Category Archives: economic recovery

26/4/21: What Low Corporate Insolvencies Figures Aren’t Telling Us

 

One of the key features of the Covid19 pandemic to-date has been a relatively low level of corporate insolvencies. In fact, if anything, we are witnessing virtually dissipation of the insolvencies proceedings in the advanced economies, and a simultaneous investment boom in the IPOs markets. 

The problem, of course, is that official statistics - in this case - lie. And they lie to the tune of at least 50 percent. Consider two charts:

And


The chart from the IMF is pretty scary. 18 percent of companies are expected to experience liquidity-related financial distress and 16 percent are expected to experience insolvency risk. The data covers Europe and Asia-Pacific. Which omits a wide range of economies, including those with more heavily leveraged corporate sectors, and cheaper insolvency procedures e.g. the U.S. The estimates also assume that companies that run into financial distress in 2020 will exit the markets in 2020-2021. In other words, the 16 percentage insolvency risk estimate is not covering firms that run into liquidity problems in 2021. Presumably, they will go to the wall in 2022. 

The second chart puts into perspective the IPO investment boom. Vast majority of IPOs in 2020-2021 have been SPACs (aka, vehicles for swapping ownership of prior investments, as opposed to generating new investments). The remainder of IPOs include DPOs (Direct Public Offerings, e.g. Coinbase) which (1) do not raise any new investment capital and (2) swap founders and insiders equity out and retail investors' equity in. 

The data above isn't giving me a lot of hope, to be honest of a genuine investment boom. 

We are living through the period of fully financialized economy: the U.S. government monetary and fiscal injections in 2020 totaled some $12.3 trillion. That is more than 1/2 of the entire annual GDP. Since then, we've added another $2.2 trillion. Much of these money went either directly (monetary policy) or indirectly (Robinhooders' effect) into the Wall Street and the Crypto Alley. In other words, little of it went to sustain real investment in productive capital. Fewer dollars went to sustain skills upgrading or new development. Less still went to support basic or fundamental research. 

In this environment, it is hard to see how global recovery can support higher productivity growth to bring us back to pre-pandemic growth path. What the recovery will support is and accelerated transfer of wealth:

  • From lower income households that saved - so far  - their stimulus cash, and are now eager to throw it at pandemic-deferred consumption; 
  • To Wall Street (via corporate earnings and inflation) and the State (via inflation-linked taxes).
In the short run, there will be headlines screaming 'recovery boom'. In the long run, there will be more structural unemployment, less jobs creation and greater financial polarization in the society. Low - to-date - corporate insolvencies figures and booming financial markets are masking all of this in the fog of the pandemic-induced confusion. 


6/5/20: The Glut of Oil: Strategic Reserves


The Giant Glut of Oil continues (see my analysis of oil markets fundamentals here: https://trueeconomics.blogspot.com/2020/04/23420-what-oil-price-dynamics-signal.html)


China strategic oil reserves have also surged. U.S. oil reserves are now nearing total capacity of 630 million barrels, and China's reserves are estimated to be about 90% of the total capacity of 550 million barrels. Japan's reserves similar (capacity of ca 500 million barrels). Australia is using leased U.S. strategic reserves capacity to pump its own stockpiles, with its domestic storage capacity already full. 

5/5/20: A V-Shaped Recovery? Ireland post-Covid


My article for The Currency on the post-Covid19 recovery and labour markets lessons from the pst recessions: https://www.thecurrency.news/articles/16215/the-fiction-of-a-v-shaped-recovery-hides-the-weaknesses-in-irelands-labour-market.


Key takeaways:
"Trends in employment recovery post-major recessions are worrying and point to long-term damage to the life-cycle income of those currently entering the workforce, those experiencing cyclical (as opposed to pandemic-related) unemployment risks, as well as those who are entering the peak of their earnings growth. This means a range of three generations of younger workers are being adversely and permanently impacted.

"All of the millennials, the older sub-cohorts of the GenZ, and the lower-to-middle classes of the GenX are all in trouble. Older millennials and the entire GenX are also likely to face permanently lower pensions savings, especially since both cohorts have now been hit with two systemic crises, the 2008-2014 Great Recession and the 2020 Covid-19 pandemic.

"These generations are the core of modern Ireland’s population pyramid, and their fates represent the likely direction of our society’s and economy’s evolution in decades to come."


23/4/20: What Oil Price Dynamics Signal About Future Growth


My column at The Currency this week covers the fundamentals of oil prices and what these tell us about the markets expectations for economic recovery: https://www.thecurrency.news/articles/15674/supply-demand-and-the-dilemma-of-trade-what-the-collapse-in-oil-prices-tells-you-about-post-covid-10-economy.


Key takeaways:

  • "...current futures market pricing is suggesting that traders and investors expect much slower recovery from the Covid-19 pandemic than the V-shaped one forecast by the analysts’ consensus and the like of the IMF and the World Bank. 
  • "As a second order effect, oil markets appear to be pricing post-Covid-19 economic environment more in line with below historical trends global growth, similar to that evident in the economic slowdown of 2018-2019, rather than a substantial expansion on foot of the sharp Covid- shock."

14/4/20: Re-Opening America: A Long Road Ahead


In our Financial Systems class, yesterday, we were discussing the potential trajectories for 'exit' from COVID19 restriction and easing of economic constraints. Handily, yesterday, Morgan Stanley published this analytical timeline of the pandemic evolution:


Their analysis is based on the following assumed timings:

  1. They expect U.S. coastal regions to peak in the next 3-5 days (so March 15-17),
  2. The rest of the U.S. will lag these by "around 3 weeks", leading to a "second peak" that promises to be not as severe as the first peak.
  3. The MS are expecting the second peak to result in the US cases peaking at x4 China and x2 Italy.
  4. MS therefore describe the U.S. trajectory as having "a very long tail".
  5. Based on comparisons to Korea testing, the MS research suggests the earliest 'reopening' date for the U.S. as mid-to-late May.
Here is MS note on re-opening:
Bleak. 

Key takeaway on the future developments: "only a vaccine will provide a true solution to this pandemic" and that means that we are likely to see - best case scenario - scaled delivery of the vaccine for the 2021 flu season. 

This is a long road ahead...