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The new Taper Tantrum – H2 outlook 2020

The new Taper Tantrum – H2 outlook 2020



The first half of this year saw one of the fastest and most aggressive market corrections in history, as Covid-19 spread around the globe.  Just as unprecedented was the speed and extent of the subsequent recovery, thanks above all to governments and central banks having sent in the cavalry to boost liquidity and plug the consumer confidence gap.  Combining fiscal and monetary stimulus, the global policy response is estimated to be $14 trillion and counting.  With all this in mind, what’s next for global markets as we enter the second half of 2020 and beyond?   

The 2020 Taper Tantrum

The second half will be all about the new Taper Tantrum.  The first one was about the Fed’s balance sheet unwind, leading to a surge in Treasury yields as the central bank announced the tapering of its quantitative easing (QE) programme in 2013.  This one will be about the end of furlough schemes in developed markets. 

Countries are opening up again in order to limit economic damage, especially in the northern hemisphere where governments are keen to support growth through holiday spending.  In the absence of a vaccine, this means that an acceleration of Covid-19 cases is almost inevitable, even with measures such as local lockdowns.  However, death rates will be lower than they were in the “first wave” for a number of reasons: we now have better treatments (e.g. steroids cut death rates in intensive care units), we have learned lessons on shielding the most vulnerable, and very sadly, many of most vulnerable may have died already in the first wave.  Most developed economies should return to some form of normality.

However, despite the recent rebound in employment (look at the US jobs numbers last week), unemployment is still exceptionally high.  US unemployment is up 12 million from February, while in the UK we have over 9 million people out of work—more than a quarter of the UK workforce.  So far, the economic damage done to individuals has been cushioned to a large extent by furlough schemes, in which the government pays a large percentage of salaries for staff whom would otherwise have been laid off.  As a result, with little to spend money on during lockdown, many people have been able to save or reduce debts.

In the US, thanks to the CARES Act, the largest economic stimulus package in US history, we have a situation in which some workers have actually been better off being out of work than they were in their previous jobs.  With direct payments to Americans and loans to business, the $2 trillion Bill amounts to 10% of US GDP, and is much larger than the $0.8 trillion Recovery Act of 2009.  Adding together compensation of employees plus government unemployment benefits, we have the strange situation in which people in the US are receiving more income on average now than they were before Covid-19.

This is a rather odd recession: they don’t normally send personal incomes soaring.

The danger is in the taper

But what will happen when this stimulus begins to wind down?  Government debt levels have exploded since March as tax receipts collapsed and unemployment costs rocketed.  Deficits have moved well above 10% for most developed market economies, while debt-to-GDP ratios have generally moved to, or above, 100%.  While there’s a lot of debate about whether this matters (see Stephanie Kelton’s recent book, The Deficit Myth, which suggests that we can print money to get ourselves out of the problem; or Eric Lonergan (of M&G) and Mark Blyth’s Angrynomics, which says that having negative sovereign interest rates makes this a time to invest in infrastructure), most governments want to start to taper assistance to the economy later this year.  In the UK, this means that government furlough payments will be reduced in August and October, putting some of the wage burden back onto employers.

What happens then?  In anticipation of furloughs ending, UK retailers in particular have already announced mass redundancies.  How many of the world’s furloughed workers don’t realise that they are actually unemployed?  For this reason, plus the continued impact of Covid-19 on global travel and trade along with social distancing nervousness (however reduced from its peak), talk of a V-shaped recovery seems difficult to square with the environment we now face, despite low rates and some continued fiscal stimulus. 

Lessons from history

It is likely that there will still be more fiscal stimulus and debt levels will continue to rise from here.  How will we deal with them?  The usual three options are: grow, inflate or default.  The answer is basically the same sort of policies that allowed the UK to deleverage from 250% debt-to-GDP after the second world war.  These included forms of financial repression like forcing high bank ownership of government bonds.  In the US, it involved pinning bond yields to low levels – like we have seen in Japan since 2016, and in Australia in March this year. Such yield curve control (YCC) is already under active debate within the Fed (YCC is different from QE in that it targets a bond price or yield, rather than simply being a purchase of a set volume of bonds).  Might we also see negative interest rates from the BoE and Fed?  On a further slowdown it is likely.

We should also consider central bank independence.  Former Bank of England Deputy Governor Paul Tucker has warned that, as the Bank is now buying basically the same value of gilts as is being issued by HM Treasury (as well as offering the government a Ways and Means overdraft for lost tax revenue), it is at risk of being seen as the financing arm of the UK authorities.

The return of inflation?

Does this make inflation more likely?  The jury is out, and this largely depends on who wins the battle between labour and capital in the recovery.  Labour has lost out for decades now.  Will Covid-19 change that?  The data so far are not promising: the latest research from the US Brooking Institute think tank says that it is the bottom 20% of wage earners that have suffered the highest unemployment rates, so hopes that we would emerge from the crisis wanting to reward low-paid key workers (nurses, delivery drivers, supermarket staff) might be dashed.  There’s still a chance of some supply side inflation, thanks to food going unpicked and disrupted logistics.  Shopping basket inflation did rise in March, as shops ended promotions and limited product ranges (and this inflation was inflicted disproportionately on lower income households as a result of how lockdowns have pushed them to buy more food while not spending as much on other, less inflationary items and activities).  But demand-driven inflation seems very unlikely overall.

Received wisdom is that QE = inflation.  Is this true?  The money supply expansion is huge – but so is the collapse of the velocity of money (i.e. the speed at which it circulates in the economy).  Some argue that the most powerful effect of QE is that on a currency: as money is printed, the currency depreciates and inflation is generated through higher imported goods prices.  But what if everyone is doing QE?  What if everyone is trying to get their currency down?  It has no impact.  Famous bear Albert Edwards goes further, to say that YCC will be even less inflationary, since countries like Japan have been able to keep yields low without even having to buy many bonds – the signalling effect is so powerful that there’s not even a monetary expansion.

Positioning for the new taper tantrum


We’ve come a long way since the lows of March, which offered some great opportunities to be overcompensated for default risk as a credit investor.  Corporate bonds, which at their lows were pricing in IG and HY default rates of 25% and 54% (23 March 2020) respectively, are now closer to fair value (pricing in 12% and 35% at 7 July 2020).  Undoubtedly this has been driven mainly by central bank buying, particularly in high yield where we have seen and can expect to see more defaults. 

Despite considerable volumes of issuance, high yield spreads have come a long way.  The main reason is not fundamental but rather the action of the Fed, which has for the first time been buying high yield ETFs and high yield bonds which were downgraded after 22nd March.  It’s hard to get excited about credit valuations at these levels.  There is still some value in investment grade: these companies are the big employers, so it is politically easy (and arguably a decent policy tool) to support them. 

The Fed’s support also begs the question, is it right that these companies survive?  We have lost the creative power of destruction, where the old makes way for the new.  Is capital really being allocated correctly and efficiently?  We have seen how growth and productivity stagnates under these conditions in Asia at the end of the last century.   

Developed markets

Despite the huge fiscal stimulus we have seen, it is difficult to be too bearish on government bonds now given the yield controlled world we live in.  And bonds like bad news: while they are clearly very expensive, they do offer potential upside in the event that negative sentiment returns to markets in the second half.  With inflation unlikely to rise significantly in the short term, I don’t mind owning duration.

In Europe, the planned recovery fund and continued Pandemic Emergency Purchase Programme (PEPP) have been supportive.  Just as important as the planned spend itself is the sentiment of burden-sharing, when it comes to helping contain EU break-up risk.  Despite some resistance to the stimulus plans from the more frugal Euro nations, Italian BTPs and other peripheral bonds have strongly outperformed core government bonds since the announcement.  I’m not convinced we’ll see much more outperformance from BTPs since their aggressive rally.  Flows are slowing as spreads are compressing, so demand is likely to shift to other high yielding sovereigns in the region that have been less aggressively bought so far by the ECB and investors.  For this reason I like bonds like 10 year Netherlands.

Emerging markets

One area in which I do see value is emerging market (EM) debt.  Firstly, it offers higher real yields than developed market bonds.  Also, EM currencies have lagged the recovery, meaning that some local currency bonds do offer attractive value (you can buy more per dollar).  Emerging markets clearly face challenges due to Covid-19, particularly as a result of headwinds to global trade, but greater EM central bank intervention than we have seen before is helping and there are regional pockets of relative value.  For example, I would expect Asia to outperform other EM regions, since high real rates make currencies here broadly attractive to investors.  Additionally, many of these economies are net exporters and so this should also improve current account balances.


We should see some mean reversion in valuations that moved aggressively in the first half.  While EM local currencies looked fundamentally cheap across the board in the first half, going forward I expect to see some more moves based on fundamentals.  I therefore anticipate rotating out of some of those currencies that have rallied aggressively (for example the Indonesian rupiah) to those where fiscal and central bank positions are strong, but valuations still look attractive (for example the Russian ruble).  I would also favour higher-beta currencies (for example those that are heavily commodity-driven, or with a reliance on external rather than domestic demand) to capture any second half mean reversion.  Likewise I am following central bank moves closely: currencies in those countries where central banks have been relatively conservative in expanding their balance sheets (e.g. the New Zealand dollar over the Australian dollar) are where I want to be (though in rates I would favour issuers where central banks are providing strong support).

Unlike many EM local currencies, the dollar looks quite expensive on a fundamental basis.  Despite this, I do own some dollar exposure, as it does its job in a risk off environment.  On balance though, I prefer the Japanese yen for the better diversification and risk off hedge it offers.  With the ECB having removed a lot of downside risk in the region through their aggressive buying programme, I also like holding the Euro.  It has become a very cyclical asset (rallying as sentiment improves, the opposite to the way the dollar is behaving), so I hold it against the safe haven currency of the region, the Swiss Franc.

Short term action, long term impact

The focus of financial markets moves quickly.  We saw over the first half of 2020 just how quickly.  After the deep and rapid panic-driven sell off as Covid-19 spread around the globe, the extent to which asset prices have recovered reveals markets’ new focus: the unprecedented magnitude of fiscal and monetary stimulus.  With millions of jobs lost in a few months, there is no doubt to my mind that it is this stimulus which is now driving markets: they are being driven by technical factors, not fundamentals.  I think the focus may change just as rapidly in the second half, and it will be to the other side of the coin: what will markets make of the inevitable end of the monetary and fiscal bridge?

Governments and central banks have, on the surface, succeeded in containing much of the financial fallout of the lockdown-driven fall in demand.  The danger now is in the taper.  In this light, it seems difficult to support the idea of a V-shaped recovery.  And the short term response of governments and central banks brings up longer term questions.  How will we get out of all this debt?  Grow?  It seems implausible that trend growth will be higher in the aftermath of this crisis than before.  Inflate?  Central banks haven’t been able to achieve their inflation targets even in the good times, so what chance do they have of inflating away the debt now?  Default?  There’s no need to default if you can print your own currency – but we might see some debt jubilees (cancellation of student loans for example), wealth taxes and confiscations, and even the cancellation of government bonds held by the central banks as part of QE.  And what happens if the market stops believing that central banks are independent?  Could that finally be the catalyst for inflation expectations to return to developed markets and, after decades of losing, will labour win over the power of capital this time round?  The actions of a few months bring up these questions and more.  We may have to wait for some years to learn the answers.

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Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl…



Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl to 18 years in jail and a travel ban for posting tweets in support of political prisoners, according to a rights group.

On Friday, ALQST rights group, which documents human rights abuses in Saudi Arabia, revealed that the Saudi Specialised Criminal Court handed out the sentence in August to 18-year-old Manal al-Gafiri, who was only 17 at the time of her arrest.

Via Reuters

The Saudi judiciary, under the de facto rule of Crown Prince Mohammed bin Salman, has issued several extreme prison sentences over cyber activism and the use of social media for criticising the government.

They include the recent death penalty against Mohammed al-Ghamdi, a retired teacher, for comments made on Twitter and YouTube, and the 34-year sentence of Leeds University doctoral candidate Salma al-Shehab over tweets last year.

The crown prince confirmed Ghamdi's sentence during a wide-ranging interview with Fox News on Wednesday. He blamed it on "bad laws" that he cannot change

"We are not happy with that. We are ashamed of that. But [under] the jury system, you have to follow the laws, and I cannot tell a judge [to] do that and ignore the law, because... that's against the rule of law," he said.

Saudi human rights defenders and lawyers, however, disputed Mohammed bin Salman's allegations and said the crackdown on social media users is correlated with his ascent to power and the introduction of new judicial bodies that have since overseen a crackdown on his critics. 

"He is able, with one word or the stroke of a pen, in seconds, to change the laws if he wants," Taha al-Hajji, a Saudi lawyer and legal consultant with the European Saudi Organisation for Human Rights, told Middle East Eye this week.

According to Joey Shea, Saudi Arabia researcher at Human Rights Watch, Ghamdi was sentenced under a counterterrorism law passed in 2017, shortly after Mohammed bin Salman became crown prince. The law has been criticised for its broad definition of terrorism.

Similarly, two new bodies - the Presidency of State Security and the Public Prosecution Office - were established by royal decrees in the same year.

Rights groups have said that the 2017 overhaul of the kingdom's security apparatus has significantly enabled the repression of Saudi opposition voices, including those of women rights defenders and opposition activists. 

"These violations are new under MBS, and it's ridiculous that he is blaming this on the prosecution when he and senior Saudi authorities wield so much power over the prosecution services and the political apparatus more broadly," Shea said, using a common term for the prince.

Tyler Durden Sun, 09/24/2023 - 11:30

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Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Authored by Mike Shedlock via,

In a symbolic, photo-op…



Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Authored by Mike Shedlock via,

In a symbolic, photo-op gesture to win union votes, Biden will head to Michigan for a token visit.

Biden to Walk the Picket Line

Taking Sides

CNN had some Interesting comments on Biden Talking Sides.

Jeremi Suri, a presidential historian and professor at University of Texas at Austin, said he doesn’t believe any president has ever visited a picket line during a strike.

Presidents, including Biden, have previously declined to wade into union disputes to avoid the perception of taking sides on issues where the negotiating parties are often engaged in litigation.

On September 15, the day the strike started, Biden said that the automakers “should go further to ensure record corporate profits mean record contracts for the UAW.”

Some Democratic politicians have been urging Biden to do more. California Rep. Ro Khanna on Monday told CNN’s Vanessa Yurkevich that Biden and other Democrats should join him on the picket line.

“I’d love to see the president out here,” he said, arguing the Democratic Party needs to demonstrate it’s “the party of the working class.”

UAW Announces New Strike Locations

As the strike enters a second week, UAW Announces New Strike Locations

UAW President Shawn Fain called for union members to strike at noon ET Friday at 38 General Motors and Stellantis facilities across 20 states. He said the strike call covers all of GM and Stellantis’ parts distribution facilities.

The strike call notably excludes Ford, the third member of Detroit’s Big Three, suggesting the UAW is more satisfied with the progress it has made on a new contract with that company.

General Motors plants being told to strike are in Pontiac, Belleville, Ypsilanti, Burton, Swartz Creek and Lansing, Michigan; West Chester, Ohio; Aurora, Colorado; Hudson, Wisconsin; Bolingbrook, Illinois; Reno, Nevada; Rancho Cucamonga, California; Roanoke, Texas; Martinsburg, West Virginia; Brandon, Mississippi; Charlotte, North Carolina; Memphis, Tennessee; and Lang Horne, Pennsylvania.

The Stellantis facilities going on strike are in Marysville, Center Line, Warren, Auburn Hills, Romulus and Streetsboro, Michigan; Milwaukee, Wisconsin; Plymouth, Minnesota; Commerce City, Colorado; Naperville, Illinois; Ontario, California; Beaverton, Oregon; Morrow, Georgia; Winchester, Virginia; Carrollton, Texas; Tappan, New York; and Mansfield, Massachusetts.

Contract Negotiations Are Not Close

Good Luck Getting Repairs

Party of the Working Cass, Really?

Let’s discuss the nonsensical notion that Democrats are the party of the “working class”.

Unnecessary stimulus, reckless expansion of social services, student debt cancellation, eviction moratoriums, earned income credits, immigration policy, and forcing higher prices for all, to benefit the few, are geared towards the “unworking class”.

On top of it, Biden wants to take away your gas stove, end charter schools to protect incompetent union teachers, and force you into an EV that you do not want and for which infrastructure is not in place.

All of this increases inflation across the board as do sanctions and clean energy madness.

Exploring the Working Class Idea

If you don’t work and have no income, Biden may make your healthcare cheaper. If you do work, he seeks to take your healthcare options away.

If you want to pay higher prices for cars, give up your gas stove, be forced into an EV, subsidize wind energy then pay more for electricity on top of it, you have a clear choice. If you support those efforts, by all means, please join him on the picket line for a token photo-op (not that you will be able to get within miles for the staged charade).

But if you can think at all, you understand Biden does not support the working class, he supports the unworking class.

Tyler Durden Sun, 09/24/2023 - 10:30

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UK Quietly Passes “Online Safety Bill” Into Law

UK Quietly Passes "Online Safety Bill" Into Law

Authored by Kit Knightly via,

Buried behind the Brand-related headlines…



UK Quietly Passes "Online Safety Bill" Into Law

Authored by Kit Knightly via,

Buried behind the Brand-related headlines yesterday, the British House of Lords voted to pass the controversial “Online Safety Bill” into law. All that’s needed now is Royal assent, which Charles will obviously provide.

The bill’s (very catchy) long-form title is…

A Bill to make provision for and in connection with the regulation by OFCOM of certain internet services; for and in connection with communications offences; and for connected purposes.

…and that’s essentially it, it hands the duty of “regulating” certain online content to the UK’s Office of Communications (OfCom).

Ofcom Chief Executive Dame Melanie Dawes could barely contain her excitement in a statement to the press:

“Today is a major milestone in the mission to create a safer life online for children and adults in the UK. Everyone at Ofcom feels privileged to be entrusted with this important role, and we’re ready to start implementing these new laws.”

As always with these things, the bill’s text is a challenging and rather dull read, deliberately obscure in its language and difficult to navigate.

Of some note is the “information offenses” clause, which empowers OfCom to demand “information” from users, companies and employees, and makes it a crime to withhold it. The nature of this “information” is never specified, nor does it appear to be qualified. Meaning it could be anything, and will most likely be used to get private account information about users from social media platforms.

In one of the more worrying clauses, the Bill outlines what they call “communications offenses”. Section 10 details crimes of transmitting “Harmful, false and threatening communications”.

It should be noted that sending threats is already illegal in the UK, so the only new ground covered here is “harmful” and/or “false” information, and the fact they feel the need to differentiate between those two things should worry you.

After all, the truth can definitely be “harmful”…Especially to a power-hungry elite barely controlling an angry populace through dishonest propaganda.

Rather amusingly, the bill makes it a crime to “send a message” containing false information in clause 156…then immediately grants immunity to every newspaper, television channel and streaming service in clause 157.

Apparently it’s OK for the mainstream media to be harmful and dishonest.

But the primary purpose of the new law is a transfer of responsibility to enable and incentivize censorship.

Search engines (“regulated search services”, to quote the bill) and social media companies (“regulated user-to-user services”) will now be held accountable for how people use their platform.

For example: If I were to google “Is it safe to drink bleach?”, find some website that says yes, and then drink bleach, OfCom would not hold me responsible. They would hold Google responsible for letting me read that website. Likewise, if someone tweets @ me telling me to drink bleach, and I do so, Twitter would be held responsible for permitting that communication to take place.

This could result in hefty fines, or even potentially criminal charges, to companies and/or executives of those companies. It could even open them up to massively expensive civil suits (don’t be surprised if such a legal drama hits the headlines soon).

Unsurprisingly the mainstream coverage of the new laws barely mentions any of these concerns, instead opting to put child pornography front and centre. Because the Mrs Lovejoy argument always works.

That’s all window dressing, of course, what this is really about is “misinformation” and “hate speech”. Which is to say, fact-checking mainstream lies and calling out mainstream liars.

Section 7(135) is entirely dedicated to the creation of a new “Advisory committee on disinformation and misinformation”, which will be expected to submit regular reports to OfCom and the Secretary of State on how best to “counter misinformation on regulated services“.

This is clearly a response to Covid, or rather the failure of Covid.

Essentially, the pandemic narrative broke because the current mechanisms of censorship didn’t work well enough. In response, the government has just legalised and out-sourced their silencing of dissent.

See, the government isn’t going to actually censor anyone themselves, protecting it from pro-free speech criticism. Rather, huge financial pressure will be applied on tech giants to be “responsible” and “protect the vulnerable”. Meaning de-platforming and cancelling independent media via increasingly opaque “terms of service violations”

These companies will be cheered on by the vast crowd of jabbed-and-masked NPCs who have been so successfully brainwashed into believing the “they are a private company and can do that they want” argument.

This has been going on for years already, of course, but that was covert stuff. Now it’s legal in the UK, and is about to get a lot worse.

It won’t be just the UK either, considering the messaging on “misinformation” being seen at the UN in the last few days, we should expect something similar on a global scale.

You can read the full text of the Online Safety Bill here.

Tyler Durden Sun, 09/24/2023 - 08:10

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