20/3/20: $4.6 trillion and counting: the scale of Monetary Easing

The monetary largesses to-date: Central Banks across the world have slashed interest rates in the past few weeks, provided additional emergency liquidity supports for the markets, ranging from equity markets to bond markets to municipal debt markets and money markets. They also announced trillions worth of direct asset purchasing and debt monetization programs. Ex-international / multinational lines and direct swaps lines, total amounts of monetary and financial channels supports deployed so far is around USD 4.582 trillion. This number also excludes open-ended (unbounded) measures, such as programs to purchase securities to guarantee specific price/yield ranges.

Here is the summary of these (and direct Government lending) programs to-date:

• 20/03/2020  Banco de México: rate cut bps = -50, base rate = 6.50, overnight interbank rate.
• 20/03/2020  National Bank of Romania: rate cut bps = -50, base rate = 2.00
• 20/03/2020  Bank of Thailand rate cut bps = -25, base rate = 0.75
• 20/03/2020  Norges Bank (Norway) rate cut bps = -75, base rate = 0.25
• 19/03/2020  Central Reserve Bank of Peru rate cut bps = -100, base rate = 1.25
• 19/03/2020  Bank of England rate cut bps = -15, base rate = 0.1, added GBP 200 billion to bond buying programme raising it to GBP 645 billion. On 17/03/2020: the U.K. Government unveiled another, larger stimulus package. It includes, among other things USD 379 billion in business loan guarantees, USD 23 billion in business tax cuts and grant funding to businesses hit worst by the virus, such as retail and hotel businesses
• 19/03/2020  South African Reserve Bank rate cut bps = -100, base rate = 5.25
• 19/03/2020  Taiwan Central Bank rate cut bps = -25, base rate = 1.125
• 19/03/2020  Bank Indonesia rate cut bps = -25, base rate = 4.5
• 19/03/2020  Philippine Central Bank cut bps = -50, base rate = 3.25
• 19/03/2020  Reserve Bank of Australia cut bps = -25, base rate = 0.25, set a target for the yield on 3-year government bonds at ~0.25%, plans to purchases bonds in the secondary market do sustain yield around 25 bps; provided a 3-year funding facility to the banks at a fixed rate of 0.25%
• 18/03/2020  Central Bank of Brazil cut bps = -50, base rate = 3.75
• 18/03/2020  Bank of Ghana cut bps = -150, base rate = 14.50
• 18/03/2020  Central Bank of Iceland cut bps = -50, base rate = 1.75
• 18/03/2020 Federal Reserve Bank of the U.S. announced the Money Market Mutual Fund Liquidity Facility (MMLF), to lend money to banks so they can purchase assets from money market funds. The U.S. Treasury will cover up to USD 10 billion of loan losses from this program, and lending under the program will not effect bank capital requirements. The program is scheduled to run until the end of September. This is similar to the AMLF program launched in 2008 after the collapse of Lehman Brothers.
• 17/03/2020 French Government announced a guarantee on bank loans to businesses up to USD 327 billion
• 17/03/2020  National Bank of Poland cut bps = -50, base rate = 1.00
• 17/03/2020  Central Bank of Armenia cut bps = -25, base rate = 5.25
• 17/03/2020  Bank Al-Maghrib, Marocco cut bps = -25, base rate = 2.00
• 17/03/2020  State Bank of Pakistan cut bps = -75, base rate = 12.50
• 17/03/2020  Central Bank of the Rep. of Turkey cut bps = -100, base repo rate = 9.75
• 17/03/2020  State Bank of Vietnam cut bps = -100, base refinancing rate = 5.00, cut bps = 50, base discount rate 3.50
• 17/03/2020 Federal Reserve Bank of the U.S.: U.S. Treasury Secretary Mnuchin approved the Federal Reserve's "Commercial Paper Funding Facility" (CPFF) which allows the Fed to create a corporation which can purchase commercial paper, short-term, unsecured loans made by businesses for everyday expenses. Mnuchin authorized up to USD 10 billion from the U.S. Treasury to help cover loan losses incurred under this program. The program will end on March 17, 2021 unless it is extended. The program is similar to the one launched after the Global Financial Crisis. On the same day, the Federal Reserve received approval to re-launch another Great Recession-era tool, the Primary Dealer Credit Facility (PDCF). PDCF will offer short-term loans to banks secured by collateral such as municipal bonds or investment-grade corporate debt. The program will run at least six months and can be extended.
• 16/03/2020 Federal Reserve Bank of the U.S. increased reverse repo operations by another $500 billion to USD 2 trillion
• 16/03/2020  Central Bank of Jordan cut bps = -100, base rate = 2.50
• 16/03/2020  Central Bank of Chile cut bps -75, base rate = 1.00
• 16/03/2020  Central Bank of Egypt cut bps -300, base overnight rate = 10.25; cut bps = -300, base overnight deposit rate = 9.25
• 16/03/2020  Czech Central Bank, cut bps = -50, base rate = 1.75
• 16/03/2020  Central Bank of Bahrain, one week deposit rate, cut bps = -75, rate =1.00
• 16/03/2020  Qatar Central Bank, cut bps = 50, base repo rate = 1.00
• 16/03/2020  Saudi Arabian Monetary Authority, cut base repo rate = -75 bps, to rate = 1.00
• 16/03/2020  Central Bank of Sri Lanka, cut base deposit rate to 6.25 and standing lending rate to 7.25
• 16/03/2020  Bank of Korea cut 50 bps to the base rate of 0.75
• 16/03/2020  Bank of Japan: short term rate -0.1%, long term 10-year JGB yield target at 0%; raised purchases of exchange-traded funds (ETFs) x2 from USD 56 billion a year to USD 112 billion for ETFs and for other risky assets, including commercial paper, created new loan program for 1 year at zero rate for financial institution.  
• 16/03/2020  Reserve Bank of New Zealand, cut bps = -75, base rate = 0.25
• 16/03/2020 Bank of Canada: the Office of the Superintendent of Financial Institutions (OSFI), Canada's financial regulatory body, lowered bank reserve requirements, allowing banks to lend an additional USD 214 billion
• 15/03/2020  Federal Reserve of the U.S., cut bps = -100, base rates 0-0.25 range, will purchase at least USD 700 billion of securities, including at least $500 billion of U.S. Treasuries and at least $200 billion of mortgage-backed securities
• 13/03/2020 Germany authorizes state-owned KfW bank, to lend out as much as USD 610 billion to companies to cushion the effects of the coronavirus
• 13/03/2020  Bank of Canada, cut bps = -50, base rate = 0.75
• 13/03/2020  Norges Bank, Norway, cut bps = -50, base rate = 1.00
• 13/03/2020 People's Bank of China: lowered the banks' reserve requirement ratio by 0.5-1 percentage points to free USD79 billion worth of new lending
• 12/03/2020 Federal Reserve Bank of the U.S. massively expanded reverse repo operations, adding USD1.5 trillion of liquidity. Effectively, the Fed extended the amount of short term loans to banks in an attempt to stabilize money markets and increase banks' access to cash.
• 12/03/2020  European Central Bank, deposit rate remains = -0.50%, cut TLTROIII rate by 25 bps to -0.75% (TLTROs are Targeted Long-Term Refinancing Operations providing negative cost loans to banks); later added to its 2019-announced asset purchase programme of EUR 20 billion a month: a one-off EUR 120 billion purchases in 2020 on top of EUR240 billion already planned, plus another EUR 750 billion in a Pandemic Emergency Purchase Programme. Purchases total planned for 2020 is at EUR 1.1 trillion.
• 11/03/2020  Bank of England, cut bps = -50, base rate = 0.25, also introduced a new programme for cheap lending and reduced a capital buffer requirements for the banks. Lowered capital requirements for U.K. banks, allowing them to use a "counter-cyclical capital buffer". Facilitating nearly USD 390 billion in new loans.
• 11/03/2020  National Bank of Serbia, cut bps = -50, base rate = 1.75
• 11/03/2020  Central Bank of Iceland, cut bps = -50, base rate = 2.25
• 05/03/2020  Central Bank of Jordan, cut bps = -50, base rate = 3.50
• 04/03/2020  Bank of Canada, cut bps = -50, base rate = 1.25
• 04/03/2020  Hong Kong Monetary Authority, cut bps = -50, base rate = 1.50
• 04/03/2020 and 03/03/2020: People's Bank of China expanded its reverse repo operations by USD 71 billion and USD 174 billion, respectively.
• 03/03/2020  Federal of the U.S., cut bps = -50, base rates range = 1.00-1.25. Largest cut since 2008
• 03/03/2020  Central Bank of Malaysia, cut bps = -25, base rate = 2.50
• 03/03/2020  Reserve Bank of Australia, cut bps = -25, base rate = 0.50
• 20/02/2020  Bank of Indonesia, cut bps = -25, base rate = 4.75
• 20/02/2020  People's Bank of China, cut bps = -10, base rate = 4.05 for 1 year loan prime rate and 5-year rate from 4.80% to 4.75%.
• 06/02/2020  Philippine Central Bank, cut bps = -25, base rate = 3.75
• 05/02/2020  Bank of Thailand, cut bps = -25, base rate = 1.00

Multinational efforts:
 

• The Fed, along with the ECB, Bank of Canada, Bank of England, Bank of Japan and the Swiss National Bank also agreed to offer three-month credit in U.S. dollars on a regular basis and at a rate cheaper than usual.
• 04/03/2020 the International Monetary Fund made USD 50 billion in loans available to deal with the coronavirus, including USD10 billion of zero-interest loans to the poorest IMF member countries. 16/03/2020 the IMF said it, "stands ready to mobilize its USD 1 trillion lending capacity to help our membership." In the same statement, the IMF said it has $200 billion in current lines of credit, some of which could be used for the COVID crisis, and that they have "received interest from about 20 countries and will be following up with them in the coming days." The IMF also is aiming to boost its debt relief fund to $1 billion from its current level of $400 million.
• 03/03/2020 the World Bank announced an initial package of up to USD 12 billion in loans for countries to help cope with the effects of the COVID19. USD 8 billion of the funding is new loans and the remaining USD 4 billion is redirected from current lines of credit.

 

20/3/20: Euromoney on Risk Landscape Changes

Euromoney on changing risk landscape for global sovereigns: https://www.euromoney.com/article/b1ktp0wqc12jyb/ecr-risk-experts-contemplate-another-financial-crisis. With a comment from myself.

20/3/20: Central Banks are Failing to Reinflate the Deflating Bubble

In the last 5 days, central banks around the world have announced 2020 monetary stimuli to the tune of USD 4 trillion (inclusive of measures continuing from those announced back in late 2019). This is what this bought them in the markets:

The problem with 'doing more of the same and expecting different results' is that the measures being deployed by the monetary authorities are predominantly skewed on simply increasing the total quantum of debt in the global economy already croaking under a mountain of debt. The markets see this. The markets know this. And, at long last, the markets are not buying any more of this.

On what timeline will the central bankers and their masters in the governments recognize the same?..

18/3/20: Dow Jones Industrials: COVID Impact

Top 50 movements down and up in Dow Jones Industrial Average from 1985 through today:

	% change on close, down		% change on close, up
19/10/1987	-22.61%	13/10/2008	11.08%
16/03/2020	-12.93%	28/10/2008	10.88%
12/03/2020	-9.99%	21/10/1987	10.15%
26/10/1987	-8.04%	13/03/2020	9.36%
15/10/2008	-7.87%	23/03/2009	6.84%
09/03/2020	-7.79%	13/11/2008	6.67%
01/12/2008	-7.70%	21/11/2008	6.54%
09/10/2008	-7.33%	24/07/2002	6.35%
27/10/1997	-7.18%	20/10/1987	5.88%
17/09/2001	-7.13%	10/03/2009	5.80%
29/09/2008	-6.98%	29/07/2002	5.41%
13/10/1989	-6.91%	17/03/2020	5.20%
08/01/1988	-6.85%	02/03/2020	5.09%
31/08/1998	-6.37%	26/12/2018	4.98%
18/03/2020	-6.30%	08/09/1998	4.98%
11/03/2020	-5.86%	29/10/1987	4.96%
22/10/2008	-5.69%	24/11/2008	4.93%
14/04/2000	-5.66%	16/03/2000	4.93%
20/11/2008	-5.56%	10/03/2020	4.89%
08/08/2011	-5.55%	15/10/2002	4.80%
07/10/2008	-5.11%	28/10/1997	4.71%
19/11/2008	-5.07%	30/09/2008	4.68%
05/11/2008	-5.05%	16/10/2008	4.68%
06/11/2008	-4.85%	20/10/2008	4.67%
14/04/1988	-4.82%	01/10/2002	4.57%
12/11/2008	-4.73%	17/01/1991	4.57%
19/07/2002	-4.64%	04/03/2020	4.53%
10/08/2011	-4.62%	24/09/2001	4.47%
10/02/2009	-4.62%	30/11/2011	4.24%
11/09/1986	-4.61%	05/04/2001	4.23%
05/02/2018	-4.60%	11/10/2002	4.20%
16/10/1987	-4.60%	16/12/2008	4.20%
27/02/2020	-4.42%	15/10/1998	4.15%
15/09/2008	-4.42%	09/08/2011	3.98%
20/09/2001	-4.37%	26/08/2015	3.95%
04/08/2011	-4.31%	11/08/2011	3.95%
02/03/2009	-4.24%	04/01/1988	3.94%
27/08/1998	-4.19%	18/04/2001	3.91%
08/02/2018	-4.15%	10/05/2010	3.90%
03/09/2002	-4.10%	18/09/2008	3.86%
12/03/2001	-4.10%	01/09/1998	3.82%
05/03/2009	-4.09%	31/05/1988	3.82%
17/09/2008	-4.06%	17/03/2003	3.59%
30/11/1987	-4.03%	05/07/2002	3.58%
20/01/2009	-4.01%	13/03/2003	3.57%
15/11/1991	-3.93%	11/03/2008	3.55%
03/12/1987	-3.92%	14/12/1987	3.53%
14/11/2008	-3.82%	18/03/2008	3.51%
22/10/1987	-3.82%	21/01/2009	3.51%
14/10/1987	-3.81%	08/12/2008	3.46%

18/3/20: What's Scarier? Corporate Finance or COVID?

Larger corporates in the U.S. are seeking public supports in the face of COVID19 pandemic, from airlines to banks, and the demand for public resources is likely to rise over time as the disease takes its toll on the economy.

Yet, one of the key problems faced by companies today is down to the long running strategies of creating financial supports for share prices that companies pursued over the good part of the last decade, including shares buybacks and payouts of dividends. These strategies have been demanded by the activist investors across numerous campaigns and by shareholders, and have been incentivized by the pay structures for the companies executives.

Artificial supports for share price valuations are financially dangerous in the long run, even though they generate higher shareholder value in the short run. The danger comes from:

1. Shares buybacks using companies cash to effectively inflate share prices, reduce free float of shares and lower the number of shareholders in the company, thereby reducing future space for issuance of new shares;
2. Shares buybacks have often been accompanied by companies borrowing at ultra-low interest rates to purchase own firm equity, reducing equity capital and increasing debt exposures;
3. Shares buybacks generate future expectations of more buybacks, even during the times of financial weaknesses;
4. Shares buybacks also reduce future firms' capacity to borrow by either increasing debt to equity ratio, increasing overall debt loads carried by the firm or both;
5. Payouts of dividends also use cash reserves the company can hold to offset any future risks to its financial wellbeing and to invest in organic growth and R&D;
6. Payouts of dividends create future expectations of higher dividends from investors, reducing firm's capacity to deploy its cash elsewhere;
7. Payouts of dividends increase cum dividend prise to earnings ratios, reducing the overall capacity of the firm to raise capital cheaply in the future.

These are just some of the factors that overall imply that shares buybacks and payouts of extraordinary (or financial unsustainable) dividends can be a dangerous approach to managing corporate finances. 

So here is the evidence on just how deeply destabilizing the scale of shares buybacks and dividends payouts has been within the S&P 500 sector:

In Q3 2019, shares buybacks and dividends yielded USD1,246.73 billion on a four-quarters trailing basis, fourth highest quarter on record. Overall market yield contributions from buybacks (3.12%) was higher than that from dividends (1.81%), with combined yield of 5.05%. In simple terms, any company operating today will have to allocate 5.05 percent of its return to simply match shares buybacks and dividend payouts yields. This is a very high fence to jump.

Put differently, what the above data shows is that just one, single quarter - Q3 2019 - has managed to absorb more resources in shares repurchases and dividend payouts than what the corporate America is currently asking in financial supports from Washington. 

What's scarier? Corporate finance or corona virus?.. 

18/3/20: Yield Curve and Recessions

Some things work even in pandemics:

18/3/20: Banks, The Fed and Money Markets Woes

My article for the International Banker on pre-Covid monetary policy bottlenecks in the US markets is out and available here: https://internationalbanker.com/finance/banks-the-fed-and-money-markets-woes/

18/3/20: Past Recessions and COVID19 Crisis

As governments around the world are revising the expected duration of the extraordinary restrictive measures aimed at containing COVID19 pandemic, it is worth looking back at the history of past recessions by duration:

The chart above clearly shows that U.S. recessions (generally historically shallower and less prolonged than those in Europe) have been lengthy in duration, with only two recessions lasting < 8 months and only six lasting less than 10 months. The 1918-1919 recession was preceded by the Spanish Flu epidemic, but the recovery from the recession was also supported by the end of the WW1. Some more on the Spanish Flu pandemic effects on the economy can be found here: https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf.

The 1918-1919 recession was not an isolated incident, as it was followed closely by the twin recession of 1920-1921. The joint episodes lasted 25 months. Similarly, the 1980 and 1981 twin recessions should also be treated as a joint episode of 22 months duration. Adjusting for these, average recession has been lasting 15 months, not 13 months, with only four recession of duration < 10 months.

Should, as now expected, the Covid2019 pandemic cause a global recession, it is unlikely to be short-lived, implying that any fiscal and monetary supports required to ameliorate the crisis core effects will have to be in place for much longer than the 2-3 months currently implied by the crisis contagion and social distancing restriction.

15/3/20: Acute beds and hospital beds capacity

With Covid-19 cases worldwide reaching almost 143,000 worldwide, it is worth examining some of the data on healthcare systems' capacity to absorb the influx of patients in weeks to come.

Here is an interesting set of data from OECD comparing the numbers of hospital beds per 1,000 population across the range of countries (I highlight some interesting comparatives):

These are not ICU beds with specialized equipment, of course, but it is hard to imagine that the relationship between ICU beds and general counts of beds is non-linear. Some people on Twitter claimed that the U.S. has higher number of acute care beds, than, say Italy or S. Korea. Which is simply, factually, false. Here's OECD data:

U.S. has 2.44 acute care beds per 1,000 population, Italy has 2.62, while S. Korea has 7.14. For those who are interested, Ireland has 2.77 and the OECD average is 3.59, with the median of 3.23.

The reality is simple: no country is fully ready for the onset of the Covid pandemic at the scale of what has happened in more impacted countries, like Italy, Korea or China. But of all countries we have data for, the U.S. system of healthcare is probably the least capable of handling any large scale public health events, not only due to mediocre capacity, but due primarily to the lack of access to healthcare.

Consider the following facts:

• Over 40% of Americans cannot afford to cover a financial emergency of > $1,000 per annum;
• Average health insurance deductible in the U.S. was in excess of $4,578 in 2018 (see chart below: source https://www.ehealthinsurance.com/resources/individual-and-family/how-much-does-individual-health-insurance-cost); for workers covered by their employers, average deductible was $1,573 in 2018 (https://www.kff.org/health-costs/report/2018-employer-health-benefits-survey/);
• By the above two facts, average family in the U.S. simply cannot afford the deductibles they are contracted for;
• The U.S. 27.5 million people were uninsured in 2018, meaning they cannot afford any care;
• 10-12.5 million of undocumented immigrants residing in the U.S. have no insurance and cannot afford any care. 

Roughly-speaking, between 159 and 162 million people living in the U.S. either have no access to insurance or cannot afford their deductibles. Does anyone expect these people to be pro-active in accessing testing and treatment for Covid early on?

9/3/20: Beware the Endlessly Inflating Global Debt Bubble

My latest article for Manning Financial on the global debt overload is available here: https://issuu.com/publicationire/docs/mf_spring_2020?fr=sZjI3NzI2MTg4NA. Alternatively, see posted below (click on each image to magnify):

9/3/20: BRIC PMIs 1Q 2020: The Test of Covid2019

BRIC PMIs for February 2020 are out and showing massive strains of #COVID2019 on Chinese economy and the twin supply and demand shocks impact on the Global economy:

Starting with Manufacturing:

India is the only BRIC economy that provided strong support to the upside for Global Manufacturing PMI, with India 1Q 2020 Manufacturing PMI reading so far at 54.9, the strongest since 2Q 2012. Brazil Manufacturing PMI was at 51.7 - marking a moderately strong expansion - roughly in line with 51.8 ad 51.9 for 4Q 2019 and 3Q 2019, respectively. In contrast, Russian Manufacturing PMI continued to show contracting sector activity at 48.1, marking the third consecutive quarter of sub-50 readings. Last time Russian Manufacturing reported cautiously positive PMIs was in 1Q 2019.

The real story, however, was Chinese Manufacturing PMI. Thanks to Corona Virus, PMI fell to 45.7 over January-February 2020, with February reading of 40.3 being a complete disaster. The quarterly average is now at it lowest reading since 1Q 2009 when it was at 44.0 and is likely to tank further in March.

Thus, BRIC Manufacturing PMI sat at an abysmal 48.6 reading in 1Q 2020 based on January-February data, the lowest reading since 4Q 2015 and notch below 48.8 reading for Global Manufacturing PMI.

Services PMIs showed the same dynamics as Manufacturing. Again, India led to the upside at 54.9, and Brazil followed at 51.6. Russia remained in solid growth territory, however, in the sector with 1Q 2020 PMI reading at 53.1. China tanked: Chinese services PMI fell to 39.2 in 1Q 2020, dragging the BRIC Services PMI to 45.6 in 1Q 2020, down from 52.3 in 4Q 2019. This is lowest BRIC Services PMI reading on record (note: I use GDP weights to compute BRIC PMIs). Global Services PMI was at 49.9.

Composite PMIs traced the patterns described above for Services and Manufacturing. India Composite PMI was at 57.0 the strongest since 1Q 2011. Brazil Composite PMI was at 51.6, basically unchanged on 4Q 2019 reading of 51.5. Russia Composite Index was at 51.8, down from 4Q 2019 reading of 52.7. China Composite PMI fell to 39.7, its lowest reading on record. Global Composite PMI was at 49.15.

Once again, these readings to-date are impact benchmarks for Corona Virus pandemic shock to the global economy, since the data does not cover the massive spread of contagion from China to other economies which happened in March. The next update, due in early April, should be brutal, as COVID19 bites across the broader global economy.

9/3/20: Irish February PMIs: Baseline for the Covid2019 Impact

With the start of March and with corona virus impacting the global economy, I have decided to restart coverage of Irish PMIs - something I did not do for some years now. So here are some of the 1Q 2020 results based on January-February data.

First off, Sector and Composite PMIs on a quarterly average basis. As reminder, Composite PMIs are computed by me based on Markit and CSO data as GDP share-weighted averages for each sub-component, namely Manufacturing, Services and Construction:

Services clearly lead the recovery from 4Q 2020 weakness, with both Manufacturing and Construction nominally in the expansion territory, but statistically too close to zero growth to be congratulatory.

Composite PMIs ex-Construction are statistically within long term average and consistent with subdued growth rates. Composite ex-Construction (based on just Manufacturing and Services) is at 52.86 against the upper bound for the 95% confidence interval around the historical mean of 52.74. Including Construction, the Composite PMI rises to 56.14.

Monthly PMIs against period averages:

None of this data reflects any major concerns with COVID2019, since no cases have been identified in Ireland in the period covered by data. The impact should be felt in March 2020 figures due at the start of April. So we can look at the above charts as the base for the upcoming COVID2019 impact.