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)