Credit deflation and the reflation cycle to come (part 2)

[sancho panza]

18 minutes ago, Cosmic Apple said:

Fairly easy engine swap out, my first foray in to anything more involved than brake discs was to put a 1.8T engine in to a Fabia (same chassis as the Polo), they are really easy to work on as the whole front end comes off, gearbox is a sealed unit etc. I know you have tools etc. You should have a go if you are ever faced with the situation again

We could do with a car maintenance thread.I'd love to have a go but have no understanding.

[sancho panza]

I knwo there are many on here running a weak dollar thesis,not least DB with his DXY 90 call.

Here's some reasoning from an experienced player.The reference to trump and protectionism is particularly pertinent given the @JMD @Harley discussions on politcal economy.Just like the 1930's.

 

worth a read

 

https://www.bloomberg.com/opinion/articles/2020-06-08/a-crash-in-the-dollar-is-coming

A Crash in the Dollar Is Coming

The world is having serious doubts about the once widely accepted presumption of American exceptionalism.

By

Stephen Roach

8 June 2020, 22:00 BST

The U.S. government needs to take better care of the dollar. 

Stephen 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."

 

 

The era of the U.S. dollar’s “exorbitant privilege” as the world’s primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d’Estaing coined that phrase in the 1960s largely out of frustration, bemoaning a U.S. that drew freely on the rest of the world to support its over-extended standard of living. For almost 60 years, the world complained but did nothing about it. Those days are over.

 

 

Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.

The seeds of this problem were sown by a profound shortfall in domestic U.S. savings that was glaringly apparent before the pandemic. In the first quarter of 2020, net national saving, which includes depreciation-adjusted saving of households, businesses and the government sector, fell to 1.4% of national income. This was the lowest reading since late 2011 and one-fifth the average of 7% from 1960 to 2005.

 

Lacking in domestic saving, and wanting to invest and grow, the U.S. has taken great advantage of the dollar’s role as the world’s primary reserve currency and drawn heavily on surplus savings from abroad to square the circle. But not without a price. In order to attract foreign capital, the U.S. has run a deficit in its current account — which is the broadest measure of trade because it includes investment — every year since 1982.

 

Covid-19, and the economic crisis it has triggered, is stretching this tension between saving and the current-account to the breaking point. The culprit: exploding government budget deficits. According to the bi-partisan Congressional Budget Office, the federal budget deficit is likely to soar to a peacetime record of 17.9% of gross domestic product in 2020 before hopefully receding to 9.8% in 2021.

A significant portion of the fiscal support has initially been saved by fear-driven, unemployed U.S. workers. That tends to ameliorate some of the immediate pressures on overall national saving. However, monthly Treasury Department data show that the crisis-related expansion of the federal deficit has far outstripped the fear-driven surge in personal saving, with the April deficit 5.7 times the shortfall in the first quarter, or fully 50% larger than the April increment of personal saving.   

In other words, intense downward pressure is now building on already sharply depressed domestic saving. Compared with the situation during the global financial crisis, when domestic saving was a net negative for the first time on record, averaging -1.8% of national income from the third quarter of 2008 to the second quarter of 2010, a much sharper drop into negative territory is now likely, possibly plunging into the unheard of -5% to -10% zone.             

And that is where the dollar will come into play. For the moment, the greenback is strong, benefiting from typical safe-haven demand long evident during periods of crisis. Against a broad cross-section of U.S. trading partners, the dollar was up almost 7% over the January to April period in inflation-adjusted, trade-weighted terms to a level that stands fully 33% above its July 2011 low, Bank for International Settlements data show. (Preliminary data hint at a fractional slippage in early June.)

But the coming collapse in saving points to a sharp widening of the current-account deficit, likely taking it well beyond the prior record of -6.3% of GDP that it reached in late 2005. Reserve currency or not, the dollar will not be spared under these circumstances. The key question is what will spark the decline?

 

Look no further than the Trump administration. Protectionist trade policies, withdrawal from the architectural pillars of globalization such as the Paris Agreement on Climate, Trans-Pacific Partnership, World Health Organization and traditional Atlantic alliances, gross mismanagement of Covid-19 response, together with wrenching social turmoil not seen since the late 1960s, are all painfully visible manifestations of America’s sharply diminished global leadership. 

As the economic crisis starts to stabilize, hopefully later this year or in early 2021, that realization should hit home just as domestic saving plunges. The dollar could easily test its July 2011 lows, weakening by as much as 35% in broad trade-weighted, inflation-adjusted terms.

The coming collapse in the dollar will have three key implications:  It will be inflationary — a welcome short-term buffer against deflation but, in conjunction with what is likely to be a weak post-Covid economic recovery, yet another reason to worry about an onset of stagflation — the tough combination of weak economic growth and rising inflation that wreaks havoc on financial markets.

Moreover, to the extent a weaker dollar is symptomatic of an exploding current-account deficit, look for a sharp widening of America’s trade deficit.   Protectionist pressures on the largest piece of the country’s multilateral shortfall with 102 nations – namely the Chinese bilateral imbalance — will backfire and divert trade to other, higher-cost, producers,  effectively taxing beleaguered U.S. consumers.

Finally, in the face of Washington’s poorly timed wish for financial decoupling from China, who will fund the saving deficit of a nation that has finally lost its exorbitant privilege? And what terms — namely interest rates — will that funding now require?

Like Covid-19 and racial turmoil, the fall of the almighty dollar will cast global economic leadership of a saving-short U.S. economy in a very harsh light. Exorbitant privilege needs to be earned, not taken for granted.

[Harley]

3 hours ago, JMD said:

Harley, others have re-used 'your' phrase 'political economy', but what did you originally mean by it? I took it to mean manipulation/propaganda wars (re. Chomsky?); i.e. that the economics can be usurped by the political. Am I wrong? Only the sense in which others have used it, it seems to me anyway, to have drifted away from the 'manipulation' point. 

I agree and am not trying to be partisan, just trying to read the situation like you. 

I mean it in the sense I studied it (politics) at college and (economics) at uni.  Economics is too siloed for practical purposes.  For example, it often assumes optimality and rationale economic actors amongst much else.  Behavioural economics (the incorporation of psychology into economics) has holed this in a practical and progressive way.  The political economy is another key area.  Governments are political so to understand things on the ground, one needs to account for that in their decision making.  And politics is not limited to governments!  

Keynesianism is an interesting area given it's ingrained in Treasury and other thinking.  It provides, if read and interpreted badly (e.g. learnt second hand), cover for essentially politically motivated behaviour arguably not supported by Keynes' original writings.

But it also goes back further to the writings of Smith, Locke, and so on as they first grappled with the industrialisation underway and sought a philosophic basis which evolved into modern day economics.  This is the area that fascinates me the most atm because we are near at least a cycle end where much we have assumed (e.g the principles of money such as a store if value in the face of rapid debasement) are called into question.  We have to go back to these first principles to make sense of today and tomorrow.

Essentially Oxford intellectually has it bang on offering PPE rather than pure Economics.  Just a shame they seem to turn out such dire practicioners!

I'm maybe being loose with some definitions but I have applied my economics in many ways in my life to good effect and not merely as a source of £9,000 pa per head!

[Harley]

1 hour ago, JMD said:

I have always thought the astronauts were taking an extroadinary risk (ripped space suit) when they did those exaggerated hops across the moon surface. Or am I just exhibiting the difference between my British 'sensibilities' and the American 'cowboy spirit'?

I think not.  I have ripped the crotch area of many a work overall!

[Harley]

42 minutes ago, Cosmic Apple said:

Fairly easy engine swap out, my first foray in to anything more involved than brake discs was to put a 1.8T engine in to a Fabia (same chassis as the Polo), they are really easy to work on as the whole front end comes off, gearbox is a sealed unit etc. I know you have tools etc. You should have a go if you are ever faced with the situation again

Interesting.  Happened away from home and I thought the economics wouldn't stack up, but could be wrong (feared a dud replacement).  Bought a Dacia!  Will service my own now I have little to lose! 

[Harley]

26 minutes ago, sancho panza said:

I knwo there are many on here running a weak dollar thesis,not least DB with his DXY 90 call.

Hugh Hendry (he's back!) made an interesting comment that the USD is the reserve currency like gold once was and is in danger of there not being enough of it just like gold, which forced people off the gold standard.  At least I think that's what he said!  I see what DB was getting at.

PS:  He also said no to future inflation but we know he's a naughty boy and loves it! 

[Majorpain]

45 minutes ago, Harley said:

Hugh Hendry (he's back!) made an interesting comment that the USD is the reserve currency like gold once was and is in danger of there not being enough of it just like gold, which forced people off the gold standard.  At least I think that's what he said!  I see what DB was getting at.

PS:  He also said no to future inflation but we know he's a naughty boy and loves it! 

That is the problem with the lack of Dollar's in the world IMO, US share of GDP is shrinking and there is really is a lack of dollars!

[Castlevania]

1 hour ago, sancho panza said:

I msut say,I have my doubts on a few of those,not least Westfield,WIzz and John Lewis.

Quite what we're doing lending CHanel £600mn I don't know.Do they manufacture here??

Wizz is worthwhile. They’ll survive. The RyanAir business model but with the customer service level of Communist Eastern Europe.

[Majorpain]

5 hours ago, sancho panza said:

The Bank of England (BoE) published a list of the 53 companies to whom it has lent more than £16 billion, at absurdly low rates, as part of its Coronavirus Corporate Financing Facility (CCFF). Launched on March 20, the scheme enables the BoE to buy short-term corporate debt (“corporate paper”) of up to one-year maturity from companies at interest rates of between 0.2% and 0.6%.

About £0.5bn of interest from reasonably solid companies with money magicked from thin air, its not a bad rate of return if it helps the economy not to collapse and they all pay it back.  Playing at investment fund is catching on!

[janch]

In line with Harley's political economics thesis:

https://www.bbc.co.uk/news/science-environment-52906551

Green business

On Monday, more than 200 chief executives of some of the UK's top firms - including HSBC, National Grid, and Heathrow airport - signed a letter to the prime minister asking him to use the Covid-19 lockdown as a springboard to "deliver a clean, just recovery".

Many people may be surprised how similar the recommendations of these two very different interest groups are.

• Both Greenpeace and the chief executives are asking the government to prioritise investments in low carbon technologies and calling for the decarbonisation of the British economy to be speeded up
• Both say they want to see a focus on sectors that best support the environment
• Both are demanding that financial support for ailing businesses must come with a requirement for them to commit to take action to reduce their impact on the environment.

 

Meanwhile, the European Union has unveiled what it called the biggest "green" stimulus in history.

 

[Popuplights]

6 hours ago, Harley said:

I still want my cheap electric buggy for nipping into town.

I could build a solar charge station.

Someone make one please!

PS: No golf cart pictures please!

 

[spygirl]

4 hours ago, JMD said:

Harley, others have re-used 'your' phrase 'political economy', but what did you originally mean by it? I took it to mean manipulation/propaganda wars (re. Chomsky?); i.e. that the economics can be usurped by the political. Am I wrong? Only the sense in which others have used it, it seems to me anyway, to have drifted away from the 'manipulation' point. 

You might query why even bother asking such a granular question. And to be clear its not the political element I'm interested in. The reason is that I have posted recently about political decisions that'll have far wider economic consequences: e.g. the Boris' HK Chinese immigration offer; Covid-19 political uber-response.

Plus the other background to this is that I am questioning my own portfolio choices in terms of potential future political decisions/dimensions/risk, so I think the discussion is relevant to this forum. i.e. I see it as another macro/trend to aid/focus investment, rather like the excellent decomplexity concept.

Political economy comes from the original word/term for what we now call economists.

A lot of economics is just politics with numbers.

A lot is just made up, wishful thinking bullshit.

 

[Cosmic]

36 minutes ago, Popuplights said:

 

What's its NCAP rating? No... Ok then

[Popuplights]

17 minutes ago, Cosmic Apple said:

What's its NCAP rating? No... Ok then

I have just watched a review, and it doesn't have front brakes...😂

[Cosmic]

1 hour ago, Popuplights said:

I have just watched a review, and it doesn't have front brakes...😂

That's illegal even on a bicycle isn't it on UK roads?

[leonardratso]

was it imported as

"gift/childs toy, varue sissy dorrar!"

for customs & excise purposes of course.

[Harley]

Thanks for the electric buggy tips guys but I think I'll be better off seeking advice from Jeremy Clarkson!

[Loki]

3 minutes ago, Harley said:

Thanks for the electric buggy tips guys but I think I'll be better off seeking advice from Jeremy Clarkson!

"I believe in speed, and power.  Speed and power solves many things"
"More is better, it just is"
"Wind isn't useful it's just annoying"

Wisdom for the ages, frankly

 

[Shamone]

On 08/06/2020 at 09:45, sancho panza said:

To be fair,US cops kill people on a relatively even weighted basis across white/hispanic/black ethnicities and do so on a regular basis.The data is pretty scary for everyone not just one section of society. As you say,that makes the riots/looting far more likely to be about lockdown than anything else.There's even been killings of black people protecting property/people during the riots which don't get any attention.

The feeling I'm getting in my middle class circles is that even the hardcore lockdown types (and there are many)are beginning to question it when they see Dominic going up to vist DB and get econ advice and 1000's marching around London.The truth will come out over the next year and I suspect Bojo will realise he's been played by the hard left.

As per the surplus energy post,the real pain is yet to hit.I suspect a lot of lockdown proponents will live to regret it.

[MrXxxx]

10 hours ago, AWW said:

I can't work out whether this is positive or negative for the companies involved. On the one hand, they needed access to cheap finance (although it seems many on the list didn't really need it). On the other hand, they now have access to cheap finance that should see them through the C19 shitstorm ahead.

Thoughts anyone?

Well the companies have a `Patsy` to blame when they reduce or cancel the divis.

[DurhamBorn]

18 minutes ago, Cattle Prod said:

Companion graph from RealVision ...comparing world financial assets (global equities, bonds amd precious metals) to liquidity. What it doesn't make clear is the lead/lag (thanks @DurhamBorn). But all that liquidity will be chasing assets at some point. 

For example, there is a 6-8 month lag in 2001 if you look carefully. An interesting year, that...

And for the first time really since the mid 70s the assets its chasing will be commods.China imported a record amount of oil in May,a record.Of course they will of been buying extra in March/April due to price,but still.That gap between assets and liquidity is inflation waiting.

[Bricks & Mortar]

28 minutes ago, Cattle Prod said:

Nice tally sheet here, h/t Dan Tapiero

I'm suspecting an unpublished agreement between central banks, whereby the US will print much more than the rest, to address the dollar shortage and reduce the DXY. 
Perhaps the rest of the world will be allowed to catch up once a decent amount of USD denominated debt has been settled.

[JMD]

12 hours ago, sancho panza said:

 

as per @Agent ZigZag different actors,differnet facrtors,different timing,similar themes.

I always remember hearing Steve Keen say back in 2009,

'the last time we had a deleveraging like this,it ended after ten years with World War 2'.

We didn't really get the deleveraging in 2009 so it's been delayed.In a way it jsut allowed the ruling politcal elites to become even more isolated from teh masses in their ivory towers.

I'm still trying to work out the ramificatiosn but I think DB's US-Sino cold war thesis is suitably compelling

The end of the dollar hegemony will have massive rrepercussions

To be honest I find S Keen a bit 'preachy' or is that just me?                                                                                                                                                    But for the macro in general, I've been thinking a lot about how the geopolitics might play out. For me the starting point is US isolationism, though what precise form is debatable. US-China tensions - yes, but I don't see things heating up, so more akin to a US-Sino 'cold shoulder' war, with US providing military/logistical support to Japan and others in the South China Seas region and where those countries will be doing most of the heavy lifting, re. political tensions with China, etc. The consequences of US stepping back from being world policeman will have far reaching effects on for example the formerly secure trade routes, and so the supply chains of for example exporters like Germany. This is why I think 'US isolation' will be defined by individual bilateral deals where for example US might guarantee continued safe passage for Japan's oil from the gulf so long as Japan helped with embargo on China's imports/exports. A sustained US Dollar devaluation will only be allowed to happen at a time and to the benefit of US exports, it's reserve currency status will also need to go if US is no longer a major player in world trade, oil, etc, instead US will be nearly self sufficient when including its trading neighbours in North/South America. ...Ok I have freewheeled a bit, but this is how I see things developing over next 10 years. I need to give more thought to east/west Europe, Russia, South East Asia, India, in terms of their next 10 year macro view - hopefully any conclusions(guesses) will guide me regarding investment decisions for these regions. 

[JMD]

12 hours ago, Harley said:

I agree and am not trying to be partisan, just trying to read the situation like you. 

I mean it in the sense I studied it (politics) at college and (economics) at uni.  Economics is too siloed for practical purposes.  For example, it often assumes optimality and rationale economic actors amongst much else.  Behavioural economics (the incorporation of psychology into economics) has holed this in a practical and progressive way.  The political economy is another key area.  Governments are political so to understand things on the ground, one needs to account for that in their decision making.  And politics is not limited to governments!  

Keynesianism is an interesting area given it's ingrained in Treasury and other thinking.  It provides, if read and interpreted badly (e.g. learnt second hand), cover for essentially politically motivated behaviour arguably not supported by Keynes' original writings.

But it also goes back further to the writings of Smith, Locke, and so on as they first grappled with the industrialisation underway and sought a philosophic basis which evolved into modern day economics.  This is the area that fascinates me the most atm because we are near at least a cycle end where much we have assumed (e.g the principles of money such as a store if value in the face of rapid debasement) are called into question.  We have to go back to these first principles to make sense of today and tomorrow.

Essentially Oxford intellectually has it bang on offering PPE rather than pure Economics.  Just a shame they seem to turn out such dire practicioners!

I'm maybe being loose with some definitions but I have applied my economics in many ways in my life to good effect and not merely as a source of £9,000 pa per head!

Yes, economics is more social science than pure science, despite what economists would have people believe. The realisation of how pittyfull the theories are, with even Noble prize winners winning every 20 years or so, with completely contradictory ideas, is probably why as you say behavioural economics has risen in prominence in recent years. And then giants like Adam Smith take it to a whole new (philosophical) level, yet still provide relevant insights and warnings for today, of for example how small, local capitalism works fine, but scaling up introduces moral hazards and produces destabilising power relationships, at least that's if I recall correctly, but happy to be corrected if I have over simplified?

[jamtomorrow]

8 hours ago, Cattle Prod said:

Companion graph from RealVision ...comparing world financial assets (global equities, bonds amd precious metals) to liquidity. What it doesn't make clear is the lead/lag (thanks @DurhamBorn). But all that liquidity will be chasing assets at some point. 

For example, there is a 6-8 month lag in 2001 if you look carefully. An interesting year, that...

Wowzers what happened here? ...