Showing posts with label US economy. Show all posts
Showing posts with label US economy. Show all posts

Monday, May 11, 2020

As Predicted, The Global Recession has Arrived, Will Depression Be Next?



A permanent lowering of the interest rate can only be the outcome of increased capital formation, never the result of any technical banking measures. Attempts to achieve a long-term lowering of interest rates by expanding the circulation credit of the banks ineluctably result in a temporary boom that leads to a crisis and to a depression—Ludwig von Mises

In this issue

As Predicted, The Global Recession has Arrived, Will Depression Be Next?
-The Wile E. Coyete Moment: From China to the World
-We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression
-The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?
-The Bernanke Doctrine in Motion!
As Predicted, The Global Recession has Arrived, Will Depression Be Next?

The Wile E. Coyete Moment: From China to the World

When about 760 million or 50% of China’s population had been immobilized and placed under home quarantine by their government in response to the COVID-19 epidemic, I predicted that this would spur a global recession.

Back then*, I called this China’s Wile E. Coyote moment.

Figure 1

In the fulfillment of this watershed moment, last mid-April, China’s first-quarter GDP reported a 6.8% contraction, its first in a few decades!

And considering that the lockdown, which began on the 23rd January in Wuhan, Hubei which spread to over 80 cities in nearly 20 provinces and municipalities that lasted mostly through March, many analysts have come to dispute the reported GDP’s accuracy. The Wuhan lockdown was lifted on April 8th.

Nevertheless, the record economic contraction has prompted the Chinese government to rethink about setting up GDP targets for 2020. According to a report from the Bloomberg/Economic Times, “China’s leaders are considering the option of not setting a numerical target for economic growth this year given the uncertainty caused by the global coronavirus pandemic, according to people familiar with the matter.” Is this a facing saving measure for an embattled ruling class, the CCP?

In the meantime, the rapid transmission of COVID-19 across the globe has eventually prompted the World Health Organization (WHO) to admit on March 11 that this was a pandemic, more than a month after declaring a public health emergency on January 30. Given the speed of transmission, why did it take so long for them to consider?

The pandemic character has been so obvious that even this layman** can distinguish!


To “flatten the curve” by social or physical distancing, many countries embraced the authoritarian approach of epidemic containment by forcibly shutting down significant segments of or the entire country, although at varying degrees.

By early April, about 3.9 billion people or half of the world’s population were under home quarantine (house arrests?)!
Figure 2

Hence, the Wile E. Coyote moment wasn’t limited to China; it became a worldwide phenomenon!

As such, in the 1Q, the Eurozone’s GDP shrank 3.8%, its fastest rate on record, while the US GDP reported a 4.8% decrease, its steepest contraction since 2008!

Bloomberg estimates that the Global GDP in April plunged by 4.8%!

But there is more behind the headline numbers.

We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression

Things that could not seem to happen—have actually been happening!

And here are just a few of them.
 
Figure 3

With a sharp decline in demand, which came in the face of a dearth of storage space, oil price futures fell to negative in the third week of April! Depressed prices put in peril debt-ridden oil companies and oil-producing nations with untenable welfare systems.

In the US, a record 20.5 million people have lost their jobs last April, sending the unemployment rate to 14.7%, the highest since the Great Depression! Yet, there were 33.5 million people who have filed for unemployment or jobless claims in the last seven weeks!

Minneapolis Federal Reserve Bank President Neel Kashkari in a CNBC interview recently said that though the reported unemployment rate could be as high as 17% — a brutal number, no doubt — but he says the true number may be as high as 24%. “It’s devastating.”

April’s job losses have virtually erased job gains of the last two decades! That’s Nassim Taleb’s Turkey Principle in action!

The US private sector employment-to-population, a measure of the number of people employed against the total working-age population (Investopedia), crashed to a harrowing 51.3% last April, the worst since, again, the Great Depression!


Again, that’s only a piecemeal of the overall picture.

And because the great Wile E. Coyote moment has only scratched the surface, governments around the world backed by their respective central banks launched a series of unprecedented measures to bailout both their financial systems and the economies.

The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?
Figure 4

Governments around the world have collectively unleashed at least USD 8 trillion worth of subsidies to cushion the impact from the economic shutdown caused by both COVID-19 and the political response to contain its spread. Bank of America’s Michael Hartnett estimates that fiscal spending support has reached $16.4 trillion, about 19% of the 2019’s USD 86 trillion Global GDP!

With depressed economies, spending at this scale translates to massive fiscal deficits, which will require extraordinary amounts of borrowings and or support from the central banks.

And as a result, in 2020, 107 rate cuts have been imposed by about 78 central banks as of May 8th.

And to ensure liquidity, global central banks have engaged in balance sheet expansion by financing their respective governments through asset purchases.

Since surging fiscal deficits signify a global phenomenon, debts and central bank assets have exploded.

Despite the Trump government’s unleashing an accrued $2.4 trillion of spending support for the main street, backed by about $ 2.41 trillion of asset purchases by the US Federal Reserve, which has been faster than the Great Recession or the Financial Crisis (GFC) of 2007 to 2008, the yield of US 2-year Treasury note dropped to a RECORD low, while Fed Fund rate futures turned NEGATIVE before bouncing above zero late last week! The Fed’s balance sheet has soared to a milestone USD 6.712 trillion and has been expected to rocket to $10 trillion by early next year!

The details of the USD 2.4 trillion spending stimulus and the various support programs bankrolled by the US Federal Government can be found here and here.

And rumors of the second phase of support from the Federal Government have been afloat due to the recent job numbers.

Yet the carrying costs of the subsidies from the Great Recession or Financial Crisis of 2007-2008 has been immense. It lowered the trajectory of the rate of economic growth, increased dependency towards leveraging or debt for financing, redirected financial activities from the economy towards debt financed asset speculation, thereby, fueling asset market bubbles, nurtured the rise of zombie firms and industries, which siphoned resources that contributed to maladjustments that decreased economic productivity, promoted the widening of inequality, and entrenched economic structural imbalances, where central bank emergency policies became the norm that ultimately increased systemic global financial and economic fragility. 

Thus, COVID-19 fundamentally exposed such embedded vulnerabilities!

And here is the thing, the US signified the epicenter of the Great Recession or Financial Crisis of 2007 to 2008 (GFC) that spread to the world.  Hence, using domestic policies and international cooperation, much of the world was able to erect defenses against the contamination.

But this time is different.

In 2020, the IMF expects about 170 nations or 90% of its 189 members to register negative per capita income growth! Over 100 countries have approached the IMF for emergency financing. Though the IMF brags that it has USD 1 trillion in lending capacity, the irony is, some of the sources of financing may be from countries that are presently in need of it!

While access to bridge financing for countries undergoing economic stress had been made available from bilateral or multilateral sources during the GFC, that’s unlikely the case today.

Moreover, today's bailouts will be like funding deadbeats, where a financial blackhole exists to continually drain resources. For instance, Argentina received a rescue package from the worth $57 billion in 2018, the biggest loan from the IMF ever. Today, or less than two years from the rescue, Argentina is on the brink of its ninth default!

Furthermore, while it took over 10-years to expose the embedded costs from bailout policies of the GFC, the imbalances built from the present simultaneous fiscal and monetary support will extrapolate to the acceleration of capital consumption.

Besides, the economic shutdown has seriously impaired the availability of capital and capital goods in the global economy!

Yet to surface and be accounted for are the second-, third- and nth order from the current ambit of socio-economic and political events, which means, the current crisis is at its incipient phase!

A prolonged recession could morph into a Depression!

The Bernanke Doctrine in Motion!
Figure 5

And imbalances?

Since the GFC, US Federal Reserve policies have greatly influenced the direction of the US stock market. In a single month, the Fed’s USD 2.4 trillion asset expansion has encapsulated such rescues!

The financial markets have been 'totally' detached from the economy, the Mainstreet, or from “fundamentals”.

Mr. Ben Bernanke penned the below, even as a professor in 2000, or before to his entry to the US central bank. He would eventually assume the highest post as Fed Reserve Chairman from 2006 to 2014:

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Central bank policies today continue to hallmark the Bernanke Doctrine and throw gasoline to the fire!

And because of this, millions of people have been hurt, and more are to suffer. This policy-induced pain represents its consequence, a somber reality of the business cycle.

Sunday, March 24, 2019

2014 Prediction Fulfilled: Philippine Yield Curve Inversion Spreads! US Yield Curve Inverts Too! Global Recession Countdown Starts


I have used all my life a wonderfully simple heuristic: charlatans are recognizable in that they will give you positive advice, and only positive advice, exploiting our gullibility and sucker-proneness for recipes that hit you in a flash as just obvious, then evaporate later as you forget them—Nassim Taleb

In this issue

2014 Prediction Fulfilled: Philippine Yield Curve Inversion Spreads! US Yield Curve Inverts Too! Global Recession Countdown Starts
-Philippine Treasuries: The Deepening Yield Curve Inversion!
-Feedback Loop: Banking Problems Ventilated through the Yield Curve and Vice Versa
-Inverted Curves: Philippines Close to Joining Mexico, Canada and the US; US Fed Powell’s U-Turn Aggravates Inversion Dynamics!
-Inverted Curves Equals a Countdown on Recession!
-Sharing the Inverted Curve: Will the Philippines Be Immune from a US Recession?

2014 Prediction Fulfilled: Philippine Yield Curve Inversion Spreads! US Yield Curve Inverts Too! Global Recession Countdown Starts

Philippine Treasuries: The Deepening Yield Curve Inversion!

The public remains stunningly oblivious to the escalating cracks behind the masquerade of a massive credit-fueled boom. 

Even before the BSP announced that it would keep its policy stance, the Philippine treasury market has continually opposed the positive signals sent by the domestic stock market.

The BSP’s disclosure had little influence on actions at the fixed income market.

Yet, the trend of the collapsing yield curve has only been accelerating!
Figure 1

First, the yield curve inversion brought about by Treasury notes.

The yield of the 1-year notes closed higher across the curve or through the 20-year bond (PDS data). Based on the official BVAL benchmark, it was higher across the curve through the 10-year bond. (Figure 1, upper window)

Though yields have been dropping on notes and bonds, this INVERSION dynamic has been the result of the faster and deeper decline of the longer-end than the shorter-end.

Next, Treasury Bills closing in fast on notes and bonds!

And despite crashing headline statistical inflation, yields of the 1-month T-Bills, and now joined by 3-month T-bills which have reached January 2019 levels, are at multi-year highs! (Figure 1, middle window) Should the current dynamics persist, the 10-, 20- or even 25-year yields may fall BELOW such level!

As I have been saying here, the stubbornness of the T-Bill yields, which curiously have been included by the BSP for its Open Market Operations, have been symptoms of intensifying liquidity drought plaguing the banking system.

Bluntly put, the BSP has lost control over yields of T-Bills!

The intensifying liquidity strains have expanded to collapse even the 20-year spread which has also inverted against the 1-year and 2-year notes.

The spread between the yield of the 6-month T-Bill and the 10-year and the 20-year bonds has fabulously flattened to a paltry 20.6 bps and 3.5 bps!

Feedback Loop: Banking Problems Ventilated through the Yield Curve and Vice Versa

Since banks operate on the principle of the maturity transformation or Banks borrow short term (deposits), lend long term (make loans, buy securities), yield curve inversions tend to magnify the “maturity/duration mismatch”, that is, pay short-term (floating) rate, receive long-term (fixed) rate.

With higher costs on short-term liabilities than the lending rates for the longer term, margins shrink or could even turn into losses, thereby discouraging banks from issuing loans.

And as short term rates continue to rise, the acquisition for funds by the domestic banking industry has shifted to bonds and stock rights.

This March, the Philippine Savings Bank [PSE: PSB], and the Philippine Business Bank [PSE: PBB] announced bond issuance programs worth Php 40 billion and Php 10 billion respectively.

For a credit dependent economy, what happens when banks reduce making loans to the public?
Figure 2
The collapsing yield curve didn’t emerge from a vacuum; the curve rolled over even before the BSP raised rates in May 2018.

Asian Development Bank’s favorite benchmark the 10-year 2-year spread has inverted, for the first time since at least a decade!

Bank stocks, as measured by the PSE’s banking index, appears to have undulated along with the gyrations of the ADB benchmark (10-year/2-year).

When the benchmark spreads narrows or flattens, the bank index follows. Such has been the correlation of both variables since the 4Q of 2014.

Recently, bank stocks have diverged from the collapsing curves.

PSYEi 30 Bank stocks have been “forced” higher to propel the index upwards.

Domestic banks have been tacitly urging the BSP to ease!

Apparently, someone persuaded the newly installed BSP Governor that easing may not be the wisest thing to do.

Inverted Curves: Philippines Close to Joining Mexico, Canada and the US; US Fed Powell’s U-Turn Aggravates Inversion Dynamics!

One of the global benchmarks for the yield curve is the 10-year/3-month spread.
Figure 3
Though the 10-year/3-month curve has been crashing too, the spread remains a slight positive 20.6 bps.

And the Philippines have landed in a page of the international elite. The Philippines was ranked eighth in terms of inverted or flattest spread!

The Philippines is close to joining Mexico, Canada, and the United States with an inverted curve from the 10-year/3-month basis.

The US benchmark spread plunged to negative, last Friday. (figure 3 lower window)

The full inversion of the US yield curve has been brought about partly by the capitulation of the US Federal Reserve Chairman Jerome Powell.

Having downgraded their U.S. growth, unemployment, and inflation forecasts, noted the Reuters, the U.S. Federal Reserve brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year amid signs of an economic slowdown, and saying it would halt the steady decline of its balance sheet in September.
Interviewed by Reuters, bond sage Jeffrey Gundlach, chief executive of DoubleLine Capital bewilderedly remarked, “This U-Turn - on nothing fundamentally changing - is unprecedented…Three months ago, we were on ‘autopilot’ with the balance sheet - and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning.”

By throwing in the towel, the FED has fundamentally acknowledged the following: First, it has overstepped its tightening. Second, the US economy cannot handle 2.25% to 2.5% interest rates. Third, stock markets actions have dictated their policies.  Fourth, they have NO clue of what they have been doing, and finally, with limited room for interest rates cuts, the door for QE 4.0 has been sprung wide open!

Inverted Curves Equals a Countdown on Recession!
Figure 4
The Fed’s policy tools have even malfunctioned.

The Effective Federal Funds (EFF) has risen above the Interest Rates on Excess Reserves (IOER) for the second straight day. (figure 4 upper window)

As the Eurodollar wizard, Jeff Sniders of Alhambra Investments wrote,

You can ignore small twists and brief turns in them, but persistent and worsening distortions are very clear signs. Escalating warnings.

While EFF remains above IOER, the entire middle section of the UST curve is under it; several maturities including the 5s are less than the Fed’s RRP “floor” today! Things are really getting screwy.

Not only has the yield curve been in full inversion but the Fed’s inflation platform has been thrown askew.

As I have pointed out last January, the association between inverted yield curves and recessions have been strong. [See The Biggest Warning Yet! Clue: Not the Hanjin Default January 13, 2019]

The linkages between inverted curves and recessions have also been causal.

As Austrian Economist Gary North wrote: (highlights original)

“What does an inverted yield curve indicate? This: the expected end of a period of high monetary inflation by the central bank, which had lowered short-term interest rates because of a greater supply of newly created funds to borrow.

“This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curvetherefore inverts in advance.

“On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

“On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

“An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

“An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely, and is almost always followed by a recession.

With the exception of 1965 to 1967, an inverted curve has signaled most US recessions. (Figure 4, Middle window)

From the Federal Reserve Bank of Cleveland wrote: “The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions (as defined by the NBER). One of the recessions predicted by the yield curve was the most recent one. The yield curve inverted in August 2006, a bit more than a year before the current recession started in December 2007. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998.” (bold mine)

So the probability of a US recession rises!

Sharing the Inverted Curve: Will the Philippines Be Immune from a Global Recession?

Will the Philippines be immune to a US (or global) recession in 2019 or 2020, considering that she shares the same malaise with the US?

The Philippines almost fell to a recession during the 2008 Great Recession or the Financial Crisis of 2007 to 2008. GDP slumped to a low of .5% in the 3Q of 2009. It took a massive series of interest cuts to the tune of 350 basis points from 7.5% (July 2007) to 4.0% (July 2009) and an economic stimulus project, mainly infrastructure based, called the Economic Resiliency Plan (ERP) worth Php 330 billion or 4.1% of the GDP to forestall it.

With today’s emergency measures still in place, viz. policy rates are close to the 2009 levels and 2016 historic low of 3%, QE remains at record and infrastructure (build, build, build) powered fiscal deficit, what economic and financial policy tools remain for the National Government to use for such contingencies?

And do notice, the correlation between the 10-year UST and Philippine counterpart has been strong too. Recent events point to UST yields falling faster than the Philippine equivalent. So will Friday’s plunge in the yields of USTs be reflected in the domestic market this week?

Though the BSP hasn’t moved on interest rates, it will soon. Oh, changes in Reserve Requirement Ratios are announced separately from the settings of the Monetary Board (February and May 2018). RRRs cuts can be expected anytime soon to plug the banking system’s liquidity cesspool.

Once data exposes the developing economic weakness from the ongoing liquidity crunch, the Fed Chair Powell’s recent reaction can be expected to be replicated by the BSP!

In consternation, the BSP will not only chop rates, but it will accelerate money printing via QE!

As a reminder, back in 2014, I wrote this: (bold original)

An inversion will likely occur when a credit crunch has become evident….

Yet the feedback loop between accruing losses and increasing credit strains will extrapolate to higher demand for short term loans which should drive short term yields to even higher levels relative to the longer end.

If such dynamic is sustained then this will eventually lead to a yield curve inversion. The inversion will now signal a recession, if not a crisis!


My yield curve inversion prediction has been fulfilled!

A recession countdown is next.

Buy the USD-Php as insurance! (The USD Peso experienced a marking the close last Friday!)