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$250BN Fund Manager Fears “Fed Will Go On Feeding The Beast” Until Dollar Loses Reserve Status

$250BN Fund Manager Fears "Fed Will Go On Feeding The Beast" Until Dollar Loses Reserve Status

Authored by Tad Rivelle, CIO of TCW Investments,

Upon his arrival in the New World, Hernán Cortés famously made history by burning his ships….

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3 years ago

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$250BN Fund Manager Fears "Fed Will Go On Feeding The Beast" Until Dollar Loses Reserve Status

Authored by Tad Rivelle, CIO of TCW Investments,

Upon his arrival in the New World, Hernán Cortés famously made history by burning his ships. The message to his sailors was clear: there can be no turning back. When the pandemic initially struck, public health officials prescribed “lockdowns.” These draconian measures were understood at the time to last 30, maybe 60 days at most. The goal was to “bend the curve” and then quickly return to “normal.” The nation – indeed much of the world – would experience a scaled up version of a Cape Cod style seasonal shutdown. The Federal government and its alter ego, the Fed, air dropped dollars by the trillions. Bridge financing, as it were. The 30-day “jaunt” through the woods morphed into a 300+ day Atlantic “crossing.” An ocean of changes – social, technological, monetary – have passed underneath and the challenge now is to understand just how different the New World will be from the Old.

Properly understood, a recession is not so much a shortfall in demand/production as it is a transformation of demand/production. The more the Old World economy transforms, the more that labor and capital have to be repurposed. Without yet knowing the extent of these changes, it is premature to handicap when and from what level the economy will organically re-start its growth trajectory. And, yet, here we stand with financial markets – seemingly oblivious to the carnage – pricing in outcomes that seem not just buoyant but, dare we say it?, irrationally exuberant.

So far, this has been perhaps that most quixotic of recessions: one in which income, asset prices, and liquidity have all expanded:

Personal Incomes and Net Worths Rose in 2020

Source: Bloomberg BEA, Federal Reserve, TCW

* As of September 30, 2020.

Households Are Flush With Cash*

Source: Federal Reserve, TCW

* Aggregate amount of households’ and nonprofit organizations’ checkable deposits, currency, time and savings deposits, and money market funds.

Of course, there is no real “mystery” here. Where the private economy fell short in terms of productive income generation, the “deficit” was more than made up by trillions in Federal borrowing and central bank money printing. Central bank assets as a percent of GDP have soared while Treasury real yields have gone negative, all the way out to the 30-year maturity:

Fed Assets as % of GDP

Source: Federal Reserve, Bloomberg, TCW

30-Year Real Rates Are in Negative Territory for the First Time!

Source: Bloomberg, TCW

While it is a bit tiresome even to us to point this out, negative real yields cannot be a result of a free market. Rational investors lend to receive some premium over inflation. Inevitably, interest rates that have been held down against their will also subdue equity discount and real estate cap rates.

Meanwhile, credit prices, which reeled under the weight of their own excess leverage slamming into pandemic lockdowns, have subsequently “V-bottomed” in price. As for de-leveraging…not so much!

High Yield Corporate Bond Prices – Near All Time Highs

Source: Bloomberg, BofA ML

Investment Grade Corporate Leverage Is at All Time High Levels

Source: Bloomberg BofA Global Research

Note: Medians based on the U.S. HG universe (ex. Fins and Utilities). Universe is rebalanced each quarter.

And, all the while, we are marooned on the shores of a new land presenting us with novel dangers and opportunities. For instance, much of the professional white-collar work force is now boldly going where such industries as management consulting had gone before. A recent study by Cushman & Wakefield estimated that as much as 37% of the U.S. workforce might have the potential for shifting to a remote work environment. And, of course, even if the future of white-collar work is some hybrid model (3 days in, 2 days out?), the ramifications will be transformational. Business travel might take many, many years to return to 2019 levels with impacts spreading out across the airline and aircraft manufacturing industries, hotels, and restaurants. The differential impact on the fortunes of large urban metropolises versus those of the suburbs may be profound.

The valuation proposition for much of the office commercial real -estate market may undergo a sea change. Certain large urban metropolises – Manhattan and San Francisco among them – that had been crammed with economic activity over the cycle that is past have been “emptied” as finance and tech workers dispersed to the burbs. The same study we referenced earlier reports that already two years’ worth of net space absorption was undone in the last three quarters of 2020. Might it turn out that most of the net add in office space over the entire past cycle turn out to be redundant? And, what of the future of shopping? Now that millions have been forcibly dragged all the way to the “Paree” of e-commerce – even for such essentials as groceries – do they all go back to their “Midwestern” farm?

While human ingenuity has always navigated us through periods of change, this reality remains: there will be many losers before there are many winners. Those “losses” will destroy certain assets and take down the debt that was pledged against it. While this process is as natural as it is unwelcome, it is also being forestalled. Market forces (reality) are at war with policy. The Fed more or less “magooed” us into Modern Monetary Theory (MMT) by its crisis response. Yep, that kept the ship afloat alright, but is there ever a good time to let nature take its course? Can the Fed step aside and let the wholesale transformations that are going to happen anyway to well, just happen?

For the moment, the answer is easy: the Fed has no reason to step aside, as the perceived cost of artificially supporting an economy unable to pull its own weight is perceived as negligible. Money printing hasn’t caused any obvious problems, at least so far. But wasn’t it Herb Stein who said that if something is unsustainable, it will end? Fiat currencies thrive for the reason that all monies have thrived: because of trust. They are trusted to be reliable stores of value and unquestioned as to their role in payment for goods and services. But the Catch-22 of any fiat currency – the dollar included – is that you can print until the cows come home so long as your counterparties go on trusting. Lose the trust, and the Fed loses the power to “buy now, pay later,” even if incrementally. Loss of trust in a fiat currency may not happen overnight (it took centuries for Rome!) but you don’t need a fancy econometric model to predict the consequences: higher inflation! Were inflation to re-appear and rates to move higher, the Fed might rue the casual way we now disperse trillions. So, just how long can the current monetary regime last? Your guess is as good as ours, but for entertainment if nothing else, we thought we’d share these historical observations:

Silver Content of a Roman Denarius

Source: Société Générale, Tulane University

Global Reserve Currencies Since 1450

Source: Monetary Gold, www.stansberryresearch.com

The upshot? The Fed will go on feeding the beast and capital markets will, for now, return the love. But we live in a “first derivative” world. A mere reduction in the rate of the deficit spending – say down to 10% of GDP from 15% – could trigger a double dip recession. We are, after all, in a New World, and the ships are burnt. Opportunities of the like rarely seen will present themselves and so will dangers. Until those opportunities represent an addressable target we intend to gather what yield we may while keeping our powder dry for the big game.

Tyler Durden Tue, 02/09/2021 - 14:15

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International

The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

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32 mins ago

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March 11, 2024

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I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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2 hours ago

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March 11, 2024

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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A major cruise line is testing a monthly subscription service

The Cruise Scarlet Summer Season Pass was designed with remote workers in mind.

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2 hours ago

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March 11, 2024

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While going on a cruise once meant disconnecting from the world when between ports because any WiFi available aboard was glitchy and expensive, advances in technology over the last decade have enabled millions to not only stay in touch with home but even work remotely.

With such remote workers and digital nomads in mind, Virgin Voyages has designed a monthly pass that gives those who want to work from the seas a WFH setup on its Scarlet Lady ship — while the latter acronym usually means "work from home," the cruise line is advertising as "work from the helm.”

Related: Royal Caribbean shares a warning with passengers

"Inspired by Richard Branson's belief and track record that brilliant work is best paired with a hearty dose of fun, we're welcoming Sailors on board Scarlet Lady for a full month to help them achieve that perfect work-life balance," Virgin Voyages said in announcing its new promotion. "Take a vacation away from your monotonous work-from-home set up (sorry, but…not sorry) and start taking calls from your private balcony overlooking the Mediterranean sea."

A man looks through his phone while sitting in a hot tub on a cruise ship.

Shutterstock

This is how much it'll cost you to work from a cruise ship for a month

While the single most important feature for successful work at sea — WiFi — is already available for free on Virgin cruises, the new Scarlet Summer Season Pass includes a faster connection, a $10 daily coffee credit, access to a private rooftop, and other member-only areas as well as wash and fold laundry service that Virgin advertises as a perk that will allow one to concentrate on work

More Travel:

The pass starts at $9,990 for a two-guest cabin and is available for four monthlong cruises departing in June, July, August, and September — each departs from ports such as Barcelona, Marseille, and Palma de Mallorca and spends four weeks touring around the Mediterranean.

Longer cruises are becoming more common, here's why

The new pass is essentially a version of an upgraded cruise package with additional perks but is specifically tailored to those who plan on working from the ship as an opportunity to market to them.

"Stay connected to your work with the fastest at-sea internet in the biz when you want and log-off to let the exquisite landscape of the Mediterranean inspire you when you need," reads the promotional material for the pass.

Amid the rise of remote work post-pandemic, cruise lines have been seeing growing interest in longer journeys in which many of the passengers not just vacation in the traditional sense but work from a mobile office.

In 2023, Turkish cruise line operator Miray even started selling cabins on a three-year tour around the world but the endeavor hit the rocks after one of the engineers declared the MV Gemini ship the company planned to use for the journey "unseaworthy" and the cruise ship line dealt with a PR scandal that ultimately sank the project before it could take off.

While three years at sea would have set a record as the longest cruise journey on the market, companies such as Royal Caribbean  (RCL) (both with its namesake brand and its Celebrity Cruises line) have been offering increasingly long cruises that serve as many people’s temporary homes and cross through multiple continents.

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