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A New Divergence?

A New Divergence?

Published

4 years ago

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Do you ever read the last few pages of a fiction book before getting into it?  It seems a bit like watching the economic data now.  We know roughly where it is headed, the unknown is precisely how it gets there.

A common criticism of economists is that they are too late in calling a recession.  One observer suggested that banks don't want their economists forecasting a recession.  That strikes me as little more than an urban myth.   Non-bank economists, central banks, multilateral institutions, like the IMF and World Bank, also often do not see an economic downturn until it is biting them or their neighbors.  At the end of the day, recessions are rare and difficult to forecast.

But this one, which, by some measures, will likely be worse than the Great Depression, has been well anticipated before it began.  The January-March quarter was bad, but the April-June quarter will be horrific.  The precise details are important on the personal level but in terms of the great flows of capital, not so much.  Yet, what may be interesting about next week's US data is it might offer a snapshot of the world's largest economy near the bottom.

The US data will include a glimpse into consumption and output in April, and offer the first indicator for the month of May.  Retail sales are around 40% of consumption and likely fell by approximately 10%.  That follows an 8.4% decline in March.  We already know that auto sales fell sharply in April (the seasonally adjusted annualized rate declined by about 25%). Hence, the new new information is the ex-auto component, which is expected to have slowed by more than 6%.

Industrial output may have contracted by more than 10% last month, on top of the 5.4% decline in March.  The capacity utilization rate may fall below the low of the Great Financial Crisis when it bottomed near 66.7.  One of the consequences of the decline in production could create shortages and force prices higher.  This kind of price increases, from an economic point of view, are not sustainable.  April CPI will be driven down by the drop in energy prices.  It could fall to around 0.5% from 1.5% in March.  The core rate will prove stickier and will only to about 1.7% from 2.1%. 

The pandemic has unleashed powerful deflationary forces. However, the worst is probably in April and early May.   That makes the Empire State manufacturing survey at the end of next week the first test of this hypothesis.  Recall that it averaged 2.3 in the second half of last year and spiked to 12.9 in February.  It fell to -21.5 in March and collapsed to -78.2 in April.  With much of the country still closed in the first half of May, it is too early to look for much more than a scant sign of stabilization.

Europe could be on the cusp of a new crisis.  The German Constitutional Court (GCC)'s ruling attacks at least two fundamental principles at the heart of the eurozone.  First, the GCC challenged the independence of the ECB by encouraging the German government and parliament to press the central bank.  Second, the GCC challenged the notion that the EU law has primacy over national law.  These seemed like settled "doctrines."

It is a bit like the famous case in the US Supreme Court in the early days of the republic, Marbury vs. Maddison.  Marbury was suing Madison, the Treasury Secretary, for not paying him after he was appointed in the waning days of Adams' government before Jefferson took office as the third president.  Jefferson wanted to make his own appointments and refused to authorize Madison to pay Marbury's salary.  The decision by Chief Justice Marshall is considered a foundation of constitutional law.  Although, in the narrow sense it found against Madison, it ruled that the law under which the appointment was made was unconstitutional.  The Supreme Court took upon itself the power to decide the constitutionality of the other branch's actions.  

This is the origin of the principle of judicial review in the US. This power over the legality of EU institutions, which the ECB is among them, is a power granted to the European Court of Justice.  The GCC ruling is nothing short of a putsch against the EU, a nullification of its ruling affirming the legality of the asset purchases.    

The GCC gave the ECB three months to respond, or it prohibited the German central bank from participating in the bond purchases (Public Sector Purchase Program, PSPP), which accounts for around a quarter of the ECB's current bond purchases.  By not responding to the GCC in any formal way in order not to acknowledge that the ECB is subject to its rulings after the European Court of Justice indicated the asset purchases were within its mandate, it shifts the hot potato, as it were, to the Bundesbank.  Bundesbank President Weidmann, who has disagreed with ECB policy, and even testified against it before the ECJ on a different charge, recognizes the importance of the ECB's independence. 

On behalf of the Eurosystem, the Bundesbank buys Bunds under the PSPP.  If German Bunds were not purchased by the BBK, they could be bought by another as the program is still obliged to follow the capital key.   It would leave the GCC challenges unaddressed and would spur others to explore the space that the GCC created for national primacy.  The Bundesbank is not prohibited from participating in the Pandemic Emergency Purchase Program (PEPP), but legal challenges may await.  PEPP is not confined to the capital key, which is the first time the ECB has had so much discretion in its purchases.  At the same time, rather than have the national central banks make the actual transactions for the Eurosystem, the ECB could centralize the market operations under its auspices, which would be more consistent with the practices of other central banks.  

The US monetary and fiscal response has been more aggressive than Europe's. It has little to do with the fact of the dollar's role in the international economy or some exorbitant privilege that is still alleged.  After all, Europe (or at least large parts of it) and Japan can borrow money for less than nothing.  The US cannot do this.  It is a question of institutional capability and desire.  It could, one could that the US has to go bigger because the adverse shock is bigger.  It might turn out to be the case, but look at the recent IMF forecasts.  The US is expected to contact less than Europe this year (-5.9% vs. -7.5%) and match its growth next year (4.7%).  The US is forecast to contract more than Japan this year (-5.9% vs. -5.2%) and rebound stronger next year (4.7% vs. 3.0%).

The return on capital is superior in the US.  Growth likely faster on a two-year view and interest rates are higher, though they cannot be considered high.  The S&P 500 (-9.5%)is also performing better than Europe's Dow Jones Stoxx 600 (-18%) and the Topix (-15%), even though the BOJ buys ETFs linked to this benchmark.  The NASDAQ is positive, albeit slightly, year-to-date.

This could be setting the stage for a new divergence similar to the aftermath of the Great Financial Crisis, where the US outperformance was significant.  The cost will be greater US debt.  The CBO projects a $3.7 trillion deficit this year (~18% of GDP) before this next package (phase 4) that could be more than $1 trillion that has begun being drafted.  Next week, the US Treasury will raise a record $96 bln in coupons at the quarterly refunding.  While the anticipated supply saw the long-end yields rise and the curve steepens, yields by any reckoning are low.

A year ago, the 10-year yield was near 2.4%.  Now it is around 6 8bp.  The market does not appear satiated, and foreign central banks, which were sellers of Treasuries in March (from their custodial account at the Fed) have returned as buyers.  Treasury holdings in the Fed's custody account it maintains for foreign central banks has risen by nearly $34 over the past four weeks.  This replaces a little less than 25% of the amount that was sold the previous six weeks.   

Some market participants are taking more seriously the possibility that the fed funds rate turns negative before the end of the year.  Starting with the March 2021 contract and running through at least January 2022, the implied yields in the futures market are below zero and as much as minus five basis points.   The larger, and arguably more significant market, the Eurodollar futures are not implying a negative rate.  The Eurodollar curve bottoms in Q3 next year around 18 bp.  That said, the US two-year yield fell to a new record low near 10 bp ahead of the weekend before settling around 15 bp.   

Unlike the US, Europe, and Japan, China's economy is expected to expand this year, albeit slowly.  The IMF projects 1.2% growth, while the Bloomberg survey from last month found a median forecast of 1.8%.  Nevertheless, China's ability to take advantage is very constrained.  

First, the trade deal with the US hangs by a thread despite some Panglossian statements by trade negotiators.  The fact of the matter is that through April, US exports to China have fallen by almost 6%  compared to a year ago, and the target lay above the 2017 levels, which was before the tariff escalation began.  

Second, China's prestige has been undermined by how it handled the outbreak of Covid-19.  Many countries have been explicit in their call, and China has pushed back, such as against Australia.  

Third, many countries fearful that Chinese companies, especially state-owned enterprises, will take advantage of beaten-down share prices and swoop in for a wave of acquisition.  Policies regarding direct investment have been tightened.  

Fourth, supply chains were already being reviewed last year in light of US tariffs, and the pandemic appears to be an accelerant.  The US may soon force medical products and medicine to be re-shored, and Europe is thinking along similar lines.  Japan has earmarked funds in this year's budget to help companies who want to move out of China.  India has set aside land for the same purpose. 

Fifth, the calendar is not its friend.  After the National People's Congress session later this month, Trump is expected to make a more statement about progress on the trade agreement, and, as now required by Congress, the autonomy of Hong Kong needs to be certified.  These events take place at a point in the US political cycle, the run-up to national elections when the rhetoric and theatrics typically escalate.  




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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

Published

8 hours ago

on

March 9, 2024

By

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

“When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

“It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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Walmart joins Costco in sharing key pricing news

The massive retailers have both shared information that some retailers keep very close to the vest.

Published

11 hours ago

on

March 9, 2024

By

As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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Walmart has really good news for shoppers (and Joe Biden)

The giant retailer joins Costco in making a statement that has political overtones, even if that’s not the intent.

Published

12 hours ago

on

March 9, 2024

By

As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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