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DataTrek: Oil Prices Hitting $140 Would Mean Recession In The Next 12-18 Months

DataTrek: Oil Prices Hitting $140 Would Mean Recession In The Next 12-18 Months

By Nicholas Colas of DataTrek Research

1970s Debt Vs. Today

Two…

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DataTrek: Oil Prices Hitting $140 Would Mean Recession In The Next 12-18 Months

By Nicholas Colas of DataTrek Research

1970s Debt Vs. Today

Two “Markets” items today:

Topic #1: Let’s talk about US Federal government and business debt levels. Such conversations are usually laden with fire and brimstone narratives, but we will avoid those as much as we can. Let’s just focus on the facts and see where they lead us.

First, here is total Federal public debt as a percent of GDP. This does not include intragovernmental holdings ($6.5 trillion currently, mostly held by entitlement programs), but it does capture the general trends quite well.

Three points about this graph:

  • US government debt as a percent of GDP has risen dramatically over the last +50 years, from lows around 30 percent in 1980 to 125 percent today.

  • The pattern of this growth is both structural and cyclical. Debt/GDP was at its lowest during this time series in 1980, when Treasury yields were at their highest. As yields fell, borrowing increased. But … Debt/GDP actually declined in the mid-late 1990s as strong labor and stock markets increased tax receipts. The Great Recession, which brought lower tax receipts and stimulative fiscal spending, increased debt issuance once again. The Pandemic Crisis had the same effect.

  • The US now has a higher Debt/GDP ratio than the Eurozone (95 pct) and the United Kingdom (88 pct), as well as China (78 pct) and India (87 pct).

Now, let’s look at US non-financial business debt (both bonds and loans) as a percent of GDP:

Two points about this data:

  • Corporate debt/GDP is 40 percent higher now than in the inflationary/high interest rate 1970s. The offsetting positive is that public and larger private companies have much higher equity valuations now versus the 1970s. Issuing stock to pay down debt may not be any CEO or shareholder’s favorite idea, but it can be done if debt service costs become too burdensome.

  • Current corporate debt/GDP levels in the high 40-percent range are still higher than the 2 prior peaks (2001 and 2008) of 45 percent.

Takeaway (1): debt is now a much larger part of the US economy than in the 1970s, and any discussion of inflation-fighting monetary policy must acknowledge that difference. Neither the US government nor private business can afford +10 percent Treasury/corporate debt yields. Those were commonplace in the 1970s; they would be very damaging now. This is why we say the famous “Fed Put” has shifted from stocks to the Treasury market. Chair Powell and the FOMC know that they must keep structural inflation at bay and Treasury yields low. Much, much lower than the 1970s …

Takeaway (2): we think this is one reason US equity markets get into trouble when Treasury yields hit 3 percent. That was the case in Q4 2018, and the same is true now. It’s not that a 3 percent cost of risk-free capital is inherently unmanageable, either for the Federal government or the private sector. Rather, it is the market’s way of signaling the manifold uncertainties if rates don’t stop at 3 percent, but instead keep rising.

Topic #2: The latest reading of the New York Fed’s Global Supply Chain Pressure Index was out this morning. This metric covers US, European and Asian purchasing manager surveys as well as real-time shipping cost analysis. The output is based on standard deviations from pre-pandemic “normal”, which for this index’s purposes is zero.

The following chart shows the index’s readings from late 2014 to the present. As noted, the first peak was in the early stages of the global pandemic crisis (April 2020, 3.4 standard deviations from pre-pandemic levels). The second was in late 2021, at 4.3 – 4.4 standard deviations.

May 2022’s reading of 2.9 standard deviations is down from April’s 3.4 level but still above February and March’s 2.8 level. The Fed’s own commentary noted “The moves in the GSPCI over the past three months suggest, for now, a stabilization of global supply chain pressures.”

Takeaway: global supply chain snarls continue to exert inflationary pressure on the US and global economy. At the margin, however, they are easing slightly. We’ve gone from +4 standard deviations of “pressure” down to just less than 3 standard deviations in the last 6 months. On Friday we will get the latest US CPI inflation report, and that will tell us if this is enough to reduce overall inflation.

As an aside: in other inflation-related news, WTI crude broke $120/barrel today.

We still believe $140/barrel is the level to watch as a recession indicator.

That would be a double from last summer’s $70/barrel level, and any time since 1970 when oil prices have gone up 2x in a year a recession has followed in the next 12-18 months.

The July 4th weekend typically marks the start of peak gasoline demand in the US; oil most likely tops out around this period in the near term. Let’s hope it does so with a $130-handle rather than anything higher.

Tyler Durden Thu, 06/09/2022 - 11:45

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International

Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China,…

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Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China, multinational corporations such as Apple are diversifying production to places with less geopolitical risk.

Nikkei Asia spoke to three sources with direct knowledge of Apple's plans to shift Watch and MacBook production out of China to Vietnam for the first time. 

Apple suppliers Luxshare Precision Industry and Foxconn have already piloted a production run of the Watch in northern Vietnam. 

The move by Apple is a further win for the Southeast Asian country as it already produces iPads and AirPods. 

Two sources told Nikkei Asia that Apple had requested suppliers to set up a MacBook test production line in Vietnam. They said progress in constructing laptop production in the country has been "slow, partly due to pandemic-related disruptions but also because notebook computer production involves a larger supply chain."  

"AirPods, Apple Watch, HomePod and more ... Apple has big plans in Vietnam, apart from iPhone manufacturing," one of the people with direct knowledge of Apple's plans said. "The components for MacBooks have become more modularized than in the past, which makes it easier to produce the laptops outside of China. But how to make it cost-competitive is another challenge."

This trend is called "friendshoring." While it's a play on "offshoring," this isn't about companies moving operations back to the US and Europe, but rather seeking foreign alternatives that retain the benefit of low labor costs but with less international controversy. 

Apple's production diversification comes as the US and China already had an increasingly adversarial relationship before House Speaker Nancy Pelosi's visit to Taiwan sparked anger with Beijing. The fact is, geopolitical and trade war tensions aren't going away anytime soon and will only push Apple further away from China. Though reshoring production to the US is unfeasible because of labor costs, maybe robotics can offset some of those costs or perhaps set up shop in Mexico, where there's abundant cheap labor and healthy demographics. 

A recent Rabobank analysis of friendshoring showed that chief beneficiaries would include countries like Vietnam, India, Brazil, Bangladesh, Indonesia, Mexico, Turkey, Egypt, and South Africa.

Apple's Tim Cook appears to have learned a valuable lesson this year that high exposure of supply chains to China during Beijing's zero-Covid policies and worsening geopolitical tensions with the West is a dangerous cocktail, and the need to diversify production in a trend dubbed friendshoring is essential for survival in a multi-polar world. 

Tyler Durden Wed, 08/17/2022 - 18:30

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International

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China,…

Published

on

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China, multinational corporations such as Apple are diversifying production to places with less geopolitical risk.

Nikkei Asia spoke to three sources with direct knowledge of Apple's plans to shift Watch and MacBook production out of China to Vietnam for the first time. 

Apple suppliers Luxshare Precision Industry and Foxconn have already piloted a production run of the Watch in northern Vietnam. 

The move by Apple is a further win for the Southeast Asian country as it already produces iPads and AirPods. 

Two sources told Nikkei Asia that Apple had requested suppliers to set up a MacBook test production line in Vietnam. They said progress in constructing laptop production in the country has been "slow, partly due to pandemic-related disruptions but also because notebook computer production involves a larger supply chain."  

"AirPods, Apple Watch, HomePod and more ... Apple has big plans in Vietnam, apart from iPhone manufacturing," one of the people with direct knowledge of Apple's plans said. "The components for MacBooks have become more modularized than in the past, which makes it easier to produce the laptops outside of China. But how to make it cost-competitive is another challenge."

This trend is called "friendshoring." While it's a play on "offshoring," this isn't about companies moving operations back to the US and Europe, but rather seeking foreign alternatives that retain the benefit of low labor costs but with less international controversy. 

Apple's production diversification comes as the US and China already had an increasingly adversarial relationship before House Speaker Nancy Pelosi's visit to Taiwan sparked anger with Beijing. The fact is, geopolitical and trade war tensions aren't going away anytime soon and will only push Apple further away from China. Though reshoring production to the US is unfeasible because of labor costs, maybe robotics can offset some of those costs or perhaps set up shop in Mexico, where there's abundant cheap labor and healthy demographics. 

A recent Rabobank analysis of friendshoring showed that chief beneficiaries would include countries like Vietnam, India, Brazil, Bangladesh, Indonesia, Mexico, Turkey, Egypt, and South Africa.

Apple's Tim Cook appears to have learned a valuable lesson this year that high exposure of supply chains to China during Beijing's zero-Covid policies and worsening geopolitical tensions with the West is a dangerous cocktail, and the need to diversify production in a trend dubbed friendshoring is essential for survival in a multi-polar world. 

Tyler Durden Wed, 08/17/2022 - 18:30

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Economics

Reduced myocardial blood flow is new clue in how COVID-19 is impacting the heart

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to…

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Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

Credit: Houston Methodist

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

In a new study published today in JACC: Cardiovascular Imaging, Houston Methodist researchers examined the coronary microvasculature health of 393 patients with prior covid-19 infection who had lingering symptoms. This is the first published study linking reduced blood flow in the body and COVID-19.

Using a widely available imaging tool, called positron emission tomography (PET), researchers found a 20% decrease in the ability of coronary arteries to dilate, a condition known as microvascular dysfunction. They also found that patients with prior COVID-19 infection were more likely to have reduced myocardial flow reserve – and changes in the resting and stress blood flow – which is a marker for poor prognosis and is associated with a higher risk of adverse cardiovascular events.

“We were surprised with the consistency of reduced blood flow in post covid patients within the study,” said corresponding author Mouaz Al-Mallah, M.D., director of cardiovascular PET at Houston Methodist DeBakey Heart and Vascular Center, and president elect of the American Society of Nuclear Cardiology. “The findings bring new questions, but also help guide us toward further studying blood flow in COVID-19 patients with persistent symptoms.”

Dysfunction and inflammation of endothelial cells is a well-known sign of acute Covid-19 infection, but little is known about the long-term effects on the heart and vascular system. Earlier in the pandemic, research indicated that COVID-19 could commonly cause myocarditis but that now appears to be a rare effect of this viral infection.

A recent study from the Netherlands found that 1 in 8 people had lingering symptoms post-covid. As clinicians continue to see patients with symptoms like shortness of breath, palpations and fatigue after their recovery, the cause of long covid is mostly unknown.

Further studies are needed to document the magnitude of microvascular dysfunction and to identify strategies for appropriate early diagnosis and management. For instance, reduced myocardial flow reserve can be used to determine a patient’s risk when presenting with symptoms of coronary artery disease over and above the established risk factors, which can become quite relevant in dealing with long Covid.

Next steps will require clinical studies to discover what is likely to happen in the future to patients whose microvascular health has been affected by COVID-19, particularly those patients who continue to have lingering symptoms, or long COVID.

This work was supported, in part, by grants from the National Institutes of Health under contract numbers R01 HL133254, R01 HL148338 and R01 HL157790.

———————–

For more information: Coronary microvascular health in patients with prior COVID-19 infection. JACC: Cardiovascular Imaging. (online Aug. 16, 2022) Ahmed Ibrahim Ahmed, Jean Michel Saad, Yushui Han, Fares Alahdab, Maan Malahfji, Faisal Nabi, John J Mahmarian, John P. Cook, William A Zoghbi and Mouaz H Al-Mallah. DOI: www.doi.org/10.1016/j.jcmg.2022.07.006

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