Connect with us

Economics

Aviat Networks Issues Open Letter to Ceragon Networks Shareholders to Correct the Latest False Claims and Mischaracterizations from the Ceragon Board

Aviat Networks Issues Open Letter to Ceragon Networks Shareholders to Correct the Latest False Claims and Mischaracterizations from the Ceragon Board
PR Newswire
AUSTIN, Texas, Aug. 11, 2022

Aviat urges shareholders to vote on the GOLD proxy card f…

Published

on

Aviat Networks Issues Open Letter to Ceragon Networks Shareholders to Correct the Latest False Claims and Mischaracterizations from the Ceragon Board

PR Newswire

Aviat urges shareholders to vote on the GOLD proxy card for ALL FIVE Aviat nominees to elect directors who will support near- and long-term value creation at Ceragon

AUSTIN, Texas, Aug. 11, 2022 /PRNewswire/ -- Aviat Networks, Inc. (NASDAQ: AVNW) ("Aviat"), the leading expert in wireless transport solutions, today issued the following open letter to shareholders of Ceragon Networks Ltd. (NASDAQ: CRNT) ("Ceragon" or the "Company") to correct the latest false claims and mischaracterizations made by Ceragon's Board of Directors ("Board") in its August 8, 2022 letter to shareholders.

Dear fellow Ceragon shareholders,

Aviat has given the Board many opportunities to consider and negotiate a transaction that would provide shareholders like you immediate value at a significant premium. Rather than engage in fruitful discussion, the Board has delayed, deferred and attempted to distract you with a series of false and misleading arguments designed to disguise their persistent failure to deliver value. Earlier this week, the Board rejected Aviat's revised proposal to acquire Ceragon for $3.08 per share in cash and stock, in another letter that distorts the record and which is replete with false claims and mischaracterizations. We're writing to you today to once again set the record straight.

THE PROPOSED TRANSACTION WOULD DELIVER SIGNIFICANT VALUE TO SHAREHOLDERS, IN EXCESS OF WHAT CERAGON CAN ACHIEVE THROUGH ITS CURRENT STRATEGY, AND WITH SUBSTANTIALLY LESS EXECUTION RISK.

  • Aviat's revised proposal represents a substantial premium of 47% to the closing price of Ceragon shares on June 27, 2022, of $2.09 (the last close price prior to Aviat's first public offer) and a 64% premium to Ceragon's 60-day volume-weighted average share price of $1.88.
  • Analysts' price targets reflect what Ceragon could achieve at some point in the future. However, following several quarters of operational challenges, a rising debt load, negative EPS and cash flow, and a botched chip rollout, we see these targets as, at best, highly aspirational. If Ceragon were to combine with Aviat, it would have the management, discipline, resources and broader platform to achieve its full potential.
  • Ceragon lowered its annual guidance in the first quarter of 2022, and in the second quarter it missed top line consensus, continuing its pattern of underperformance, having missed analysts' consensus earnings expectations for five of the last ten quarters. Continued performance at these woeful levels will lead to analyst price target reductions.
  • While Ceragon touts its progress in North America, industry league tables list Aviat as the number one player in North America, with Ceragon not even among the top three.1
  • In its August 8 report, independent proxy advisory firm Institutional Shareholder Services ("ISS") noted that Ceragon, "underperformed peers and the Nasdaq index over all measurement periods ended on the unaffected date… While revenue growth deceleration has also been an issue at peers, the Company's gross margins are below pre-pandemic levels and have not shown signs of recovery over the past several quarters."2 ISS is an independent shareholder advisory service whose recommendations are relied upon by thousands of institutional investors.

Results like these are what Ceragon's Board expects you to believe is "strong business momentum." Since the beginning of 2019, Ceragon has incurred negative free cash flow of $48 million as it has attempted to produce its much-delayed next generation chip, and this burn rate has accelerated as the company has consumed $35 million of the $48 million in just the last 18 months. We believe that this 28-nanometer chip, when it is finally rolled out, will consume more power and create cost, system design, and supply chain challenges. Ceragon's debt-laden balance sheet will not support the expensive redesign needed to address these problems, which we fear could lead this entrenched Board to raise additional capital through a dilutive equity offering.

The truth is that Ceragon is struggling on its own, and is not going to achieve outlandish price targets, or even its own projections. We continue to believe that Ceragon would see tremendous advantages from being part of a larger platform with more scale and resources as part of Aviat. In fact, ISS noted that a "lack of clear progress" could send Ceragon's stock lower in the absence of a transaction, including one with Aviat.

THE CERAGON BOARD HAS DONE VIRTUALLY NOTHING TO EXPLORE (AND EVERYTHING POSSIBLE TO PREVENT) A POTENTIAL TRANSACTION WITH AVIAT OR TO MAXIMIZE VALUE FOR ALL SHAREHOLDERS.

Despite Ceragon's claims to the contrary, the Board has repeatedly erected roadblocks to exploring a value creating transaction with Aviat at any price, even declining to name their own price when offered the opportunity. Instead, they indicated it would take two months to determine a price, which is not what would reasonably be expected from a party genuinely interested in "maximizing shareholder value" – and which is grossly inconsistent with how quickly they rejected both our original and revised public offers. ISS said that "it is questionable to what extent the board has been open to negotiating a deal," and that the Board "does not appear to have engaged in detailed discussions."

We have been crystal clear since making our offer public on June 27 that our very strong preference is to negotiate a mutually agreeable transaction with Ceragon, and we have always believed that eventually they would come to the bargaining table. Unfortunately, since June, Ceragon has spent less than 30 minutes total in dialogue with Aviat, preferring instead to spend their time coming up with specious objections like demanding a reverse termination fee (payable from Aviat to Ceragon if a mutual definitive agreement was entered into but could not be closed) that was both unorthodox and outrageously high (~$60 million) as a prerequisite for discussions; complaining that our proposed reverse termination fee was too low, when in fact all we proposed is that it be based on market standards; or demanding that Aviat agree that Ceragon would not have to pay a termination fee (in the event someone else proposed to buy them after they executed a definitive agreement with Aviat).

What we now recognize is that this Board cannot come to its senses, because the Board lacks the necessary independence to do the right thing for shareholders.

CERAGON SHAREHOLDERS DESERVE A CHANCE FOR GREATER VALUE. THE ZISAPEL BLOC ON THE CERAGON BOARD IS THE PROBLEM. REPLACING A MAJORITY OF THE BOARD IS THE SOLUTION.

Three members of Ceragon's seven-seat Board are closely tied to a fourth director, the Company's Chairman, Zohar Zisapel, and serve on boards or as executives of other companies he controls. Since their other business interests are closely tied to him, it is easy to understand why these directors would support Mr. Zisapel's interests over those of other Ceragon shareholders. ISS said that "investors may question to what extent they would challenge the company's chairman/co-founder." Together this bloc provides Mr. Zisapel with effective majority control of the Board.

Please note that although Mr. Zisapel founded Ceragon, he neither owns nor controls the majority of voting shares. In fact, in February 2021, he sold approximately one-third of his Ceragon shares, when the stock was trading at over $5.00 per share, well above where it has traded since, and has not replenished his position since, showing little confidence in Ceragon's future.

The Zisapel bloc has presided over considerable destruction of shareholder value:

  • Former Ceragon CEO Ira Palti oversaw total shareholder return of -21% during his tenure as CEO of Ceragon versus Russell 2000 TSR of 323% during the same period. That is an underperformance of 343%. ISS agrees that Ceragon has underperformed under Mr. Palti's leadership and recommends that shareholders vote FOR his removal from the Board.
  • Yael Langer, who is currently employed by Mr. Zisapel, has been on the Ceragon Board since 2000, presiding over consistent underperformance. ISS also recommends that shareholders vote FOR Ms. Langer's removal from the Board to bring a fresh view to Ceragon's challenges.
  • Mr. Zisapel himself has watched Ceragon's stock price decline by 87% over the 22 years since he took Ceragon public in August 2000. He has been Chair for every one of those 22 years.
  • David Ripstein was previously employed by Mr. Zisapel, and is CEO of another company that demands considerable time and attention, which leads us to fear he would be quick to defer to Mr. Zisapel and Mr. Palti.

As the Board of a publicly traded company, Ceragon's directors should represent the interests of all shareholders, not just Mr. Zisapel.

A VOTE FOR ALL OF AVIAT'S FIVE DIRECTOR NOMINEES ON THE GOLD PROXY CARD IS THE PATH TO CREATING GREATER BOARD INDEPENDENCE AND GREATER SHAREHOLDER VALUE.

All five of our nominees are thoroughly independent – from Aviat itself, from Ceragon's management and, perhaps most importantly, from Mr. Zisapel – and able to provide a fresh, unbiased perspective at a critical junction for Ceragon. No matter what Ceragon tries to allege, when elected, all five of Aviat's nominees would honor their fiduciary responsibility to maximize shareholder value and evaluate and oversee fairly not just our proposal to acquire Ceragon but also any other path to value creation.

To set the record straight on one of Ceragon's most outlandish red herrings, Aviat director nominee Jonathan Foster has the public company board experience to be an immediate asset to the Ceragon Board. Serving today on four other public company boards, service on Ceragon's Board would not make him over-boarded according to the criteria of either ISS or proxy advisory firm Glass Lewis, both of which consider a director over-boarded only if they serve on six or more boards concurrently. Ceragon has also used cherry-picked dates in an attempt to distort the record of another Aviat director nominee, Dennis Sadlowski, who as first a board member and then CEO of CECO Environmental Corporation helped that company significantly reduce its debt, strengthen its leadership team and implement strong processes and overall operational rigor.

As usual, the Ceragon Board is trying to make issues where none exist, hoping you'll excuse them for refusing to engage in discussions regarding a combination with Aviat that would yield a significant premium for shareholders and provide a more effective platform for its technologies. Only by voting FOR Aviat's proposal to remove three entrenched Ceragon directors and FOR the election of ALL FIVE of Aviat's nominees on the GOLD proxy card TODAY can shareholders realize the considerable value of this combination.

YOUR VOTE IS CRUCIAL. Please visit ValueForCeragon.com for more information.

Sincerely,

Peter A. Smith
Aviat Networks
President and Chief Executive Officer

About Aviat Networks, Inc.
Aviat Networks, Inc. is the leading expert in wireless transport solutions and works to provide dependable products, services and support to its customers. With more than one million systems sold into 170 countries worldwide, communications service providers and private network operators including state/local government, utility, federal government and defense organizations trust Aviat with their critical applications. Coupled with a long history of microwave innovations, Aviat provides a comprehensive suite of localized professional and support services enabling customers to drastically simplify both their networks and their lives. For more than 70 years, the experts at Aviat have delivered high-performance products, simplified operations, and the best overall customer experience. Aviat Networks is headquartered in Austin, Texas. For more information, visit www.aviatnetworks.com or connect with Aviat Networks on TwitterFacebook and LinkedIn.

Forward-Looking Statements
The information contained in this document includes forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements include, without limitations, statements regarding the proposed transaction between Aviat and Ceragon, the results of the requested extraordinary general meeting of shareholders of Ceragon, Ceragon's actions in connection therewith, and any potential related litigation. All statements, trend analyses and other information contained herein regarding the foregoing beliefs and expectations, as well as about the markets for the services and products of Aviat and trends in revenue, and other statements identified by the use of forward-looking terminology, including, without limitation, "anticipate," "believe," "plan," "estimate," "expect," "goal," "will," "see," "continue," "delivering," "view," and "intend," or the negative of these terms or other similar expressions, constitute forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, forward-looking statements are based on estimates reflecting the current beliefs, expectations and assumptions of the senior management of Aviat regarding the future of its business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Such forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this document. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include the following:

  • the impact of COVID-19 on our business, operations and cash flows;

  • continued price and margin erosion as a result of increased competition in the microwave transmission industry;

  • our ability to realize the anticipated benefits of any proposed or recent acquisitions, including our proposed transaction with Ceragon, within the anticipated timeframe or at all, including the risk that proposed or recent acquisitions will not be integrated successfully;

  • the results of the extraordinary general meeting of Ceragon's shareholders;

  • the impact of the volume, timing, and customer, product, and geographic mix of our product orders;

  • the timing of our receipt of payment for products or services from our customers;

  • our ability to meet projected new product development dates or anticipated cost reductions of new products;

  • our suppliers' inability to perform and deliver on time as a result of their financial condition, component shortages, the effects of COVID-19 or other supply chain constraints;

  • the effects of inflation and the timing and extent of changes in the prices and overall demand for and availability of our inputs;

  • customer acceptance of new products;

  • the ability of our subcontractors to timely perform;

  • weakness in the global economy affecting customer spending;

  • retention of our key personnel;

  • our ability to manage and maintain key customer relationships;

  • uncertain economic conditions in the telecommunications sector combined with operator and supplier consolidation;

  • our failure to protect our Intellectual property rights or defend against Intellectual property infringement claims by others;

  • the results of our restructuring efforts;

  • the ability to preserve and use our net operating loss carryforwards;

  • the effects of currency and interest rate risks;

  • the effects of current and future government regulations, including the effects of current restrictions on various commercial and economic activities in response to the COVID-19 pandemic;

  • general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States and other countries where we conduct business;

  • the conduct of unethical business practices in developing countries;

  • the impact of political turmoil in countries where we have significant business;

  • the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships; and

  • Aviat's ability to implement our stock repurchase program or the extent to which it enhances long-term stockholder value.

For more information regarding the risks and uncertainties for Aviat's business, see "Risk Factors" in Aviat's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on August 25, 2021, as well as other reports filed by Aviat with the SEC from time to time. Aviat does not undertake any obligation to update publicly any forward-looking statement, whether written or oral, for any reason, except as required by law, even as new information becomes available or other events occur in the future.

Additional Information

This document does not constitute an offer to sell or exchange, or the solicitation of an offer to buy or exchange, any securities, nor will there be any sale of securities in any states or jurisdictions in which such offer or sale or exchange would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities will be made except by means of a prospectus meeting the requirements of section 10 of the Securities Act of 1933 or an exemption therefrom.

In connection with any transaction between Aviat and Ceragon that involves the issuance of Aviat shares to the Ceragon shareholders, Aviat will file a registration statement with the SEC. INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT, ANY AMENDMENTS THERETO AND OTHER RELEVANT DOCUMENTS THAT MAY BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE TRANSACTION. Investors will also be able to obtain copies of the registration statement and other documents containing important information about each of the companies once such documents are filed with the SEC, without charge, at the SEC's web site at www.sec.gov.

Investor Contacts

Aviat Networks
Andrew Fredrickson
+1-408-501-6214
andrew.fredrickson@aviatnet.com

Okapi Partners LLC
Bruce Goldfarb / Chuck Garske / Teresa Huang
+1-212-297-0720
info@okapipartners.com

Media Contact

Abernathy MacGregor
Sydney Isaacs / Jeremy Jacobs
+1-212-371-5999
sri@abmac.com / jrj@abmac.com

____________________

1 Source: Skylight Research

2 Permission to use quotations from ISS was neither sought nor obtained.

View original content to download multimedia:https://www.prnewswire.com/news-releases/aviat-networks-issues-open-letter-to-ceragon-networks-shareholders-to-correct-the-latest-false-claims-and-mischaracterizations-from-the-ceragon-board-301603917.html

SOURCE Aviat Networks, Inc.

Read More

Continue Reading

Economics

Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Roughly 60% of Americans say they’re living paycheck to paycheck -…

Published

on

Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Roughly 60% of Americans say they're living paycheck to paycheck - a figure which hasn't budged much overall from last year's 55% despite inflation hitting 40-year highs, according to a recent LendingClub report.

Even people earning six figures are feeling the strain, with 45% reporting living paycheck to paycheck vs. 38% last year, CNBC reports.

"More consumers living paycheck to paycheck indicates that many are continuing to lose their financial stability," said LendingClub financial health officer, Anuj Nayar.

The consumer price index, which measures the average change in prices for consumer goods and services, rose a higher-than-expected 8.3% in August, driven by increases in food, shelter and medical care costs.

Although real average hourly earnings also rose a seasonally adjusted 0.2% for the month, they remained down 2.8% from a year ago, which means those paychecks don’t stretch as far as they used to. -CNBC

Meanwhile, Bank of America found that 71% of workers say their income isn't keeping pace with inflation - resulting in a five-year low in terms of financial security.

"It is no secret that prices have been increasing for everyday Americans — not only in the goods and services they purchase but also in the interest rates they’re paying to fund their lives," said Nayar, who noted that people are relying more on credit cards and carry a higher monthly balance, making them financially vulnerable. "This can have detrimental consequences for someone who pays the minimum amount on their credit cards every month."

According to an Aug. 30 report from the Federal Reserve Bank of New York, credit card balances increased by $46 billion from last year, becoming the second-biggest source of overall debt last quarter.

And as Bloomberg noted last month, more US consumers are saddled with credit card debt for longer periods of time. According to a recent survey by CreditCards.com, 60% of credit card debtors have been holding this type of debt for at least a year, up 50% from a year ago, while those holding debt for over two years is up 40%, from 32%, according to the online credit card marketplace.

And while total credit-card balances remain slightly lower than pre-pandemic levels, inflation and rising interest rates are taking a toll on the already-stretched finances of US households.

About a quarter of respondents said day-to-day expenses are the primary reason why they carry a balance. Almost half cite an emergency or unexpected expense, including medical bills and home or car repair.

The Federal Reserve is likely to raise interest rates for the fifth time this year next week. Credit-card rates are typically directly tied to the Fed Funds rate, and their increase along with a softening economy may lead to higher delinquencies. 

Total consumer debt rose $23.8 billion in July to a record $4.64 trillion, according to data from the Federal Reserve. -Bloomberg

The Fed's figures include credit card and auto debt, as well as student loans, but does not factor in mortgage debt.

Tyler Durden Tue, 10/04/2022 - 20:25

Read More

Continue Reading

Spread & Containment

Plunging pound and crumbling confidence: How the new UK government stumbled into a political and financial crisis of its own making

Liz Truss took over as prime minister with an ambitious plan to cut taxes by the most since 1972 – investors balked after it wasn’t clear how she would…

Published

on

The hard hats likely came in handy recently for Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. Stefan Rousseau/Pool Photo via AP

The new British government is off to a very rocky start – after stumbling through an economic and financial crisis of its own making.

Just a few weeks into its term on Sept. 23, 2022, Prime Minister Liz Truss’ government released a so-called mini-budget that proposed £161 billion – about US$184 billion at today’s rate – in new spending and the biggest tax cuts in half a century, with the benefits mainly going to Britain’s top earners. The aim was to jump-start growth in an economy on the verge of recession, but the government didn’t indicate how it would pay for it – or provide evidence that the spending and tax cuts would actually work.

Financial markets reacted badly, prompting interest rates to soar and the pound to plunge to the lowest level against the dollar since 1985. The Bank of England was forced to gobble up government bonds to avoid a financial crisis.

After days of defending the plan, the government did a U-turn of sorts on Oct. 3 by scrapping the most controversial component of the budget – elimination of its top 45% tax rate on high earners. This calmed markets, leading to a rally in the pound and government bonds.

As a finance professor who tracks markets closely, I believe at the heart of this mini-crisis over the mini-budget was a lack of confidence – and now a lack of credibility.

A looming recession

Truss’ government inherited a troubled economy.

Growth has been sluggish, with the latest quarterly figure at 0.2%. The Bank of England predicts the U.K. will soon enter a recession that could last until 2024. The latest data on U.K. manufacturing shows the sector is contracting.

Consumer confidence is at its lowest level ever as soaring inflation – currently at an annualized pace of 9.9% – drives up the cost of living, especially for food and fuel. At the same time, real, inflation-adjusted wages are falling by a record amount, or around 3%.

It’s important to note that many countries in the world, including the U.S. and in mainland Europe, are experiencing the same problems of low growth and high inflation. But rumblings in the background in the U.K. are also other weaknesses.

Since the financial crisis of 2008, the U.K. has suffered from lower productivity compared with other major economies. Business investment plateaued after Brexit in 2016 – when a slim majority of voters chose to leave the European Union – and remains significantly below pre-COVID-19 levels. And the U.K. also consistently runs a balance of payments deficit, which means the country imports a lot more goods and services than it exports, with a trade deficit of over 5% of gross domestic product.

In other words, investors were already predisposed to view the long-term trajectory of the U.K. economy and the British pound in a negative light.

An ambitious agenda

Truss, who became prime minister on Sept. 6, 2022, also didn’t have a strong start politically.

The government of Boris Johnson lost the confidence of his party and the electorate after a series of scandals, including accusations he mishandled sexual abuse allegations and revelations about parties being held in government offices while the country was in lockdown.

Truss was not the preferred candidate of lawmakers in her own Conservative Party, who had the task of submitting two choices for the wider party membership to vote on. The rest of the party – dues-paying members of the general public – chose Truss. The lack of support from Conservative members of Parliament meant she wasn’t in a position of strength coming into the job.

Nonetheless, the new cabinet had an ambitious agenda of cutting taxes and deregulating energy and business.

Some of the decisions, laid out in the mini-budget, were expected, such as subsidies limiting higher energy prices, reversing an increase in social security taxes and a planned increase in the corporate tax rate.

But others, notably a plan to abolish the 45% tax rate on incomes over £150,000, were not anticipated by markets. Since there were no explicit spending cuts cited, funding for the £161 billion package was expected to come from selling more debt. There was also the threat that this would be paid for, in part, by lower welfare payments at a time when poorer Britons are suffering from the soaring cost of living. The fear of welfare cuts is putting more pressure on the Truss government.

a man in a brown stocking hat inspects souvenirs near a bunch of UK flags and other trinkets
The cost of living crisis in the U.K. has everyone looking for deals where they can. AP Photo/Kirsty Wigglesworth

A collapse in confidence

Even as the new U.K. Chancellor of the Exchequer Kwasi Kwarteng was presenting the mini-budget on Sept. 23, the British pound was already getting hammered. It sank from $1.13 the day before the proposal to as low as $1.03 in intraday trading on Sept. 26. Yields on 10-year government bonds, known as gilts, jumped from about 3.5% to 4.5% – the highest level since 2008 – in the same period.

The jump in rates prompted mortgage lenders to suspend deals with new customers, eventually offering them again at significantly higher borrowing costs. There were fears that this would lead to a crash in the housing market.

In addition, the drop in gilt prices led to a crisis in pension funds, putting them at risk of insolvency.

Many members of Truss’ party voiced opposition to the high levels of borrowing likely necessary to finance the tax cuts and spending and said they would vote against the package.

The International Monetary Fund, which bailed out the U.K. in 1976, even offered its figurative two cents on the tax cuts, urging the government to “reevaluate” the plan. The comments further spooked investors.

To prevent a broader crisis in financial markets, the Bank of England stepped in and pledged to purchase up to £65 billion in government bonds.

Besides causing investors to lose faith, the crisis also severely dented the public’s confidence in the U.K. government. The latest polls showed the opposition Labour Party enjoying a 24-point lead, on average, over the Conservatives.

So the government likely had little choice but to reverse course and drop the most controversial part of the plan, the abolition of the 45% tax rate. The pound recovered its losses. The recovery in gilts was more modest, with bonds still trading at elevated levels.

Putting this all together, less than a month into the job, Truss has lost confidence – and credibility – with international investors, voters and her own party. And all this over a “mini-budget” – the full budget isn’t due until November 2022. It suggests the U.K.‘s troubles are far from over, a view echoed by credit rating agencies.

David McMillan 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.

Read More

Continue Reading

Economics

Roubini: The Stagflationary Debt Crisis Is Here

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to…

Published

on

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Tyler Durden Tue, 10/04/2022 - 17:25

Read More

Continue Reading

Trending