Can Central Banks Stop the Bankruptcies? | The Big Conversation | Refinitiv


The gap between Main Street and Wall Street
has never been more acute. Many financial assets are soaring, whilst
the average consumer is struggling with debt that has been brought into sharp focus by
a loss of income. But is the current mix of monetary accommodation
once again distorting the long term outlook for the economy? That’s The Big Conversation. In March, Spain experienced a 9.4 percent
surge in bankruptcy rates amongst its small businesses, that was according to a report
by Thomson Reuters. And considering that the crisis was probably
at its deepest in April, we should expect these numbers to rise dramatically. And this won’t be an isolated experience either,
other regions have been hit equally hard, although measures in UK and Germany plus the
difficulty of entering filings during a period of lockdown, have meant that bankruptcies
in these regions have actually fallen. In Japan, on the other hand, Reuters reports
that coronavirus has pushed 141 companies into bankruptcy since February, mainly in
the travel and leisure sector. Now the sort of level of balance sheet impairment
to the household, corporate and government level will be one of the key drivers of economic
growth over the next few months. So far, risk assets have already experienced
two of the three classic phases of a major economic bust. The deleveraging phase and then the hope phase. But as the reality phase kicks in, a key concern
will not be about the monetary inflation of central banks, which is all this money printing
which we discuss further in The Whisper, but it’s about the potential for monetary deceleration
i.e. the velocity, not the amount of money. According to the St. Louis Fed velocity is,
“the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then
more transactions are occurring between individuals in an economy”. Or simplified even further – when there is
an increasing amount of economic activity taking place, velocity will be rising. I prefer not to use equations, but a simple
formula for the velocity of money is that V is equal to the price of goods multiplied
by the quantity of goods. And then all that’s divided by the money supply. So velocity=price x real expenditure divided
by money supply. And what’s money supply? Well, the M2 money supply is often used, which
is checking, savings and deposit accounts, plus money markets and mutual funds. Therefore, an even more simplified version
of velocity would be to divide gross national product GNP by money supply such as the M2
just outlined earlier. In this chart showing the central bank balance
sheet versus the velocity of money, we can see the economic fragility that has persisted
before the coronavirus. Velocity had been in a sharp decline because
money supply was increasing at a faster rate than GNP growth. What that means is that each new unit of so-called
stimulus was having a lower and lower return on growth. So if we now roll onto today’s environment,
we know that the numerator of GNP or GDP, i.e. the economy is collapsing whilst the
denominator of M2 money supply is accelerating. Therefore, velocity will fall much further
because corporates will offset lost revenues and start to hoard cash in anticipation that
their future revenues will fall. Households will start to plug their own shortfall
in savings and try to offset the debts that they had built up over the preceding years. And all this is going to be deflationary. In this chart, we can see the relationship
between the year on year change in CPI and the year on year changes in the velocity of
money. It implies that US CPI is going significantly
lower, perhaps even as low as we saw in 2008. Even if peak economic contraction is now behind
us. Now to avoid deflation, governments need to
stimulate aggregate demand to levels that are above and beyond where they were prior
to the virus. Raising asset prices is not the same thing
as raising economic activity, and we saw that for the last 10 years. Cash flows from governments to the private
sector, that’s corporates and households, are merely filling the void, helping to stabilize,
but not to stimulate the economy. Because that real economy of businesses and
households is preoccupied with firstly plugging the immediate liquidity crisis, such as paying
today’s mortgages or rent, and then secondly, hoarding cash in anticipation of future solvency
issues such as a decline in income revenues. Meanwhile, the outlook for U.S. bankruptcies
looks shocking. Expectations for a V-shaped recovery appear
increasingly unlikely simply because the lockdowns have dragged on from Spring and into Summer. And even as economies edged towards normality,
it’s going to be via a series of baby steps rather than a straight line release. This following chart shows the potential magnitude
of the risks. Here we plot the US unemployment rate against
Chapter 11 bankruptcy filings. Even if we adjust the size and speed of the
rise in unemployment with an expectation that jobs will return much faster than expected,
we should expect bankruptcies to rise dramatically. In reality, I think it’s fair to assume that
within the leisure and hospitality industries, the return to work will be a drawn out affair
with restrictions of some sort in place throughout the Northern Hemisphere’s Summer. The hope is always that the US consumer will
come good. And over the last 40 years, the consumer has
proven remarkably resilient. The consumer is therefore key. But it’s the consumption part of the economy
that has been taking the hit from coronavirus this time around. And what is the likelihood that the consumer
behavior will return to normal afterwards? U.S. consumers were not in a robust position
prior to the crisis. Despite the recovery in the aftermath of the
great financial crisis in 2008, 45 percent of Americans have close to zero cash in their
savings account. And that’s according to a survey by GoBanking
Rates in December 2019. Auto and student loans are also at record
levels. We can see in this chart how auto loans have
soared past the previous peak prior to the great financial crash of 2008. Credit card financing costs have also risen,
despite Fed funds that are close to zero, pushing credit card delinquency rates to a
20 year high. And that was before Covid struck. It’s clear that many US and many European
consumers have been teetering on the edge for years, living paycheck to paycheck. Now, with paychecks abruptly postponed and
in some cases canceled, many households will be missing rental, mortgage and credit card
payments and also skipping on health care, setting in motion the dominoes in which their
credit scores will be impaired. And banks who are already hoarding cash will
be reluctant to lend. Government handouts will be used to plug the
holes in today’s cash flows, or they will be hoarded in order to offset a decline in
future revenue or wages. And in many cases, it will be used to pay
down debt. We can already see that the US savings rate
is now at the highest level since the early 1980s, and that creates a vicious spiral. If households are hoarding, then corporate
cash flows will be impaired. Corporates will therefore also hoard against
a drop in future revenues and they will cut jobs and cut wages. Household balance sheets will therefore be
impacted further, forcing more retrenchment in cash hoarding by companies that are fearful
of future revenue losses. And then the banks will hoard. Their capital will be kept aside and they
will only lend to the less risky corporates because consumers are exacerbating that dynamic. Now, let’s be clear, we’re not talking about
a complete collapse in consumption. In fact, the next set of headlines will probably
be about how economies are returning to something like normality. But it’s what happens at the margin that matters. It only takes a small percentage of consumers
to stay away from restaurants and leisure facilities to push a profit into a loss. If fixed costs are inelastic, it only takes
a few weeks of the new normality with slightly smaller customer bases to push companies into
insolvency. Many industries have wafer thin margins and
consumption patterns aren’t likely to return to pre-Covid levels, even if economies rapidly
reopen, because the crisis has revealed the underlying balance sheet fragility and may
now trigger a desire to de-lever. And that would be deflationary. The question is then if consumers retrench,
can central banks print at a fast enough pace to offset the decline in demand? Now, Jerome Powell is backing the Fed as he
should. But the experience over the last 10 years
of unorthodox accommodation is that central bank’s efforts actually make matters worse. In the 1970s, they didn’t try and create inflation,
but they got it. Over the last decade, they didn’t try to create
disinflation, but they got it. Today they are trying to create inflation
and history suggests that they won’t get it. But they might get an even greater disconnect
between the equity market and the underlying economy between Wall Street and Main Street. There’s a lot of chatter about the performance
of the U.S. equity market when compared to the outlook for the broader economy, in particular
the consumer, as we’ve just discussed. The Nasdaq 100 has rallied back to within
about 4 percent of its all time highs with both it and the S&P making new recovery highs
on Monday. So although the NASDAQ is signaling what appears
to be a healthy recovery, there are many other signals from the market that are indicating
a less robust outcome. So how should we interpret these mixed signals? Firstly, as mentioned in the main section,
it’s key to understand that the equity market is not necessarily representative of the economy,
and that the US equity market is not representative of global equities. Arguably, the US equity market, which has
been outperforming most other major global benchmarks for the last decade, has not been
trading on fundamentals for some time, but has been trading on flows. These flows would be buyback flows, 401K pension
flows, and even inflows from foreign capital. Assets had already migrated from active managers
to passive managers who have a concentration bias into the largest names by market capitalization
such as those in the S&P 500. And this has helped keep valuations on the
S&P 500 at elevated levels for a very long time, even prior to the Corona crisis. Since the crisis, these flows have been concentrated
into an even smaller handful of tech names, mainly those with a significant global online
presence. And this has helped elevate the Nasdaq to
its highs. The S&P 500 has also benefited from these
flows, although the rally in the S&P is still very much in line with the other bear market
rallies, at least at this stage it is. So far the S&P has recouped 62 percent of
its initial decline and that’s a classic Fibonacci retracement level. And it mirrors numerous historical examples
in which we first see an aggressive liquidation phase or deleveraging, followed by a significant
rebound. And this is what happened in 1929. A liquidation phase followed by a big rally
of around about 50 to 60 percent before the market rolled over. The same pattern was true the Japanese Nikkei
225 after its equity bubble peaked at the end of the 1980s, followed by a sudden decline
before bouncing to recoup 50 percent of its losses and then rolling over again as reality
kicked in. And then more recently, the sell off at the
end of 2018 also saw a 62 percent rally before the index rolled over to make new lows. Clearly, the S&P, like the Nasdaq, could break
above the 62 percent retracement level, which has been testing this week. But at this stage, it is still perfectly in
line with numerous historical examples of how a market might perform through a classic
equity bust. The Nasdaq itself is not a play on the macro
economics, but on the performance of only a handful of stocks. But when we look around the rest of the world,
the dominant performance of large cap US markets is clear. Ignoring the volatility in March, the S&P
500 has continued to move higher versus the German DAX, the UK’s FTSE 100 and Europe’s
EuroStoxx50 index. Many of these markets, such as the UK’s FTSE100,
have struggled to hold the 38 percent retracement level versus the S&P at 62 percent, and the
Nasdaq having almost recouped all of its losses. Many global equities remain entrenched in
long term bear markets. The Japanese Nikkei 225 has failed to regain
the highs made in 1989 and the EuroStoxx 50 has failed to regain the highs made in early
2000. The U.S. market reflects the dominant flows
of corporate buybacks in the years preceding Covid-19, followed by the concentration of
flows into the winners such as Amazon over the last couple of months, plus both the explicit
support of the US Federal Reserve for certain asset classes such as investment grade corporate
bonds, as well as the implicit support for equities by the threat of further intervention,
such as we saw over the weekend from Fed Chairman Powell. However, there are still areas within the
US equity market that are a closer reflection of the underlying economic malaise. The small-cap Russell, 2000, has retraced
50 percent of the initial de-leveraging, but remains 20 percent off the highs, even after
Monday’s huge rally. And even within the S&P 500, which is around
12 percent off the all time highs when we filmed this piece, if we excluded the top
five or six performing tech names, then the rest of the index would be down closer to
25 percent. The market cap of the top five or six stocks
is equivalent to the bottom three hundred and twenty five or so names, which is one
of the greatest concentrations that the index has seen. Digging deeper still, we can see the performance
of the banks has massively lagged the performance of the broader equity market. Although the role of banks in the economy
has diminished since the financial crisis of 2008, partly due to regulation and the
need to rebuild their working capital, they are still integral to the performance of the
real economy – and that’s the economy of businesses and households rather than the financial assets
such as equities and bonds. The BKX, the bank index, managed only a 38
percent retracement of the initial selloff, and has again been within a whisker of the
recent lows. The ratio of the bank index vs. the S&P 500
last week made a new all time low. Banks are clearly indicating that the economy
remains in limbo, even as we contemplate a reversal of lockdowns and another rally in
the Nasdaq 100. In Europe, the picture is even worse. The eurozone banks made a new intraday all
time low last week, hobbled by a backdrop in which the eurozone and EU leaders are again
showing during times of crisis that there is no union, even though there has been a
rescue package announced this week. And this performance in banks is repeated
across the world. The Australian Bank Index only managed a rebound
of 23 per cent of the original decline that happened in March. So whilst the Nasdaq and to a lesser extent
the S&P 500, are highlighting the strength of a handful of stocks, the banks are reflecting
the reality that the rest of the economy is experiencing. For smaller businesses lacking the technology
or the clout, insolvency is an issue which is on the immediate horizon. Lower or negative interest rates were already
a challenge for banks. The potential wave of global insolvency is
clearly being reflected in both their relative and absolute prices, even whilst a handful
of stocks, at least in the US, give the impression that the economy appears to be anticipating
a rapid rebound in activity. Between Friday of last week and Monday of
this week, at one point, silver had gained 10 percent. But silver still remains a laggard versus
gold. Monday’s squeeze higher in precious metals
was in response to US Federal Reserve Chairman Powell’s weekend comments on the US show 60
Minutes, in which he outlined the policy tools at his disposal. In many ways, we shouldn’t be surprised that
his enthusiasm for printing, this has become enshrined in many central banks emergency
rule books. The interview also came hot on the heels of
an address earlier last week in which he outlined the headwinds for the U.S. economy. Basically playing good cop/bad cop. When the presenter of 60 Minutes Scott Pelley,
asked him if he had flooded the system with money during the crisis period, he said, “Yes,
we did, that’s another way to think about it.” And when asked “Where does it come from? ” He answered, “We print it digitally. We have the ability to create money digitally.” When pressed further, the key passage was
“Has the Fed done all it can do?” And he replied, “There is a lot more we can
do. We’re not out of ammunition by a long shot. No, there’s really no limit to what we can
do with these lending programs.” Many risk assets, particularly those pricing
inflation, sprinted higher on Monday. So after money printing in 2020 was at a rate
that dwarfs 2008, especially when we look at the growth on a year on year basis, the
Fed is prepared to do yet more. Precious metals took a leg higher in anticipation
of the bigger bailout that Powell was suggesting, although gold did retreat off its highs when
real yields started rising. But for silver, there is still some considerable
catching up to do. Silver has many industrial uses, and when
liquidations impacted all risk assets in March, the precious metals with industrial uses were
particularly badly hit. And even gold was impacted by margin calls. But when we look at the price action, we can
see that silver’s performance has also lagged gold over the last five years. And with that underperformance being particularly
acute over the last few months. And when we look at the longer term chart,
we can see how extended the current period of underperformance has become. And yet on those other occasions when precious
metals rallied, silver eventually outperformed gold, as it did in 2011 and also in 1980. The Corona crisis has added a further dimension
by impacting a large number of silver miners who’ve temporarily had to mothball their operations,
thus creating some of the supply chain bottlenecks that will put upward pressure on prices. And given the small size of the market, and
the potential size of interest from institutional investors, prices could move quite quickly. And if we think that this period of money
printing is going to be far in excess of other periods – and Chairman Powell has implied
that they have a lot more ammo, then that environment should be excellent for the precious
metals complex. Precious metals perform well in a period of
deflation. And in order to avoid deflation, central banks
will print more money in order to try and create inflation. That should also be good for precious metals,
so therefore the path to inflation, If we can ever get there is paved with both silver
and gold. Silver is coming off a very slow start, but
history suggests that once it gets going, this is a supercharged precious metal that
everyone begins to chase.

100 thoughts on “Can Central Banks Stop the Bankruptcies? | The Big Conversation | Refinitiv

  1. Really? Balance sheet fragility? Let's try to be a little more accurate and call it balance sheet collapse. Some honest analysis would really be appreciated here.

  2. Equity markets are not necessarily a reflection of the general economy? How about the equity markets are completely disconnected from the general economy. Stop being delusional.

  3. The inflationary impact of government spending is the big question. Will it be continued deflation and a depression, or stagflation?

  4. "we print it digitally" should really have cause a revolution, but people are probably just too busy watching Netflix instead. Sad reality! Thanks for the great work as always to the team at real vision!! Keep it up!

  5. I read the title and the answer is No.
    The corporate socialism only goes to the top 1 % And I could of told you this before the crisis.

  6. It is excellent that he keeps hammering these points over and over.. I am not tired of hearing them
    Money velocity… Main street is not wall street.. Delevereging.. Insolvency risks…
    I wish he talks one day about the zombie banks and corporations…there number has accelerated lately

  7. In 2 months in america when people dont have money to buy groceries. there will be a really big problem. if u have 25 percent unemployed without currency to spend, u have a major problem. especially when they are armed.

  8. You said all that to throw to Real Vision's Silver Sale – where the Comments have been turned off.
    Scammers.

  9. Where do you get 14% unemployment? There are 33 million newly unemployed and another 4 million unemployed before this began, With 165 million in the labor market at the start of January 2020 my math shows unemployment above 20%.

  10. terrific video but please explain – you lament the fact 45% of Americans had little or no savings at the time of the 2008 economic crisis … and a few moments later you're predicting doom and gloom because household savings levels are at their highest since the 1980s?

  11. Thank you for the great analysis, how does these US M2 and Velocity compare to Japan over the past 10 years?

  12. Excellent!: vicious -ve feedback loops on the downside just opposite to the boom +ve ones on the upside.

  13. The solution is simple: Governments need to engage in massive, large scale projects – infrastructure, telecommunications, energy, food and water security, housing, and more importantly healthcare, medical R&D.

  14. The Corona Virus is the pin that popped the debt bubble. Too many leveraged Longs have caused Bitcoin & Gold to dump to great prices for us. Accumulate these cheap prices, you will thank yourself in 12 months for doing this. Its these times.. that true wealth is made. 90% of people are selling out, so you take the other side.I still plan on buying a little bit more Btc in the next couple days. I have exactly 14 BTC left on my Nano. I am indeed grateful for the services of Mr Douglas Murray whose trade patterns have been the secret behind my huge cash out on bitcoin trading. I have strong faiith in hiis strategies and he can also help you make huge gains from trading.  Y'all can reach out to him through His * Mail *([email protected] com)" or  Whatsapp +1 (832) 413-2374..

  15. As can be seen on the following price chart, Bitcoiin maintained the 38. 2% Fibonacci retracement level of 9300usd, At its first drop to these levels, bitcoin reached around the mentioned area before a rapid pull back. However, at the second drop, Bitcoiin declined to 9I20usd, but the candles’ bodies still maintained the 9300usd support and closed above the 935Ousd, This does not mean that the correction is over, or Bitcoiin is saved from seeing 8000usd prefix again, but as long as the 9350usd is kept, the bulls are here for the short-term. As Mr. Davison Irving stated in the latest price analysis when Bitcoiin was trading around 9700usd, even forming a higher low at 9200usd to 9300usd will be considered healthy and bullish, but for now, you can only make a profit by trading, for me I advise you multiply the little you have with Joseph's strategy, I was able to make 7bt with I.5bt in 3 weeks with the same strategy, reach him on telegram:@davisoncrypto or WhatsApp+ +44 7723 770849

  16. As always, thank you, Roger, for your concise analysis of what appears to be utter monetary madness

  17. In another news, the previous monetary metal, that was demonetized, is dropping further and further back. Copper. Same is happening now to silver. And has been happening for 100 years. There's no point for 2 monetary metals, if access is generally the same. People tend to bet the stronger. That flow is mostly one direction. Silver->Gold. What is really exiting, that the calculation will also effect gold-btc dynamics, in the future. We know some people already act on in favor of BTC vs. Gold. What direction will that development go towards, do you think?

  18. 💛💚💙🧡
    When James Bond speaks, you LISTEN
    Thankyou Mr. Bond … I will buy some Bitcoin
    💛💚💙🧡

  19. Honestly this must be the best assessment of the markets and the economy on youtube. If you know anyone who can do a better job let me know?

  20. Am I being thick?
    So a $ billionaire has money in the bank, but when there is finally no one growing and processing food, or manufacturing toilet paper!
    How does their $ billions help them?
    What will they wipe their ar*es with?

  21. Great presentation but why the oblique camera angle where Roger is looking in a direction other than at the viewer? So irritating for the viewer.

  22. The more the Fed balance sheet rises the poorer Americans become. "The economy remains in limbo", no, the economy is in the toilet and swirling the bowl. The morbidly obese on Wall Street are in danger of being marched up the gallows and paid back for their unmitigated greed and evil.

  23. Great content but just one ear sore – it's "Ni-ke-e" as in "e" in "smell", not "Ni-kai". Since Nikkei is a major index one hears from media nonstop, mispronouncing it makes you sound very unprofessional.

  24. He states that equities are not a reflection of the economy and then keeps talking about the stock markets…

  25. Can Central Banks stop bankruptcies? Sure they can. They can issue a decree!

    "Thou shalt NOT go BK!"

    Or something to that effect.

    Since we don't have a free market any longer it should be easy enough to do. I'm not saying it's sustainable. I'm just saying sure….it can be done….

    John~
    American Net'Zen

  26. Nope, massive retail closings are underway, no backstop to workers or small businesses mean it's permanent.

    There is no recovery, pensions gone, one-time dimes thrown on the pavement for the poor to feel relieved … doesn't do diddly to create an economy, fabulous transfer of wealth by the World's Finest Ponzi Scheme.

  27. Jay Powell, got rope-a-doped by 60 min. If I was Fed Chairman, I would never be so transparent in my explanations to the media. E.g. We don't "Flood the system with money" we provide market stability, period. We don't "print it digitally" we increase our balance sheet with assets that require protection, period. What kind of people does the Fed hire?

  28. It's only a 'great' crash for the economic predators who use these manufactured events to rob the commons.

  29. People riddled with debt increases from just trying to keep up. Unfortunately personal debt often models public debt and will do so until something drastic changes in the global monetary system.

  30. What an 'IGNORANT' title! The very entities that have shut down the world and are about to destroy everything and everyone to bring in the beast system is going to take everything you own and love. Leave you on the streets or shove a needle and chip in you!

  31. The core issue is not whether central banks can stop the bankruptcies but whether we should get rid of privately owned central banks and follow the Chinese example where the central bank is a public bank and can cancel the debt burdens on companies and individuals without causing a debt problem

  32. the fed are basically real life equivalent of finding the money cheat in a video game. Until of course you realise that it ruins the game . . .

  33. ~2:50 “This chart shows each new unit of stimulus was having a lower effect on growth”. The Elephant in the room is if it’s so easy to see this why do Central Banks persist despite the clear trend of following Japan in this downward spiral? Are our leaders that terribly short sighted?

  34. Graph at minute 2:35 comparing velocity and balance sheet is amazing. Tells the whole story… the greater the "stimulus" the slower the recovery.
    "Stimulus" has the opposite effect of stimulating the economy. It is actually a depressant. Funny money disincentivizes investment.
    Profitability (projected internal rates of return), not sugar water, drives investment in a capitalist mode of production.
    In today's environment, profitability must exceed projected income from funny money before anyone sane will risk investing.
    So what does the FED do? Increase the funny money.
    Lame.

  35. Someone on Bloomberg Television said it right: The Federal Reserve can throw the economy a life preserver but it can't get it out of the water.

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