The Economics Thread

MTF

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berbatrick said:

The dick flatenning meme but for nationalising the oil industry.
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Market clearing and price discovery are generally beautiful things that serve us really well (vs attempting to centrally figure out how much of each good and service should be produced and at what prices). But they really don't work well right in the middle of a crisis.
 

Adisa

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Lots of US Shale companies have announced halts in production. Trying to look at their capital ratios but I'm sure yt doesn't look good.
Does anyone have an idea of America policy makers thinking? Are we looking at convertible equity covenants attached to bailouts?
Looking at prices today, see this fool.
 
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Sky1981

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ClaytonBlackmoorLeftPeg said:
Clearly very little movement on interest rates.

banks are at least I’m a good position, certainly compared to 2008. Whilst there is a squeeze on liquidity, there’s no reason that won’t return once we start spending again. We may see QE, but at the moment everyone will be hoarding cash, so no point until we can spend.

the packages that the UK government have put forward is astonishing, they need to fill in the self employment gap, but once that’s done it is very comprehensive.

I think we then need to wait. There is not a lot else that we can and should be doing.

there could be some real positives that come from this. Reduced carbon emissions, prosperous wildlife, stopping the devastation of the rain forests in Brazil (I assume
That’s on hold). If firms can be more productive by working flexibly and with employees as home, we have a chance of increasing productivity, which is how you grow the economy

once countries can be productive again we will need to review.

In terms of the long term, I don’t think you can make any predictions until we know the likely impact of this. Best case life returns to relative normality in a couple of months and we start rolling out a vaccination. Worst case we have restrictions on movement (in some form) for the same couple of years - which destroys most of the service industry.
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Bamks are fecked. Their assets in terms of loans and credits are virtually worthless.

Credit cards. Loans. Mortgage. People cant afford to repay them.

Our government has instruct banks to freeze installment of many items for 12 months.

I dont envy being in their shoes
 

Pexbo

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Christ this is going to end up being an economical event like no other before it. Could literally end up changing the fabric of society.
 

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Drifter said:
Same goes for Airlines who waste it on Stock buybacks.
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I'm not opposed to bankruptcy in the normal course of business. A lot of companies still manage to operate through it, keeping the services and employment alive while equity holders get wiped out. But we can't realistically funnel thousands upon thousands of cases into the system (courts, lawyers, accountants, etc) and hope that it will all sort itself out. It will actually be less costly in the medium term to save companies broadly and in fact use them as a conduit for population assistance in the meantime (conditioning any loans on the continuation of employment).
 

VorZakone

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Pexbo said:
Christ this is going to end up being an economical event like no other before it. Could literally end up changing the fabric of society.
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It won't. All this oil stuff is because of May futures. June is looking better.
 

Atze-Peng

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Gold is now being pretty much physically (you can still buy it on paper. lol) unavailable for 3-4 weeks. https://www.zerohedge.com/commodities/gold-now-unobtanium

After some shenanigans, the price reached another new height very recently and I think we will see more spikes of this coming where forces try to artificially press the price down, but the massive amounts of demand and money printing will keep shooting it up. And when people finally realise gold is almost unavailable, silver will do the same.
 

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Article about the risk of the chinese economy:
The coronavirus outbreak has already taken a great toll on the Chinese economy, with all headline readings pointing towards a record slowdown in growth during the first two months of the year.
But there is an even greater danger for what was once the world’s fastest-growing major economy: that Covid-19 will become the catalyst that will bring its many long-simmering problems to the boil. At the centre of these problems is a rising systemic risk in its banking and financial systems caused by a high level of debt accrued over the past decade.

The outbreak could not have occurred at a worse time. The past 10 years have not only seen the economy saddled with this debt, but it has also involved a steady structural slowdown that last year saw the growth rate fall to 6.1 per cent, the lowest in decades. Now, just at the very time the country might consider spending more to prop up that growth rate, a raging pandemic means it will be making much less money than usual.
The latest data from the Chinese Ministry of Finance shows fiscal revenue plunged by 9.9 per cent in the January-February period, the steepest drop since 2009. Overall tax revenue fell 11.2 per cent, driven by a 19 per cent slump in value-added tax (VAT) revenue, the main source of fiscal income. These drops come just as the government has offered a handsome tax cut in response to the pandemic.

Meanwhile, the escalation of the pandemic in the rest of the world will only further weigh on China’s economic growth, corporate profits and personal income. In turn, this will inevitably drag down government revenue in months to come.
Beijing’s proposed stimulus spending will only exacerbate China’s already-massive debt pile, which had reached 310 per cent of gross domestic product by the end of last year (Personal Note: The USA has a dept to GDP ratio of ~110%), according to the Institute of International Finance. Many economies that have experienced such levels of debt have gone on to suffer a financial crash or economic crisis. China now accounts for about 60 per cent of the US$72.5 trillion emerging market debt.

A deleveraging campaign had reduced Beijing’s debt mountain in 2018. But it has since returned to credit-driven stimulus to support growth and combat the effects of its trade war with the United States.

About 80 per cent of China’s debt stock was accumulated over the past decade as the country strived to achieve the politically significant milestone of doubling its economic sizefrom 2010 to 2020. The milestone was a key goal in President Xi Jinping’s Chinese dream of “national rejuvenation”.

While the coronavirus threat has receded in China itself, any hope of an early recovery is forlorn as Covid-19 is still ripping through the major developed economies – essentially, China’s customers and tradepartners. Plunging demand from abroad will create a second shock wave that will hit China’s export-oriented economy just as it is recovering from the first shock of having to lock down its cities.

China’s balance sheet will be hit by both dwindling revenue and a spiralling demand for spending. Rising corporate debt, surging local government borrowings, and soaring non-performing loans for commercial banks are three areas that could wreck its fragile financial and banking systems. The non-financial corporate debt-to-GDP ratio jumped from 93 per cent in 2009 to 153 per cent last year, one of the highest in the world. The Institute of International Finance warned that China was the major driver of global non-financial corporate debt. China’s bond defaults also hit records in 2018 and 2019.

Meanwhile, China’s local government debts will jump as a result of more infrastructure-driven stimulus. This will add to a debt pile already worth up to 40 trillion yuan – about 40 per cent of the country’s 100-trillion-yuan GDP last year. S&P Global Ratings has singled out local government financing vehicles as being chiefly responsible for the accumulation of hidden debt. At issue is that while local governments want to spend more, their income from land sales, the main source of local fiscal revenue, is decreasing. The Ministry of Finance said revenue from land sales, which are off-budget, fell by 16.4 per cent in the first two months of the year.

China’s commercial banks also face a severe test as bad debts are likely to rise. Even before the outbreak, China’s banking system was a ticking time bomb, with the state having to step in to rescue a string of embattled medium-sized lenders. A Financial Stability Report released by the People’s Bank of China at the end of last year described 586 of the country’s almost 4,400 lenders as “high risk”. Data from the China Banking and Insurance Regulatory Commission shows there has been a steady rise in the non-performing loan balances of commercial banks since the middle of last year, a result of Beijing scaling back itsdeleveraging campaign.

China’s policymakers face a difficult choice: tolerate an unprecedented slowdown or go for massive stimulus and risk detonating a financial time bomb.
China’s economic planners have a habit of relying on massive levels of debt-financed stimulus whenever growth slows. The closed nature of its financial system affords policymakers the luxury of complacency, as they have a war chest of US$3.1 trillion in foreign exchange reserves.

All the signals suggest this is what they will do once more, despite the risk. Leaks suggest Beijing has amended its 2020 budget to raise the deficit to 3.5 per cent of GDP from an original cap of 3 per cent to fund this massive stimulus. Analysts say the actual fiscal deficits could jump much higher than last year’s 4.9 per cent, which included off-budget sheet borrowing and spending. Indeed, a meeting of the politburo, China’s top decision-making body, on March 27 suggested scaling up the stimulus package, with calls to raise the fiscal deficit ratio, increase issuance of Special Treasury bonds, and raise the quota of local government special bond issuance. Policymakers have also directed commercial banks to tolerate a higher threshold for bad loans, hoping to keep thousands of small and medium-sized enterprises from collapsing. The government has already sped up the issuance of bonds. The issuance of special-purpose bonds almost tripled to 950 billion yuan in the first two months of 2020, compared with last year.

It is to be expected that China’s debt will rise substantively in coming months, as in all previous crises. However, Beijing should beware that this time its fiscal measures will be limited. They will help only the country’s internal issue of supply and do nothing for external demand. China should exercise extreme caution: a financial virus can be as toxic, contagious and lethal as a biological one if it is allowed to spread.
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https://www.scmp.com/week-asia/opin...us-has-lit-fuse-time-bomb-chinas-economy-debt
 

Yik

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Pexbo said:
Christ this is going to end up being an economical event like no other before it. Could literally end up changing the fabric of society.
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https://www.theguardian.com/world/2...ooks-bleak-europes-restaurants-after-lockdown

https://www.theguardian.com/business/2020/apr/26/restaurants-stare-into-social-distancing-abyss

Harrowing reads.

Its such a massive catastrophe that you can't even think of it as one economic crisis. Almost all sectors of the economy are impacted but for me the hospitality sector is possibly going to be the worst impacted especially in the medium to long term. Its staggering to think about how badly the hospitality sector is gonna suffer in the coming months.

According to those articles above people won't be going to pubs/restaurants/hotels/clubs/holidays in the same numbers they used to and it does not make economic sense for many businesses to open up with all the social distancing rules plus the inevitable lack of consumer confidence until a vaccine comes out. Assuming a 30-50% drop in consumer demand even when things open up, I can't see many smaller businesses surviving that.They are not going to get enough footfall for the foreseeable future to justify their rents and other costs. Fewer customers and less of them allowed in then before. Its going to be brutal. It might also mean some large chains failing as well eventually or at least downsizing.

I hope I'm wrong but I see this as a kind of event which will lead to structural unemployment at least in the small, independent part of the hospitality sector.
 

Pexbo

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Yik said:
https://www.theguardian.com/world/2...ooks-bleak-europes-restaurants-after-lockdown

https://www.theguardian.com/business/2020/apr/26/restaurants-stare-into-social-distancing-abyss

Harrowing reads.

Its such a massive catastrophe that you can't even think of it as one economic crisis. Almost all sectors of the economy are impacted but for me the hospitality sector is possibly going to be the worst impacted especially in the medium to long term. Its staggering to think about how badly the hospitality sector is gonna suffer in the coming months.

According to those articles above people won't be going to pubs/restaurants/hotels/clubs/holidays in the same numbers they used to and it does not make economic sense for many businesses to open up with all the social distancing rules plus the inevitable lack of consumer confidence until a vaccine comes out. Assuming a 30-50% drop in consumer demand even when things open up, I can't see many smaller businesses surviving that.They are not going to get enough footfall for the foreseeable future to justify their rents and other costs. Fewer customers and less of them allowed in then before. Its going to be brutal. It might also mean some large chains failing as well eventually or at least downsizing.

I hope I'm wrong but I see this as a kind of event which will lead to structural unemployment at least in the small, independent part of the hospitality sector.
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I was thinking about the hospitality industry recently and all the independent restaurants, bars and pubs which are likely to go under because of this.

I’m wondering whether there could be some sort of Government scheme on the other side which forgives Coronavirus initiated bankruptcies (maybe not limited to hospitality) and grants low/zero interest loans to get companies back up and running again. It should be different to startup schemes as they should already have staff/supply chain/goodwill/reputations in place.
 

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I’m wondering what will happens to the gyms and Spa’s. What will happen to those PT’s and employee’s?
I play Sunday league football and even though the league are making preparations for 20/21 I’m not optimistic there will be a next season.
 

Yik

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Pexbo said:
I was thinking about the hospitality industry recently and all the independent restaurants, bars and pubs which are likely to go under because of this.

I’m wondering whether there could be some sort of Government scheme on the other side which forgives Coronavirus initiated bankruptcies (maybe not limited to hospitality) and grants low/zero interest loans to get companies back up and running again. It should be different to startup schemes as they should already have staff/supply chain/goodwill/reputations in place.
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I agree with you that there should be a massive government led intervention to help get small business back up and running. A "restartup" scheme if you will.

However there are a number of problems with this assuming social distancing lasts until early 2021 or beyond.

1) Lease cancellations and removal of shop fittings/sale of assets etc. making any restart impossible or pretty much mean starting from scratch.
2) Staff: No guarantees they'll hang around especially if its a specialty restaurant kind of thing
3) Customer's preferences changing permanently i.e. to eating at home/takeaways thus even "goodwill" wont be enough to ensure business viability

In short, unless a detailed plan of this kind of scheme is announced in the next few weeks I'd expect a lot of business owners to make the difficult but rational decision of liquidating their businesses and looking at alternatives. Also any sort of arrangement by the government on making sure small business owner's stay in business will have to account for how they'll pay back rent for all the months in which there was no business, and all the months in which business is not back to normal.

I suppose it could be workable, especially for those business owners who either outright own their premises, have lower rents or have sufficiently paid off their mortgage. The government would probably have good numbers on all of this so they'd know exactly how much trouble the sector is in and how they can structure a bailout.

Its not like landlords will have a lot of potential tenants for commercial properties so they might well agree to waive off rent? Its a clusterfeck the more I think about it. :nervous:
 

Adisa

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What makes this figure scary is that the real hit to the economy started in Q2.
 

Adisa

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Another question, how much more junk can the Fed have on its balance sheet before it becomes a problem?
 

Adisa

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MTF said:
There is no limit to that :houllier:
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Yes in theory, there is no limit to the size of the balance sheet but it risks political inteference if this keeps carrying on. We already know policy makers were complaining about its size before this crisis. There is also talk of adding corporate bonds to the balance sheet. Now, when the time comes to normalise, as they call it, it could have serious consequences.
 

Adisa

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Can anyone give me an explanation for the massive disconnect between the stock market and underlying economy?
Just look at forward P/E ratios. Not seen anything like this in my shorr life.
 

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Adisa said:
Can anyone give me an explanation for the massive disconnect between the stock market and underlying economy?
Just look at forward P/E ratios. Not seen anything like this in my shorr life.
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Thinking of FAANG and other hyped stocks or market in general? A view on what P/E ratio all stocks in US (s&p500) currently have on average looks quite normal or a bit to the normal-high end no?

Mean:15.78
Median:14.82
Min:5.31(Dec 1917)
Max:123.73(May 2009
 

Atze-Peng

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Adisa said:
Can anyone give me an explanation for the massive disconnect between the stock market and underlying economy?
Just look at forward P/E ratios. Not seen anything like this in my shorr life.
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The rundown is that the fed is shitting out money and giving it to businesses that hold stocks to artificially create a higher stock pricing. It's fighting the risk of bursting bubbles by creating another bubble
 

MTF

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Adisa said:
Can anyone give me an explanation for the massive disconnect between the stock market and underlying economy?
Just look at forward P/E ratios. Not seen anything like this in my shorr life.
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In any case, you would have to look past the NTM or 2020 P/E, because 2020 earnings will be lower than 2019 and 2021 in nearly any scenario. Even if a company were to have 0 earnings in one year, and normal earnings with no growth all the others, you'd only take some 4% off of the value of that company for that 1 year lost earnings. So in a vacuum, if you tell me that a company is going to lose 1 full year of earnings and if I still want to buy it for 5% less than it was before, I'll take that.

What I'd argue isn't being factored so much into prices now is the potential for recession or worse through the end of 2020 and into 2021 and beyond. As an analyst myself, all that I can sort of justify when estimating future sales and margin trends is some sort of return to normality, given that no one is also asking me to estimate the overall impact to GDP/demand. So most estimates for 2021 are at or above 2019 levels (accounting for some growth). I do personally see a high risk of recession and a significant one into 2021, but I don't think that is how most higher-ups who really call the shots are thinking.

Just one last factor to consider is the following: the current government's response is pretty much shit, and especially shit for small and medium businesses. But what's in the stock market and the S&P 500/DJIA in particular? Big businesses. Those will mostly be ok, and the ones that compete with smaller ones will find an even more favorable competitive landscape. I still personally think the market is overvalued after this fast recovery, but I hope this gives some insight into how maybe others are thinking.
 

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MTF said:
In any case, you would have to look past the NTM or 2020 P/E, because 2020 earnings will be lower than 2019 and 2021 in nearly any scenario. Even if a company were to have 0 earnings in one year, and normal earnings with no growth all the others, you'd only take some 4% off of the value of that company for that 1 year lost earnings. So in a vacuum, if you tell me that a company is going to lose 1 full year of earnings and if I still want to buy it for 5% less than it was before, I'll take that.

What I'd argue isn't being factored so much into prices now is the potential for recession or worse through the end of 2020 and into 2021 and beyond. As an analyst myself, all that I can sort of justify when estimating future sales and margin trends is some sort of return to normality, given that no one is also asking me to estimate the overall impact to GDP/demand. So most estimates for 2021 are at or above 2019 levels (accounting for some growth). I do personally see a high risk of recession and a significant one into 2021, but I don't think that is how most higher-ups who really call the shots are thinking.

Just one last factor to consider is the following: the current government's response is pretty much shit, and especially shit for small and medium businesses. But what's in the stock market and the S&P 500/DJIA in particular? Big businesses. Those will mostly be ok, and the ones that compete with smaller ones will find an even more favorable competitive landscape. I still personally think the market is overvalued after this fast recovery, but I hope this gives some insight into how maybe others are thinking.
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At times like this, reverse DCFs are the only thing that works. Any multiple based on traling earnings or book will be flawed. It's impossible to predict earnings trajectory. But a multi-scenario reverse dcf will broadly tell you whether a stock is stupidly valued or not. My suspicion is that they are.
 

MTF

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Interval said:
At times like this, reverse DCFs are the only thing that works. Any multiple based on traling earnings or book will be flawed. It's impossible to predict earnings trajectory. But a multi-scenario reverse dcf will broadly tell you whether a stock is stupidly valued or not. My suspicion is that they are.
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Completely agree that DCF is actually the way to go. But he started the question on multiples, and especially when people look at the aggregate market you can only really go by P/E (looking at the aggregate market levels is not something that I really do).
 

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Appreciate some insights on the loans reliefs given to businesses in USA affected by Covid 19. I read that some banks are telling loan applicants to default on other loans, to enhance their chances of a successful application. That being said, are there no repercussions on a loan default? What is stopping businesses from taking on a cash injection through PPP or EIDL, keeping the cash and winding up the businesses? Are there no stigma on bankruptcy? No claw backs from creditors on the loan applicant’s personal assets?
 

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CNBC's Andrew Ross Sorkin accuses co-anchor Joe Kernen of abusing position to help Trump


Capitalism.
 

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