Unnecessary Head Scratching: Q3 2020 Z.1 

Doug Nolan


Airbnb traded to $165 in early Thursday trading, more than doubling its Wednesday evening $68 IPO price - valuing the company north of $100 billion. 

After pricing its IPO shares at $102, DoorDash saw its stock price quickly trade up to $184, valuing the food delivery business at about $59 billion. 

December 11 – Bloomberg (Bailey Lipschultz and Drew Singer): 

“The first initial public offerings in the wake of Airbnb Inc.’s red-hot debut soared, led by four nascent drug developers. The massive gains for AbCellera Biologics Inc., Certara Inc., Nanobiotix and 4D Molecular Therapeutics Inc. showcased Wall Street’s appetite for both newly public companies as well as blossoming drug developers... AbCell soared more than 200% above its IPO price on Friday, while 4D climbed by 84%. Vivos jumped 71%, Certara by 51% and Nanobiotix is up 25% from its offering price.”

December 11 – Bloomberg (Sonali Basak): 

“The exuberance is stunning. Airbnb -- valued at $18 billion just seven months ago -- was worth more than $100 billion when it went public on Thursday. It’s still valued at more than Marriott and Hilton combined. The price differential to its IPO had many on Wall Street scratching their heads.”

Note to head scratchers: Unnecessary. 

The blistering IPO market is but one of the myriad late-cycle manifestations of Acute Monetary Disorder. If Tesla can trade with a market capitalization approaching $600 billion (more than double Toyota!), what’s keeping Airbnb from sporting a snazzy $100 billion valuation? Wall Street should waste no time in bringing scores more IPOs to market – with so many billionaires in the making. 

November’s record $121 billion ETF inflow – boosting the y-t-d flow tsunami to a record $659 billion. SPACs and frenetic retail call option buying (one can only imagine current hedge fund derivatives strategies). 

Friday’s record $18 TN of negative-yielding global bonds (now including overindebted Portugal and Spain). 

Bund yields at negative 0.64%. The bottom line: Securities markets – profoundly speculative and unmoored. These darling IPOs – along with the equities market more generally – are dispensing some serious “wealth creation.” 

Future historians will recognize it much more in the context of Bubble period wealth redistribution and destruction. 

For now, this fiasco is one hell of party (patrons luxuriating at the endless punchbowl). 

It’s a globalized Bubble – notably central bank Credit, Chinese finance, speculative leverage/securities Credit, and sovereign debt across developed and EM economies. 

And once a quarter we have the opportunity to examine the Fed’s Z.1 “flow of funds” report – data that help illuminate the U.S. financial sector’s contribution to the Great Global Credit Bubble. 

As the below analysis will highlight, the U.S. system is in the throes of runaway central bank “money” creation; unparalleled system Credit growth; unprecedented government debt expansion; and record “money” supply inflation, along with an attendant powerful inflationary dynamic throughout the bubbling securities markets feeding into inflated Household perceived wealth (Net Worth). 

The numbers are so huge as to be numbing; nothing remotely normal about any of this. 

Total Non-Financial Debt (NFD) expanded $737 billion during Q3 to a record $60.113 TN. Through the first three quarters of 2020, NFD surged an unprecedented $5.740 TN, or 14.1% annualized. NFD was up $6.181 TN over the past year (11.5%) and $8.817 TN (16.7%) over two years. For perspective, NFD expanded on average $1.830 TN annually over the past decade. NFD has ballooned 71% since the end of 2008.

Washington continues to propel borrowing mayhem. 

Outstanding Treasury Securities jumped $530 billion during the quarter to a record $22.900 TN. Treasuries were up $3.882 TN over three quarters, with year-over-year growth of a staggering $4.329 TN, or 23.3%. Since the end of 2007, Treasuries outstanding have inflated $16.849 TN, or 278%. Q3 federal Expenditures were up 50% y-o-y, while Receipts were about flat. Borrowings accounted for about half of federal spending during the quarter. Noteworthy as well, at $429 billion the federal deficit for the first two months of the new fiscal year (post Q3) is running 25% ahead of the year ago level.

Yet Treasury is not the only profligate borrower residing within the beltway. 

GSE (government-sponsored enterprises) Securities jumped $123 billion during Q3 to a record $9.866 TN. GSE Securities increased $437 billion y-t-d, $523 billion y-o-y, and $845 billion over two years. That these thinly (I’m being generous) capitalized financial juggernauts continue to balloon ensures massive future taxpayer bailouts. I suppose there’s some pressure on the GSEs to crank out securities to be conveniently monetized by our overbearing central bank. 

Corporate Bonds increased $97 billion during the quarter to a record $14.973 TN, with a one-year increase of $1.016 TN (7.3%). Corporate bonds are on pace for the strongest annual expansion since 2007’s record $1.398 TN. 

Total Debt Securities rose $734 billion during the quarter to $52.619 TN, with record one-year growth of $5.851 TN. At 249%, Q3 Total Debt Securities-to-GDP compares to 213% at the end 2008; 158% to end the nineties; 126% to close the eighties; and 74% to conclude the seventies. Total (Debt and Equities) Securities rose $5.206 TN during Q3 to a record $109.687 TN – with a one-year gain of $11.834 TN, or 12.1%. Total Securities have inflated $63.504 TN, or 138%, since the end of 2008. At 518%, Q3 Total Securities-to-GDP compares to 373% at the end of 2007; 351% to end the nineties; 194% to close the eighties; and 117% to conclude the seventies. 

With housing finance the cheapest ever, no surprise that mortgage Credit is now expanding at the strongest pace since 2007. 

Overall mortgage Credit increased $227 billion during Q3 to a record $16.562 TN. This was up from Q3 ‘19 growth of $193 billion and the largest gain since Q3 2007. 

Household Mortgage borrowings increased $165 billion (vs. Q3 ‘19’s $98bn) to a record $11.507 TN, also the fastest expansion (5.8% annualized) since Q3 2007.

The Household Balance Sheet remains fundamental to Bubble Analysis. Bolstered by gains in both Financial Assets and Real Estate, Household Assets surged $4.080 TN, or 12.0% annualized, during Q3 to a record $140.310 TN. Household Assets have now almost doubled from year-end 2008’s $76 TN. After declining $6.814 TN during Q1, Household Assets experienced an unparalleled six-month gain of $12.418 TN. 

With Household Liabilities rising $262 billion (largest gain since Q2 ’07!) to a record $16.790 TN, Household Net Worth jumped $3.817 TN during the quarter to a record $123.520 TN. Net Worth was up $8.768 TN, or 7.6%, y-o-y, with a three-year gain of $20.541 TN, or 20%. At 584%, Household Net Worth-to-GDP compares to previous cycle peaks 493% during Q1 2007 and 447% during Q1 2000.

Household holdings of Financial Assets surged $3.398 TN during Q3 to a record $98.713 TN. Financial Holdings were up $25.890 TN, or 36%, over five years. At 467%, Q3’s ratio of Financial Assets-to-GDP was up from 328% at the Q1 2009 cycle low - and compares to cycle peaks 377% during Q3 2007 and 356% for Q1 2000. 

Household Total Equities (Equities and Mutual Funds) jumped $2.431 TN during the quarter to a record $32.426 TN, with an unprecedented six-month gain of $7.775 TN (more than reversing Q1’s $6.6 TN drop). At 153%, Q3 Total Equities holdings-to-GDP compares to a cycle low 53% during Q1 2009 - and previous cycle peaks 104% during Q2 2007 and 117% for Q1 2000.

Household Real Estate holdings jumped $430 billion during Q3 to a record $34.867 TN. At $1.596 TN, the y-o-y increase in Real Estate holdings is the largest since 2006. And at 165%, Real Estate-to-GDP compares to Q2 2012’s cycle low 125% and the previous cycle peak 190% during Q3 2006. 

With Washington and market-based finance dominating system Credit expansion, the banking system was relegated to second class bit player for the quarter. 

Bank Assets expanded $130 billion during Q3 to a record $22.903 TN. Bank Loans actually contracted $171 billion during the quarter (though Mortgage loans increased $24bn) to $12.160 TN. The Bank Asset “Reserves at the Fed” contracted $43.8 billion during Q3 to $2.743 TN - but with an unprecedented year-over-year rise of $1.316 TN. 

What has the banking system been doing with much of this central bank (play) “money”? 

Bank Debt Securities holdings jumped another $280 billion during the quarter to a record $5.509 TN, with an unprecedented one-year gain of $868 billion (18.7%). 

For comparison, 2019 posted an annual record $347 billion jump in Debt Securities holdings – after averaging $153 billion annually over the previous 20 years. Over the past four quarters, Bank holdings of Treasuries increased $326 billion, Agency Securities $458 billion, and Corporate bonds $43 billion. 

On the Bank Liability side, Total Deposits rose another $180 billion to a record $18.217 TN, with an unparalleled one-year gain of $3.018 TN (19.9%). Total Bank Deposits ended the quarter at 86% of GDP, up from 62% to end 2008. Total system Checking and Time Deposits jumped $4.779 TN, or 27.5%, year-over-year to $22.132 TN. For perspective, Total Deposits expanded on average $534 billion annually over the previous 25 years. Contracting $228 billion during Q3 to $4.408 TN, Money Market Fund Assets were nonetheless up $966 billion, or 28.0%, year-over-year.

Federal Reserve Assets expanded $39 billion during Q3 to a record $7.403 TN – or 35% of GDP. Fed Assets inflated $3.024 TN in three quarters and $3.393 TN, or 85%, over five quarters. Fed Assets ended June 2008 at $951 billion, or 6% of GDP. As such, Federal Reserve Assets have inflated 678% in just over 12 years. Quarter-end Fed holdings included $5.056 TN of Treasuries and $2.198 TN of Agency/MBS Securities.

Rest of World (ROW) holdings of U.S. Financial Assets jumped $1.731 TN during Q3 to a record $37.117 TN, or 175% of GDP. 

ROW holdings ended 2009 at $14.362 TN, or 92% of GDP, and the nineties at $5.621 TN, or 58% of GDP. Holdings of U.S. Debt Securities rose only $45 billion during Q3 to a record $12.768 TN, with a one-year gain of $673 billion. Corporate Bond holdings jumped $94 billion during the quarter to a record $4.302 TN, with a notable one-year expansion of $392 billion. Benefitting from rising stock prices, ROW Total Equities holdings surged $931 billion during the quarter to a record $9.969 TN (one-year gain $1.483 TN). Also buoyed by inflating values, ROW U.S. Direct Foreign Investment surged $731 billion to a record $9.799 TN. 

Nothing short of an incredible three quarters of U.S. “money” and Credit growth. 

Next week China.

Buttonwood

Is there an M&A boom coming?

Finance, economics and psychology all come into it



Imagine you are the boss of a public company. Normally you are busy making decisions, visiting outposts, talking to customers, suppliers and employees. The meetings are endless. You have little time for reflection. 

Then, suddenly this spring, after a bout of firefighting, the diary is bare. You sit in your study, hiding from the family, and ruminate—about what your firm lacks, about what it has too much of. You call a friendly investment banker and say: “I may need to do a deal soon.”

The results of such stay-at-home strategy sessions are now apparent. The past few weeks have seen a burst of M&A activity. There are merger deals of all kinds, in all parts of the world, across many industries—from tech and health care to banking and publishing. 

The dealmakers at investment banks are joyful. The last time things were this busy, they say, was in 2007-08.

Shareholders have some call to fear the worst. There is a weighty body of literature, some of it dating from the stockmarket bust of the early 2000s, that says mergers do not create value for the acquiring company. 

More recent research is more nuanced. Mergers overseen by serial acquirers tend to add to value, it finds. Once M&A gets going, things can quickly get out of hand, of course. But this early in the economic cycle, and in the unusual circumstances, mergers are more likely to have a coherent logic to them.

To understand the burgeoning M&A boom, go back to January and February. Bankers had a full pipeline of deals. 

Then the pandemic took hold. A dealmaking CEO had to think again. If you had a merger in the works, you pulled it. You couldn’t project numbers with confidence. 

You didn’t know if you could afford a deal, or finance it. Even then, the calls with bankers never stopped. In place of black-tie events came virtual schmoozing—from one home study to another.

The deal pipeline started to thaw in June or July. Announcements have been coming thick and fast since. A lot of this is down to market conditions, which quickly turned favourable and have remained so. Equity prices have roared back from their lows of late March. 

The companies with shares that rallied first—technology and health care—found themselves with a highly valued currency with which to pay for deals. The corporate-bond market has reopened with a vengeance, making debt finance available. 

Interest rates are at rock bottom and likely to stay there for a while. Private-equity firms have a lot of unused capital (“dry powder”) to call upon.

But financial conditions are not the only explanation. The economy is another. The pandemic has given companies new problems to solve and made some existing ones more pressing. M&A offers a fix. Debt-laden firms need to sell assets. Buyers want to plug some strategic holes. 

The rationale for a deal might be to secure supply chains, to diversify across geographies, to acquire a specific (often digital) capability; or simply to bolster revenues or cut costs when the outlook for profits is rather bleak. Some of the transactions that are happening now are deals of opportunity, says Alison Harding-Jones, head of M&A in Europe, the Middle East and Africa for Citigroup, a bank. 

And some are deals of necessity. Covid-19 has created winners and losers across industries, but also within them. CEOs of winning companies may find that the acquisition on their lockdown wishlist is available. Those of losing companies must simply try to sell wisely.

Both kinds will be wary of the response from shareholders. The risks of getting the price wrong or of underestimating the hassle of integrating acquisitions are ever-present. 

But deals that have a decent-looking strategic case are likely to be given the benefit of the doubt. Serial dealmakers will get the most leeway. 

Research from McKinsey, a consultancy, finds that companies that do lots of smallish acquisitions over time tend to add value to them. Such “programmatic acquirers” take more care in assessing targets, aligning m&a with broader corporate strategy and integrating their purchases.

As a rule big, one-off deals are riskier. The dangers seem small now but will grow the longer the M&A boom goes on. Bosses will start to worry that their dealmaking rivals look more in command of events. 

They will be prone to the ill-advised, grandiose merger. When the boom is all over, a few such souls will find themselves back in the study at home, but this time because they no longer have an office to go to, asking themselves: “Why did I do it?”

The right kind of discipline

Budget deficits should depend on the unemployment rate

Fights about stimulus are breaking out everywhere. Time for rules-based budgeting


Economic forecasters could be forgiven for feeling a sense of whiplash. As covid-19 runs rampant in Europe and America the world economy is taking another hit from the pandemic. America’s consumers are gloomy; Europe’s service sector is contracting. 

At the same time the growing prospect of mass vaccination in 2021 raises the prospect of an imminent recovery. In 2020 economists were too pessimistic about how fast growth would rebound after the first wave of infection, especially in America. A vaccine might allow another snapback in 2021.

A springtime consensus that governments should spend big on rescue packages has given way to bickering and confusion. In America Steve Mnuchin, the treasury secretary, is bringing to an end some of the Federal Reserve’s emergency programmes. 

Janet Yellen, whom President-elect Joe Biden this week chose to be Mr Mnuchin’s successor, will be greeted by a legal and political storm about the Fed’s lending authority. 

Congress looks unlikely to agree to renew emergency spending on unemployment insurance and loans before Mr Biden takes office. In Europe Hungary and Poland are holding up the eu’s budget and its €750bn ($900bn) “recovery fund” in a spat over whether the disbursement of cash should be conditional on countries upholding the rule of law. 

The European Commission has warned several countries about their debts. Britain’s government is trying to reconcile an instinctive suspicion of deficits with a recognition that the economy still needs life support, in part by cutting the foreign-aid budget.

Clear thinking is needed. It should start with the recognition that public debts in rich countries, though soaring, are sustainable because of rock-bottom interest rates. 

Despite borrowing 19% of its GDP this year, Britain will save about £13bn ($17bn) on debt interest compared with last year. While rates are low, higher debt will not by itself demand belt-tightening after the crisis.


A different problem will arise if the pandemic scars economies, reducing tax revenue and increasing welfare spending for a long time. The result would be a persistent shortfall in the public finances. 

Yet the extent of the pandemic’s lasting impact is highly uncertain owing to the novel nature of the crisis. 

The main driver of recent economic fluctuations has been government diktats about whether shops and restaurants can stay open, the impact of which baffles orthodox economic models. 

America’s unemployment rate undershot the Fed’s summer forecast by more than two percentage points within a matter of months. The scenarios presented by Britain’s official forecasters this week ranged from there being no enduring damage to a long-term hit to GDP of 6% a year.

It is better to wait to see how large a hole the pandemic leaves in budgets than to risk slowing the recovery with premature austerity. Britain has chosen to wait. More countries should follow the example of Australia and pledge not to tighten fiscal policy actively until the economy has crossed a defined threshold—in its case an unemployment rate of 6%. 

Much as clear “forward guidance” by central banks helps monetary stimulus to work, fiscal rules would help boost confidence in the future.

Sadly, putting in place a new, formal, fiscal framework will be hard in America, with its divided and gridlocked political system. All the same, a pragmatic deal may be possible in the short run—Democrats should accept the smaller stimulus on offer from the Republicans, rather than hold out for the enormous spending they would prefer. 

With the unemployed burning through their savings and small firms facing a bleak winter, the speed of emergency support matters more than its size.

The consequences of any policy mistakes will be all the greater today because low interest rates mean that central banks cannot easily ride to the rescue. Governments can afford to wait a little longer before tightening the purse-strings. 

And waiting is the cautious and responsible choice.  

Why a private league is a ‘dangerous game’ for Europe’s football elites

Investors who are counting the financial cost of the pandemic continue to argue for a radical breakaway competition

Murad Ahmed in London 

© FT montage; Reuters; Getty Images | Clubs and players at the top of the pyramid would be even richer under plans for a European super league


Towards the end of his resignation speech, Josep Maria Bartomeu, president of FC Barcelona, the world’s highest-earning football club, hurled a bombshell.

“I can announce something that will change in an extraordinary way the future revenue of the club for years to come,” he said in October. “The board of directors have approved the acceptance of requirements to take part in a future European super league of clubs, a project put forward by the biggest clubs in Europe.”

Though providing few details, Mr Bartomeu became the first senior football executive to publicly confirm the existence of a radical project — one that, for months, had been discussed only in fevered WhatsApp messages and clandestine meetings between the sport’s power brokers as the coronavirus crisis threatened their revenue model.

The richest clubs were contemplating a breakaway competition that would supersede the existing structure of the world’s favourite sport. The motivation was clear: to secure more frequent matches between heavyweight European teams, believing this will draw higher broadcasting and sponsorship income and create a better spectacle on the pitch.


Josep Maria Bartomeu, front right, at Camp Nou. The outgoing president of FC Barcelona said in October that his club's 'board of directors have approved the acceptance of requirements to take part in a future European super league' © Albert Gea/Reuters

Gianni Infantino, president of Fifa, world football’s governing body, says agreeing the new 10-year calendar of competitions 'is crucial for the future' of the sport and should be settled next year © Leonhard Foeger/Reuters


Although such a move risks the ire of loyal supporters — who remain energised by local rivalries — club owners are running increasingly international brands, with fanbases in the US, China and beyond. 

And with the globalisation of football came a sense of entitlement. The biggest sides drew the largest worldwide audiences and so therefore should gain an even greater share of the financial rewards.

Yet a super league also risks devaluing or even destroying the very thing that has transformed top clubs into multibillion-euro companies: existing national and continental contests that have built followings over decades.

It is not a new idea. In the early 1990s, a group led by Silvio Berlusconi, the former Italian prime minister, media mogul and one-time owner of AC Milan, considered a breakaway European competition. 

Again, in 2016, some of the continent’s biggest clubs, including Germany’s Bayern Munich, discussed joining a new tournament backed by US billionaire Stephen Ross, according to leaked documents revealed by Der Spiegel magazine.

On each occasion, the game’s governing bodies avoided a revolt by ensuring more money from existing competitions flowed to the wealthiest clubs. This has exacerbated the imbalances within the sport. 

Revenues at the 10 richest clubs in Europe were €6.3bn last season, up from €2.6bn a decade earlier, according to the consultancy Deloitte.

These increases reflect gains from broadcasting and sponsorship deals across football. But a handful of top clubs in each of the “big five” leagues of England, Spain, Germany, Italy and France have pulled away from their national peers, partly through regular appearances in the elite Champions League, where every year €2bn in prize money and TV contracts is distributed between participating clubs.

Qualification for that tournament stems from performing well in national leagues, ensuring domestic competitions have remained vibrant. Some of the wealth from European competitions is shared through “solidarity” payments worth €130m last season to clubs in smaller countries.

A breakaway that does not depend on qualification via a domestic league would create an unbreachable chasm between the biggest teams and the rest of the game. If the rupture occurs, “this fairytale of being in the same football family comes to an end”, says the head of a top national league, referring to the interconnected nature of the sport at all levels. 

“But it depends if the clubs have the courage. I’m not sure they will really dare to do so.”


Using Covid ‘to prove a point’

Interviews with more than 20 leading club, league, media and financial executives — some speaking on the condition of anonymity — suggest a breakaway league is more likely than ever before. 

They highlight three main factors: a new “international match calendar”, which dictates the timing of club and national team competitions, expires in 2024 and is set to be renegotiated; the financial impact of the pandemic; and a new generation of institutional investors, particularly from the US, driven more by financial returns than emotional ties.

Gianni Infantino, president of Fifa, world football’s governing body, says agreeing the new 10-year calendar “is crucial for the future” of the sport and should be settled next year. Some football executives suggest the disclosure of the super league talks are a bargaining chip to force Uefa, European football’s governing body, to cram more lucrative Champions League ties into this busy schedule.

“History repeats itself,” says Andrea Agnelli, president of Juventus, champions in Italy for the past nine years, and chair of the powerful European Club Association, which represents more than 200 top teams. 

He is, instead, spearheading efforts to reform existing continental competitions. “Go back and look at what happened 25 years ago when changes were first introduced to the Champions League,” he says. “Everyone was against it. Now, everybody loves it.”



Juventus coach Andrea Pirlo, back right, with club president Andrea Agnelli, who is spearheading efforts to reform existing continental competitions © Massimo Pinca/Reuters

Liverpool FC owner John W Henry with his wife after last year's Champions League final. The US billionaire is in talks over a stock market listing of his sports holdings, valued at $8bn © Carl Recine/Reuters


The talks are happening against a backdrop of financial anxiety. Across Europe, lost match-day income because of empty stadiums, as well as discounts demanded by broadcasters and sponsors for postponed games during lockdowns, will result in €3.6bn in lost revenues over the next two years, according to the ECA.

Barcelona has reported a coronavirus-induced shortfall of more than €200m, leading to a pre-tax loss of €100m last season, which has accelerated the breakaway discussions, according to people briefed on the talks.

“It’s essentially using Covid and the existing chaos . . . to prove a point,” says one club owner. “Small clubs in certain countries can’t survive the crisis and [the super league] is the way to protect football.” 

The other main factor is the arrival of owners and investors seeking a return on investment from the game. This includes billionaire US moguls, such as John W Henry, who bought English Premier League champions Liverpool in 2010, and is in talks over a stock market listing of his sports holdings — which also includes baseball’s Boston Red Sox — valued at $8bn.

US investment banks have helped England’s Tottenham Hotspur and Italy’s Inter Milan tap bond markets. Hedge funds are lending to clubs and, in the case of Elliott Management at AC Milan, acquiring them.

“The mindset of the Americans when it comes to capital is the thing that’s really different this time,” says a top European football official. “You have the Glazers [the family which owns Manchester United] and John Henry who have spent time understanding the game. You have money from private equity pouring into Italian football.

“You have Wall Street,” he says. “It’s pretty relentless and they will come again and again.”


$6bn debt financing package

Mr Bartomeu’s resignation was forced by an impending vote of no confidence from Barcelona’s members. His parting shot was an attempt to establish a legacy beyond being the man who fell out so badly with Lionel Messi — the club’s greatest ever player — that the Argentine forward threatened to leave.

He discussed going public with the true mastermind of the super league: Florentino Pérez, Mr Bartomeu’s counterpart at bitter Spanish rivals Real Madrid, according to people familiar with the discussions. 

For more than a year, Mr Pérez has sought private backing for his plan. It would involve up to 20 clubs in a “closed” division from which teams cannot be relegated, playing midweek games to allow clubs to continue to participate in their domestic leagues at weekends. It is viewed as a replacement for the Champions League, rather than threatening the primacy of domestic leagues.



Mr Perez initially approached private equity groups, such as CVC Capital Partners, before a plan was developed with investment bank JPMorgan, which is assembling a $6bn debt financing package to launch a European Premier League, according to those with knowledge of the talks.

As first reported by Sky News, the money would be paid back against future media rights sales, and will cover start-up costs and guarantee prize money to clubs. Real Madrid, Barcelona, CVC and JPMorgan all declined to comment for this article.

The structure follows the model of US sports such as the National Basketball Association, and is designed to provide more consistent revenues by guaranteeing an increased number of European matches.

It also envisages governance reforms relatively uncommon in football, such as the introduction of player salary caps, which could boost profitability if it can rein in spiralling wages and transfer fees that make up the biggest cost at most clubs. In the 2018-19 season, player salaries in clubs in the big five national leagues increased by €1bn to €10.6bn.

“The point of the European super league project is to create a monopolist employer of players,” says François Godard from research group Enders Analysis. “Cost control is where they must take action.”

Captain Sergio Ramos of Real Madrid shakes hands with club president Florentino Perez, the mastermind of the super league © Denis Doyle/Getty

Lars-Christer Olsson, chair of European Leagues, says “we don’t want anything to be established to make the Champions League closer to a private league' © Gualter Fatia/Getty

Domestic repercussions

The super league discussions are having repercussions across the sport. In February, a group of key figures in English football, including Mr Henry and Joel Glazer, co-chairman of Manchester United, began discussing “a reset of the economics and governance” of the game in England dubbed “Project Big Picture”.

The proposals included reducing the number of teams in the Premier League from 20 to 18, and eliminating one of the domestic knockout competitions. This would make room for more European matches. When the plans leaked in October it caused a furore, with critics accusing bigger clubs of a power grab.

One leading European club executive, however, says the subsequent collapse of the talks could work to the benefit of the leading English teams: “The Project Big Picture discussions with Liverpool and United is a way to justify their future decision [to join the super league],” they say.

Liverpool and Manchester United declined to comment for this story.

Separately, plans put forward by a mixture of clubs and investors to create a new competition featuring top clubs in Scotland, Sweden, Norway, Denmark and Ireland — discussed with JPMorgan and other private equity groups — broke down in recent weeks, according to people with knowledge of the talks.

The talks ended, they say, when Celtic, the Scottish club that would have been its biggest participant, backed out. The Glasgow-based club declined to comment.

A €1.6bn deal for CVC and Advent International to take a 10 per cent stake in Serie A, Italy’s top league, has also been disrupted by the rumblings around a rival super league. The private equity groups want a “breakaway clause” to be inserted in the agreement, fearing that if it goes ahead it could damage the value of the Serie A media rights.

Paolo Dal Pino, Serie A’s president, rejects the idea, saying: “There is absolutely no way we accept clauses like this.” The other option for the private equity groups, according to people close to their deliberations, is to invest in the super league itself.


Big clubs getting bigger

The super league discussions are filling a vacuum created by the breakdown in talks over radical changes to the continent’s existing club competitions. Last year, Uefa and the ECA proposed reforms which envisaged a promotion and relegation system, with the top 24 teams in the Champions League gaining automatic qualification for the following year’s competition.

Those plans were shelved amid a fierce fightback from smaller clubs, national leagues and fan groups. Mr Agnelli maintains that changes to the Uefa competitions are needed to retain enthusiasm among younger audiences. “It’s not about today or next cycle,” he says. “It’s about 15-20 years from now . . . what I would like is that football remains, if not increases, it’s premium position as the best sport in the world.”

These reform talks — paused due to the pandemic — have been given new urgency. The idea gaining the most traction is to replace the opening Champions League group stage — in which groups of four teams play each other home and away — with a so-called “Swiss model” based on chess competitions.

Each team would play 10 matches against 10 different opponents. Those with the best records would qualify for the knockout rounds.

This Swiss model is generating excitement because “for the first time in history, these Champions League teams would be ranked together on the same table”, says a person with knowledge of the plans. Another possibility is slimming down the latter stages, replacing home and away legs with one-off ties — a format instituted last season due to the pandemic.

These tortuous discussions may stall again, as smaller clubs and leagues worry that altering the status quo cuts them further adrift from the game’s financial giants.

Lars-Christer Olsson, chair of European Leagues, the body which represents national competitions, insists there are “red lines” in any format changes. This includes maintaining the link between performance in domestic leagues in order to qualify for European contests.

“We don’t want anything to be established to make the Champions League closer to a private league at the top of the European pyramid,” says Mr Olsson.

Many football executives do not believe that top clubs will really join a breakaway. English teams, in particular, risk devaluing the Premier League, which has multiyear broadcasting contracts worth £9.2bn — more than any other domestic league competition.

Others ask whether the game’s superstars would even want to play in it. Without Fifa’s explicit approval, players could be prevented from featuring for their national teams. That would mean missing the World Cup, the quadrennial tournament that many footballers consider the sport’s true pinnacle.

Whether through an enhanced Champions League or a breakaway, many are convinced of the final result: more money-spinning ties between Europe’s biggest clubs, further cementing their places in the sport’s hierarchy.

“Financial power is transforming sporting power,” says a top European football administrator. “This is a very dangerous game.”

A Tale of Two Economies

As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”

Stephen S. Roach



NEW HAVEN – Suddenly, there is a credible case for a vaccine-led economic recovery. 

Modern science has delivered what must certainly be one of the greatest miracles of my long lifetime. 

Just as COVID-19 dragged the world economy into the sharpest and deepest recession on record, an equally powerful symmetry on the upside now seems possible.

If only it were that easy. With COVID-19 still raging – and rates of infection, hospitalization, and death now spiraling out of control (again) – the near-term risks to economic activity have tipped decidedly to the downside in the United States and Europe. The combination of pandemic fatigue and the politicization of public health practices has come into play at precisely the moment when the long anticipated second wave of COVID-19 is at hand.

Unfortunately, this fits the script of the dreaded double-dip recession that I warned of recently. The bottom-line bears repeating: Apparent economic recoveries in the US have given way to relapses in eight of the 11 business cycles since World War II. The relapses reflect two conditions: lingering vulnerability from the recession, itself, and the likelihood of aftershocks. Unfortunately, both conditions have now been satisfied.

Vulnerability is hardly debatable. Notwithstanding the record 33% annualized snapback in real GDP growth in the third quarter of this year, the US economy was still 3.5% below its previous peak in the fourth quarter of 2019. With the exception of the 4% peak-to-trough decline during the 2008-09 global financial crisis, the current 3.5% gap is as large as that recorded in the depths of every other post-WWII US recession.

Consequently, it is ludicrous to speak of a US economy that is already in recovery. The third quarter snapback was nothing more than the proverbial dead cat bounce – a mechanistic post-lockdown rebound after the steepest decline on record. That is very different than the organic, cumulative recovery of an economy truly on the mend. The US remains in a deep hole. 

Just ask American consumers, who, at 68% of GDP, have long accounted for the dominant share of US aggregate demand. After plunging by an unprecedented 18% from January to April, total consumer spending has since recouped about 85% of that loss (in real terms). But the devil is in the details.

The rebound has been concentrated in goods consumption – big-ticket durables like cars, furniture, and appliances, plus soft-good nondurables like food, clothing, fuel, and pharmaceuticals that have more than made up for what was lost during the lockdown-induced plunge. 

In September, goods consumption in real terms was 7.6% above its pre-pandemic January 2020 high. The bounceback benefited significantly from a surge in online buying by stay-at-home consumers, with e-commerce going from 11.3% of total retail sales in the fourth quarter of 2019 to 16.1% in the second quarter of 2020.

But services consumption, which makes up over 61% of total US consumer spending, is a different matter altogether. Services accounted for fully 72% of the collapse in total consumer spending from January to April. While services have since partly bounced back, as of September, they had recouped just 64% of the lockdown-induced losses earlier this year.

With COVID-19 still raging, vulnerable American consumers remain understandably reluctant to re-engage in the personal interaction required of face-to-face services activities such as restaurant dining, in-person retail shopping, travel, hotel stays, and leisure and recreation activities. 

These services collectively account for almost 20% of total household services outlays.

The understandable fear of personal interactions in the midst of a pandemic brings us to the second ingredient of the double-dip: aftershocks. With the current exponential rise in COVID-19 cases, lockdowns are back – not as severe as in March and April but still aimed at a partial curtailment of person-to-person activity heading into the all-important holiday season. 

Precisely at the moment when the economic calendar typically expects an enormous surge of activity, the odds of a major seasonally adjusted disappointment are rising.

This poses serious risks to the still-battered US labor market. Yes, the overall jobless rate has come down sharply from 14.7% in April to 6.9% in October, but it remains essentially double the pre-COVID low (3.5%). 

With weekly claims for unemployment insurance only just starting to creep up in early November as new curfews and other lockdown-like measures are put into place, and a dysfunctional US Congress failing to agree on another relief package, the risk of renewed weakness in overall employment is growing.

The news on vaccines is truly extraordinary. While the logistics of production and distribution are daunting, to say the least, there is good reason to be hopeful that the end of the COVID-19 pandemic may now be in sight. 

But the impact on the economy will not be instantaneous, with vaccination unlikely to bring about so-called herd immunity until mid-2021 at the earliest.

So, what happens between now and then? For a still vulnerable US economy now in the grips of predictable aftershocks, the case for a relapse, or a double-dip, before mid-2021 is all the more compelling.

To paraphrase Charles Dickens, this is the best of times and the worst of times. As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. 

In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.