what we do. There’s no way of rising above the system — keeping a part of yourself ideologically sound — whilst taking part in it. But I’ve been poor and there was nothing noble about that either. It didn’t stop the rich being rich. That’s definitely not an excuse or a justification for anything. It just is what it is.

You’re also right to worry about the lost talent being drained to finance. It’s why with half a career gone, I’m now training in something else. I can’t be propping it up with my toil any more. But I’m not willing to give up the drug until I have my support network in place.

 

[yield]

You’d be right to say we are what we do. There’s no way of rising above the system — keeping a part of yourself ideologically sound — whilst taking part in it. But I’ve been poor and there was nothing noble about that either. It didn’t stop the rich being rich. That’s definitely not an excuse or a justification for anything. It just is what it is.

You’re also right to worry about the lost talent being drained to finance. It’s why with half a career gone, I’m now training in something else. I can’t be propping it up with my toil any more. But I’m not willing to give up the drug until I have my support network in place.

Glad to hear that! Read about your help, with the drilling, on Surrey Hills

At the start. Good luck

 

[Idaho]

I'm an untalented arts graduate stuck in finance

 

[redsquirrel]

C&P from a piece in the FT, usual caveats about economists apply, but of some interest. The comments of Mike Wilson are a wonderful illustration of how these people cannot see beyond their religion. And Mazzucato's comments reveal just how limited the sort of re-heated Keynesism she and her fellow travels propose is.
---------------------

Are we heading into another Depression?

The Covid-19 lockdowns have led to the largest rises in unemployment since the 1930s. The Financial Times asked leading economists and market analysts what to expect and what might be done to avert turmoil

While 2020 has been an unusual year to say the least, I would argue that financial market behaviour has been quite predictable. The pandemic led to a sharp drop in the market, record unemployment and, tragically, 100,000 deaths thus far in the US. But it also prompted policymakers to respond with unprecedented support. The US Federal Reserve is now on track to expand its balance sheet by 38 per cent of gross domestic product over the next 18 months to $12tn, or twice as much as it did after the 2008 financial crisis. We project that fiscal spending plans will result in US deficits this year approaching 25 per cent of GDP, a level not witnessed since the second world war.
Though Covid-19 came out of the blue, recessions are never caused by a single event. Instead, they are the result of excesses that have built up in the real economy. With the prior expansion lasting a record 10 years, there were plenty of excesses by the time 2020 rolled around.
...
Historically, economies frequently experience a V-shaped recovery after a recession. The severity of this particular recession, combined with the unprecedented policy response, makes it unlikely we will see anything but a V-shaped recovery this time.

Covid-19 has brought economies to their knees. The question is how long and how severe the resulting recession will be. The answer depends on the quality and quantity of global stimulus packages. To work, they must address both demand and supply, delivering income to the most vulnerable through well-structured universal basic income policies or national job guarantee schemes, and assistance to companies to get back on their feet as well as providing a bold, green direction for investment.
Economic growth will also depend heavily on the speed at which we can find a vaccine, manufacture it at scale and make it globally accessible....
...We need policies that are not only reactive but also strategic, bringing us closer to an investment-led global Green New Deal. Bold plans to create carbon-neutral cities and regions could foster creativity and innovation — especially now that many have rediscovered the joys of walking and biking.

 

[kabbes]

The rediscovered joys of walking shall set us free

 

[Idaho]

The rediscovered joys of walking shall set us free

To be fair, for us in the developed world, our lives should contain a lot more walking and biking!

 

[kabbes]

To be fair, for us in the developed world, our lives should contain a lot more walking and biking!

This seems a rather different issue, though, than the claim that people doing a bit of walking whilst having nothing else to do during an unseasonably warm, sunny period of time somehow is a catalyst for a sustained investment in green infrastructure.

 

[Artaxerxes]

To be fair, for us in the developed world, our lives should contain a lot more walking and biking!

Its hard to do that when its an uncut 8 hours at work then 1-2 hours commute for the majority of the year though

I do think jobs should be willing to work shorter hours in winter for same pay, it'd be better for everyone psychologically and its not like any fucker does any work in December and most of January anyway.

 

[Idaho]

This seems a rather different issue, though, than the claim that people doing a bit of walking whilst having nothing else to do during an unseasonably warm, sunny period of time somehow is a catalyst for a sustained investment in green infrastructure.

I agree Mariana's brief overlap with a concept that is reasonable was coincidental and unintended.

 

[Idaho]

Its hard to do that when its an uncut 8 hours at work then 1-2 hours commute for the majority of the year though

I do think jobs should be willing to work shorter hours in winter for same pay, it'd be better for everyone psychologically and its not like any fucker does any work in December and most of January anyway.

If you're asking me, then we should all work 3 or 4 days a week for at least a living wage. But that's just me.

 

[Artaxerxes]

If you're asking me, then we should all work 3 or 4 days a week for at least a living wage. But that's just me.

Thats the dream yeah.

We all work to much and it was interesting seeing how much better some people I know felt when they were only working 3 or 4 days a week during this whole pandemic. More time to actually live and study for themselves.

 

[yield]

C&P from a piece in the FT, usual caveats about economists apply, but of some interest. The comments of Mike Wilson are a wonderful illustration of how these people cannot see beyond their religion.

Thanks for the link RS. At least it's not paywalled! Mike Wilson is delusional if he thinks this will be a V shaped recovery. They're pushing on a string.

And Mazzucato's comments reveal just how limited the sort of re-heated Keynesism she and her fellow travels propose is.

Marina Mazzucato is the best of a bad bunch. The poverty of the imagination.

The academies are so determined to control what is acceptable thinking that there's no-one in positions of power to offer an alternative apart from (as you said) reheated Keynesianism

 

[yield]

ECB gives another shot of stimulus as economy reels or Outline - Read & annotate without distractions
June 04, 2020

(Reuters) - The European Central Bank approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War Two.

Just months after a raft of crisis measures, the ECB again expanded its money-printing scheme to cushion a potential fall in output of up to 12% this year, even as governments spend record amounts to preserve jobs while restrictions keep businesses shuttered.

“The euro area economy is experiencing an unprecedented contraction,” ECB President Christine Lagarde said. “There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it.”

The ECB’s move, coming just weeks after Germany’s Constitutional Court tried to curb its powers, was also seen as an act of defiance, with one of the European Union’s most powerful institutions making clear it would not take orders from national courts.

Thursday’s decision extended the ECB’s emergency bond purchase scheme to mid-2021 and increased it by 600 billion euros to 1.35 trillion euros. That should allow the bank to buy up most of the new debt euro zone governments are issuing to overcome the pandemic.

Millions Of Americans Skipping Payments As Tidal Wave Of Defaults And Evictions Looms or Outline - Read & annotate without distractions
NPR. June 03, 2020

One big thing lawmakers need to resolve is whether to extend the federal government's expanded unemployment benefits. Getting that unemployment money is the biggest reason most people who've lost jobs are able to pay rent and keep a roof over their heads. And while some people are going back to work, many others are not.

"When the $600-a-week unemployment insurance runs out at the end of July, most people expect tremendous displacement risk," says Andrew Jakabovics with the affordable housing nonprofit Enterprise Community Partners. "Evictions are likely to go through the roof."

U.S. schools lay off hundreds of thousands, setting up lasting harm to kids or Outline - Read & annotate without distractions
June 04, 2020

(Reuters) - Late last month, San Diego high school teacher Jessica Macias put aside her worries about her future, psyched herself up and launched into an enthusiastic lesson via video feed to her class on the theory of knowledge.

Macias, a 26-year-old English teacher, had attended Castle Park High School herself as a student. While delivering that lecture, she said, she was “pushing to the back of my head” that she’d soon be unemployed. Macias, along with 204 other teachers in San Diego’s Sweetwater Union High School District, will lose her job when the school year ends June 5.

The night before the class, she said in an interview, “I couldn’t sleep because I was thinking about not having a job.”

Macias will join the staggering number of public school personnel across the United States who have lost their jobs in the wake of school closures amid the Covid-19 pandemic. In April alone, 469,000 public school district personnel nationally lost their jobs, including kindergarten through twelfth-grade teachers and other school employees, a Labor Department economist told Reuters.

 

[yield]

Fidelity chief warns of global corporate solvency crisis
FT. June 07, 2020

Fidelity International boss Anne Richards has warned that the asset management industry will struggle to provide enough capital to fix the solvency problems public businesses face as economies emerge from lockdown.

The fund management executive, whose investment company oversees £305bn in client assets, said many businesses would need an injection of capital to offset the high levels of debt they had accumulated during the crisis, which has left whole industries unable to operate.

But she said it was vital that businesses focused on ensuring they had access to as many pools of capital as possible, adding: “The [asset management] industry is not going to be enough to solve this solvency problem.”

The scale of cash needed to repay the public funding businesses have received from governments or central banks is likely to be so large that it is “either going to be written off or sit on balance sheets, where it will have a depressing effect”.

A debt jubilee for businesses but not people?

But she said the rapid action from central banks in response to the crisis had stabilised markets, giving people confidence that although “we might be going into a deep recession, that didn’t mean a financial crisis”.

 

[Flavour]

A debt jubilee for businesses but not people?

Exactly. Too big to fail: the entire private sector

 

[not-bono-ever]

ECB have ramped up their moribund bad bank warehouse project to Chollima speed- the implications of unpaid Euro debt slopping around with the 'rona are now worrying the bankers. Very deep recovery pool requirement has been discussed amongst the big banks.

 

[Idaho]

Exactly. Too big to fail: the entire private sector

No, just the big companies. No one gives a shit about the little ones. They're meant to go bust.

 

[redsquirrel]

This could go in various places but I think it's relevant to this thread - particularly considering the fight between oil suppliers that's been happening.

It's very much from the FTs ideological viewpoint but has some interesting points.

Can the world kick its oil habit?

Nick Mabey leads a London-based climate think-tank called E3G, which is pushing to accelerate the green transition. He attributes the difficulty in displacing oil to its entanglement with major industries, from defence to energy and finance, and its deep links to geopolitics: “A government will need to transition to cleaner fuels but also maintain arms sales and keep auto workers on side. Unravelling this requires deep structural change.”

BTW If people would rather I can c&p the article rather than use the archiver?