Economische aanraders 11-08-2019
Economische aanraders: Veren of Lood biedt u op zondag wekelijks een inkijkje in (minstens) 15 belangrijke of informatieve artikelen en interviews die vooral de voorafgaande 7 dagen op economisch terrein verschenen op onafhankelijke sites.
De kop is de link naar het oorspronkelijke artikel, waarvan de samenvatting of de eerste (twee) alinea’s hier gegeven worden. Er zijn in deze rubriek altijd verschillende economische scholen vertegenwoordigd, en we streven er naar die diversiteit te handhaven.
We nemen wekelijks ook een paar extra links op naar artikelen die minder specialistische kennis vereisen. Deze met *** gemerkte artikelen zijn ons inziens ook interessant voor lezers met weinig basiskennis van economie.
Why is the Euro rallying on risk off? – Strategic macro
Normally in a risk off the USD, TSYs would rally and equities and the Euro would fall. The Yen usually rallies due to capital being repatriated.
But we have seen in early August that the Euro has rallied on risk off. That can only be flow and position unwind driven.
So which flows and positions are being unwound? Aside from all of the other financial assets like ABS, corp debt, equities, if we just look at Treasuries we might get an answer.
Europe, including the City of London have bought $2.8Tn in Treasuries this cycle, net, plus other US financial assets as part of QE leakage. China and Japan also bought but stopped accumulating TSYs in 2015 and have even cut back on holdings recently.
A Currency War Will Only Weaken Growth And Strengthen Gold – Daniel Lacalle
A few months ago many of us read about the conspiracy theory of “the nuclear option”, according to which China could generate a huge debt crisis in the United States and destroy the US economy if it sold its treasury holdings.
China is an can become a greater economic leader, but the Chinese yuan cannot be a global reserve currency while maintaining capital controls and exchange rate fixing.
This week we have verified that the reality is very different. China has reduced its holdings of U.S. bonds by $ 100 billion since the September 2018 highs and the result is that the U.S. treasury bond has strengthened without the need for Federal Reserve repurchases, while China has been forced to devalue the yuan when the country’s capital flight intensified (more than $40 billion in the first half, according to the IIF, registering the highest figure in ten months in June).
China’s Biggest Problem Isn’t Trump, It’s a Broken Banking System – Tho Bishop
This week the Bank of China announced a devaluation of the yuan to roughly ¥7 to $1, a par last seen in April of 2008. The Trump administration retaliated by designating China as a currency manipulator, a move Washington has long threatened but had never acted on.
The irony here is that China had been artificially propping up – rather than holding down – its currency for years, with some analysts contending that the yuan would fall 30-40% if allowed to float on the market. As one may expect from a political conflict, the move was less about facts and more about positioning as the trade war between Trump and the Chinese Communist Party (CCP) continues to escalate.
The market’s reaction to the re-engagement of this battle of wills between the world’s two largest economies is itself telling. Monday’s massive sell-off suggests the market had expected some sort of grand agreement between the two countries. Perhaps Wall Street thought Trump was desperate for a deal going into election season, or that political pressures in Hong Kong would soften Beijing. In any case, the rose-tinted glasses of financial markets highlights a more fundamental problem – they still think Trump’s trade policies pose the greatest risk to China’s economy.
Financial constraints and the diffusion of technology – Çağatay Bircan, Ralph De Haas
Recent debates about the global productivity slowdown point to a large and increasing productivity gap between firms operating at the global technological frontier and those trailing behind. This column analyses whether better access to bank credit can accelerate technological diffusion and narrow the productivity gap between leading and lagging firms. Using data from a large emerging market – Russia – it shows that while bank loans can encourage firms to adopt new technologies and become more productive, long-run benefits vary substantially across industries and regions.
Deeply Negative Nominal Rates Are On Their Way – Alasdair Macleod
Growing evidence of a severe global recession is sure to provoke more aggressive monetary policies from central banks. They had hoped to have the leeway to cut interest rates significantly after normalising them. That hasn’t happened. Consequently, as the recession intensifies central banks will see no alternative to deeper negative nominal rates to keep their governments and banks afloat through a combination of eliminating borrowing costs and inflating bond prices. It will be the last throw of the fiat-money dice and, if pursued, will ultimately end in the death of them. Gold and bitcoin prices are now beginning to detect deeper negative rates and the adverse consequences for fiat currencies.
Earnings dynamics and firm-level shocks – Benjamin Friedrich, Lisa Laun, Costas Meghir, Luigi Pistaferri
We know little about how much fluctuations in a firm’s fortunes are passed on in wages. The column uses Swedish data from 1997 to 2008 that identifies individual workers to show that shocks to firm productivity are passed on as variation in worker wages. The variation is high for high-skilled workers. Unskilled workers, perhaps due to union or minimum wage protection, experience smaller fluctuations.
Financial World Gone Nuts: $15 Trillion Negative Yielding Debt – Wolf Richter
12 countries with negative 10-year yields. A race to hell.
Every day brings new indications that the financial world is going from already nuts to even nuttier. According to Bloomberg, the total amount of bonds outstanding globally that are trading with a negative yield exceed for the first time $15 trillion. This includes government and corporate debt, and also some euro junk bonds that have joined the elite group (click to enlarge):
A chart like this, of markets and central banks chasing each other further and further into the negative-yield absurdity, is crying out loudly: “Somebody has got to put a stop to this race to hell.”
To Avoid A Collapse Means Restoring Glass-Steagall (Without The Green New Deal) – Matthew Ehret
With the recent discussion of the collapse of the western system of banking (and neo-liberal ‘post-truth’ values more generally) a serious overview of the post-WWII stripping down of nation states is in order. Over the past couple of weeks, various figures like France’s Finance Minister Bruno Le Maire and American Senator Elizabeth Warren have called for a re-organization of the banking system
Price Stability Is Overrated – Frank Shostak
The idea of price stability originates from the view that volatile changes in the price level prevent individuals from clearly seeing market signals as conveyed by changes in the relative prices of goods and services.
For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price increase gives an impetus to businesses to lift the production of apples versus potatoes.
By being able to observe and respond to market signals as conveyed by changes in relative prices, businesses are said to be able to be in tune with market wishes and therefore promote an efficient allocation of resources.
It is held that as long as the inflation rate as measured by the rate of increase in price level is stable and predictable, individuals can identify changes in relative prices and thus maintain the efficient allocation of resources.
Central banks and reputation risk – Jon Danielsson
As central banks accumulate ever more job functions, their reputation risk increases. This column offers a cautionary tale from Iceland where, after the central bank was put in charge of capital controls, it was subject to severe attacks because of perceived mistakes in how the capital controls were enforced. The accumulation of powers erodes a central bank’s independence and subjects it to regulatory paralysis.
***Heavy-Truck Orders Collapse Stunning 81%. Lowest Since 2010 – Wolf Richter
Order backlog still feeds truck makers, but they don’t disclose for how long.
Orders for Class 8 trucks – the iconic trucks that haul part of the economy’s goods across the country – collapsed by 81% in July compared to July last year, to 9,800 units, the lowest since 2010, according to FTR Transportation Intelligence on Friday. It was the ninth month in a row of year-over-year declines. But “declines” is not the right word. This year so far, these year-over-year “declines” ranged from -52% to -81%, which makes for a stunning collapse of the historic boom last year:
***Bunker Chaos: Global Shipping-Fuel Price Plunges Amid Slowdown Fears – TYler Durden
Bunker fuel is the primary type of fuel used to power large shipping vessels. In the crudest of terms, bunker fuel is excess fuel leftover after refineries have processed gasoline and diesel from the crude. The shipping fuel is dense and heavy, has to be boiled before it can flow into the vessels’ engine(s).
Bunker fuel prices serve as a proxy to the health of the global shipping industry. If prices rise, that usually means the demand to fuel vessels is increasing, which in turn, powers container ships and tankers from the East to West, or West to East.
Over the last month, bunker fuel prices in Houston, Rotterdam, Fujairah, and Singapore, major shipping terminals across the world, have collapsed. Bunker fuel in Houston has fallen -30% in 30 days, -27% in 27 days in Rotterdam, -18% in 26 days in Fujairah, and -29% in 27 days in Singapore.
***The structure of global trade finance: A very long-run view – Olivier Accominotti, Stefano Ugolini
The 2008 crisis has revealed how banking and liquidity problems can have far-reaching consequences on global trade. This column reconstructs the evolution of global trade finance from the Middle Ages until today. Just like in medieval times, today’s global trade is predominantly financed through banks so that banking problems automatically transmit to international trade. In contrast, from the 16th to the 20th century, trade finance was mostly market-based. The decline of market-based trade finance was triggered by major geopolitical shocks.
The State of the American Debt Slaves, Q2 2019 – Wolf Richter
The bifurcation among consumers.
Consumer credit – auto loans, student loans, and revolving credit such as credit card balances and personal loans, but not housing-related debt such as mortgages and HELOCs – grew 5.4%, or by $208 billion, in the second quarter compared to a year ago, to a new record of $4.06 trillion (not seasonally adjusted), according to the Federal Reserve this afternoon.
This 5.4% year-over-year gain was the strongest such gain in two years. The quarterly gain from Q1 to Q2 of $60 billion was the strongest such gain since Q2 2016. In other words, American consumers are not slackers. They are doing their collective job, propping up the US economy
The Hard Truth – Chris Martenson
Watching CNN often feels like the inept product of a university committee that sought to create a program of sensitivity training for adult sufferers of acute ADHD. After just five minutes you know what it’s like to be trapped in a brain that’s distracted part way through every thought pattern and cannot maintain enough attention to form a coherent sequitur.
However, if we set these entirely useless distractions aside it’s quite apparent that something big is going on. And it’s not positive.
It’s a complex story with lots of moving pieces and it takes a bit of effort to puzzle it all out, but more and more people are arriving at the same conclusion; something is going to break.
Trade and the Fed – John H. Cochrane
Should central banks offset trade wars? I think this is a question nobody is asking but it needs to be asked. Central banks including the US Fed and ECB seem to take for granted that any reduction in economic activity demands “stimulus” to offset it. But stimulus can only provide “aggregate demand.” What if the problem is “aggregate supply” — an economy humming along at full demand, and then someone throws a wrench in the works, be it a trade war, a bad tax code, or a regulatory onslaught? (I’ll stop using quotes, to signal my dislike for these terms.)
Nothing Is Guaranteed – Charles Hugh Smith
There are no guarantees, no matter how monumental the hubris and confidence.
The American lifestyle and economy depend on a vast number of implicit guarantees– systemic forms of entitlement that we implicitly feel are our birthright.
Chief among these implicit entitlements is the Federal Reserve can always “save the day”: the Fed has the tools to escape either an inflationary spiral or a deflationary collapse.
But there are no guarantees this is actually true. In either an inflationary spiral or deflationary collapse of self-reinforcing defaults, the Fed’s “save” would destroy the economy, which is now so fragile that any increase in interest rates (to rescue us from an inflationary spiral) would destroy our completely debt-dependent economy: were mortgage rates to climb back to historical averages, the housing bubble would immediately implode.
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