Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Week 15. April 10 - April 16, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
The main story is the decline in industrial inflation and the beginning of deflation (the same situation in China).
We have emphasized several times that a structural crisis can follow an inflationary or deflationary scenario. The US monetary authorities were so terrified by the events of 1930–1922, they were prepared to do anything to avert a deflationary scenario (it is because of this that Benjamin Bernanke, the Fed chairman who succeeded Comrade Greenspan and advocated for dumping "helicopter money" into the economy, was given the nickname "Ben-helicopter" by bankers).
The Fed was actively decreasing the money supply by selling securities on the balance sheet, as experience has demonstrated, and hiking the rate was one technique of tightening monetary policy. The impact was not precisely what was anticipated.
Clearly, not enough has been done to reduce consumer inflation.
Many professionals are discussing this, including Jamie Dimon, CEO of JPMorgan: "People should be ready for higher rates for a longer period."
However, preserving the status quo (or hiking rates) in a weakening economy will simply hasten the decline. This, as we know, has been occurring for a year and a half and is only concealed because inflation is underestimated. However, given that deflationary tendencies are evidently escalating, it's feasible that soon they won't need to be underestimated.
There is already almost obvious deflation, apparently, and the real sector has very serious problems.
Here we need to comment. How is it that industrial inflation turns into deflation, consumer inflation somehow falls, and people expect prices to rise? As companies cut prices amid falling demand, their debt grows. And, sooner or later, it comes to bankruptcies and/or closure of production, after which the remaining producers raise prices. This is no longer a market economy, this is an economy in falling markets, and a completely different logic works.
Does Powell want to continue this pattern? In the end, we are merely discussing choices for a recession, and it still won't be feasible to halt it, therefore he has a point.
Analytics
IMF as a relic of the economic system
"A sharp tightening in global financial conditions (risk aversion) — could have a significant impact on credit conditions and public finances, particularly in emerging market and developing economies." This would accelerate large capital outflows, an abrupt increase in risk premiums, a dollar appreciation in pursuit of safety, and a significant halt in global activity as confidence, household spending, and investment decline.
In fact, as 2022 eloquently demonstrated, challenges in developed countries are not replicated in emerging markets.
There was no pressure on either the foreign exchange market or the capital market of developing nations for the first time in modern history, despite a record simultaneous strike to the stock and bond markets of developed countries with cumulative losses comparable to the 1930s of the 20th century.
Historically, particularly from 2007 to 2013, any instability in the United States or Europe had severe repercussions in emerging markets,
as evidenced by an outsized decline in the stock market, pressure on the bond market (falling prices, rising yields), and a sharp depreciation of the national currency. This was most pronounced in Russia due to its high integration into the international capital market, or rather its high dependence.
Now things are different; there is a separation and fragmentation of formerly very stable connections with the industrialized world.
The concentration of international funds on the domestic financial markets of developing nations is declining, the proportion of domestic currencies in cross-border transactions is increasing, domestic sources of investment are expanding, and the capital market is becoming more autonomous. This is true of almost all prominent developing nations, not just Russia.
The notion that, under unstable conditions, everyone will rush to the primary funding currency (the dollar) is neither false nor exaggerated as a central trend. Yes, this is still true, as the dollar, along with the euro, is one of the most important sources of cross-border financing, and the overwhelming majority of countries external debt is denominated primarily in dollars and euros.
Simultaneously, the dependence and stability of ties with the developed world are diminishing; if not, the financial system and foreign exchange market of developing countries would have been devastated in 2022, given the magnitude of pressure on the developed world's asset market. But it isn't!
This is a misunderstanding on the part of the IMF, as the problems in the financial system are enormous and March's banking crisis was only "phase zero" in a lengthy chain of detrimental events. There will be a sequel, but not immediately. The hazards here are significantly greater than the 15% estimated by the IMF.
Another misunderstanding of the IMF. Not in the reaction of Central Banks - this is crystal obvious - but in the balancing of risks. Filling the system with liquidity means reversing the path toward inflationary neutralization, while simultaneously undermining confidence in fiat currencies and contributing to an even greater outflow of deposits into alternative instruments, as we are currently observing.
Every action elicits a response. Liquidity cannot be used to cover gaps in the balance sheet without repercussions.
Consequently, the IMF is conceptually very far behind contemporary trends and contends with significant perceptional inertia.
US Inflation
The reduction in US inflation to 5% per year is related to last year's high comparative base and the energy component.
The average monthly inflation rate in the United States was 0.81% from January to June 2022, with March last year having one of the highest monthly impulses for the year - 1% m/m, then 0.4% in April, 0.92% in May, and a record plus 1.19% m/m in June.
In this regard, a slowing of inflation is unavoidable. As previously predicted, inflation may fall to 4-4.5% by June 2023, totally in line with predictions due to the base effect of last year.
The second slowing element is the energy component, which has a weight of 7% in the CPI structure and is down 6.4% year on year and minus 3.5% year on year due to a large drop in oil and gas prices.
Energy alone shaved over 0.25 percentage points off the monthly inflation rate in the United States. The overall consumer price index increased by 0.1% while excluding energy and food, it increased by 0.4%.
Over the course of 13 months, the drop in wholesale food prices began to effect retail pricing as well. So food prices declined by 0.3% per month but jumped by 8.5% per year (weighted inflation 8.7%), resulting in a "withdrawal" of 0.03 percentage points in the total US CPI, and core inflation excluding energy and products rose by 0.4%.
The growth rate of public catering (cafés, bars, and restaurants) is fast - 0.6% m/m and 8.8% year on year.
With the exception of food and energy, all other goods show low growth rates of 1.5% per year and 0.2% per month, which is associated with supply chain normalization, a decrease in intermediate costs as raw materials fall, a decrease in prices for international logistics (especially by sea), and normalization of world production volume in accordance with effective demand.
The conveyor generates a deflationary or low-inflationary tendency.
Services, with the exception of energy and utilities, are increasing in price at an unprecedented rate - 7.1% per year and an extra 0.4% per month.
Everything related to human labour and, to a lesser extent, automation is getting increasingly expensive as a result of labour shortages, deterioration of labour force quality, and loss in labour productivity. IT services, for example, become more expensive because they cannot be automatically scaled.
The dependence is clear: manual, low-skilled labour with no room for scalability and automation becomes more expensive.
Core inflation is expanding at a rate of 0.4% m/m and 5.6% y/y, leaving the Fed with little room for manoeuvre
and forcing it to retain the rate at a minimum. However, given the upcoming "swotting" in the makeover of global indexes, rate growth is entirely probable. There is far too much dumb and easy money in the economy.
Inflationary Processes in the United States: A Look Back
The irony of inflation in the United States is that if there are so-called "one-off" elements that are aggregated into a group of difficult-to-solve problems, everything starts over.
Automobiles were one of the inflation triggers in 2020-2021, when, due to a shortage of new automobiles, demand for used cars climbed to a record high, as did prices - the total growth reached 55% from June 2020 to January 2022.
The shortfall was caused first by logistical issues caused by covid limitations, which pushed a stack of backlogs down the chain due to intermediate and component shortages. Later, difficulties with the chips occurred, both indirectly as a result of the postponed anti-COVID efforts and directly as a result of increased demand for cars following the "helicopter money" scattering. The industry was not prepared for such rapid manufacturing.
By 2023, all problems have been resolved, all pending orders have been almost fully closed, and the opposite effect has occurred - overproduction and overstocking of automobiles, which has already been reflected in prices. New automobile prices increased by 2.4% in six months, compared to 9-10% at the end of 2021. Prices for secondhand cars have dropped by 11% in the last six months (based on current trends).
There was an issue with energy, utility bills, and products in 2022, despite an increase in commodity group and wholesale prices. The price spread was either a record or close to a record. Now, energy and utilities are deflationary, and product prices are falling rapidly (as seen in the graphs).
The problem of rising rental prices started in mid-2022, as a derivative of the rise in home prices (40-45% in two years), which causes problems even now, despite the fact that property prices have been declining since July, while rentals continue to expand rapidly.
With the exception of medical and educational services, the price increase has now spread to a wide range of services.
Due to the base impact and sustained deflationary trends in energy and products, CPI could fall to 4% y/y by mid-2023; nonetheless, underlying and structural inflation remains high at roughly 5-6% and will remain so for a long time.
Is there a serious fiscal problem in the United States?
The federal budget deficit in the United States reached an astonishing $1.1 trillion in the fiscal year 2023 (just six months from October 2022 to March 2023), and the deficit for the year was $1.8 trillion - this is important.
The last time there was a larger balance sheet imbalance was in 2021 ($1.7 trillion), during the "helicopter money" period when the Fed lavishly paid unsecured multi-trillion dollar COVID cheques to the public at the expense of the printing machine.
In normal times, the tolerable deficit in this period is around $700 billion (inflation-adjusted - 800 billion), but it is already $1.1 trillion!
March was a very hot month for expenditure, which climbed by 38% year on year on comparable income, generating a $378 billion deficit, which is double the typical.
The annual deficit in 2021 prices is $1.6 trillion, reaching the record budget gap in 2009 ($1.8 trillion adjusted for inflation). The 2021 record is still a long way off, but the fuse has been lit.
Annual expenses have increased fast since August and are now about 20% greater than the medium-term average of 2012-2019, while revenues are falling.
Expenses increased by 13%, or $358 billion, over the last six months. The largest negative contribution was produced by net interest expenses, which climbed over 1.5 times or by $90 billion (total - $301 billion over 6 months).
Interest rates are unfavourable. Gross interest expenses averaged $558 billion from 2018 to 2021, increased to $710 billion in 2022, and are expected to exceed $1 trillion this year.
Over the last five years, interest income has averaged $120 billion, with the Fed repaying $80 billion per year. Due to Fed losses, there will be no return this year. Net interest expenditures might add more than $300 billion in additional expenses by the end of the year.
Net interest expense exceeds all corporate income fees by 2.2 times!
Defence spending - plus $ 30 billion for six months, overall health care - plus $ 45 billion, social security - plus $ 60 billion, but minus $ 52 billion in targeted population support, excluding pensions.
The scenario is difficult...
The US Treasury's cash position
The US Treasury's cash in Fed accounts has dropped to $86 billion, a critically low level.
It was $410 billion at the start of the year, $500 billion in the first days of February, $350 billion before the banking crisis, and now more than $260 billion has been cremated in 40 calendar days.
In the face of an unrealized debt ceiling buffer, the US Treasury actively borrowed a year ago, allowing it to accumulate nearly $1 trillion in cash, and $150 billion is currently regarded as a necessary amount, given the volume and volatility of spending.
Access to the open market is restricted because they recently reached a debt ceiling ($31,381 billion). Off-balance-sheet operations for $150-$200 billion are doable, as are some domestic debt manipulations, but something else is critical here.
Any emergency, any variation from the predicted expenditure timetable, and everything is out of the game. There is no cushion between the debt limit and the cash reserves. As a final date, the debt limit should be raised in June.
According to operational monitoring of the budget schedule, the deficit for the first 12 days of April was $32 billion (revenues - $177 billion and expenses - $209 billion). With the present spending trajectory, the second half of April should see a budget surplus amid peak yearly tax receipts, perhaps closer to $150 billion each month, boosting the cash to $250 billion - enough for May, but June is dubious.
All of this suggests that the US Treasury will have to join the market on a major scale in 1.5 months to fund the mounting deficit while also attempting to build cash to at least $500-600 billion. At least one trillion dollars.
Summer borrowing will take place in a highly volatile debt market and at extremely high rates, adding to interest payments that are already close to $1 trillion per year.
The interest expense to budget income ratio is reaching 17%, the highest since 2000!
At the same time, only $2 trillion in treasuries have been deposited and refinanced for a year since September, implying that they have not yet begun...
Corporate bonds issued in the United States
Despite the fact that there was a record outflow of deposits from US banks in history (according to preliminary calculations, still 370-390 billion each month, rather than 500 billion, as the Fed asserts with seasonal adjustment), demand for bonds remains volatile.
According to operational data on corporate bond placements, high-yield bond placements fail to zero (no demand), and this aspect cannot be isolated.
Junk bonds, which accounted for more than 20% of all corporate bond offers between 2010 and 2021, are a major source of finance for low-margin and/or loss-making enterprises.
Risk aversion develops during crises, and demand for toxic or dangerous assets falls proportionately. Junk bonds accounted for 5.6% of the placement structure in 2000, the same (5.6%) in 2008, and 8.3% in 2022, compared to 25% in 2021.
Currently, the amount of junk bond placements is 35-45% of redemptions (103 billion were placed in the last year, while more than $230 billion were redeemed).
This gap is filled by lending, because loan rates are currently lower than trash bond rates, and there was an opportunity for loans. That is precisely why "there was an opportunity."
According to estimates, approximately 75-80% of all hazardous loans for zombie enterprises are concentrated in small and medium-sized banks.
领英推荐
Following the March events:
Given that there is now little demand for this asset class and that the "credit shop" is gradually being phased out and/or curtailed, someone will suffer in the near future. We are waiting for a break in the non-financial sector's balance sheets.
Demand for investment-grade corporate bonds has returned, with demand now 50% higher than in April-December 2022, despite a liquidity loss from deposits.
Current placements allow you to fully cover repayments plus a bit extra, which is extremely tough for businesses with zombies.
The QT program is now on hold
The Fed has paused its QT balance sheet reductions once more, bringing the gap between actual June 2022 sales of $602 billion and planned sales of $853 billion to $252 billion.
Because selling is discontinuous, one should not expect a weekly sale of securities, but it is more necessary to evaluate the medium-term trend, which demonstrates a consistent increase in the gap.
Bank deposits with the Fed increased by $440 billion after a large-scale March injection program, but declined by over $100 billion during the month - there is a significant association with the S&P 500 index.
The market is decreasing due to a liquidity squeeze and expanding due to the opposite scenario.
However, since the beginning of March, the US Treasury has "added" over $250 billion, which has been moved to dollar REPOs with the Fed, raising the repo by the same amount.
Between February 23 and April 12, bank deposits/excess reserves and REPOs surged by over $560 billion.
Apart from the local occurrence in April-May 2020, this is one of the strongest rises in banking system liquidity in history.
This was made possible by Treasury spending money and Fed loan programs.
Did everyone count and debate the "largest" balance-sheet reduction initiative, which actually totalled $600 billion in 9.5 months? And how about $560 billion in cash in seven weeks? --> This is the primary reason why the S&P 500 soared despite acknowledged difficulties.
Because of the projected budget surplus, liquidity will be reduced beginning in mid-April.
In terms of lending in the last five weeks:
Lending has fallen by $60 billion since the peak, but more instances of the banking crisis are on the way.
The IMF is trolling
The April overview IMF predicts no crisis in 2023.
In truth, the system has held up well during the biggest oil and inflationary crises in 40 years.
According to the IMF, the combination of challenges in 2023 (consistently high background inflation in developed countries, the crisis in the cost of finance on the trajectory of intensive development in rates, banking and debt crises) would have little impact on the global economy, resulting in a "soft landing."
A mild and manageable recession is forecast in the following significant countries:
Only Russia, Hong Kong, and Ukraine will have a lower GDP in 2022.
"Spillover effects from the rapid rate hike are becoming apparent as the focus is on banking sector vulnerabilities and fears of contagion in the broader financial sector, impacting non-financial firms," the IMF says of the March events. Politicians, on the other hand, have enough leverage and drive to stabilize the system."
The IMF predicts that growth in rich countries would decrease from 2.7% in 2022 to 1.3% in 2023, while worldwide growth will fall from 3.4% to 2.8%. Even if banking troubles worsen, global growth will slip by only 0.3 percentage points to 2.5% compared to the base case. That is criminal foolishness!
The IMF identifies the following issues:
However, when problems are identified, the risks are rarely effectively weighed.
The IMF has historically hoped for the "invisible hand of the market," self-sufficiency, and successful, powerful leverage in the hands of politicians to magically solve all issues.
It is obvious that the IMF cannot declare the true condition of affairs, but this seems excessive. They seemed to regard us as foolish children before, and now as a complete imbeciles. At the very least, it is intolerable ??.
The mismatch between supply and demand
In the United States and other affluent countries, a fundamental mismatch between supply and demand triggered a destructive inflationary spiral. Retail sales at par increased by a record 31%-33% from February 2020 to March 2023, with the major growth surge occurring from April 2020 to March 2021.
From 2010 to 2019, the "normal" growth rate was 11%-13% during a similar period, implying that nominal retail sales have quadrupled the medium-term trend in the last three years.
Inflation covered the difference. Taking inflation into account, the increase in retail sales is more modest - 12.7% since February 2020, while the decline for two years (from March 2021) is 3%, and the last year minus 1%, but retail sales in real terms remain at least 7% higher than the medium-term trend of 2010-2019.
Everything that has happened in the last two years with the money supply, incomes, and population demand is an adjustment to the natural balance of supply and demand that has developed over time, determined by the structure of the labour market, sectoral structure, labour productivity, and money circulation mechanisms.
In other words, the excess liquidity generated in 2020-2021 is being disseminated across the system in a "thick layer," restoring consumption and production to historical levels.
This is accomplished through a drop in the money supply (extra liquidity) and inflation, which results in a decrease in consumption (normalization to the historical pattern).
Retail sales have been flat for the past two years, while nominal sales have increased. With a 7% difference between the 2010-2019 trend, stagnation is possible, but a drop is more likely.
The drop in demand in the US economy is due to the depletion of the savings rate and the slowdown in lending, which in 2022 worked as the key stabilizing element in demand in a situation where helicopter money was shut off in 2021.
Although there is still a lot of money in the economy, the shock scenario of a cliff cannot be realized; however, imbalances in the banking system and zombie enterprises are rising.
Three major banks in the US have reported
JPMorgan Chase (JPM), CitiGroup (C), and Wells Fargo (WFC) Bank profits increased, but why?
Profit growth is attributed to the outstripping of growth in interest rates on loans relative to deposits while controlling costs, although there are clear symptoms of deterioration in the loan portfolio's quality.
Comparing Q1 2023 to Q1 2022:
Only JPM contributed to the improved performance, and the source of the extra profit is net interest income, despite the loan portfolio's depreciation.
But what caused this to happen?
Because of the low cost of deposit money, banks were able to raise lending rates at a slower rate than the Fed's rate grew distributed loans.
At the same time, the overall increase in lending rates was more than the increase in deposit rates, increasing net interest revenue. However, lending fell in the first quarter of this year, and quality is decreasing rapidly.
Deposit outflows have levelled off, but lending is beginning to fall
Consolidated figures on banks in the Fed's H8 report are consistent with bank comments - deposit outflows from the US banking system have stabilized, but lending is beginning to drop.
The date set for the cessation of lending growth is January 20, 2023. Since then, the cumulative increase in loans made to individuals and legal companies has been close to zero (within a modest margin of error).
Since March 15, 2023, there has been a tenth-of-a-percentage-point decline, which does not appear to be pronounced (or noteworthy), but there is reason to believe that March is the turning point for bank lending.
Lending reversal is a fixed feature of commercial credit at all levels, including capital-building loans (industrial facilities, commercial real estate) and other company loans. Retail lending is increasing, but the rate of increase has slowed many times.
This trend is noteworthy for various reasons:
The first reason. Bank lending increased by about $900 billion, or 9%, from March to June 2020, but this increase was virtually entirely driven by corporate loans backed by government guarantees. Furthermore, about half a trillion dollars in bank loans were repaid on a post-COVID deleveraging trajectory from June 2020 to July 2021.
There was a tipping point in July 2021, and from August 2021 to December 2022, bank lending increased by $1.7 trillion, or 16.5%, the highest growth rate ever in absolute terms and comparable to the most intense phase of bank credit growth in 2005-2007, i.e. it was a very powerful impulse.
Since January 2023, lending rates have dropped rapidly and have fallen to zero since February, and since March, the downward trend has been broken, indicating a break in the trend.
It is crucial to note that at the macro-financial level, the trend break does not occur all at once - there is a period of inertia (up to 3-6 months), but when the break occurs, the credit contraction process might last at least a year, if not several years.
It took 3.5 years in the early 1990s, over 1.5 years in the early 2000s, and nearly three years during the 2009 financial crisis.
February appears to be a trend reversal, March a confirmation of a reversal, and April will see the reality of negative loan trends.
The second reason. Bank lending in a closed capital market served as a "lifeline" during the financial crisis for vulnerable companies in the bad debt segment, which will account for 25% of all corporate debt placements in 2021.
Now that placements have dropped to zero, bank lending has begun to shrink, and cash gaps and holes in non-financial enterprises' balance sheets may widen.
Bankruptcies are unlikely to occur in a flash, although bad news may emerge between May and June.
The third reason. When helicopter money was switched off, the main resource for maintaining a high consumption rate was the depletion of savings and retail lending.
The primary savings buffer was eliminated in 2022, and retail financing is getting more expensive. As a result, we should expect a rise in negative consumer demand trends beginning in April.
What is happening today makes perfect sense. Rising interest rates beginning in Q3 2022 and tightening lending rules beginning in March 2023 as a result of the financial crisis will worsen the credit squeeze. Furthermore, loan interest rates will continue to rise as a mechanism to compensate for higher deposit expenses, and lending will suffer even more as a result.
In terms of the deposit base, deposits into the banking system totalled 61 billion seasonally adjusted and 75 billion without SA in the previous week through April 5 inclusive.
The situation is currently stabilizing slightly, although the deterioration in the banking system may be long-term due to the previously stated reasons.
JPMorgan CEO Jamie Dimon's annual letter
JPMorgan CEO Jamie Dimon has issued the company's annual letter to shareholders. Such letters are useful to read in general since the CEO of the largest American bank's viewpoint or public position counts, but this year is particularly interesting.
Here are several quotes [with our comments] :
Amusing statistics facts
THE END OF THE REPORT
Stay tuned.?
Regards, Negorbis.
The key info about the financial and banking crisis can be found in three issues dedicated to this subject:
Part I "Falling Bank Chronicles"
Part II "Crisis of confidence & regionalization"
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