Macroeconomics: The Day Ahead – 20 November 2020

Good Morning: The Long & the Short of it and The Bigger Picture

Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist

  • Digesting mixed run of data, weak Japan PMIs and UK Consumer Confidence,  strong UK Retail Sales; Canada Retail Sales & Eurozone Consumer Confidence  ahead; central bank speakers again plentiful, but Mnuchin move to end  some Fed Lending programmes, Sunak budget tightening talk and stalled  EU recovery programme in focus as infection rates continue to rise
  • Latest IIF world debt report and rising levels of corporate zombies  a reminder of challenges before hoped for vaccine relief
  • US and UK finance ministers sending the wrong signals at the wrong time



So another week ends, and the markets’ overall strategic position remains a heavily leveraged ‘Long future normality / prosperity, Short current reality of adversity / uncertainty’; the funding of that position continues to be cheap thanks to central bank largesse, but the risk of a margin call on the short position is increasing, with the lack of any market depth in execution terms also a key risk. Will today’s schedule of data and events change any of that? Probably not. There are Japan’s flash PMIs (dropping back in both cases, thanks to rising infection rates), UK GfK Consumer Confidence (slipping to a 6-mth low on lockdown measures), Retail Sales (surprisingly smashing expectations again. perhaps helped by some ‘hoarding’ ahead of lockdown?) & PSNB to digest with only the less than timely Canada Retail Sales and Eurozone prov. Consumer Confidence ahead. On the events agenda, as expected China left the key LPR rates unchanged for a seventh month, and ahead lies another day that is again replete with central bank speakers, though the KC & Dallas Fed conference on energy and the economy may offer some fresh insights, which the rest of the day’s speakers will almost certainly not. On the political front, progress briefings on Brexit trade deal negotiations would have been the highlight, but are temporarily suspended due to an EU negotiator testing positive for the virus. However the day’s incompetence prizes goes to the UK and US finance ministers for signalling austerity type measures, with Sunak apparently set to squeeze public sector wages, and (outgoing) Treasury Secretary for pulls plug on some of the Fed’s pandemic lending programs, which were set to sunset on 31 December. The latter programmes may not have seen much take up, but the backstop remains important, above all in the absence of any further fiscal measures from Congress – this is precisely the kind of misstep the current juncture which may well come back to bite them hard, but the economy harder, as well as further undermining whatever limited credibility either have, and in terms of crisis management, this is a clear ‘fail’. In relation to that overall skew in market positioning, the latest IIF report on global debt levels (see various charts attached) again highlights that the elephant in the room remains the mountain of global debt, which has grown exponentially due to the pandemic, and as much as central banks have emphasized that this is not the moment to discuss it, and are indeed calling for even more to support economies. At least Fed chair Powell was this week candid enough to admit that US federal debt levels are not on sustainable path, and as US corporate zombie debt grows exponentially (see chart), and indeed elsewhere, it places a large burden on any recovery. To be sure there will be many that object to the typical zombie metric of ‘revenues being insufficient to cover debt service costs’, preferring such metrics as debt to enterprise value, though the latter is so subject to arbitrary valuations, above all the frequent abuse of ‘goodwill’. Be that as it may, the simple point again boils down to just how much longer companies (large, medium or small) can avoid either drastic restructuring or insolvency by borrowing to meet shortfalls in revenues relative to costs, given the impact of restrictions on movement and activity to contain the pandemic has already been severe for many, and will likely remains so well into H1 2021.

Two much used quotes seem highly apposite:

William Pfaff: ““The accounts that history presents have to be paid. Past has to be reconciled with present in the life of a nation. History is an insistent force: the past is what put us where we are. the past cannot be put behind until it is settled with.”

Jacob Burckhardt: “The state incurs debts for politics, war, and other higher causes and ‘progress’. . . . The assumption is that the future will honour this relationship in perpetuity. The state has learned from the merchants and industrialists how to exploit credit; it defies the nation ever to let it go into bankruptcy. Alongside all swindlers the state now stands there as swindler-in-chief.”

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