Negative interest rates cannot save indebted economies

Setting the price of money below zero creates more problems than it purports to solve

Jacques de Larosière 

Jacques de Larosière
The monetisation of government debt will lead to creeping economic nationalisation, writes Jacques de Larosière © Patrick Kovarik/AFP/Getty



Can interest rates be eliminated to avoid servicing monumental debts? The Covid-19 crisis, exacerbated by the consequences of having hyper-accommodative monetary policy for too long, has led to entire economies becoming over-indebted.

To deal with this situation where public leverage has broken all peacetime records, some advocate monetising the debt through central bank purchases of new bond issues and negative interest rates. This is despite the historical record which shows that debt restructurings have proven to be the most effective way to address unsustainable debts.

In the context of economic depression, low inflation and interest rates already at zero, central banks of course cannot achieve negative real interest rates. So, instead, they may want to retrieve some margin by deliberately setting negative rates. Monetary policy would then regain its traditional driving role, as it would be able to recreate negative real rates, despite a lack of inflation.

Proponents of this approach have anticipated some of the objections.

First, the liquidity trap. When rates are negative, investors tend to shun bonds to avoid the “tax” caused by negative rates. One result of this is an accumulation of savings, held in liquid assets such as banknotes or cash accounts. But these barely help foster productive investment.

Proponents of negative interest rates argue that the response to this problem is to eliminate large denomination banknotes and ensure that banks pass on the full cost of negative rates to their depositors.

But should depositors be taxed and made to pay most of the cost of emerging from this crisis? That would create major economic and political problems in a country like France, where household savings historically finance about 85 per cent of national investment.

Then there is the risk of inflation. In the long run, any anti-recessionary monetary policy must eliminate the difference between potential growth and currently depressed growth rates through money creation. The risk of inflation is nonetheless considered unlikely given the scale of the Covid-19 crisis, the slow recovery, and structural forces such as ageing, unemployment and technological progress. Even if inflation does return, there will still be time to turn the tide and return to more traditional monetary policy.

Surprisingly, such proposals — which are designed to eliminate an economic fundamental, namely the price or cost of saving — fail to consider an essential question: the value of money. Money is based solely on trust. But the risk of losing that trust will loom if those responsible for it resign themselves to a role that leaves them as suppliers of an unlimited commodity rather than as vigilant guardians of its stability.

Moreover, the moral hazard of a system where indebtedness can be permanent and infinite, regardless of debtors’ credit quality, poses serious moral and political problems as it nationalises risk and responsibility.

Negative rates also damage productive investment. They encourage companies to take on cheap debt to pay for share buybacks instead of investment; allow zombie companies to survive, lowering overall productivity; encourage asset bubbles; obliterate the distinction between profitable and unprofitable activities; and make little or no distinction between good or poor quality debtors.

An economy where interest rates remain negative for decades will not inspire confidence in entrepreneurs. Paradoxically, it will create more precautionary savings.

The monetisation of government debt — most of which will end up on central bank balance sheets — will also lead to creeping economic nationalisation and crowd out profitable economic activity.

Everyone knows how excessive debt can lead to crisis. We have paid the price of this causality for decades. And yet negative interest rates open the credit floodgates to both governments and the private sector. They are a source of financial instability and help to create asset bubbles.

A more reasoned policy response to over-indebtedness is clear. Undertake, where necessary, debt restructurings with a co-operative spirit and a sense of market priorities. Scrutinise public budgets and prioritise certain future expenditures, such as education, health and research.

Last, undertake the structural reforms that have been postponed for too long but are the only measures that can deliver a sound, sustainable and better future.


The writer, a former IMF managing director, was governor of the Bank of France 1987-93

REVISITING OUR SILVER AND GOLD PREDICTIONS – GET READY FOR HIGHER PRICES

Chris Vermeullen

If you have been following our research into Gold and Silver over the past years, then you were already prepared for the recent rally that has taken many investors by surprise. This year, 2020, Gold and Silver are set up to have their best year of price appreciation over the past 40+ years.

It is no consequence that this is taking place right now. Our cycle research and our predictive modeling systems have helped us stay well ahead of this move. In fact, way back in early 2019, we were already warning this type of price move would take place and suggesting a target price level of $3750 for Gold was not out of the question.

OUR GOLD PREDICTIONS CAME TRUE

This article will review some of our past research posts to help you better understand what is really happening in precious metals right now. One of our most visited research articles in 2019 was related to our prediction that Gold would rally from $1240 to well over $1700 before the end of 2019 based on our Adaptive Dynamic Learning (ADL) predictive modeling system.

Our predictions at that time shocked many traders because the global markets were not expecting precious metals to rally in this manner reflecting a renewed “fear trade” setting up. 

The idea that Gold could rally nearly 40% at a time when the global markets appeared to be driving growth and gains was alien to most people. 

Yet, here we are with Gold attempting to break above $2000 and our $1700 price prediction being a thing of the past.
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SILVER GOES INTO FULL SUPER-HERO MODE

Later in 2019 our research team published the infamous “Silver Super-Hero” article. This article suggested that Silver was deeply undervalued at a $15 price level, especially at a time when we believed Gold would begin to skyrocket higher. We pushed this article out in September 2019 attempting to alert our followers to the incredible opportunity setting up in Silver.

One highlight of this article was that Eric Sprott, of www.SprottMoney.com (https://www.sprottmoney.com/eric-sprott ) picked up on our research and highlighted it in many of his podcasts over the past 12+ months. Eric is a renowned gold bug and recently mentioned in one of his podcasts that the Technical Traders is one of his “favorite” researchers of precious metals due to the accuracy of our predictions.

Be sure to opt-in to our free market trend analysis and signals now so you don’t miss our next special report!

Whenever someone like Eric Sprott picks up on our research and confirms our efforts, it is like winning an award from another seasoned and experienced trader/researcher. With Eric’s help, many other metals traders learned of our research and predictions – which further added to our accolades and credibility related to our precious metals research.




The recent breakout move in Silver also added to the ‘win’ column of our incredible research and predictions. When Gold moved above $1800 per ounce Silver suddenly sparked to life and rallied to levels near $24 in an instant. 

This huge upside move in silver sent a shock-wave out to metals traders – you better start paying attention to what is happening in precious metals (and particularly Silver) because this is just getting started.

CYCLES, SETUPS & THE EVENTUAL PEAK IN METALS

Part of our research delves into cycles and broader price patterns. When we discuss patterns and cycles that are setting up, we want you to consider how these powerful events can turn into incredible opportunities for skilled technical traders and how you should be preparing for these events.

Near the end of 2019, we published a research article about the 7-year cycle that was just starting in Gold and how traders needed to prepare for this pattern. Remember, by this time, we had been warning and suggesting that Gold and Silver would begin to skyrocket higher for well over 12+ months. It was just a matter of time before the fuel was ignited and prices started to climb.

The COVID-19 virus event was the event that suddenly questioned longer-term sustainability and global market capabilities. We were aware of this new virus and the potential for global problems in early January 2020, yet the metals markets ignored the real risk. It was not until February/March that traders started paying attention to the true risk factors related to this global event. Yet in December 2019 we were warning of the risks:

Be prepared for a surprising spike in volatility in early 2020 with a moderately strong potential for an early 2020 downside price rotation which prompts a new price trend and possibly an early test of support (near 280 on the SPY chart). 2020 is going to be a fantastic year for skilled traders – get ready for some incredible price action.




Currently both Gold and Silver are moving moderately higher after the explosive upside breakout move recently. Our researchers believe another wave of higher price levels will engage both Gold and Silver over the next 30+ days where Gold will target the $2300 level and Silver will target the $33~$35 level. It won’t end there either. 

Both Gold and Silver are moving in measured price waves it appears. As risks continue to become evident, we believe that Gold will eventually target the $3350+ level and Silver will eventually target the $75 to $85+ level. These targets are very likely to happen before the end of 2020.

Where is the peak in Gold and Silver? Based on our research we believe Gold will peak somewhere above $3750 per ounce and Silver will peak somewhere above $120 per ounce. It is not too late to get positioned for this incredible rally in precious metals if you have not already done so.

Europe’s big fiscal deal

The EU’s €750bn covid-19 plan is historic—but not quite Hamiltonian

After a marathon negotiation, EU leaders agree to borrow and spend jointly on an unprecedented scale. Yet doubts remain




LIKE ALMOST everything else at this week’s European Council, which concluded at 5.30am on July 21st after five days of deliberation, the question of whether it was the longest EU summit in history was hotly contested. Some said it beat the record-holder, a mammoth discussion over institutional arrangements in Nice in 2000.

Others thought it fell half an hour short. Either way, the summit, which signed off on a multi-year spending package worth €1.8trn ($2.1trn), will be one for the history books.

The deal struck by the EU’s 27 national leaders has two elements: the regular EU budget, or multiannual financial framework (MFF), worth nearly €1.1trn over seven years; and a €750bn “Next Generation EU” (NGEU) fund to help countries recover from the covid-19 recession. 

Rows over the second of these explain the summit’s length.

A debate over whether to replace the word “decisively” with “exhaustively” in the communiqué took up several hours. But in the end each leader was able to return home bearing a bauble.

France and Germany laid the groundwork for the deal with their own agreement in May, and the final compromise was not too distant from their proposal. Hard-hit southern governments secured recovery funds worth several percentage points of GDP. The small countries of the self-styled “frugal” bloc—the Netherlands, Austria, Sweden and Denmark—won hard-fought concessions.

Poland and Hungary managed to water down efforts to attach rule-of-law conditions to budget payments. Most leaders emerged into the Brussels dawn claiming to have agreed on something historic, and to judge by the soaring euro, investors concurred.

The deal broke two historic taboos, says Silvia Merler, head of research at Algebris Policy Forum, the advisory branch of an asset-management firm. First, Europe’s leaders agreed that the European Commission can incur debt at an unprecedented scale. Starting some time in 2021, the NGEU will be funded by borrowing over six years, with bonds at a range of maturities extending to 2058.

Second, a total of €390bn will be distributed as grants, and hence will not increase recipient governments’ debt burden. This is a lifeline for the likes of Italy, where government debt is already on course to reach 150% of GDP by the end of 2020. It breaches a former red line over substantial intra-EU fiscal transfers. Both developments would have been unimaginable just six months ago.

The EU has now marshalled a fiscal response to the covid crisis equal to or better than America’s. The programme is equivalent to 4.7% of its GDP, a macroeconomically significant amount that comes on top of large stimulus spending by national governments. It has plugged the budgetary hole left by the departure of Britain, a net contributor before Brexit.

It has answered the European Central Bank’s repeated pleas to balance its monetary activism with a comparable fiscal effort. The EU may also have set a precedent for handling future crises, although any additional future collective borrowing will be stubbornly resisted by the frugals (as well as parts of Germany).



The recovery funds will be distributed to governments using an allocation key based on criteria such as unemployment and income per person. Governments will submit spending and investment plans to the commission, which will evaluate them on the basis of its annual “country-specific recommendations”.

These are reform checklists which Ursula von der Leyen, the commission’s president, promises will pack “more punch”. Governments’ spending plans are also supposed to align with the commission’s priorities on climate and digitisation.

But the commission will not have the final say over whether to approve disbursements of funds. Rather like Germany during the euro crisis, the frugals do not trust Brussels’ technocrats to police the reform efforts of southern states. Instead Mark Rutte, the Dutch prime minister, secured an “emergency brake”: any government can object to another’s spending plans, delaying and complicating disbursements.

That allows him to tell Dutch voters that they have not signed a blank cheque for feckless southerners. But Lucas Guttenberg of the Jacques Delors Institute fears the brake could entrench mistrust inside the EU if beneficiary governments believe others are objecting in bad faith.

The deal falls some way short of the “Hamiltonian moment” some had hoped for it. Unlike America’s treasury secretary in 1790, no one has proposed mutualising EU countries’ legacy debts; not even the new common debt will enjoy joint-and-several guarantees. And the question of how the EU will pay back the sums borrowed has been left largely unanswered.

Attempts to increase the EU’s “own resources” (its revenues, in EU jargon) have traditionally been blocked by national parliaments, which jealously guard their powers of taxation. Yet from 2028 money must be found to repay the debt the EU will soon incur: if not from own resources, then from larger national contributions. Next year the commission will propose EU-wide taxes on digital firms and climate-unfriendly imports.

There are two areas of concern. The first is the price demanded by the frugals. To preserve the recovery fund’s grants, cuts fell on so-called “future-oriented” areas like research, health-care and climate adjustment. These, critics grumble, are precisely the priorities the frugals claim should take precedence over agricultural and regional subsidies, which remain intact.

Moreover, the frugals won big increases to the rebates they get on their contributions to the EU budget. (Austria’s doubled.) These small-country triumphs cost money, and will have to be fought over again when the next MFF comes around. Emmanuel Macron, France’s president, has long wanted to eliminate the rebate system.

A second set of concerns centred on how to prevent handouts to countries that undermine the rule of law. The EU has long struggled to bring wayward governments like Hungary’s and Poland’s into line. Both are large net recipients from the MFF, and some hoped to pressure them by attaching rule-of-law conditions to disbursements.

In the end the language agreed on is studiously ambiguous. It promises “a regime of conditionality to protect the budget” but is vague on how to obtain it. “Lots of people will want this to be made more precise,” says Katarina Barley, a German social-democratic MEP.

Ms Barley and her colleagues in the European Parliament, which must sign off on the deal, will soon have their say. Many criticised the deal’s cuts to favoured programmes and its lack of a provision for parliamentary oversight of the spending.

Yet although the parliament may complain about the deal, on past form it is unlikely to squash it. A budget must be in place from the start of next year. The parliament will not want to spark a crisis by blocking it.

Fears mount of a fresh Latin American debt crisis

Region’s weak economies appear ill-equipped to cope with a rapid rise in borrowing

Michael Stott in London and Andres Schipani in São Paulo


Women health workers pictured in Buenos Aires. Latin America struggled with multiple issues before the pandemic, from weak health systems to high levels of borrowing © Ronaldo Schemidt/AFP/Getty


Latin America is at the centre of the coronavirus pandemic, suffering some of the worst infection rates and highest death tolls in the world. Now economists warn that the region faces more bad news: its sickly economies risk falling into a new debt crisis even worse than the last big bust of the 1980s.

The continent was struggling with multiple “pre-existing conditions” before the virus took hold: anaemic growth, weak health systems, low tax revenues, high levels of borrowing and an over-reliance on commodity exports.

Now some of the longest lockdowns in the world, together with the accompanying costly rescue programmes, have wreaked havoc on public finances. Chile, Brazil and Mexico were among the five emerging markets globally with the biggest increase in debt to GDP this year, according to the Washington-based Institute for International Finance. Chile's total debt rose 30 per cent year-on-year in the first quarter.

Latin America “already had a lot of debt before the crisis,” José Ángel Gurría, secretary-general of the OECD, told the Financial Times, adding that after the “brutal reality” left by the virus the region would need much “greater resources and/or relief on its debt”.

Government borrowing in the region is spiralling, alarming investors. “It’s definitely the elephant in the room,” said Claudio Irigoyen, head of Latin American research at Bank of America, of the debt problem.

“The trade-offs in Latin America are much worse than in other regions. There’s a very under-developed health and sanitation system, which dictates strict lockdowns, but there’s also a very high degree of labour informality which means you can’t extend the lockdowns in time or you risk social chaos.”


Residents of Heliópolis, São Paulo, line up for a food donation © Alexandre Schneider/Getty


Advanced economies can tap vast resources from central banks because they have strong currencies and investors willing to continue buying their debt. Latin American countries have no such safety net and labour under the weight of a history of debt crises stretching back more than a century.

Argentina and Ecuador are already in default on their foreign debt and are negotiating restructurings. Argentina has adopted a more confrontational stance, while Ecuador has won praise for a more consensual approach. Neither has yet agreed a deal with all bondholders.

Brazil, the region’s largest economy, has seen its debt rocket as its precarious public finances feel the impact of a deep recession and sharply increased government spending. William Jackson at Capital Economics forecast that Brazil’s debt-to-GDP ratio could jump to close to 100 per cent this year from 76 per cent last year. “It’s a ticking time bomb,” he said.

Alberto Ramos, chief economist for Latin America at Goldman Sachs, said Brazil needed to convince investors that it could get its public finances back on track. “If you start with a very fragile fiscal position, you will come out with an even uglier fiscal position which requires . . . the right signalling from policymakers that this was just a one-off expansion . . . and that after that you will embrace a fiscal adjustment,” he said. “The biggest fear in the market is when exactly the authorities will embrace such an adjustment.”

President Jair Bolsonaro’s government insists that pro-market reforms are still alive and will resume later this year. But Brazil faces elections in 2022, making it highly unlikely that ministers will adopt painful austerity measures ahead of the vote.

Line chart of Latin America & Caribbean, gross public debt as a % of GDP showing Debt in the region had been on a rising trend before the virus hit


Mexico, the region’s second-largest economy, started the pandemic with relatively sound public finances and low levels of debt. However, President Andrés Manuel López Obrador’s decision to press on with an austerity programme, instead of spending to save the economy, is likely to deepen the country’s recession and stymie its recovery.

The IMF forecasts that Mexico’s GDP will plummet 10.5 per cent this year, which would make it the hardest-hit major emerging market in the world. Lower oil revenues and the virus impact mean the country’s sovereign debt is likely to lose its coveted investment grade credit rating in 2022 unless policy changes, according to Morgan Stanley. Colombia, the region’s fourth-biggest economy, has sounder government policies but risks a downgrade in the first half of next year because of weak public finances, the bank says.


José Ángel Gurría, secretary-general of the OECD, says Latin America will need greater relief on its debt © Stefan Wermuth/Bloomberg


The OECD’s Mr Gurría, who is a former Mexican finance minister, said investors had little tolerance for rising debt in emerging markets. “Once a country passes 50 per cent [debt to GDP] they put it on warning, once it passes 60 per cent they put flashing lights on it and once they pass 70 or 75 per cent . . . at that moment all the alarms go off”, he said.

Colombian president Iván Duque has argued that rating agencies should suspend their normal evaluation criteria for sovereign ratings because of the pandemic but his calls are unlikely to be heeded. Instead, investors are likely to favour nations which had built rainy day surpluses before the virus and are better placed to ride out the storm.

Peru and Chile are the best examples. “Peru’s financing strategy before Covid was practically a zero-debt policy,” Maria Antonieta Alva, Peru’s finance minister, told the FT. The country’s debt-to-GDP ratio was 26 per cent late last year and even after a generous stimulus plan, was still only forecast to rise to about 30 per cent, she added.


Eric Parrado, chief economist at the Inter-American Development Bank, forecasts that average debt levels across the region will rise from 57 per cent before the pandemic to 71-76 per cent by 2022. He said the rapidity of the debt build-up was particularly worrying.

“It’s not so much the absolute level of indebtedness which matters, as the speed at which it rises,” he said. “It’s rather like a bullet: if you throw it, it has no impact, but from a gun it’s the speed that kills you.”

HSBC profits plunge 96% as loan-loss provisions jump on coronavirus

Europe’s largest bank warns of impact of US-China friction as crisis hits loans

Stephen Morris in London and Primrose Riordan in Hong Kong


HSBC has been caught in the middle of tensions between the US and China © Reuters


HSBC unveiled an almost seven-fold jump in reserves for bad loans and a precipitous drop in second-quarter profit, as Europe’s largest lender laid bare the damage inflicted by the coronavirus crisis.

The bank, which is also caught in the crosshairs of escalating tensions between the US and China, said on Monday that provisions for potential loan losses surged to $3.8bn in the quarter, about $1bn more than analysts had expected.

The move means HSBC so far has set aside $6.9bn for souring loans in 2020 and the bank raised its forecast for provisions for the full year to between $8bn and $13bn, reflecting “the deterioration in consensus economic forecasts”.

The bank also said it planned to “accelerate” its 35,000 job-cuts programme announced earlier this year and may consider further restructuring measures to trim costs. 

Chief financial officer Ewen Stevenson told the Financial Times the bank was expecting a “much sharper” V-shaped recession, with any recovery pushed further out into 2021.

He said the deepening pessimism was driven “by the path of Covid, whether we can see the path to an effective vaccine, the outlook for Brexit . . . big events that we expect to have clarity on in the next six months, which will have a meaningful impact”.

HSBC’s sharp increase in provisions echoed those of European peers. Last week Santander boosted reserves to €7bn, Barclays to £3.7bn and Lloyds to £3.8bn. The six-largest US lenders collectively provisioned $61bn in the first half, levels last seen after the 2008 financial crisis.

As a result, HSBC’s second-quarter net income was almost wiped out, plunging 96 per cent to $192m, far below the $1.3bn expected by analysts. Revenue fell 4 per cent to $13bn largely due to a decline in retail banking income, which was partially offset by a surge in trading at the investment bank.

“We realise that the revenue scenario we now face post-Covid is more challenged, so we will look at what we announced in February and what other [strategic] actions we may need to take in response,” chief executive Noel Quinn told the FT.

The stock fell 6.5 per cent in London following the earnings announcement, to its lowest level since 2009. The shares have dropped 42 per cent this year as the bank has battled Covid-19, ultra-low interest rates and a confrontation between China and the west over Hong Kong, its most important market.

The results reflect a “bleak outlook” for the company, said RBC analyst Benjamin Toms. The share price fall is “partially driven by renewed friction between the US and China after [President Donald] Trump announced a plan to ban TikTok” over security concerns about the video app. 
While based in London, HSBC makes the vast majority of its earnings in Asia. For the past five years it has been reducing investment in the US and Europe and redeploying assets to mainland China.

The bank on Monday pointed to the risk of being caught between the two powers after Beijing introduced a controversial national security law in Hong Kong. Washington has responded to the legislation — which HSBC publicly backed, breaking with its longstanding policy of neutrality — by threatening sanctions against Chinese and Hong Kong government officials.

Hong Kong’s national security law makes it illegal to co-operate with foreign sanctions regimes, a potential complication that creates “additional risks for the group”.

“Disagreements over trade, technology, human rights and the status of Hong Kong could result in people, sanctions, regulatory, reputational and market risks for the group,” the bank said in its earnings release. 


Line chart of Share price (pence) showing HSBC flirts with lowest level since spring 1996


“HSBC has to operate in a difficult geopolitical environment. Current tensions between China and the US inevitably create challenging situations for an organisation with HSBC’s footprint,” Mr Quinn said. 

Mr Quinn said it would obey the controversial national security law and Mr Stevenson pointed out that despite being caught in the crossfire, the bank has posted three quarters of consecutive revenue growth in mainland China. Deposits also grew in Hong Kong in the quarter.

“It’s very hard to point to any meaningful impact at the moment on the business,” said Mr Stevenson. “We are very pleased with the resilience of Asia for us more generally.”
Still, the deteriorating economic outlook is a serious challenge for Mr Quinn, who was named chief executive earlier this year with a mandate to speed up a revamp of the bank.

HSBC said uncertainties due to the coronavirus pandemic could also “adversely affect” its dividend policy, which it will not re-evaluate until the end of the year.

Pressure from the Bank of England forced HSBC to cancel its dividend for the first time in 74 years. The move angered its large retail investor base in Asia and reignited a debate among executives over whether the lender should move its domicile to Hong Kong.

Is a China-US “Rivalry Partnership” Possible?

One must hope that China and the United States will eventually arrive at an understanding that great-power competition does not preclude cooperation to resolve major global challenges. The main challenge will be to avoid a damaging derailment during what is likely to be a long and bumpy journey toward this destination.

Mohamed A. El-Erian

elerian127_FRED DUFOURAFP via Getty Images_trumpxi


LAGUNA BEACH – Not a day seems to pass without further evidence of the mounting economic tensions between China and the United States, the world’s two largest economies. This growing antagonism will have a bigger immediate impact on China than on the US, as bilateral decoupling fuels a broader ongoing process of deglobalization. And the negative spillover effects for a subset of other countries – which I call the dual-option economies – could be particularly significant.

Even from a purely economic perspective, it is hard to envisage any durable abatement of Sino-American tensions in the near future. And that is before factoring in national-security issues, let alone those relating to technology and human rights.

The economic and financial implications of COVID-19 are uniting three segments of the US economy in decoupling from China. This dynamic is unlikely to abate anytime soon and will be mutually reinforcing, meaning that one plus one plus one adds up to more than three.

For starters, the US government recently escalated a long-running tit-for-tat conflict by imposing bilateral economic and financial sanctions on China, with explicit bipartisan backing from Congress. The blame game over the pandemic serves to reinforce the tougher US stance, which is unlikely to change, regardless of the outcome of this November’s presidential and congressional elections.

America’s corporate sector also will drive decoupling, as more US firms look to tilt away from efficiency and toward resilience. This entails “near shoring,” “reshoring,” or “localization,” which implies moving Western supply chains out of China. Some industries, such as pharmaceuticals and technology, will likely come under pressure from governments in the US and elsewhere to do the same.

This does not mean that Western multinationals will abandon China anytime soon. Most will instead look to move toward an “in China for China” model. But this approach will lessen these firms’ involvement in the country, increase their vulnerability, and limit their ability to inform and influence outcomes that affect them.

US households will contribute to the decoupling, too. With the recovery from the deep coronavirus-induced recession likely to be slow, and the global economy in a highly desynchronized phase, part of the recent jump in US unemployment is likely to prove frustratingly slow to reverse.

Although this multifaceted decoupling process will create economic headwinds for both the US and China, its impact is likely to be asymmetrical. Specifically, China is more vulnerable, because it still needs the global economy to facilitate its impressive development process.

The issue here is not so much China’s short-term growth performance, given that a V-shaped recovery is already underway. Rather, economic decoupling threatens to complicate the country’s highly challenging middle-income transition, which has proved to be the trickiest stage of the development process for many other economies.

Decoupling will also make it costlier for China to sustain some of its recent international economic ventures, such as the signature Belt and Road Initiative (a massive transnational infrastructure investment program) and its large-scale lending to many developing countries. In particular, the Chinese government may find it harder to push back against the narrative that too many of these alliances are transactional and one-sided, and not strategic enough.

Finally, rising Sino-American tensions may have major implications for dual-option countries such as Australia and Singapore, which have maintained strong national-security links with the US and equally strong economic ties with China. While the cost of this dual-option strategy has been low so far, it will now likely rise, as is already increasingly the case in technology.

These countries will have to consider the possibility that they will be asked to choose between the two leading global powers – something that I suspect they would be unwilling and unprepared to do. Although this is the most important foreign-policy question facing many governments, so far it has generated relatively little discussion.

All these factors point to an unusually uncertain macroeconomic and microeconomic outlook that is ever more vulnerable to policy mistakes and market accidents. The preferred destination for all is what former Google CEO Eric Schmidt calls a “rivalry partnership” between the US and China, whereby healthy competition does not preclude the cooperation and shared responsibility that are critical to tackling major global challenges such as climate change and pandemics.

The challenge will be to avoid a damaging derailment during what is likely to be a long and bumpy journey toward this goal.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

miércoles, agosto 05, 2020

OH. MY. GOD. / THE REFORMED BROKER

Oh. My. God.

by Joshua M Brown


Updating all my macro models to incorporate a “get long housing during pandemics” trade so that I can impress you next time.
Look at this s***
 
You can borrow at two-and-change percent to buy a house as you flee the city for the suburbs, now that your current or future job probably doesn’t care where you do it from.
 
RIP Manhattan apartment prices. Basically money is free and you can buy a McMansion on the internet right now. Almost nothing down, almost zero cost, if your credit isn’t bad.
Houses for between one and two million dollars in my town are being snapped up over the phone on the day they list.
Bidding wars are common and in some cases the buyers haven’t even visited the property.
 
I own this REIT in my retirement account, where I reinvest the dividends. I do this sort of thing to resist the temptation of going out there and pretending I can do real estate as a hobby. It’s called Invitation Homes.
 
They own 80,000 single family houses (not apartment buildings, houses) in some of the hottest suburban areas in America, like SoCal, Florida, Atlanta, etc.

People who were selling this thing into the pandemic had the story backwards.  This ain’t your run-of-the-mill recession.
It’s never been more important to have somewhere to live. And for many, space is now more important than proximity to an office building area or a culturally enthralling downtown.

That’s what the pandemic has changed for millions of people.
So if they’re not ready to buy a house, a single-family house they can rent in a great neighborhood is the answer. Invitation Homes owns more single-family rental houses than any other company or entity in America.
The real money is in selling ancillary services to their tenants, like entertainment services, landscaping, alarm systems, dog walking, etc. They can also be opportunistic about selling some of their portfolio of homes into a raging bull market like this one.
But we’ll talk about that some other time…
Household formation is exploding as the millennials round the corner into the early stages of middle age. Marriage, kids, promotions, desire for space, second car, back fat.
They want homes. Houses.
They’re not so different from their parents after all.
Unfortunately – and, believe it or not – we are under-housed in the United States.

Much of the existing housing stock is out of date or unsuitable.
Older people are staying longer in their houses than they once did a generation or two ago. We need more construction.

Here are the homebuilders index ETFs, absolutely on fire this summer: