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The coming debt and population problem

  
  Analysis
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Death and taxes

Debt levels are set to rise to unprecedented levels. According to the International Monetary Fund in June the public debt, as a share of GDP in advanced economies, is set to come in at over 130% for this year and next. To put that into perspective that surpasses the debt levels from the second world war.If you look at the chart below you can see that the double whammy of the Global Financial Crisis, followed by the present pandemic is pushing debt to record levels.

Death and taxes

 

The population problem

The general thinking now is that the present crisis is a one in a hundred years kind of event (what if it isn’t) and that future generations will be able to claw back the debt levels over time. However, a publication from the Lancet in the UK suggests that there is a falling population that could fall by 9% at the end of the century. So, this means that there will be a large decline in numbers of working age adults. There are some countries which are projected to be particularly badly hit. Japan, Spain, Portugal, and Thailand are expected to see their populations halve by the end of the century. The countries which are projected to see 25% population declines are also projected to see a higher ration of older to younger people. So, more of this debt is going to be shouldered by fewer as an ageing population raises further spending considerations.

What will happen next?

There will be moves by governments to start to cap this debt problem. It will not be allowed to continue unless we get into worst disasters than we presently are in. The main concern is that of default. As long as willingness to repay remains, then the debt pile can be reduced. The main risk is if the debt becomes too great and the easiest solution is to just walk away…

USA credit rating outlook revised to negative from stable by Fitch

  
  Analysis
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Bold move by the rating agency

USA downgrade Fitch
The rating was affirmed at AAA but lowered to negative from stable. That’s how you get yourself a lawsuit.
  • Cites ongoing deterioration in public finances
  • Sees general debt to GDP above 130% by 2021
  • Expects deficit to narrow to 11% of GDP in 2021
  • Expects US economy to contract 5.6% this year
  • Statement
What Fitch had to say:
The Outlook has been revised to Negative to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan, issues that were highlighted in the agency’s last rating review on March 26, 2020. High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus. They have started to erode the traditional credit strengths of the US.
They’re not wrong.
Another risk they cite is the possibility of policy gridlock after the election because neither party will get a 60-seat Senate majority.

G20 says 36 of 77 eligible countries have applied for debt relief

  
  Analysis
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Group of 20 major economies offered a suspension of official bilateral debt payments to77 eligible countries

  • 36 of the 77 have applied
The offer is to help countries combat the coronavirus pandemic and its economic impact.Saudi G20 secretariat said the debt relief initiative approved in April could provide immediate liquidity of $14 billion as more countries participated and that amount could increase significantly if additional creditors, including multilateral development banks and private-sector creditors, joined the initiative.
(info via Reuters )
Group of 20 major economies offered a suspension of official bilateral debt payments to77 eligible countries

Paul Tudor Jones is one of the great macro traders of all time but he’s ‘a slave to the tape’

  
Analysis, Education
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How does Paul Tudor Jones see the world now?

Paul Tudor Jones is one of the great investors of all time and he’s renowned for macro calls. His latest market outlook highlights the coming waves of direct debt monetization that will reshape the economies and financial markets of the world.
“There will be many assets that will move as a result of this money creation. So what is an investor to do? Traditional hedges like gold have done well, and we expect investors to continue to seek refuge in this safe asset. One thing I have learned over time is the best thing to do is let market price action guide your decision-making and then try to understand the fundamentals as they become more evident and comprehensible,” he writes in a note with Lorenzo Giorgianni.
That’s an odd thing for one of the great macro traders of all time to say, but if you look back over his (rare) public comments, it’s a familiar theme. Here’s what he said back in 2009:

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Deficit discipline is dead

  
  Analysis
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Debt is no longer a four-letter word

The legacy of the coronavirus crisis may be that it kills the idea that deficits matter.
The Tea Party derailed Obama’s legislative agenda, lamenting high deficits. At least 12 Senators and at least 50 members of the House were elected on Tea Party platforms. These were the most-hardcore deficit hawks in history.
Trump vaulted himself to the White House by tapping Tea Party sentiment. Here’s a sample:
For reference, the combined deficit in Obama’s final four years was $2.19 trillion.
Yesterday, Trump tweeted this:
tweet
The deficit in the US this year will be at least $3 trillion and probably $4 trillion.
I’m not here to point out they hypocrisy, you can get the anywhere.

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The good news is that the European stock markets are closed

  
Analysis, Global Indices
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German DAX, -3.1%. France’s CAC down -3.8%

The good news for the European stock markets is that they are close for the day.  Each of the major indices had sharp declines. Sometimes closing feels good. The provisional closes are showing:
  • German DAX, -3.1%
  • France’s CAC, -3.2%
  • UK’s FTSE 100, -3.5%
  • Spain’s Ibex, -3.8%
  • Italy’s FTSE MIB, -2.6%
To give an idea of the year to date performance of the major indices :
  • Germany, -6.65%
  • France, -7.6%
  • UK FTSE 100, -9.7%
  • Spain’s Ibex, -5.6%
  • Italy’s FTSE MIB, -2.8%
Comparing to the US market year-to-date:
  • Dow industrial average, -7.6%
  • S&P index, -5.63%
  • NASDAQ index -2.42%
In Asia the year-to-date’s are showing:
  • Japan’s Nikkei, -7.22%
  • Hong Kong’s Hang Seng index, -5.01%
  • Australia S&P/ASX 200 -0.39%
  • China’s Shanghai index -1.93%

In other markets as London/European traders look to exit:

  • gold is trading up $12.80 or 0.78% at $1653.72
  • WTI crude oil futures are trading down $-2.08 or -4.25% of $46.66
In the US stock market the snapshot of the major indices currently shows:
  • S&P index -69.3 points or -2.22% of 3047.44
  • NASDAQ index -221.2 points or -2.46% at 8759.96
  • Dow -578 points or at -2.17% at 26371
In the US debt market yields are sharply lower with the 2 year down -8.9 basis points. The 10 year is down -5.8 basis points.. The 2 – 10 yield spread has widened to 20.42 basis points from 17.24 basis points yesterday on increasing expectations that the FOMC will be forced to lower rates
US yields are lower across the board with a letter yield curve
In the European debt market, yields are mixed with German, France, and UK yields lower while Spain, Italy, Portugal yields are higher (flight to safety and out of the riskier countries):
European yields are mixed
In the forex market, the EUR is the strongest (and got stronger in the session).  Germany did say earlier today that they would contemplate more fiscal stimulus and technicals improved. The EURUSD did run into resistance against the 1.100 level however.
The weakest currency is the CAD as oil continues to get hammered. The GBP and USD are also weaker on the day:

Global debt reaches record levels

  
Analysis, Economy
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Global debt is currently at it’s highest level in peacetime,

On average, the world’s major economies, have debts of more than 70% of their GDP’s. This is the highest level in the past 150 years apart from s spike during WWII. See the chart below courtesy of the Financial Times

Global debt is currently at it's highest level in peacetime,

In the UK that debt deficit is presently at around 87%, but it is only set to grow with both Conservative and Labour plans to increase public spending levels. This will in part be a Brexit boost to lift morale. Increasing welfare states, growing democracies and an ageing population all lead to to the conclusion that global debt is set to keep growing.

Debt

Surging household debt clouds Asia’s growth outlook

  
Analysis, Economy
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The rapid expansion of household debt in emerging Asian countries, particularly China, has become a risk to the global economy.

In Thailand and Malaysia, debt has ballooned due to booms in the auto and housing markets, and the growing repayment burden has dampened consumer sentiment. In China, household debt as a percentage of nominal GDP is now over 50%. Countries such as Thailand have begun curbing their consumption in response to rising debt levels.

The U.S. Federal Reserve is expected to cut interest rates at the end of this month. Emerging economies also have room for interest rate cuts, which would boost growth in the short run but could deepen the scars from indebtedness over the long term.

Somprawin Manprasert, chief economist at Bank of Ayudhya, pointed out that household debts have ballooned as a result of incentives for the purchase of cars and other items introduced by the Thai government in 2011. This is a structural factor that will weigh on future consumption, Somprawin said.

Thailand’s household debt ratio is close to 70%. That is higher than in Japan and other advanced economies, which have ratios of about 58%, and well above that of the eurozone. The main reason is auto loans. To support the car industry, the Thai government introduced tax incentives to encourage purchases, which took off in 2012. As a result of the higher debt load, personal consumption has been sluggish and inflation has been weak.

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What is Risk?

  
  Education
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This is another piece in the irregular Simple Stuff series, which is an attempt to make complex topics simple.  Today’s topic is:

What is risk?

Here is my simple definition of risk:

Risk is the probability that an entity will not meet its goals, and the degree of pain it will go through depending on how much it missed the goals.

There are several good things about this definition:

  • Note that the word “money” is not mentioned.  As such, it can cover a wide number of situations.
  • It is individual.  The same size of a miss of a goal for one person may cause him to go broke, while another just has to miss a vacation.  The same event may happen for two people — it may be a miss for one, and not for the other one.
  • It catches both aspects of risk — likelihood of a bad event, and degree of harm from how badly the goal was missed.
  • It takes into account the possibility that there are many goals that must be met.
  • It covers both composite entities like corporations, families, nations and cultures, as well as individuals.
  • It doesn’t make life easy for academic economists who want to have a uniform definition of risk so that they can publish economics and finance papers that are bogus.  Erudite, but bogus.
  • It doesn’t specify that there has to be a single time horizon, or any time horizon.
  • It doesn’t specify a method for analysis.  That should vary by the situation being analyzed.

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