Period: 20 – 26 February 2021
Top news story: The main news, of course, is the various terrifying rumors about the state of financial markets. Their interpretations may vary, but US markets at the end of the week sagged quite thoroughly (the collapse is premature to speak of). In combination with some other data (see the Macroeconomics section of the Review), this creates a certain pessimism.
Experts of the Mikhail Khazin Foundation for Economic Research interpreted the events in their own way. According to them, the main indicator of the market for today has become shares of Amazon company (see graph). The value of these shares has sold down a triangle of blue lines, which means they’ll fall to the red line.
If this logic is followed, the market should adjust substantially in a reasonably short time (about a month), with the last year’s minimum likely to be missed. Then the market can start to grow again – until another recession.
Such a scenario, although it is by no means a full-fledged recession, nevertheless carries with it certain dangers, but about them – in the final section of the Review.
Germany’s GDP has been revised slightly upwards in the fourth quarter – still -3,7% per year and -4,9% per year for all 2020:
In France, in the 4th quarter –4,9% per year, in the whole of 2020 -8,2%. The annual decline in Japan’s industrial production worsened to a minimum of 4 months (-5,3%):
United States Goods Trade Balance stands at record lows:
Core inflation in the Euro Area (excluding food, fuel, alcohol and tobacco) in January surged to its peak since 2015:
Housing prices in the United States, according to the S&P/Case-Shiller survey, rose by 10,4% per year in December – a peak since 2013:
According to official figures, in January there is already +11,4% per year:
Meanwhile, the rate on a 30-year mortgage rose to a 6-month peak of 3,08%, with mortgage applications crashing by 11,4% a week the previous week (the worst since April 2020):
However, the Fed’s head insists on continued emissions and other incentives:
Just in case we remind that emission (with some adjustment factors) amounts to a rate cut. At least, that’s what most models show. You cannot lower the interest rate below zero (banks will not keep money in Fed accounts), but you can print money all you want. This creates a certain collision, which, again, we will address in the summary.
Market sentiment of the French has worsened again:
And for Americans, they’re at a six-month minimum: the main pessimists are people with incomes below $75,000:
Employment in Britain has been declining for 9 consecutive months, with unemployment peaking since 2016:
But average wages soared by 4,7% a year – a record since April 2008:
The second wave of the pandemic triggered a rise in unemployment in South Africa, reaching record levels (32,5%).
Mexico’s retail outlet returned to a monthly minus in December, which increased the annual decline from -5,1% to -5,9%.
In Japan, retail sales are falling on a monthly basis for 3 consecutive months:
The year-on-year decline was the worst in 4 months (-2,4%):
The retail balance of Britain remains near the minimum.
The Central Bank of South Korea left rates in place.
Summary: Numerous signals indicate that financial markets are at historic highs. At the very least, there’s going to be a very serious adjustment that could turn into collapse under adverse circumstances. It will probably start in March.
The problem is that the financial situation of most enterprises in the real sector is extremely difficult. In this situation, stock assets are essential elements of financial stability, as they are collateral assets. Under Trump the Federal Reserve bought the assets of real-sector enterprises for the legalization of emissions, under Biden (see the difference of «Trump plan» from «Biden plan») already assets of banks and other financial institutions are bought.
In such a situation, a sharp decline in the value of collateral assets (even without a total collapse of markets) could have a very negative impact on individual real-sector entities that would not be able to refinance their debt. Let us recall that the Spring Crisis of 1930 (which lasted until the end of 1932) began at the moment of the firm recovery of the market after the collapse in October 1929, has already been compensated by almost one-third of the recession and everything seemed to be over with all the troubles. But the depreciation of collateral assets led to problems, and by the end of March 1930, a deflationary shock had begun due to the enterprises’ inability to maintain wages and incomes of entrepreneurs.
In other words, a major adjustment in the spring of 2021 may itself be harmless enough, but it may have very negative consequences in other sectors of the economy. And with the Biden administration, there’s probably no way to solve these problems.
Another negative factor is the unavoidability of additional emissions. As noted in the previous section, emissions in terms of impact on the economic system are equivalent to a rate cut. But today capital does not reproduce: the financial sector’s profits are provided only by emissions, and the real sector is not reproduced when inflation is objectively estimated. It is for this reason that the Fed’s head constantly announces the rate hike.
But, in fact, because emissions cannot be discarded, the rate goes down. That is, the losses of all economic agents increase, which requires even more issuing money. The picture is already threatening (see fig. below) and there is no hope that the problem will be solved. In fact, the flywheel of the world economy is spinning more and more, and this means that smaller and smaller forces could bring it down.
In such a situation, a major adjustment in itself can be a destabilizing factor and, most of all, macroeconomic models cannot make any clear forecast, because the system is long outside the scope for which the models were prescribed. Roughly speaking, all arrows on all scales have long been in the «red» sector and we can only wait for events to develop.
Have a good weekend and have a good week!