Random Facts & Data - W44

 

Random Facts & Data, week 44.

Number 1 to 5

 

 


 

 


 


Random Facts & Data - W43

Random Facts & Data, week 43.

Number 1 to 5

 

 


 

 


 

 


 


 


Photo by Dominik Dancs on Unsplash

Are Carbon Credits a Financial Scam?

When money is the way to avoid an announced disaster. 


All about the source. 

For keeping our modern way of life uninterrupted, lots of hydrocarbons are required.

A fancy trip from the US to Thailand accounts for lots of Co2 Kg per person. Getting clothes and electronics delivered from factories in Asia to your doorstep in Europe requires to burn fuel. Hosting work files and selfies in the cloud requires electricity. 

Every day the world consumes gigantic amounts of energy; roughly 84% of it comes from fossil fuels, oil, natural gas, and coal. This percentage remains almost uniform, independently of the countries considered (OECD 80%, Non-OECD 87%). 

 

 

Even after the effect Al Gore's movie 'An Unconvenient Truth' caused, fossil fuel consumption grew by 20%, from 113,613 to 136,762 TWh (Data from Ourworldindata.com). Emissions soared 17.5% in the same period (Statistical Review of World Energy). 

"Energy is indeed the major contributor to climate change and to local air pollution", Global Energy Fundamentals by Simone Tagliapietra (2019).

Temperatures are rising. Mainstream scientists agree on the origin of that phenomenon. Carbon dioxide is to blame, even though the primary greenhouse gas is water vapor, the well-known H2O. 

Ideally, fossil fuels should be replaced by cleaner options, but that is impossible to this day. It even might be the case that replacing one with the other on a 1:1 basis could be achievable, not because the sun, sea, or wind are not abundant enough, but because the potential energy contained in fossil originated liquids is more significant than the one obtained from renewable sources.

But that's physics. Finance has a different interpretation. 

As Maslow said, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” If emissions are the consequence of keeping economies growing, it could be applied the other way around by creating financial incentives to fight global warming.

After all, morale alone was incapable of stopping them (and us).

 


Carbon Credits 101

Let's start with the official definition

..."a carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas. The main goal for the creation of carbon credits is the reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming"...

Based on the text, a Carbon Credit is a tradeable instrument that gives the buyer the right to pollute. 

 

 

It is like admitting you're not capable of changing yourself and procure it from others. A man can't stop drinking; therefore, he buys some soberness from one of his acquaintances. 

This Carbon Credits are presented in the form of projects. Companies can put their money in diverse initiatives, mostly in developing countries, allowing the local population to improve their quality of life. 

Many of them have had remarkable results, such as providing stoves, preventing poor communities from inhaling toxic fumes when cooking. Other examples like reverting desertification or investing in young female education in Asia and Africa have been successful. 

Sadly, in parallel, Carbon Credits also opened the door for polluters to clean their image. Instead of changing their practices, they can concur to a market that assigns value to a particular volume of gas that threatens us in the long run. The most pervasive effect of it is the network of commission-getters. Lobbyists, financial institutes, and high-standard living NGO executives live out the credits exchange and project management.    

Even an under a non-exhaustive assessment of greenhouse emissions' effects would consider externalities such as respiratory problems. The model's design is a mild solution for a significant crisis. 

 


How a Carbon Credit is calculated

There is no convention on measuring the cost of a carbon dioxide tonne, and it doesn't surprise me, to be honest. 

It depends on the program the buyer engages in. It works more like a menu on which you fish for prices depending on your budget and how cool is the project you want to 'support.'  

You love nature, so let's plant some trees in Patagonia. Are you a social rights activist? Let's support knitting schools for girls in Sri Lanka. Is your dog your best friend and consider all living nature part of your family, you have to stick to the great cats' program in Kenia. 

Let's take the Air Travel Industry as a reference. When buying a ticket, soon to be passengers have the option of paying for the CO2 their trip will generate. Options vary from S$3 up to S$25 (US$2.20 to US$18.41) 

Don't get me wrong; I think any program meant to benefit nature, equality, and improving life quality is welcomed. What causes a massive dissonance is that countries' economic activity and companies are the roots of some of those problems.

A vicious cycle encompasses advertising products and services people don't need, overspending using easy-to-access credits, and permanent change of trends and values. 

When approaching this model, a question arises, who calculates the total amount of emissions a country or company generates? 

I've been part of a team whose responsibility was to determine the volume of the emissions from the company I used to work for originated. My task was to give a consultant all the data for them to come up with an estimation.

To this day, I believe the environmental consultant assigned to our project trusted in what she was doing. She put a lot of effort into having an overall image of how offices, workers commuting, electricity, air conditioning, logistics activities, and goods purchased from China generated emissions.

The results were vague. I understood that it is almost impossible to have an accurate idea of the carbon footprint based on the information available. Internal procedures are not designed for it. Even on those that have been updated, it is common o find flagrant emissions miscalculations.  

 


Follow the money

Our ever-growing economy works under the promise of more significant returns in the future, doing whatever is necessary today for achieving so. 

In Jørgen Randers, author of The Limits to Growth (1972) words: 

"It is cost-effective to postpone global climate action. It is profitable to let the world go to hell.

I believe that the tyranny of the short term will prevail over the decades to come. As a result, a number of long-term problems will not be solved, even if they could have been, and even as they cause gradually increasing difficulties for all voters"

Here comes the profitability - sustainability paradox. Everyone agrees something has to be done, introduce a price on carbon, on fuels, on polluting activities in general, but when election times come, no one votes for those alternatives. 

Societies and business will put short term goals before a blurry defined future. 

If a political option wins the election and issues new rules capping pollution quotas, it is enough for businesses to relocate to other territories with lax regulation. Money not only flows through financial institutions but between countries. 

Under the current Carbon Credit system, in most cases, as stated before, money flows from highly industrialized to developing countries. And on its way generating fees for those managing and allocating the funds. 

 


The Controversy

I side with those who think it's better to do something than nothing. If you believe weather conditions are changing, you also understand that the consequences are terrible. Storms, droughts, wildfires, and extreme temperatures are most likely to occur in severe forms due to a hotter planet. 

Nevertheless, the tools developed have serious flaws, and we must talk about them. 

Have the Carbon Credits model impacted the amount of Co2 emitted in some way? 

The answer is: No. 

You don't have to be an expert or a researcher to find that emissions soared in recent years; just Google it. 

Let's forget the difference between the proper price of the carbon emissions effect and the one market assigns to it. Instead, let's focus on the message it generates, replacing the co-responsibility we as a whole have by creating a similar market instrument, and not in the opposite way, adapting the current financial-productive system based on growth and resource depletion into a common good one. 

The way we relate to the planet highly depends on how we've been raised. I was born in 1977. I come from an oil-rich country with carbon-copied customs from the US; sustainability, environmental concerns, or clean energies were subjects I don't remember listening to when growing up. 

Current policies and agreements are made by a generation even older than me, people that I believe are trying to make a real effort to clear the path for a better world, but this work is far from good; younger minds have to jump into the discussion. 

The program subsidized thousands of projects, including hydropower, wind, and, infamously, coal plants that claimed credits for being more efficient than they would have been. CDM became mired in technical and human rights scandals, and the European Union stopped accepting most credits. A 2016 report found that 85% of offsets had a "low likelihood" of creating real impacts. 

Source: ProPublica

Like coins, carbon credits are two-sided. Several researchers affirm that up to 85% of the funds traded in the concept of carbon credits have either non or minimal impact on the environment. 

On the other hand, hundreds of public affairs specialists showcasing numbers that support the system's effectiveness. 

Weak tools lead us to mediocre results, the clock is ticking, and we're far from addressing 'the emissions issue'. Ambivalent solutions and perspectives are human approaches. In the meantime, the planet is still ruled by the laws of nature. 

-

Written by: Juan Carlos Golindano

October 17, 2020


Analysis: GDP per barrel of oil consumed

Methodology: The numbers presented are the product of the Gross Domestic Product division in U.S. dollars by the number of barrels of oil consumed by a country in a calendar year.

 

E.g., China RATIO (2019) = (Chinese GDP in US$ 2019 / Barrels of oil consumed in China in 2019)

 

Important: This is an exercise to obtain a ratio that allows the uniform of oil impact in the national accounts; we do not assume that oil is the only source of energy used by the countries analyzed.

 

Sources:

  1. GDP data: World Bank (GDP current $)
  2. Energy consumption data: B.P., Statistical Yearbook 2020 (Oil Consumption Barrels).

 

The purpose of this analysis is twofold:

  1. Economic: Compare the efficiency of each economy in transforming the use of fossil fuels. Understand if there are coincidences, convergences between countries analyzed.
  2. Environmental: Attempt to determine if it is possible to maintain the level of growth and meet the debt obligations of the countries and, at the same time, replace oil with clean energy.

 

Based on the above table and referring to the first motivation for this analysis, we can state the following:

 

  • Countries in which the GDP/barrel of oil ratio are higher are those with higher value-added embedded on their exports, with greater industrial technification, and a more significant financial services component in relation to ist GDP.
  • Countries with the lowest ratio are those that either have an abundance of oil resources (Saudi Arabia, Russia), with a low-tech industrial sector (India) or a higher percentage of the primary sector within the total GDP (Argentina).

 

However, when comparing between 2019 and 2009, the countries that have increased the ratio the most are Russia and China (6.72 and 4.09 times, respectively). The explanation may lie in the increase in the added value of the goods produced or in taking advantage of the opportunity to improve, that is, moving from rudimentary processes to others that are a little more technologically advanced, a process that was no longer possible in industrially developed countries (Germany).

The graphic representation of the table above is like this:

Of which we can differentiate two groups:

  1. Switzerland, Germany, Japan, the Netherlands, and the United States
  2. China, Poland, Argentina, Mexico, India, Russia, and Saudi Arabia.

 

To answer the second question, regarding the capacity to repay the sovereign debts contracted while decreasing oil consumption, we will take one country from each group as an indicator. From the first group, the United States, from the second group, Mexico.

According to Trading Economics, the total foreign debt of the United States amounts to 5,371,451 million euros, that of Mexico to 446,898.10 million U.S. dollars.
Maintaining our initial consideration by which we use the ratio of GDP barrels of oil, the number of barrels required for the repayment of the foreign debt (we insist, maintaining the current ratio), would be as follows:

 

Legend: Country, Debt in US$, GDP created per consumed barrel, Number of barrels required, years.

The United States would need to extract 10.25% of its proven oil reserves (almost 69 billion barrels) and Mexico 184.74% of its reserves (nearly 6 billion barrels) to cover its foreign debt, assuming that they would devote all their income to paying it, which is impossible.

The above is a non-scientific conclusion; it is only an indicator of the pressures that energy use will put on certain countries; in the case of Mexico, its energy transformation is a necessity not only for environmental reasons but also for financial ones, its dependence on external energy sources will make it susceptible to external shocks and the increase in the cost of living for its inhabitants.

In the case of the United States, the increase in reserves and inventories from fracking as an extraction process places it in a less compromised situation. However, this industry -oil fracking- depends mainly on government subsidies because its high extraction price per barrel makes it unviable to compete with countries like Saudi Arabia or Russia.

We can also assure that debt will continue to grow (Q.E. and Post-COVID bond purchase, financed by the Federal Reserve and the ECB). Economic activity under current growth models at all costs will only decrease the use of fossil resources through increased productivity.

Incorporating clean energy on your initiative in resource-rich countries or countries with large populations looks complicated. Technologies that incorporate renewable sources require active training of the labor force, not to mention that in energy-intensive processes such as steelmaking or aeronautics, there are not yet fuels capable of generating a similar return to fossil fuels.

--

Article wrote by Juan Carlos Golindano for Datonomía on October 1st, 2020.


Weekly Economic Report CW22/23

Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios. Views very obviously mine.

 


1. Europe’s Hamiltonian moment

The new Franco-German proposal for a €500 billion European recovery fund could turn out to be the most important historic consequence of the coronavirus. It is even conceivable that the deal struck between German Chancellor Angela Merkel and French President Emmanuel Macron might one day be remembered as the European Union’s “Hamiltonian moment,” comparable to the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped to turn the United States, a confederation with little central government, into a genuine political federation

The plan amounts to only 3% of the EU’s GDP, compared with the 15% of GDP already committed by Germany to industrial support. Creating any EU recovery plan will require unanimous support from the EU’s 27 member countries – and this will involve unseemly late-night squabbles between the self-styled “Frugal Four” northern governments (the Netherlands, Austria, Finland, and Sweden), which have vehemently opposed funding for Mediterranean EU members which, according to Wopke Hoekstra, the Dutch Finance Minister, have mainly themselves to blame for “failing to reform.”

Comments

Is this enough for the EU to remain united as an institution? What we've seen is that Germany and France stood up and put in place a financial instrument for 'Mediterranean' countries for accessing to credit, it is common that in multilateral organism some of its members opposed to certain measures but in the case of Europe it is not simply divergence in positions, it is a challenge for the way of life of the south.

If Spain, Greece, Italy, and Portugal, were to make deep changes in their government and social structures they will be all their political ground, opening the possibility for the extremism to overtake power. It is not only the amount of money to which they can access, it is the future of entire countries that is in play.

Is the EU capable of attenuating differences, potentiating each country's capabilities instead of shortcomings? Time will tell.


2. Europe's economy has 'likely bottomed out' and is starting to bounce back, according to a set of closely-watched business surveys

"The eurozone saw a further collapse of business activity in May but the survey data at least brought reassuring signs that the downturn likely bottomed out in April," Chris Williamson, chief economist at IHS Markit, said in a statement.

 

 

"Although the pace of decline has eased since April's record collapse, May saw the second largest monthly falls in output and jobs seen over the survey's 22-year history, the rates of decline continuing to far exceed anything seen previously,"

Comments

2008-2009 crisis can't be seen as a reference for this period. Its causes were different, its timing and the way of 'contagion', starting from real-estate until reaching sovereign debt implications. Nonetheless, what we know is that markets bounce and start having a non-predictable pattern on which they go up and down in a fast fashion. Saying that the EU is back on track on its path for recovery is undoubtedly good news, the question is, is this a sign that without even being free of COVID19 is there a chance for going ever lower than in March/April period. Are institutions and authorities creating false expectations?

My interpretation is that there’s no way of knowing how the economic activity will be until we all get back on business, until the last sector starts assessing how are their capabilities after the virus shock.

Perhaps a second wave of the illness hit us back, or even the system’s workers' absorption capacity doesn’t recover at the expected pace. Note aside, financial crisis took 12 to 14 months to fully impact the system, this time could be worse.


3. Germany's Economy Is A Bigger Risk Than Ever For EU Stability

No country in Europe is in a better position than Germany when it comes to funding domestic economic recovery. But in Brussels, Rome and Madrid, politicians see that as a potential problem: They're worried that less economically stable countries might be left behind by the coronavirus pandemic, and that Germany and other countries with strong economies will widen the gap between themselves and the rest of the EU.

The worry is that the crisis will only widen the gap, as richer countries such as Germany, the Netherlands and Austria can afford to pump a lot of money into their national economy to see it through the pandemic. Last year, Germany's national debt fell below 60% of GDP, the level set out in the Maastricht Treaty, and before the crisis the social security office was sitting on reserves reaching into billions of euros.

Comments

Germany is the leading country within the EU, is a powerhouse that owes its success to a great industrial network, productive and talented workers. That translates into growing gaps of positive trade and capital balance, that can be then reinvested, the system feeds itself.

Is Germany widening the difference between

 



4. Banks will struggle to generate profits even as the global economy recovers, IMF says

 

"Banks’ earnings have already been hit hard by the economic shock of the pandemic. JPMorgan Chase, for example, reported a 69% drop in profit for the first quarter compared with one year earlier. The KBW Bank Index, which tracks two dozen bank stocks in the U.S., has plummeted 39% year to date".

“Banks go into this crisis with a lot of capital and liquidity,” Tobias Adrian, financial counsellor of the IMF, told CNBC. “Having said that, this is a very, very severe economic crisis.”

Comments

How is this possible if the most significant packages stimulus of the history has been approved? In the US, Europe, and many other countries, freshly electronically created money has been injected for the economy to regain impulse. These measures use the financial system as a link between production, corporations, and small businesses and monetary authorities who print that money.

In the end, the dynamism this new system will adopt and how the monetary base circulates will most likely end up with the banks collecting this money for diverse reasons. Either by increasing financial activity due to an economic boost (impulsing the intermediation activity nature of the financial institutions) or by keeping their vaults to the top due to low returns on bonds, corporate shares, or any other instrument, that make cash as a favorite option for parking wealth.

The only set back I might foresee is a potential slow down on money's velocity of circulation, that even with high levels of liquidity and expansive policies may dry up the profit scheme that feeds the banking system.


5. How The Crisis Is Making Racial Inequality Worse

"Job losses are "dramatically concentrated in the low end of the wage distribution," says Erik Hurst, an economist at the University of Chicago's Booth School of Business. He is the co-author of a new study, "The U.S. Labor Market during the Beginning of the Pandemic Recession," which analyzes payroll data from millions of American workers between early March and mid-April".

Comments

This is a repeated phenomenon, those who end up carrying the worst part of a crisis are those who were already in bad situation before the virus. Minorities are prone to live in the outskirts, to have difficult access to services and food supply, depend on daily basis jobs with no fixed contract, and no possibility of remote work.


6. Tanzania's President Insists COVID-19 Was Defeated With Prayer Amid Concerns Scale of Outbreak Being Hidden

On just one day this month, 50 Tanzanian truck drivers tested positive for the coronavirus after crossing into neighboring Kenya. Back home, their president insists that Tanzania has defeated the disease through prayer.

The president has argued that if restrictive measures are adopted, Tanzanians may have nothing to eat.

“Make all kinds of noise as a sign of thanksgiving to show our God has won against disease and worries of death that were making us suffer,” Paul Makonda, the regional commissioner of commercial hub Dar es Salaam, said at a news briefing. In March, Magufuli ordered three days of national prayers against COVID-19 and has since said they have been answered.

Comments


7. Latam Airlines seeks bankruptcy protection as travel slumps

 

“We are looking ahead to a post-COVID-19 future and are focused on transforming our group to adapt to a new and evolving way of flying, with the health and safety of our passengers and employees being paramount,” he said in a statement announcing the bankruptcy filing.

Latam's move comes little more than two weeks after another major Latin American airline, Avianca Holdings, filed for bankruptcy protection in New York. Australia's second-largest carrier, Virgin Australia, sought bankruptcy in its home market last month.

Latam's bankruptcy filing includes parent company Latam Airlines Group S.A. and its affiliated airlines in Colombia, Peru, and Ecuador, as well as its businesses in the U.S.

The company is not including its affiliates in Argentina, Brazil, and Paraguay in the turnaround effort. It says it is talking with the Brazilian government about how to proceed with its operations there.

Latam is South America's largest carrier by passenger traffic. It operated more than 1,300 flights a day and transported 74 million passengers last year.

The airline had more than 340 planes in its fleet and nearly 42,000 employees on its payroll, according to its more recent annual report. It reported a profit of $190 million in 2019.

Comments

 


8. World Bank: 48 Countries Hold 15.6 TW of Offshore Wind Technical Potential

 

“To date, relatively little research has been undertaken on the potential for offshore wind in emerging markets. Any assessment of this kind must start with an estimate of technical potential, that is, the maximum possible installed capacity with current technology, as determined by wind speed and water depth. Subsequent steps in analyzing a country or region’s offshore wind potential will add further detail to the assessment, including environmental, social, technical and economic constraints”, the World Bank states.

Comments

Is COVID19 outbreak reshaping the way we source energy? Is this really a feasible scenario, moving more aggressively into renewable sources while the world needs cheap oils and raw materials and for recovering its industrial activity levels?

That's something I've been mentioned, environmentalists


9. Oil prices climb on prediction of swift demand rebalance

Oil has surged more than 80% this month as demand returned following the easing of lockdown restrictions in some countries, while output cuts have started to chip away at the oversupply. The International Energy Agency sees oil consumption eventually rebounding past pre-virus levels, even as some argue that the coronavirus outbreak will fundamentally shift patterns of consumption.

“Global supply is still heading lower while demand is rising,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “This all lays the ground for higher prices down the road.”

Prices:

  • West Texas Intermediate crude for July delivery rose $0.84 from Friday to $34.09 a barrel as of 10:26 a.m. London time
  • Brent for July settlement added 1.8% to $36.17 a barrel

Comments

 


10. Pandemic could cost global economy $82 trillion in depression scenario

$26.8 trillion, or 5.3% of five-year GDP, to be lost.

For the U.S., the potential five-year loss ranges from $550 billion to $19.9 trillion.

It’s safe to say financial markets are not pricing in a global depression. The S&P 500 SPX, 1.69% has climbed over 30% from the lows of March.

If the numbers sound too outlandish, consider that growth and returns on assets can be depressed up to 40 years after the pandemic has passed, according to Keith Wade, chief economist at U.K. fund manager Schroders.

Comments

 

 


11. Josep Oliu: "With each passing day it seems that the recovery will be faster"

 

 


Weekly Economic Report CW21-2020

Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios. Views very obviously mine.

1st section: Europe [Articles 1, 2 and 3]

2nd section: US [Articles 4 and 5]

3rd section: Developing world [Articles 6 and 7]

4th section: Energy market [Articles 8 and 9]

5th section> Future scenarios [Article 10].


1. Italy to allow unrestricted travel starting June 3

From the article: 

The announcement was a major move for Italy as it seeks to reopen its tourism industry and salvage some of the summer vacation season

Italy became the epicenter of the coronavirus in Europe in late February, enacting one of the world's strictest coronavirus lockdown.

Analysis:

Is it too late for countries to receive tourists in this 2020, travelers seems not to be open to visit places that have been under a widespread Coronavirus contagion. In Spain, 50% of people have canceled vacation plans in 2020.

Knowing that we’re entering into a once-in-lifetime depression. Are tourists in the position of spending as much as they were used to? I think they're not.

Monetary injections from the governments sponsored by the ECB might try to return confidence and liquidity, but in the end, it is a matter of disposable income, which is its lowest level since the '30s.

 


2. The looming economic disaster will only get worse if those leading us stick to dogma

From the article:

Economically, the new common sense is that Keynes is back. The government is having to spend, borrow, print money and extend its reach in ways unparalleled in peacetime in order to prevent mayhem. But Keynesianism is more than this – it is an entire body of thought about the way a capitalist economy functions. It goes far beyond doing all that it takes to head off a slump.

They need surefooted government that seeks active involvement of workers and citizens in decision-making to ensure the right calls are made and are widely owned.

Britain soon confronts a potential sovereign debt crisis given the scale of its deficits, made worse, although officials are too politic to acknowledge this truth even in confidential papers, by the prospect of a no-deal Brexit

It has to signal a readiness to raise taxes as a necessity, even to breaking its manifesto commitments, across the board: the country is in no mood for more austerity.

Of necessity the debt will have to be converted into shares, in turn converting the government from lender to part owner – in effect creating a kind of sovereign wealth fund.

 

Analysis:

 

Will Keynesianism help us in getting the economy back on track? Understood as running deficits to stimulate demand, deepening treasuries, and corporate bonds purchasing programs?

What if is precisely state intervention through monetary policy responsible for artificially inflating bubbles, such as the real estate prices?

Are governments capable of bailing out the majority of underwater businesses in exchange for part owning them? Is this feasible? Are we interested as a society in 1. Having a bigger government, 2. Putting breaks to innovation by having a bureaucrat as a shareholder?

 


3. Manfred Weber: Ban Chinese buy-outs of EU firms during pandemic

From the article:

 

“We have to see that Chinese companies, partly with the support of state funds, are increasingly trying to buy up European companies that are cheap to acquire or that got into economic difficulties due to the coronavirus crisis,” the German MEP said. “We have to protect ourselves.”

Shielding EU companies from Chinese investors is important, as Beijing becomes “the strategic competitor for Europe that represents the authoritarian model of society.

“I am making it clear that countries like Italy or Spain must not use the billion-dollar aid from the reconstruction fund … to fill their budgetary gaps or to pay out pensions,” the 47-year old said. “We need strict controls to ensure that the money is spent properly.”

 

Analysis:

 

Is this the right time to limit foreign investment? Or is it time for thinking of it as a geostrategic factor that could change the reality of our countries regarding their political and social equilibriums?

Is the free flow of money one of the signs we're entering on a deglobalization era?

The truth is that after depressions, when systems morph into something new and unexpected, it won't heart any if Europe starts thinking if shareholder compositions of EU-based companies could threaten the liberal model democracy on which the union is based.

 


4. Goldman Spots A Huge Problem For The Fed

From the article:

 

Last week, the Treasury shocked the world when it announced that in the current quarter (the 3rd of the fiscal year), the US will need to sell a mindblowing, record $3 trillion (pardon, $2.999 trillion) in Treasurys to finance the US money helicopter.

And since it is just a matter of time before Congress has to pass yet another fiscal package which will be at least another trillion dollars, and up to $3 trillion if the Democrats get their wish, one can say that Guggenheim's projection of over $5 trillion in debt issuance this calendar year will be wildly conservative.

Now here's the thing: as Deutsche Bank recently showed, so far this new debt avalanche was entire monetized exclusively by the Fed, whose debt purchasing operations have been far greater than the net Treasury issuance.

As Goldman writes overnight, putting the problem in its proper context, "Central banks have been purchasing sovereign bonds at a rapid pace (Exhibit 1), faster than past QE programs in most cases. These purchases are occurring against a backdrop of a surge in fiscal deficits, which will require enormous amounts of additional sovereign supply to finance them."

 

Analysis:

 

Money Helicopter [FED] > Treasuries = Imbalance

Globally the 80% of contracts, insurances, debt, investment, and other financial instruments are denominated in US dollars, creating 'room' for this humongous amount of newly issued money.

There is a significant concern about how this injection will be absorbed by a system that has stopped working.

Will it accelerate the recovery, or is it going to be like gasoline to the inflation flame?

Note: these numbers don't even include the treasuries required for financing the deficit.

 


5. Fed Warns of Financial Risks as Coronavirus Downturn Persists

From the article:

 

The coronavirus outbreak upended markets in March, and the Federal Reserve said on Friday that the financial system had exacerbated that turmoil and warned that highly indebted businesses remained a vulnerability that could hurt the broader economy.

“While the financial regulatory reforms adopted since 2008 have substantially increased the resilience of the financial sector, the financial system nonetheless amplified the shock, and financial sector vulnerabilities are likely to be significant in the near term,”

“Economic activity is contracting sharply, and the associated reduction in earnings and increase in credit needed to bridge the downturn will expand the debt burden and default risk of a highly leveraged business sector,”

“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse or financial system strains re-emerge,” the Fed warned.

 

Analysis:

 

2008-2009 Recession, measures were taken to avoid system fragility. Those measures helped to keep banks steady while Coronavirus hit the market in March/April, but Fed states there’re ”vulnerabilities are likely to be significant in the near term.”

How ambiguous could a situation be? Not to mention that a significant shock on the supply side that leads to a shutdown of the economy can bring a massive wave of credit defaults not only corporate but in Real Estate.

Is the Fed in the capacity of supplying the system not only buying treasures and corporate bonds but also bailing out potentially in risk banks? [Chapter 11, what is it?].

What are we missing here? If there’s no need for the system to produce to keep growing, let’s print our way out of depression.

From the article:

Government measures to limit the spread of COVID-19 continue to affect household access to food in urban and rural areas across the region… Movement restrictions and social distancing measures have widely reduced poor households’ sources of income, especially among those who rely on income sources in the informal sector. Further, remittances from the United States and Europe have declined.

In Central America, a forecast of average precipitation from May to August is most likely to overcome short-term rainfall deficits and favor an average Primera harvest in August/September… Poor rainfall performance is delaying agricultural activities

In Haiti, the socio-political situation remains calm but unpredictable, while inflation continues to be the long-term driver of high food prices. Crisis (IPC Phase 3) and Stressed (IPC Phase 2) outcomes continue to be driven by high food prices and exacerbated by the indirect impacts of COVID-19 on market functioning, remittances, and household income.

 

Analysis:

 

Political instability in developing countries Migration.

Political instability in developing countries Proliferation of gangs, illegal activities.

Political instability in developing countries Failed states.

Are we convinced that Coronavirus depression is something we can attack from an ‘each’ country perspective? How likely is that after a couple of years, systemic problems go back to bite us?

Remittances are reaching all-time lows and monetary flows that help weak governments stay in power because if they had to cover what people received from abroad, there would be thousands of protests each year in Central America, Southeast Asia, or Africa.

Or is China’s Development Bank coming at the rescue?

 


7. Managing the Coming Global Debt Crisis

From the article:

The developing world is on the cusp of its worst debt crisis since 1982. Back then, three years had to pass before creditors mounted the concerted response known as the Baker Plan, named after then-US Treasury Secretary James Baker. This time, fortunately, G20 governments have responded more quickly, calling for a moratorium on payments by low-income countries.

 

…”The crisis currently engulfing the emerging and developing world is unprecedented. More than $100 billion of financial capital has flowed out of these markets – three times as much as in the first two months of the 2008 global financial crisis”…


[In 1982] …”Debts were written down.
Bank loans were converted into bonds – often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners” – subsidies that collateralized the new securities and enhanced their liquidity”…

 

Analysis:

 

Latinamerica’s facts:

  • High unemployment rates.
  • High rates got submerged economy.
  • Higher interest rates (compared to US, EU).
  • Non-industrialized economies.
  • Low level of specialization.

Result: LA countries will have to negotiate how to get funds to cover trade and capital imbalances, in a hard-to-deal-with market. Getting financed will come under the figure of highly tailored conditions in lenders’ favor.

What’s the most probable scenario: Inflation and exchange controls. Some exceptions, like Chile or Colombia, might be seen as references for the rest of the region.


8. Oil Prices Stage a Modest Recovery as Demand Rises and Supply Drops

From the article:

Driving in the United States and Europe is picking up a little. Refineries in China are buying more oil as that country’s economy reopens. Saudi Arabia and Russia ended their price war and slashed production, and American oil companies are decommissioning rigs and shutting wells.


All those developments have helped push up oil prices modestly in recent weeks. On Friday, U.S. oil futures climbed more than 7 percent to nearly $30 a barrel, which is just enough for some of the best oil wells in the United States to break even.



The International Energy Agency expects gasoline demand in the United States this month to be down 25 percent from last May. While that is hardly good news for the oil industry, it is a big improvement from the 40 percent decline in April.

Analysis:

Multiple recovery curve shapes have been mentioned, V, U and, L. But, last week I've heard there's a new type, 'the swoosh recovery', resembling Nike's logo.

Chances are that recovery won't be fast, continuous, and somehow defined. It is likely that we will alternate ups and downs until we wither solve whole systems predicaments or until substituting the current model for something different (which can take years to achieve).

To me, this type of headlines is more wishful thinking, kind of news that is not supported by overall analysis but to minor changes in prices due to even smaller changes on the demand side.

Demand will rise but it will have a ceiling, which is people's capacity to consume. If there's not disposable income available, there will be no boost on the demand whatsoever.

 


9. Will Oil Prices Go Negative Again This Month?

From the article:

 

 

The Commodity Futures Trading Commission has warned that as the expiry date for the June West Texas Intermediate contract approaches, the chances of extra price volatility have increased. The regulator told brokers, exchanges, and clearing houses that "they are expected to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing."

There are some early signs that demand for oil may be on the mend, too, with gasoline production rising last week and inventories falling by 3.5 million barrels. Storage space for crude, however, remains constrained due to the sheer size of the overhang on a global scale. This means that a second selloff is a very real possibility and a temporary slide of WTI below zero is also possible.

 

Analysis:

 

Price volatility again in May contracts → is economic activity recovering as expected? Or is it only wishful thinking? Is it more like an L or a Nike Swoosh?

Changes in society's way of life will be translated into less dependency on energy sources, in specific fossil fuels. Understood as minimum car use, fewer flights, and less industrial activity due to a slump on the demand?

3/4 of our energy supply (before Corona) came from fossil fuel. Either we decrease its use due to demand destruction (not for the sake of the environment), or we come up with the same model of society, on which to recover previous activity levels we will end up consuming more carbon emitters fuels.

 


10. Welcome to the First Global Economic Depression of Our Lifetimes

 

From the article: 

 

Unlike 2008, this is a crisis of the real economy, as both supply and demand are taking massive hits in an unprecedented amount of time. But just as important is the continuing threat posed by the coronavirus. For all the talk of us reaching “peak” coronavirus cases, this is not going to be a “peak” in the style of Mount Fuji—steep ascent, a sharp peak up top, followed by a steep descent.

There are plenty on unknowns, but for my money, I’d say it’s years before the U.S. unemployment rate falls back down below 10 percent.

We should really be concerned about middle-income and developing economies in a coming global depression given that they have even less resources, less resilient healthcare infrastructure, much larger populations and much more unsustainable debt.

To avoid the worst of what’s to come, we need better global cooperation. Maybe starting to use the term “depression” will begin focusing minds in the right direction. And if we play our cards right, maybe we could avoid a “great” depression and just get a middling one instead.

 

 

Analysis: 

 

Are politicians responsible enough to admit that locking down societies following the Chinese model of dealing with the virus has been a complete disaster? In the beginning, it was feasible to think we had to 'stop life' to understand how the virus acted. But then, weeks passed, and under the excuse of flattening the curve, the economy entered on hibernation mode, which is no more than 'value destruction mode.'

For the sake of keeping life above the economy, they have caused precisely the contrary, to jeopardize life by posing multiple risks on the countries they rule. Debt creation, rampant unemployment, and nationalism exacerbation. Now, the industrial fabric has to be recovered, and hundreds of companies bailed out in different sectors.

In the end. who's going to pay for it? The usual suspects, workers, and small/medium size companies. 

 


Weekly Economic Report CW20-2020

Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios. Views very obviously mine.

  • 1st Part: Europe [Articles 1, 2 and 3]
  • 2nd part: US [Articles 4 and 5]
  • 3rd part: Developing world [Articles 6 and 7]
  • 4th part: Energy market [Articles 8 and 9]
  • 5th part: Future scenarios [Article 10].

>>> Access to the original news clicking on the headlines.


 

From the article

*In an angry, self-righteous tone, the court argued that it was not bound by a December 2018 ruling by the Court of Justice of the European Union (CJEU) on the same matter, because that court had grossly violated methods of legal interpretation by failing to apply the EU’s “proportionality principle” properly. As a result, the German court found the CJEU’s ruling to be ultra vires (beyond the CJEU’s powers) and therefore not binding.*

What is the Principle of Proportionality & Subsidiarity?

The principle of proportionality and subsidiarity is extremely important because it underlies everything the European Union does in areas where it does not have the right of exclusive competence.

In plain English, it means that the EU should not get involved in matters which do not concern it.

Our comments

Should it be interpreted that Germany is one step ahead of the rest of the union discussing in advance a topic that will be eventually brought to the table? Is Northern Europe capable of assisting Spain, Italy, and Greece without having internal discontent?

In Spain, politics are against receiving funds tied to targeted budget commitments. I see no other way of getting assistance from Brussels to cover the massive hole in the budget this pandemic has originated.
European authorities mentioned that members could borrow up to 2% of their budget at an interest rate close to 0%.

Is it possible to clear the negotiation path having national courts ruling over the country's relationship with the European Union? Who's in charge of defining the limits of the socioeconomic programs established to equilibrate those who have to those who need, understood as a North-South relationship are.

 


 

From the article:

In an interview with published late Saturday, the former Italian prime minister said the credit line which was finalized on Friday, is “the symbol of the different way in which we face the crisis: ten years ago a country in trouble asked for help in exchange for draconian conditions while today, with Europe facing a common crisis, we have an instrument accessible to all and without conditions.”

Our comments: 

The question is if those funds are enough to cover the deficit without significant sacrifices on each assistance receiving country. Are they entering in an anti-Europe era promoted by anti-austerity measures politicians and collectives? Is it possible to keep quantitative easing (asset and bonds purchasing process) conducted by the ECB at a constant rate to avoid stagflation but impulsing productiveness? 

And knowing how the balance of power changes, especially after a global scale event like COVID-19, who guarantees this offer won't change? Would it be used as political blackmail?

Let's see the GDP forecast for the four larger economies the EU:

Germany:

France:

Italy:

Spain:

 

 

The best-positioned country is Germany with a little over 5% deficit, to more than Italy's more than 10%. Even though Germany is impacted (ar the majority of the countries in the world), its capacity to change the downtrend back to close to zero levels in three years seems impressive compared to the rest. On the opposite side are France, Italy, and Spain that would require more time to equilibrate their national accounts and get back to equilibrium.

With deficits reaching 10% or more, is it possible for Italy and Spain to keep social programs and welfare state without comprising parts of it, perhaps their healthcare system? Is it possible to nor putting pressure on corporate and personal income taxes? I doubt it.

As part of Europe, both countries won't face the monetary consequences of running deficits, such as inflation but, it will be required to aggressively cut on spending, shrinking public administrations and funding to regions or autonomous communities, expanding the gap between rich and often industrial areas with poor, relying on tourism or agriculture as a source of income.

Communities like Lombardia or Catalunya are likely to start considering working on having their state, with all the implications it could have. Nationalism and localism will arise. 

 


 

From the article

It finds that these restrictions are likely to have a very asymmetric effect across EU labour markets, with the most negative employment impact concentrating in the most vulnerable countries and categories of workers.

The countries with a higher share of employment in the forcefully closed sectors are likely to suffer a much higher impact... ""...The main driver behind this heterogeneity is regional economic specialisation. Indeed, some Mediterranean countries account for higher shares of employment in leisure activities, hospitality, personal services, and other sectors that have been strongly hit, but they also have higher shares of self-employment and temporary contracts (especially in the closed sectors), which can compound the negative effects of forceful closures. On the other hand, the countries in which the shares of essential or teleworkable sectors are higher are those of Northern and Western Europe. These countries are potentially less exposed to the negative consequences of the current crisis.

 

Source: Employment figures from 2018 annual LFS data. Wage percentiles by job from EJM database (Hurley et al. 2019).

 

Our comments: 

Deepening income inequality leads to social unrest. New normal will attest to a struggle between liberal democratic parties with radical ones. Who's going to win the battle over the discourse, over the interpretation of the numbers.

What crisis demonstrates over and over that most affected people are always those who before the crisis hadn't work stability, competitive wages, inadequate skills in regards to new technologies, among other indicators. Workers groups are a fertile ground where radical movements and ideas flourish.

How are sovereign states supposed to cope with the need of having a safety net in place for those in need and keeping it active for an extended period while running large budget deficits?

 


 

 

From the article:

Facebook now says it will allow employees to continue working remotely through the end of the year. Yesterday, Google announced the same. Microsoft has previously said it will keep its employees working remotely at least until October.

I wrote this week that as much as 70 percent of your workforce wants remote working to remain an option, and as many as 54 percent say they’d like it to be their primary way of work. This is no longer a trend. It’s more like a permanent shift.

 

Our comments:

What will be the impact fo slashing the number of employees on real estate? Are companies willing to maintain large corporate spaces empty? The impact is likely to affect property valuations, and therefore putting hundred of thousands of landlords underwater.

If that happens, how probable would it be to have a second wave of bankruptcies originated by imbalances on the real estate market? The answer is, almost inevitable, but realistically amidst of depression, it looks pale.

 


 

 

From the article:

Recent moves across the U.S. to roll back measures enacted to slow the spread of the deadly Covid-19 outbreak could backfire and make the economic decline longer and worse — putting some states on course for deepening economic turmoil into the summer. Polls continue to show Americans deeply uncomfortable with going back to anything resembling normal life. And they overwhelmingly fear fresh outbreaks, putting a lid on a significant recovery in consumer spending — let alone the rehiring it would eventually support — until much more virus testing and treatment is available.

We have to be utterly realistic about this because there is political fantasy out there and then there is economic reality,” said Joseph Brusuelas, chief economist at consulting firm RSM. “It is going to be years before we recover all of these lost jobs and as much as 25 percent of them aren’t ever coming back.”

In some ways, the Covid-19 crisis compressed what could have been several years of shifts to online retailers such as Amazon and Overstock into a period of weeks, meaning employees in many brick-and-mortar stores may need to retrain for new occupations. Companies coming out of the crisis may also accelerate their reliance on technology to replace staff and reduce the amount of office space they need, slowing job gains and hurting the commercial real estate industry.

“It’s going to take years to get these jobs back and many are never coming back,” said economist Megan Greene, a fellow at Harvard’s Kennedy School of Government. “Industries writ large are going to have trouble reopening and others are going to figure out how to use technology to limit the number of people they rehire. This crisis has just accelerated all of these trends.”

That will not be a quick process. Fiscal support from Congress and easy money policies from the Federal Reserve will help. But even if people have some money in their pockets and can pay for rent and food, the economy cannot really reboot — and hiring can’t take off — without a stronger feeling of public safety. “You could drop as much money on me as you want, but that doesn’t mean I’m going to go book a vacation and get on a plane,” said Greene.

Our comments: 

The economy is not only 'motivated' by monetary injections or fiscal stimulus, but it also depends on the psychological interpretation of facts by those that take part in it. Are people feeling unsafe when going out? Results will be a tanking Restauration sector, hotels, and events.

Are employers open to hiring back all the workers they laid-off without a clear sight what's ahead? What if it is needed to lockdown us again?
There will be a recovery, and we don't know its form yet; it is likely to look like an L or a U instead of a V as authorities expect. The question is, is the economy be the same after a pandemic? Let's see.

 


 

From the article

Still, Guedes said in a live online event hosted by Itau Unibanco Holding SA (ITUB4.SA) that he sees Latin America’s biggest economy posting a “V-shaped” recovery, as its vital signs are preserved so far.

Brazil’s Congress on Thursday approved a constitutional amendment with extra spending and emergency measures to help weather the impact of the crisis, giving the central bank powers to buy private and public sector assets.

In case of a depression, Guedes said the central bank could provide liquidity to companies and even small businesses.

“We are going to shower all the economy in case of a depression, if there is infinite demand for liquidity,” he said.

 

Our comments:

Monetary expansion without limit? Is it Brazil inventing a new way of conducting monetary policies and haven't shared it with the rest of the world?

This is the type of statement that -of course- makes sensational headlines. 

But in reality, everyone knows that Brazil will be profoundly affected by COVID-19 not only because of the virus itself but the dryness of the international funds market.

A country that relies on exporting raw materials (Iron, oil) with a tendency to have an impossible-to-maneuver budget because of the size of its social programs is prone to have major unbalances shortly.

In case of indeed having limitless resources, are they going to be directed to banks and corporations to allocate them and buying bonds? Or is it going to deepen the inequality (53.9 Gini's coefficient) that characterizes Brazilian society?

An example of blank expressions, with the only intention to avoid sovereign risk indexes to explode.


 

 

 

From the article:

69% of survey respondents said getting enough food and water would be difficult if they had to stay home for 14 days.

Our comment:

Reports indicate that the COVID-19 outbreak has been well managed in Africa. Numbers haven't exploded; people have accepted lockdowns, understanding public health was in danger.

But, it is also understandable that African countries' societies with low savings levels will be compromised soon, running short of household stocks. That is, no food and no water whatsoever.

Unstable governments would be threatened by people rioting for food. Unsettled territories force people to migrate to wealthier areas. Large numbers of migrants flood transit countries like Lybia and put pressure on European borders.

G20 countries have not only an internal crisis to deal with but to help other states hold their things together to avoid massive migrations, carrying with them the burden of being assisted.

 


 

 

 

From the article:

Jamie Webster, Senior Director, Boston Consulting Group Center for Energy Impact: Demand is clearly coming back, with multiple indicators showing positive signals as economies begin to open up. Boston Consulting Group’s Shutdown oil demand index, a measure of shutdown policies on oil demand, has dropped to 538, indicating demand is down just less than 20 million barrels per day (bpd), from the high point on the index of 789 in mid-April. But the recovery will likely be slow. It took nearly three years for global oil demand to recover from the Great Recession. U.S. oil demand did not recover until 2015, when low prices, combined with a strong economy, boosted oil demand. The lagging indicator will be jet fuel as business travelers are slow to return to the air and lower economic activity and COVID-19 concerns will cause vacation travelers to prefer driving vacations over those that require air travel.

Our comments: 

Storage capacity is full oils that are going to be depleted is the one in the tanks, but what happens to those fields that went offline due to the prices? And this is not only happening in the US with the shale wells like Bakken. There are two possible scenarios: I. Oil prices remain low due to tanking demand, in a world incapable of getting back to the pace of growth before COVID-19, or II. High oil prices due to pressures on the supply side as a result of a crisis on the US oil industry, and in OPEC countries after a low investment in production period.

 


 

 


From the article: 

General Manager in charge of Budgets, Ben Akabueze said ‘‘Our forecast oil revenues have decreased by more than 80%. We had to lower our budget to bring it down to a base of $20 per barrel’‘.

In March, the government of Africa’s most populous nation announced a drastic reduction in its budget of about 15 percent due to fall in oil prices to $33.8 billion.

Our comments: 
Cutting 15% in the budget of any country is an unpopular austerity measure. Still, it requires special consideration if we are talking about Nigeria, a country with 200 million people and expanding (see population pyramid), will likely be drawn into an instability period. Deepening differences between the south (Christian, more developed, part of the government) and the north (Muslim, rampant poverty, and terrorism).
A ticking bomb.

 


 

From the article:

In other words, an end can occur not because a disease has been vanquished but because people grow tired of panic mode and learn to live with a disease. Allan Brandt, a Harvard historian, said something similar was happening with Covid-19: “As we have seen in the debate about opening the economy, many questions about the so-called end are determined not by medical and public health data but by sociopolitical processes.”

Will that happen with Covid-19? One possibility, historians say, is that the coronavirus pandemic could end socially before it ends medically. People may grow so tired of the restrictions that they declare the pandemic over, even as the virus continues to smolder in the population and before a vaccine or effective treatment is found. “I think there is this sort of social psychological issue of exhaustion and frustration,” the Yale historian Naomi Rogers said. “We may be in a moment when people are just saying: ‘That’s enough. I deserve to be able to return to my regular life.’”

Our comments: 

Just a random thought, what would be the way of dealing with COVID-19 if the virus would appear in California, or Denmark instead of China? Are we using lockdown measures in the XXI century because nature is so powerful that we have to accept there're no different ways of dealing with a highly contagious virus?

Even after weeks of confinement, what if in January WHO would encourage the general use of masks and location tools? Promoting remote working on those capable of doing so while keeping the rest of the economy awake. By using hotels, AirBnb's, and any other available infrastructure to keep 60+ years old isolated and safe?

In the end, as the article mentions, people will get used to it; we indeed flattened the curve by remaining at our houses but, what about the economy? If what we were doing is delaying the cases because without the vaccine seems, we all will catch the virus. Is it possible that in the parallel world, we might be doing things differently instead of retreating and losing our liberties?

This pandemic is demonstrating we as a society are open to accepting the abjection, having fear as an excuse for doing so.

 

 


 


Weekly Economic Report CW19-2020

Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios.
Note: Views very obviously mine.

1. Will Swedes reach herd immunity and move forward to a better position in comparison to other countries?

https://www.youtube.com/watch?v=xBcqnZUjX9g&feature=youtu.be

Life is important. Life must be always in the center, but as exposed in different scenarios, was it possible to approach this crisis from a different perspective? Will Swedish have a better post-COVID economy overall?.

Senior scientist Johan Giesecke reconfirms that Stockholm will achieve herd immunity by mid-May. “People are not stupid. If you tell them what’s good for them..they follow your advice. You don’t need laws, you don’t need police in the streets.”

2. United Nations: The coronavirus pandemic could result in between 420 million and 580 million more people, or 8% of the global population, living in poverty, a study by the United Nations University has found.

This crisis is taking people by the millions under the poverty line. People all over the world will have a hard time not only making ends meet but surviving due to the humongous impact on the economy pandemic has had.

In Italy the mafia has started offering 'financial instruments' to those not covered either by banks or the government, as Roberto Saviano tells on his article:

According to Italian anti-mafia sources, the Camorra has also started providing loans – but not at its usual high interest rates – of between 50% and 70%. Demand for loans is so high in this period that it is still profitable to offer competitive rates, even lower than those offered by the banks.

 

3. The World Bank predicts global remittances will fall by 20% this year

 

Source: World Bank, Migration and Development Brief 32 

The lockdowns globally have forced neighborhood shops that provide remittance services to close or cut open hours, making the normal money transfer routes inaccessible. These shops are not categorized as essential services in most countries as the amount of money going through them do not make up a large share of the economic activities of the remittance-sending countries, according to Dilip Ratha, the lead economist for migration and remittances at the World Bank.

A reduction in the flow of money received on the ‘peripheral’ countries may lead to government insolvency, lack of income puts pressure on social and relief programs. Remittances in the majority of cases come to ‘rescue’ governments and help households to make ends meet.

Less money received from abroad has been in the past the roots of uprising movements. After the 2008/2009 crisis Arab Spring took place, overthrowing presidents at an astounding pace.

4. Oil and commodity prices continue at low levels

Red dots represent fully loaded oil tanker ships "stranded" at sea due to no global demand for oil - approx cost per day per ship is $30,000/-. (https://twitter.com/subnut)

It is highly probable that contracts due in May will go to extremely low levels or even negative, the capacity of storage is full and a myriad of ships still sit in the sea, waiting to discharge their load.

Even though this is mainly referred to as WTI prices, all ‘oil baskets’ are correlated. Countries like Saudi Arabia, Nigeria, or Venezuela that depends almost entirely on oil revenue will have a hard time trying to balance their budgets.

The red arrow indicates prices soaring originated on China’s import of oil as a continuous process of expanding its economy. It created a commodity ‘bubble’ that popped in 2008 due to the Subprime crisis.

To find a parallel situation regarding oil prices in the past, we have to go back to the ’70s, just before the Yom Kippur war. It was indeed a different world back then, the impact of Coronavirus is more significant than we can predict, not only in economic terms but in concerns to oil producers’ political stability.

Graph from the article: Oil and commodity prices are where they were 160 years ago

5. Are we in the presence of an asset bubble?

 

 

I think certainly we are, and when it pops, it will collapse the stock and credit market because this amount of leverage is unsustainable.

Which companies will be saved from the coming tsunami, those who are sitting on cash, with the capacity to keep income flowing, not susceptible to significant disruptions at least not originated in purchase preferences changes. Examples of them are the food industry, transportation, utilities, hi-tech with a high top line, and low production costs.

The graph illustrates what is called the Buffet Indicator which is mainly used to calculate how's the stock market in relation to the GDP. In the current situation, it is over 120% - 140%, meaning that it would take one year and a couple of months for the economy to match the value of the sum of capitalizations.

The Stock Market is Significantly Overvalued. Based on the historical ratio of total market cap over GDP (currently at 132.3%), it is likely to return -0.4% a year from this level of valuation, including dividends. (Source: https://www.gurufocus.com/stock-market-valuations.php)

This is taken from GoldSilver.com YouTube Channel

https://youtu.be/4OID-NX96kY

6. After COVID-19, who wins and who loses?

Main Street may never be the same: The survey reveals the extent to which that small business boom has not just been stopped by the coronavirus but may forever be changed by it: 72% of all small business owners say the outbreak is likely to have permanent effects on the way they run their business.

 

Who’s losing here, and why?

  • Informal and blue-collar workers - no salary or income during the lockdown. Machines will replace up to 70% of the low skilled workforce.
  • Small brick and mortar businesses - Internet took over, no way of competing in terms of tax and sunken costs.
  •  Business with cashflow issues - they are not likely to be bailed out. No experience or connections to get assistance or completing the requirements for applying to a rescue plan.
  • Citizens in general - we were kept in our houses. Not only at the beginning but for almost two months. Once governments advance on limiting our lives, it is difficult to make them retreat.

Who’s winning?

  • Hi-Tech firms - Almost exclusively.
  • Bailed out companies - Again. No surprise here.

*Note: I’m against bailing out process in general. Bankruptcy laws should be applied to those troubled companies instead of giving them money, created out of thin air. 

7. From Project Syndicate: Biodiversity or Bust.

Illnesses transmitted from animals are more prevalent than ever. A 2017 peer-reviewed study found that 75% of emerging infectious diseases affecting humans, such as West Nile virus, Ebola, SARS, and Lyme disease, are zoonoses, or illnesses caused by pathogens that have jumped from animals.

In 2018, the French government adopted a policy to stop importing products linked to deforestation – such as palm oil, beef, and wood – by 2030, and it has established a cap on biofuels derived from raw materials that contribute to deforestation. Instead of the usual blame game, policymakers chose a collaborative approach with exporting countries, including the use of development aid, to encourage them to switch to biodiversity-friendly production methods. The strategy also includes a plan for “zero deforestation” public procurement and labeling requirements to help consumers make better choices.

At this point, there are fewer and fewer people denying the relationship between environmental damages made by humans and pandemics. A virus that comes from an animal or an insect specie that overtakes new areas due to the change in planet temperature.

We have to resolve our dichotomy, either we understand that always-profitable business and ever-growing economies are achievable situations but at the expense of devastating the planet or we accept that we can keep having a Business-as-Usual scenario but with lower short term benefits.

In Jørgen Randers words, ‘It is profitable to let the world go to hell’, and he continues:

‘I believe that the tyranny of the short term will prevail over the decades to come. As a result, a number of long-term problems will not be solved, even if they could have been, and even as they cause gradually increasing difficulties for all voters.’

 

8. Are we going greener? Answer: not as fast as originally planned.

Source: Full report – BP Statistical Review of World Energy 2019

Often, amidst the renewable energy hype, we tend to forget that the vast majority of the energy comes from non-renewable sources. Correlation between economic growth and energy consumption is positive and, in some cases, close to 1.

We must try not to be fooled by wishful thinking, the only way that we can move forward on preserving the nature and having a prosperous life under the current system is to reduce our consumption in general.

Impulsing growth in non-intensive in energy activities. Such as developing local supply networks. No all of them will be profitable or comparable to previous solutions, but it is the only way to achieve both sustainability and keeping our economic systems running.

9. Another one from Project Syndicate, The Coming Greater Depression of the 2020s, Nouriel Roubini's forecast.

Just wanted to point out a few ideas Nouriel Roubini exposes on his article:

The policy response to the COVID-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.

How will countries deal with massive deficits? Perhaps, resetting the system? I think there will be one major scenario, governments under the pressure of growing waves of unemployed people will propose significant increases on wealthy people and companies, investments and banking system.

That might end up paralyzing the economy, but, on the contrary, raising taxes to middle-class workers, entrepreneurs, and small companies exclusively might spark the flame of instability.

With millions of people losing their jobs or working and earning less, the income and wealth gaps of the twenty-first-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.

COVID outbreak has opened Pandora's box, subtle changes that were occurring before the virus appearance are reinforced. Why not plan a factory or service without workers, maybe with a minimum human installed capacity? What prevents businesses from starting from scratch and think about how it would be to compete in the future?

Think about this, if a company stays afloat during this stop, and is capable of getting back on track, it would be surviving to the most significant disruption ever known under this economic model on which we live.

Countries will have a growing number of permanently unemployed people—those incapable of multiple reasons to keep up with the technology and its proxies.

10. From Harvard Business Review: Why stock buybacks are dangerous for the economy?

The final article is about what I think is the scam of the decade.

How are big companies allowed to inflate their way up through buying their shares? It is indeed legal, but is it morally acceptable?

Many companies I admire, including Apple, have taken that path. In that particular case, they're not asking for a bailout. They sit on a pile of cash ready to be used and getting back to the new normality.

What happens to those that have underinvested in its infrastructure, vehicles, or kept wages low and bought back their shares to increase their price artificially? What about that? What about making people believe that the stock market mimics reality and painting a prosperous future scenario when, in fact, the typical worker doesn't get any option of participating in that process?

Look at this graph:

 

From the article:

Buybacks’ drain on corporate treasuries has been massive. The 465 companies in the S&P 500 Index in January 2019 that were publicly listed between 2009 and 2018 spent, over that decade, $4.3 trillion on buybacks, equal to 52% of net income, and another $3.3 trillion on dividends, an additional 39% of net income. In 2018 alone, even with after-tax profits at record levels because of the Republican tax cuts, buybacks by S&P 500 companies reached an astounding 68% of net income, with dividends absorbing another 41%.

This ‘financial engineering process’ is one the roots of inequality, a reality that ends up mining the system and the capacity of the majority of people to prosper. It’s not about opportunities is about of bring those who have the talent, invest in M&A, R&D, develop new products, conduct new ways of doing business instead of hoarding all that vast amount of money under the figure of dividends and buybacks.

Should the government jump in and forbid buybacks, I don’t think so. Should it be regulated in some way? No, no at all. What I suggest is to change the mindset, to understand that this model is not sustainable, and at some point, it will revert into massive riots on which resembling 1789’s France, some may lose their head for not being smart enough.

(Source: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy)


Divergent roads

Were we condemned to suffer from both economic havoc and the pandemic?

No one denies that is easier to suggest measures on how to face difficult times in retrospective, or in plain words once they have happened.

It is true. It is easier. But at the same time, it is our responsibility as citizens, locked down for the common good to assess different scenarios that could serve as options for achieving the same goal.

In particular, what if instead of following China’s whole population lockdown model we opted for a different set of measures. Is it possible? I truly believe it is, and I’ll try to explain to you how.

Lockdown First

COVID19 firsts alerts (2019-nCOV by that time) were issued on January third week (W3 2020), through the World Health Organisation’s twitter account. Even there are reports that the Taiwanese government was alerted to the World Health Organization on December 31st, 2019.

On January 23rd (W5 2020) Chinese government restricted the movement of people, by shutting public transport, airports, and road traffic with other provinces. It preceded Wuhan’s full lockdown that occurred on February 20th (W8 2020).

World Health Organization declared Coronavirus as a pandemic on March 11th (W11 2020). This means that lockdown measures precede in eleven days the notion of the global impact the virus could have, and this is not a trivial fact.

What if

There’s always someone that makes that question. In my experience, that might upset those who were in charge of making decisions, but this is not the case. It is obvious that we didn’t pay attention to the warnings of renowned personalities like former President Barack Obama, Microsoft’s founder Bill Gates or infectious disease expert Michael Osterholmthrew to all of us.

Also, it was easy to copy a model that apparently proved to work, especially if it was suggested by the entity in charge of overseeing the outbreak, the World Health Organization. The range of maneuver was extremely limited, the lockdown as a one, and the only alternative had become the unique narrative available.

There are some guiding lines that the virus described in those early days, it is particularly harmful to older people and those with preexistent conditions such as respiratory deficiencies or cardiovascular diseases. Human to human contagious was confirmed, and asymptomatically carriers as a variable for spreading patterns were considered.

With this in mind, an alternative model would be possible if those in more severe risk were put in quarantine, limiting their social contacts. How attainable was to recreate the same lockdown situation but with targeted portions of the society, instead of an all-in model?

All about trends

COVID19, as the WHO called after a couple of weeks of its appearance, makes two clear statements to us humans. First was, even though we have recurring seasonal influenza, which kills around three hundred thousand people a year mostly in the US, transmittal speed would be different. Infection numbers followed from the beginning was a perfectly defined exponential trend. It was simply explosive.

Second, it would impact our daily activities, aggressively getting into our bodies taking advantage of the proximity we tend to have in offices, subway, stadiums, airports, and so on.

There wasn’t room for ambiguous answers, authorities had to act fast, establishing clear and mandatory measures to be applied over society as a whole. But, how to get the data that serves as a base for articulating proper policies on such an abnormal time? There wasn’t.

The rapid growth of the number of cases led governments to have a dual approach to the virus, countries like Taiwan, Singapur, or South Korea implemented tracking tools to locate infection multipliers. Authorities relied on apps created specifically for this nuisance.

On the contrary, countries in Europe and the US minimized COVID19 impact by comparing its potential impact with other known illnesses, incapable of grasping the real threat that this novel virus poses on them timely measures were not taken.

In Spain data suggests that the government didn’t realize how deep the country was getting into until the number of cases simply exploded. It was on week eleven (W11 2020). Even though Italy was having a hard time dealing with the virus, conferences were organized to communicate how harmful the pandemic could be, the country lacked solid leadership from the executive branch of the state when facing the threat.

But, let’s try to recreate the situation, what if we could get valuable insights from Hubei’s lockdown. What if we can understand how to avoid massive contagion while finding the best combination of measures.

Deconstructing the stages

For the sake of the analysis let’s divide the virus occurrence timeline into three:

  • First: Contagion starts, no lockdown measures have been taken.
  • Second: Lockdown enabled. The Health system gathers and analyzes data.
  • Third: Measures adjustment, based on each country particular conditions.

Source: Our World in Data Reports

From this chart, we can affirm the following:

  • There was a window of at least six weeks for Spain to learn from Chinese data.
  • At the end of W8 2020, there was enough data to understand the age cohorts affected by the virus.
  • On March 3rd, the University of Bern published a paper containing the following statement:

…” We find that 1.6% (1.4-1.8) of individuals infected with COVID-19 during that period with or without symptoms died or will die, with even more important differences by age group than suggested by the raw data. The probability of death among infected individuals with symptoms is estimated at 3.3% (2.9-3.8), with a steep increase over 60 years old to reach 36% over 80 years old”…

The numbers in Spain

There are multiple reasons to believe that cases and disease reporting is not doing right. It is not clear if it obeys to an express intention from the authorities or it is one of the consequences of a not expected pandemic for which we were far from comprehending how to deal with it.

National authorities report describes the following situation after a month of confinement (W16 2020):

Source: Ministerio de Sanidad del Gobierno de España

  • 44,8% of the cases require hospitalization, which is 54,677 patients.
  • Out of those cases, age range from 0 to 49 years old accounts for 7.2% of the patients that required a bed in the health system, which is 8,798 patients.
  • Intensive care cases among 0 to 49 years old patients are equivalent to 0.51% of the total cases.
  • Cases requiring special attention either hospitalization or Intensive Care start to soar for 50–59 and older ranges.

In a graphical way, here is the data:

Alternative roads

What if after the fourth week of confinement the Spanish government would change the rules, using as a reference not only the local situation but what has happened on those places where a partial lifting of the lockdown has started?

Allowing people ranging from 18 to 49 years old to get back to their jobs would be an invigorating move. Clear rules and guidelines, accompanied by technological tools would be the first step for avoiding what looks like a free fall for our economic system.

It could be adapted either to each autonomous community, industry, or service, keeping a close eye to the reports from the health care system. The private sector wouldn’t be working at full capacity, many people on that have kids who are not going to school.

Nevertheless, it is the first tryout to understand how to get out of the swamp involuntarily we got in. It was not our society’s fault to get impacted by a virus from overseas but we cannot dismantle our way of creating wealth either.

On March 22nd, Thomas Friedman in the New York Times quotes Dr. John P.A. Ioannidis, an epidemiologist and co-director of Stanford’s Meta-Research Innovation Center who said:

…“locking down the world with potentially tremendous social and financial consequences may be totally irrational. It’s like an elephant being attacked by a house cat. Frustrated and trying to avoid the cat, the elephant accidentally jumps off a cliff and dies.’’…

We cannot be on our houses indefinitely, there is no vaccine on the horizon, and a new collective behavior arose as the only way out. Contagion rates may soar, and new lockdowns will be required. If this is the case, why not finding the best alternatives for dealing with our new reality.

Analyzing numbers is nothing without an opinion. Everyone will see the world based on their personal beliefs, on what is their current situation and what expect from the future.

Data from both places allow me to synthesize what I guess would be my advice as an economist in case of being asked. There are millions of pieces on information to be reviewed, singularities, and deviations that break whatever approach we suggest for solving a crisis like the one we are in the middle of.

My conclusions led me to think that all these measures were taken with the only intention of not surpassing national health system capacity. This may be obvious but it draws more severe implications.

Of course, we have to keep our elders safe and try to minimize virus impact in society as a whole but, it is true that we cannot rely on one restrictive model based on Hubei’s experiences. It is mandatory for us to find the best possible system on which our economic system and our liberties get the lightest impact possible.

In the meantime, I will remain concerned about how our future would look, if we keep prioritizing our health systems putting all the other options out of the table.


Weekly Economic Report CW18-2020

Selection of news, studies, papers, events, and any other source of information I use as a reference to understand current and future economic scenarios.
Note: Views very obviously mine.