(07-09-21) Tokyo 2021: Memento Minsky in Sports Companies

A week with North American indices on the rise and European indices weighed down by news from the ECB and negative economic results from several countries in the euro area. Banks on both sides of the Atlantic suffer from the systemic problem of excessive indebtedness and their indices are trading down. The Delta variant affects the Forex, Metals, and Crude markets.

This week, the US market has pulled the bandwagon, accompanying the other markets with it. The North American upward trend continues, but not so much the European one. The pessimism of inflationary news has taken its toll during the first part of the week, especially in the banking sector. Not only in Europe but globally, at the sectoral level. EURO STOXX Banks has suffered declines of 10% and the United States has also had declines in the banking sector partly dragged down by the news from the ECB. Do not rule out that it is an adjustment from the big rise from last year's lows.

(Marketwatch) Sen. Elizabeth Warren has issued a notice about the WellsFargo (NYSE: WFC) debt restructuring scandal, claiming that “clients should not suffer in their credit scores because their bank is restructuring after years of scams. and incompetence”. The senator argued that "sending them a warning is not enough, but Wells Fargo must do things right." Ted Rossman of CreditCards.com alleges that “this issue is specific to Wells Fargo. They are in the punishment room of the federal reserve for their regulatory problems in the past,” he adds, “they must pay back the debt they borrowed, but the additional credit line will no longer be available to them, and this can cause their credit usage ratio skyrockets and credit score plummet”. The message of a fraud that has been dragging on since 2016, has caused the entire banking sector in the United States to be affected. Despite everything, the company did not close negative + 3.7% after falling 1.6% on Thursday, having revalued its value by 45% throughout the year, the same as the average for the entire sector.

EURO STOXX 50, which represents the Euroland Blue Chips, like the rest of the indices has experienced a bearish reversal this week. In general, European stock markets have suffered a rather sad close. Despite this, this Friday, they have recovered a large part of the gap caused during the session. They have reached the lows of the previous session. In general, all European indices have ended up stained red, with a few exceptions.

Wallstreet has finished its week in green even though RUSSELL 2000 has not behaved in the same way, ending in negative. Although SP500 has had a rough Friday, suffering a crash; has managed to recover its quotation at the starting prices. The one that has shown the most vitality has been NASDAQ. It has started by burning the July gains on the tech index, but recouping its losses at the end of the session.

It is obvious that the yield gap between European equities, compared to North American’s, has widened dramatically since mid-June. Yesterday's disaster was enormous. The frequency to date has grown by 5.5 percentage points (investing). The European short trend is bearish and it will be the bears who will lead, while the bulls will have to sweat ink to support the fight against the trend. While it is true, the strength of the US market always helps Europe.

In the middle of the summer period, the stock markets rise around 13% on average on both sides of the Atlantic sea. In Europe, the best performing indices are the CAC40 and the Dutch AEX, with rises of 16% for both. These are large since both indices have the strength of luxury-related companies behaving outstandingly (LVMH, Hermés, Kering…), and the company with the largest European capitalization, the Dutch ASML Holding, which has risen almost 50% so far this year.

It is not an easy period, because the money that moves the markets rests in this summer period. A wide lateral movement can be anticipated that can extend until October, consuming time (deploying a lateral movement) or in-depth (more or less vertical falls). It is not surprising that we are entering a side market with a bearish bias. Except for a few specific stocks, it doesn't make much sense to enter the market now when everyone is leaving. As the saying goes: "Sell in May and go away".

The strength of the US market is also justified by the rebound caused by the sovereign debt buying rally. It has caused long-term returns to drop considerably. The wind that was driving the so-called “reflation trading” has been eliminated, which was favoring the stocks of companies more sensitive to the economic cycle and it was expected that they would benefit more from the increase in prices and the acceleration of economic growth (Marketwatch).

This "supposedly" temporary inflation is causing risks to financial stability, which due to the pressure in the rise in prices is already affecting the real estate market and it is becoming more interesting to sell than to buy properties. Hence, large magnates and landowners have been liquidating properties in the American West to move to regions with less tax pressure and greater facilities, such as Texas, and large funds such as Black Rock have been launching with more intensity since last year, like vultures to carrion, to the highly overpriced Spanish property market.

The indices fall during the week, in large part, is due to fears of the pandemic and its Delta variant, added to the buying rally of US Treasury debt. The latest data suggests that the recovery could be weaker than anticipated, and when additional unemployment benefits expire in September, demand could decelerate dramatically. Research from the American Economic Review clearly shows that spending will drop even further in households affected by job loss when this happens. In sum, to all this, investors are concerned that even if the Fed plans to reduce asset purchases, the real change will be months away. Both issues have strongly affected the USDJPY exchange rate, which after the news of an Olympics without tourists have only accelerated the collapse to below 110.

(investing) Canada has two months of job losses and a sharp increase is expected, according to economists, a 195,000 increase is predicted for June after the loss of 68,000 in May. It would be consistent with the rebound in the IVEY PMI index and the improvement in employment conditions. The unemployment rate is expected to fall from 8.2% to 7.7%, as restrictions are eased, growth will accelerate. This should put an end to the rally in the USDCAD pair.

With the change in the GBPUSD sterling, it may amplify its losses if the British data disappoints when the monthly GDP data, Trade balance, and the PMI index are released. Given the slowdown in the country, the reports may be rendered downward. The Australian and New Zealand dollars, closely tied to the pound, have been heavily affected by risk aversion, the Australian being the most vulnerable after the tightening of restrictions.

The EURUSD has moved against the tide rising to levels of 1.1850 after the ECB announced its new inflation target of 2%, allowing a temporary deviation above or below it to occur. This post goes online from the speeches of previous weeks.

We have witnessed the debt acquisitions of several communication-related funds of many sports teams and even leagues and television rights to control the communication of various sports fields of different kinds. This is largely due to the fight of tech giants like Apple, Netflix, Disney, Amazon, Globo, DAZN, Sky, etc. for hoarding the pay-per-view model and retaining customers in their respective business models. Today, athletes are much more than something to watch on television. Through agreements, documentaries are made of them, different business opportunities are explored that generate value for the brands they represent and make viewers not only follow their sports content, but also those that parallel their figures.

All of this has happened, following Minsky's famous model of financial crises. The classification of sports-related companies has changed from sustainable companies too speculative companies. Already before the pandemic; and during the pandemic, many became Ponzi schemes. Unable to pay the interest on the debt, they required further refinancing; as has been the case of several European clubs such as Atlético de Madrid, which has recently received more than a one billion investment to deal with the debt, among many others. Not to mention the case of the Chinese league, which was a first-rate economic spillover during the first phase of the pandemic and caused the definitive closure of the best teams in that league loaded with extremely expensive signings to maintain.

As Hyman Minsky (1974) said: "A fundamental characteristic of our economy is that the financial system oscillates between robustness and fragility, and this oscillation is an integral part of the process that generates economic cycles."

According to Minsky, financial systems are inherently susceptible to speculative attacks, which, if they last long enough, end in major crises. This theory invalidates the outdated and helpless Theory of Efficient Markets, completely discredited by the technology bubble, and more recently, by the alternative investment boom, which was back in vogue. He was something of a radical in his emphasis on the tendency of markets to glut and disrupt. I have always affirmed that human systems tend to chaos and that is why regulators exist, it is a way of controlling that chaos in systems theory.

However, after what happened recently, the Minksy model takes on more validity, since liquidity injections by central banks, designed to avoid or delay a Minsky moment. As Christopher Word of CLSA Group would affirm on his day; they force over-indebted investors to sell even solid investments to repay loans, causing huge losses in all markets, and a huge demand for liquidity that forces central banks to lend money without an end. Hyman, opposed to the ideas of the school of the city where he was born (Chicago), was a great opponent of Keynes, the father of the new deal. In 1998, during the Russian crisis, McCulley coined the expression "Memento Minsky".

Charles Kindleberger in Manias, Panics, and Crashes: A History of Financial Crises, is a clear Minsky affiliate. In essence, in good times investors take risks until they take too many. And at some point, they reach a point where the liquidity generated from their assets is not enough to pay off the mountains of debt, they incurred to buy them. The loss of assets motivates banks to lend the money to claim these loans, which causes a collapse in the value of these assets according to Minsky. This could lead to a downward spiral and in serious cases stagflation and if the US Bank does not turn it around, it could drag the rest of the central banks, as it is largely the reference currency for all.

What is most amazing about the matter is that Japan will not be able to cover the extremely expensive Olympics and its debt already amounts to 1,216 trillion yen. In 2020, the government increased its bond debt by increasing it to 1,074 trillion yen and they expect to increase this year by 43.6 trillion. Adding the limitations of the pandemic to the Tokyo Games, Japan will spend 15.84 billion dollars on the aforementioned event, and canceling it would have been more expensive after such an investment that exceeded the London games. It could have happened that this economist would be warning the Fed or Japan with an "I told you so", like the unique Michel Blurry who they constantly try to penalize when he warns of market excesses.

Switching to cryptocurrencies matters. This week, the trend has been broken and there are hesitant recoveries. Bitcoin (USDBTC) was plummeting its price until Thursday touching $ 32,406.67 and recovering to the band of $ 33,400. Ethereum (USDETH) started the week after the North American holiday with a drop that it recovered on July 7 to $ 2,390. It seemed that it would continue, but on Thursday and Friday, it was not able to sustain that price falling to $ 2,057 at the end of the session. The sentences against BINANCE at a global level have caused cryptocurrency trading to slow down due to fear of not being able to withdraw capital, this being the second-largest exchange in the world.

Still, Joe Biden's Antitrust policies could be the key to the monopolistic activities of the large caps. They refer to the big BigTechs that control more and more sectors and have become lobbies by themselves. The president recalls that decentralized technologies could be key. If we go back to the time when Napster was persecuted and the all-powerful music lobbies caused that company to disintegrate, the decentralization of crypto could solve this type of excess of power from corporate monopolistic structures, which can provide a solution to the North American economy. It can be added that they could also solve the global inflationary problem because we are paying money that comes from the state debt to companies like Amazon, Google, and Facebook to get everything.

As for metals, XAUUSD gold was the Top player of the week. Started Monday at $ 1,790 with several attempts to break $ 1,818 and ended the week at $ 1,808. It has closed the best week of the last 7, due to the growing concern of the new covid variant. As the US government convinces of its full employment intentions, Gold could be seen to exceed $ 1,850 by the end of the year. As the lateral movement is canceled, the bullish positioning can be continued. Silver, which has been in a bullish channel all year, has started touching $ 26.907 and has ended the week at $ 26.188.

Oil prices this week reached annual highs at the beginning of the week and entered a doubts phase. It is due to the lack of agreement between the producing countries, added to the delta variant that is in the expansionary phase. The recovery of economic activity has boosted prices during Tuesday, for fear of lack of coverage of the current crude oil supply to meet demand. On that day, Brent (UKOIL) has reached the highest since 2018, achieving $ 78 per barrel and WTI (USOIL) at $ 77, has reached the highest price in more than 6 years. Once this milestone happened, a downward trend has started that has extended until Thursday; when the price of both securities has recovered. OPEC + did not reach an agreement on Monday and contacts have been suspended until further notice. UAE tries to increase the production quota unlike countries like Saudi Arabia or Russia. It does not rule out that the UAE will unilaterally increase its production, which would cause market volatility, according to a report by Singular Bank. Per Goldman Sachs (NYSE: GS) briefing, a supply shortfall is estimated at 5 million barrels a day. Following market gossip shops, the investors are worried a possible rebound in the incidence of the coronavirus could slow down demand, and this very reason could slam the brakes on demand. Hence there is a discrepancy between both sides in OPEC +.

 Happy Trading and Happy Friday!

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* This article only expresses my opinion and under no circumstances represents an investment recommendation, but a merely educational document.