Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Weeks 23-24. June 05 - June 18, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
In other words, contrary to all the stories in various kinds of "expert" sources that say that the situation is changing for the better, even the official data does not show this. In reality, as we remember, industrial inflation is seriously underestimated in those sectors where it exists today, so the real economic downturn is much higher.
As we have repeatedly noted, during a structural crisis, after a sharp decline in a particular industry, there comes a time of relative stability, during which there may even be a slight increase. The downturn is spilling over to other industries. And if you don’t focus on these moments of the decline, then there is a feeling that everything is fine, there is a slight increase, there ... So it is in Germany - after a sharp decline in the industry, the situation seems to have settled down and for several months the indicators will be quite tolerable. But the fall will erupt somewhere else.
We have previously drawn attention to this circumstance: cheap Chinese imports compensate for the drop in living standards for households.
This is deflation in its purest form, a sign of a serious economic downturn.
There seems to be deflation here too. But then the picture of the economic downturn is clear: the PPI index describes the prices for final goods in technological chains. If final prices fall, then assembly plants actively reduce purchases, this goes down the chains and a clear decline begins.
In general, a rather severe crisis has begun in China.
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Analytics
The labour market in the United States
According to BLS data, about 4.1 million jobs have been generated in the United States in the last year. Job growth rates are 1.8 times the average monthly pace from 2010 to 2019. Over 3.5 million jobs were generated in the private sector, with another 540 thousand added in the public sector.
1.57 million jobs have been generated since the beginning of 2023 (1.24 million in the private sector and 331 thousand in the public sector), growth rates have slowed marginally but remain exceptionally high by historical standards.
Because of the massive labour shortage, it is conceivable to grow job creation (as soon as the workforce is ready) at a quicker rate than in 2010-2019, indicating that demand for labour currently exceeds supply.
According to work structure, labour productivity, and consumer demand for goods and services, the job shortfall is anticipated to be 4-4.5 million.
The gap between trend employment and current employment has shrunk to 3.6 million jobs from 2010 to 2019.
This disparity can be closed in three ways: by boosting labour productivity, decreasing demand, or raising supply.
Labour productivity and labour market structural characteristics are relatively inert and long-term processes, and imbalances are here and now, thus the Fed is impacting demand by tightening financial conditions because the offer's scaling potential is restricted.
When we compare employment in May 2023 to employment in pre-Covid February 2020, we see that five sectors of the economy have not recovered: the public sector, mining, culture, sports and entertainment, catering, and other consumer and household services.
Together, the "depressed" industries account for about 30% of all employment in the United States, indicating that this is a large component.
Since 2020, the following sectors have led the recovery: transportation and logistics, information, and professional and business services, with "information" rising in the final year. This covers information technology, telecommunications, television and radio, movies, news agencies, and publishing.
Europe's retail sales are declining
Retail sales are decreasing in Europe on the back of rising inflation, decreased nominal income growth, slower lending, and depleted savings.
Negative factors are comparable in Europe to those in the United States, but European processes are more pronounced.
The drop was 2.7% y/y in April 2023 for all EU-27 nations, although the base of comparison is rather high, given the highest quantities of retail sales were recorded in March-April 2022.
In comparison to pre-Covid January 2020, a 2.6% gain, indicating that Europe has formally escaped from the COVID crisis and managed to lessen the severe impacts of the 2022 crisis.
Food inflation is at a 45-year high, and demand is falling even faster - minus 4.7% year on year and negative 1.9% by January 2020.
It should be highlighted that the magnitude of the blow to the retail sector is the largest since 2009, with the exception of a local episode of the COVID crisis that resulted in a forced economic shutdown.
During the worst part of the crisis in 2009, retail sales plummeted by 3.7% year on year in February 2009 and by minus 2.6% year on year for the entire year, while during the recession of 2011-2012, sales declined by an average of 1.2% year on year.
In the historic history of Europe, there has never been a greater decrease in retail turnover of food and beverages than in 2023.
Retail sales patterns in European countries are highly multidirectional.
A significant blow to Germany, which had a 4.3% dip, but the comparative base is relatively high. Retail sales in Germany remained flat for over 15 years, from 2000 to 2015, before rising dramatically by 25% from 2016 to 2021.
The challenging scenario is in Italy, where retail sales are at a historic low, albeit with a better year-on-year dynamic - minus 2.5%.
In France, a reduction of 2.7% year on year, but an increase of 7.2% compared to January 2020, and is currently near the maximum, notwithstanding the current decline.
In Spain, on the other hand, there is an abnormal growth of 7.3% y/y, but a gain of 2.8% compared to January 2020. COVID and the protracted crisis of 2009-2016 wreaked the most havoc on Spain, while inflation in 2022 hardly impacted the country.
The Capital Market in the United States
In the United States in 2022, there was a record low amount of IPO placements in monetary terms since 1995, and an anti-record in terms of dollar liquidity and market capitalization was set, at least since 1987 (when statistics began).
IPOs were more than ten times lower relative to market capitalization from 2018 to 2021, and 20 times lower than the speculative frenzy of 2021. The position is improved with secondary offerings, although the gap is about half of what it has been in the previous 3-5 years till 2022.
There was no development from January to April 2023; the market for primary and secondary placements was at its lowest point, but it ballooned in May. Since May, the market has recovered slightly, with the highest placements since November-December 2021, both in IPO and SPO.
Market circumstances have improved as a result of an excessive influx of technological companies flying along the trajectory of the 2021 bubble, which was dependent on the flow of liquidity from deposits.
Hundreds of billions of dollars have been looking for a temporary home, and nothing has proven to be more appealing than the "AI that will change the world" myth. Almost all of the S&P 500 capitalization rise this year has been driven by a surge in the capitalization of 10-15 technology businesses.
All of this stupidity works until it is squeezed, and it will soon be squeezed: large placements of treasuries against the backdrop of Fed sales, low household savings rates, and declining buybacks will lead to liquidity fragmentation in the system (some have a strong deficit, others have a surplus).
As a result, one should not expect a consistent improvement in the stock market scenario.
Redistribution of liquidity
The unprecedented transfer of liquidity from deposits to money market funds and bonds aided the recovery of the US debt market.
The number of high-yield (mainly junk) bond placements in the dollar financial system in April-May 2023 was equivalent to placements in January-February 2022 (prior to the Fed's tightening monetary policy cycle).
High Yield bonds are the most dependable measure of the system's risk appetite and available liquidity. If there is insufficient liquidity and/or risk appetite is low in the priority hierarchy, high-quality AAA bonds are preferred, followed by lower levels (BBB/CCC, and so on) when liquidity imbalances normalize.
Demand for trash bonds in the United States is three times higher in the first five months of 2023 than in mid-2022, but three times lower than at the pinnacle of the speculative frenzy in Q1-2 2021. Current monthly placement volumes of 20 billion are still insufficient for overlapping repayments of 20-30 billion, but the cash gap has narrowed dramatically.
Investment grade bond placements for January-May 2023 are on par with pre-crisis levels, but 1.5 times lower than peak volumes in Q2 2020.
The process for refinancing bonds (placements overlap redemptions), at least investment grade, is now operational, and the trash bond market has nearly stabilized.
With corporate lending diminishing, the open market (bonds) is the sole viable business option for financing current and future activity.
With a decrease in demand for bonds due to the monetary policy tightening cycle and record negative real rates in 2022, financing worked as a lifeline for businesses, who have since returned to bonds.
The grounds for the reorientation include the excess liquidity in deposits and the normalization of real rates as inflationary expectations fall.
Cash gaps may emerge, however, if the liquidity situation worsens as a result of record treasury placements.
Treasury placements
Due to the debt ceiling, net treasury placements were near zero ($12 billion) over the last three months, from March to May 2023. Only $340 billion in the last six months, and $362 billion since the beginning of 2023.
The zero withdrawal of treasury cash since March allowed the stock market to rise and transfer demand into corporate bonds.
Almost the entire volume of placements was achieved in promissory notes (papers with maturities of up to a year) - 82% or $ 296 billion - with no placements of medium-term or long-term treasuries.
Since September 2022, when market rates were fairly high, more than 85% of all bills in circulation have been refinanced, with placements of $2.4 trillion in treasuries maturing one to ten years and $330 billion in long-term treasuries maturing more than ten years.
As a result, over $2.8 trillion in medium- and long-term treasuries, as well as nearly $3.3 trillion in promissory notes, are already trading at high rates. As a result, over 25% of all public debt has been refinanced during the time of high-interest rates (since September 2022).
What were the net treasury placements in past years? During the 2009-2011 crisis, $1.6 trillion was set at the top per year in 2022, $1.5 trillion in 2021, and $4.3 trillion in 2020.
As previously stated, net placements totalled $0.36 trillion from January to May. From June to December 2022, the US budget deficit was $1.4 trillion; in 2021, the deficit was $1.1 trillion; and in 2020, the deficit was $1.8 trillion.
Given the US Treasury's depleted cash position and a predicted $1.2 trillion deficit from June to December 2023, the lower bound should be $1.5 trillion, but more likely $2 trillion.
The Ministry of Finance itself does not know how much it will be, because much will depend on the size of the deficit and market conditions, but even with $1.5 trillion in placements, the stress on the system will be severe, inevitably affecting the corporate market (stocks and bonds), creating deficits and liquidity gaps in the weak links of the chain.
The good times are just getting started.
The cost of servicing US debt
In the United States, the cost of debt payment is increasing.
There are now 4 trillion bills in circulation, with a servicing cost of exactly 5% (nearly all debt was refinanced at high rates, plus a premium for the White House's folly on the national debt limit, when certain issues were issued at rates close to 6% in April-May).
The weighted average rate on notes (bonds with maturities ranging from one to ten years) in circulation is 1.93%, compared to 1.42% in January 2022. Since March 2022, when the Fed began boosting refinancing rates on new placements, $4 trillion has been lost, and $2.2 trillion has been lost since September 2022, when rates jumped significantly.
So far, the problem is under control, with average weighted rates remaining at 2013-2018 levels, but the farther we go, the more securities will be refinanced, and the higher the penetration of the current high rates.
There are $4.1 trillion of long-term bonds in circulation, with a weighted average interest of little around 3%. There is no specific reaction here because $600 billion of bonds have been spent on refinancing and new placements since March 2022, with another $330 billion invested in September 2022.
Weighted average rates on all public debt fell to 2.7% (the highest since May 2009) from 1.45%.
From 2013 to 2018, the weighted average rate was at 2%, increasing to 2.5% by 2019.
The US Treasury managed to keep the cost of debt servicing low by implementing an ultra-easy monetary policy as the debt itself grew dramatically. From 2007 to 2021, for example, the public debt expanded 4.5 times from $5 trillion to $22.5 trillion, while the cost of debt payment increased only 1.3 times from $255 billion to $330 billion.
Everything has changed now. The Fed's record rate of growth has resulted in a significant increase in the cost of financing the market portion of government debt - more than $660 billion as of May 2023, which is more than double what it was in Q4 2021!
A large refinancing of existing debt and new placements of $1.5-2 trillion are on the way, which will further accelerate the cost of debt servicing, which may exceed defence spending by Q4 2023.
The stock market in the United States
Although the bubble in the US stock market deflated little in 2022, the frenzy is resuming, and here's the thing: such euphoria previously occurred under fundamentally different conditions.
When inflation is low, bond rates are near zero, and monetary policy is extremely loose, high corporation multiples are normal and appropriate.
When deposit rates, short-term bill rates, and long-term bond rates are all zero, with a liquidity surplus and moderate inflation, stock market investments make sense as an alternative, liquid, and adequately capacious liquidity absorber. It made sense before, but not today, with treasuries yielding 3.75% to 5%.
According to corporate multiples, the market is now 35% more expensive than its historical counterparts, when the Fed's monetary policy was comparable to the current moment and inflation was in the range of 4 to 6%, but never before has the market been so expensive, as it is now, with background inflation of 5%.
Yes, the price was higher in 2021, but the liquidity balance and inflation rate were different.
Taking inflation, bond rates, and monetary policy out of the equation, the current market value is twice that of the historical average over the last 120 years for a combination of four earnings and profitability multiples.
It was this pricey during the dot-com bubble in the early 2000s and again in 2021.
In real terms, the market's divergence from the historical trend is 2.2 times, which is comparable to the dot-com boom.
Corrections must be made to the financial system's level of development, the diversity of financial counterparties, the depth of the financial system's penetration into the economy, and the current liquidity balance.
However, historical analogues show that the market is not cheap, and conditions have deteriorated dramatically - inflation, tight monetary policy by the Fed, and there is still a serious degradation of the liquidity balance owing to big treasury placements ahead.
Active industrialization in the United States
The United States is experiencing an unprecedented industrial infrastructure construction boom in modern history. Spending on industrial infrastructure has increased 2.6 times since February 2021, representing the most significant infrastructure rise in at least 30 years.
Capital expenditures on industrial infrastructure increased 3.3 times between July 2004 and February 2009 (4.5 years) in the United States and 2.9 times between February 2011 and June 2015 (nearly 3.5 years). The expansion cycle is speedier and more ambitious this time around.
The cost of labour and materials, architectural and engineering work, overheads, interest and taxes paid during construction, and the contractor's profit are all included in the Census classification.
Industrial infrastructure covers all buildings and structures on production sites, but excludes non-stationary industrial equipment integration and production debugging, whereas fixed equipment is included. Office buildings and warehouses owned by manufacturing enterprises but not established on a manufacturing site are categorised as "office" and "commercial" correspondingly.
Spending on industrial infrastructure has increased to 29% of non-residential development by the private sector, about twice as much as in 2020.
The priorities and stages of industrialisation / de-industrialization are obvious in relation to the total volume of construction.
For example, there was an active era of deindustrialization (a shift in priority to other sorts of construction) from 1995 to 2002, and the industrial sector currently dominates like never before.
The distribution by industry is intriguing, but such data is not currently available.
Construction of Industrial Infrastructure in the United States
Not all construction in the United States is successful, nor is all industrial infrastructure construction.
In terms of nominal costs, the energy infrastructure has remained stagnant for nearly ten years, but it should be noted that inflation for industrial buildings and equipment is significantly different from consumer inflation.
Telecommunications infrastructure spending has not surpassed 2007 levels (15% lower).
After a three-year decrease, growth in transportation infrastructure spending has restarted (plus 40% by July 2022) but is still lower than in 2019.
Spending on real estate construction in the education sector and the culture, sports, and entertainment industries are on track to compensate for the post-COVID fall but are still below 2019 levels.
The tourism and hotel industries were struck a devastating blow: expenses fell by 2.3 times in 2020-2021, and are presently 30% lower than in 2018-2019.
Because office and commercial real estate are subject to business cycles, particularly office real estate, there have been "timid attempts" at recovery. With the development of telecommuting, several office spaces have been vacant for nearly three years.
Commercial real estate, on the other hand, is increasing rapidly, about 50% since 2021, confidently updating historical highs.
What exactly is included? First and foremost, as the most significant section of this group, retail and warehouse space (all sorts and sizes ranging from small shops to huge shopping complexes), catering facilities, beauty salons, dry cleaners, laundries, pharmacies, small companies, post offices, agricultural infrastructure, and so on.
According to construction statistics, development is severely dispersed, with only two sectors experiencing the greatest recovery impulse: industrial infrastructure and commercial real estate.
Costs of construction might be viewed as an indirect (verification) indicator of the crisis. If the collapse accelerates, it is a signal for the execution of crisis mechanisms, although this is not yet obvious.
The financial system in the United States is under stress
The financial system in the United States is gradually becoming more burdened. Weighted average deposit rates jumped from 0.11% in Q1 2022 to 1.36% in Q1 2023 (the highest since Q1 2009). The cost of maintaining domestic deposits is currently $59 billion every quarter!
It is important to remember that not all deposits have interest rates. Currently, 26% of all deposits have zero interest rates (interest-free deposits), mostly settlement accounts / current legal entities and individual checking accounts.
Not all savings deposits have been refinanced at the current market rates, which are still higher than 1.36% but lower than the Fed's benchmark rate - one-year savings accounts can be found for around 3%.
The difference between weighted average deposit rates and market rates on dollar liquidity reached a fresh high of 3.4 percentage points. Market rates often climb faster than the deposit-weighted average during a Fed policy tightening cycle; this is normal, but there has never been such a huge disparity as presently.
The weighted average rate on loans is 6.05%, a 1.9 percentage point increase over the year, compared to a 1.2 percentage point increase on deposits, implying that banks' net interest margin improved by 0.7 percentage points.
The margin between lending and market rates for dollar liquidity fell to its lowest level in 40 years, at 1.3 percentage points, down from 4.3 percentage points in 2020-2021.
Monetary policy transmission is hampered because lending rates are rising less rapidly than the Fed-regulated market rate for dollar liquidity.
All of this was possible because of surplus liquidity (which has already dramatically dropped), which allowed for inexpensive funding in deposits and untying loan rates from the Fed's benchmark rate, but even a 2 percentage point increase reduced demand for loans. Lending has been effectively halted since January 2023.
Due to a scarcity of liquidity, banks will be forced to hike deposit rates, reducing margins, and any attempts to boost lending rates would further reduce demand for loans, increasing delinquencies and write-offs.
Loan portfolio quality
The deterioration of the quality of American banks' loan portfolios is unavoidable
- a decrease in business margins in the context of a protracted inflationary crisis, difficulties in accessing capital on the open market, and tightening lending conditions have a devastating effect on business balance sheets, increasing the cost of servicing obligations and reducing integral solvency.
Actual loan write-offs for Q1 2023 totalled $12.4 billion, the highest since Q2 2020; in relation to the volume of the loan portfolio of persons and legal companies, write-offs are at 0.1%, i.e. over 0.4% of all loans are written off per year.
We're talking about non-performing loans, the return of which has become impossible, and restructuring has become meaningless due to borrowers' default/bankruptcy or a catastrophic drop in solvency.
Given the rise in lending over the last three years, the volume of write-offs does not appear to be significant - it is about at the pre-crisis level of 2016-2019, while during the peak of the 2008-2011 crisis, write-offs reached 0.7-0.8% per quarter (seven times higher).
It should be noted that the building of reserves for potential write-offs is growing quicker than the write-offs themselves, indicating that banks have reached a fairly sensible conclusion about the true state of affairs with borrowers.
The volume of allocations to the creation of provisions for credit losses has been at a maximum since 4Q 2010 ($ 20.8 billion), which is nearly 1.5 times more than in 2016-2019, and expenses on reserves have been at a maximum of 10 years, not counting the local episode of the COVID crisis.
The degradation process is ongoing, but the processes are only just getting started due to impact lags. The weighted average loan rate was raised by merely 2 percentage points, lending instantly froze and delinquencies rose.
An increase in loan rates will compound unfavourable trends exponentially, yet it is difficult not to increase because the cost of funding rises and the interest margin falls.
The Fed's rate boost is starting to have an impact, and the negative consequences are just getting started.
What happens to the money?
If money leaves deposits, it goes somewhere. According to data from the Fed's Z1 report for the past 12 months (from April 1, 2022, to March 31, 2023), $1.1 trillion was withdrawn from American households' deposits, cash, and other monetary assets, a record outflow in the history of the American financial system, including in relative comparison.
What happened to such a large cash flow? In a bond.
If there was a record outflow from bonds of $1.23 trillion in Q1 2021, the trend by Q1 2023 is absolutely reversed - a record influx of $2.3 trillion, with the largest distribution occurring from Q4 2022 to Q1 2023 ($1.4 trillion).
For the year, $460 billion was allocated to equities, money market funds, and mutual funds, with $480 billion allocated in the second half of the year, i.e. Q2-Q3 2022. However, the whole flow - $1.2 trillion in the last 12 months and $940 billion in the last half year - was concentrated in money market funds.
Money market funds invest 40% of their assets in bonds and the balance in REPO transactions, thus the annual bond flow will be greater than the previously announced $2.3 trillion.
Stocks and mutual funds have not been in demand by the general public since Q2 2022, resulting in a $280 billion outflow for the year and a near-zero balance since the start of Q4 2022.
Deposits, bonds, stocks, and investment funds generate a net cash flow of $1.6 trillion every year, with $0.9 trillion generated in the second half of the year, and net savings of $670 and $360 billion, respectively.
Savings and cash flows converge over longer time periods. Over the last five years, cumulative savings totalled $8.4 trillion, and net investment in the aforementioned financial instruments was $9.7 trillion. Savings totalled $13.3 trillion over a ten-year period, while net financial flows totalled $13.2 trillion.
There are currently $650-$800 billion in yearly savings, implying a loss in the possibility of spreading liquidity into financial instruments, threatening the successful operation of both the bond and stock markets.
Who stabilized the Treasury market from early 2022 until now?
American consumers are the primary purchasers of all US Treasury debt instruments.
From January 1, 2022, to March 31, 2023, cumulative net purchases were $1.7 trillion, the largest influx into Treasury by the US populace in the market's history.
We're talking about direct purchases, which exclude money market funds, which primarily invest in treasuries (approximately 20% of assets), and mutual funds, which mostly invest in stocks but also buy treasuries (7-8% of assets).
Since the beginning of 2022, the population's market position on the Treasury account, including mutual funds, has shifted in a positive direction by $1.4 trillion. The population's estimated net investments, including investment funds, could approach $2 trillion.
The Fed's market position was reduced by $1.1 trillion, although net sales were $500 billion.
Commercial banks reduced their positions by $147 billion, and investment funds, brokers, and dealers, including money market funds, reduced their positions in treasuries by $457 billion from the beginning of 2022 to March 31, 2023 (primarily due to bond impairment), while net sales from the financial sector are estimated to be $350 billion.
At market valuation, insurance, pension, and government funds raised their investment in treasuries by $75 billion, with net acquisitions estimated to be about $250 billion.
Non-residents' position in the Treasury account has declined by $212 billion in market value since the beginning of 2022 but has begun to increase in Q1 2023.
As a result, from Q4 2021 to the end of Q1 2023, the share of non-residents in total treasury volume remained steady (34%), as did the shares of private insurance, pension (4%), and public funds (9%).
The share of investment funds, brokers, and dealers has dropped from 10% to 8%, while the Fed's participation has dropped from 27% to 22%. The people, on the other hand, have raised their proportion of treasury participation from 9 to 16%.
In 2023, the public will be the largest net buyer of Treasuries, followed by non-residents and pension funds.
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Market expansion is a myth
Despite the fact that the US stock market has had one of the biggest comeback impulses in the last 15 years, there are no significant and sustained cash flows into the market. Market expansion is a myth, a fraud.
All US resident institutional organizations, excluding the firms themselves, were net sellers of US stocks in Q1 2023 of $167 billion (based on Z1 data from the Fed).
The population was the greatest seller, with direct sales of $98 billion and indirect sales of $18 billion (Mutual funds + Closed-end funds + Exchange-traded funds), for a total of $116 billion, the highest sales flow since Q4 2018!
In comparison, the net positive flow in the first half of 2021 was $330 billion in Q1 2021 and $530 billion in Q2 2021, despite the hype and investment boom in shares from individuals.
Pension and insurance funds, both private and public, have usually sold $70 billion in US stocks in Q1 2023. Pension and insurance funds began actively "pouring" the market in Q1 2013, selling $2.1 trillion in shares in 10 years, making them the permanent and largest seller.
Non-financial enterprises sold $40 billion, with purchases from banks, brokers, and dealers reaching $60 billion (an all-time high quarterly purchase, the previous high being $45 billion in Q4 2009).
Non-residents purchased $44 billion in shares as current account surpluses recovered in major US allies.
Buybacks raised cash flow to the market by $170 billion in Q1 2023, excluding share placements; corporations offset all negative cash flow from residents by $167 billion.
In early 2023, who is buying back the stock market? Corporations through buyback, brokers and dealers, and non-residents are all eligible.
Buybacks in the Present and Future
Corporations are keeping the American economy from collapsing. In the first quarter, excluding share placements, $170 billion was spent on buybacks, which is close to an all-time high (due to low placement volumes).
This volume was sufficient to halt the flow of sales from locals, namely from the populace, who are shifting money into bonds at an unprecedented rate.
By the end of 2022, approximately 90% of all operating flow had been directed to dividends and buybacks, which is comparable to the period of shareholder frenzy from 2015 to 2021, when almost 100% of operating flow had been devoted to shareholder policy.
Business directs anything that can be directed to the market. However, growing capital expenditures as a result of inflation and inherent underinvestment, difficulty in accessing the capital market, and tightening financial conditions in the face of falling profitability may push corporations to reduce their buyback program.
The repurchase totalled $923 billion (+5% yoy) by the end of 2022, and it is expected to fall by 10% in 2023, with the majority of the reduction occurring in the second half of 2023.
From the beginning of 2009 to the first quarter of 2023, the total volume of buybacks excluding all placements (IPOs and SPOs) amounted to $4.9 trillion, and the business established itself as the primary buyer in the stock market in early 2023, surpassing the population.
We may observe the synchronization of the curves (debt and net buyback) in terms of trajectory and volume ($6 trillion, of which $1.9 trillion are loans and $4.1 trillion in bonds versus $4.9 trillion in repurchases) if we follow the accumulated dynamics of debt changes.
In other words, the increase in corporate debt since 2009 has been virtually exclusively driven by shareholder policy.
Without the outrageous buybacks, the business would have ample cash for both investment policy and payouts. The chase of multipliers, when exaggerated to the point of insanity, greatly damages the business's stability.
With a decline in buybacks in the second half of the year and big placements of US Treasury securities, the market will be extremely challenging.
Fed mismanagement and losses
According to Z1 statistics, $3.6 trillion indicates an unrealized loss on all bonds issued in the dollar financial system that have not been redeemed as of March 31, 2023.
This loss is shared by all holders of dollar bonds issued by both the private and public sectors, not only banks. The loss is defined as the difference between the nominal and market value based on market quotations on American stock exchanges' open trading system.
The loss was reduced by $1.6 trillion from Q3 2022, because following the banking panic in mid-March, there was a sharp increase in almost all bonds across the entire yield curve due to an epic redistribution of nearly $0.5 trillion in a short period from cash assets to bonds, though it also got into stocks.
Bonds fell again on June 12 as the actual Fed rate climbed and market expectations for a rate drop in the next 12 months stabilized, as well as due to more substantial cash flow into the equity market in Q2 2023 (mainly to tech companies).
The predicted loss of dollar bonds for all holders by June 12, 2023 is $4.1-$4.3 trillion, and the position assessment has altered by 6.8 trillion minus compared to Q4 2020 (when the bonds were at their peak in price).
However, based on the most recent government data, the $3.6 trillion loss is broken out as follows:
The Fed's policy is to blame for such enormous bond losses - a quick increase in rates to a maximum since mid-2007, and the growth rate is the greatest in 43 years.
The financial sector expertly manipulates reporting by shifting bonds into the HTM category, allowing "isolating" losses in reporting and pricing them at face value.
Dollar global debt
As of Q1 2023 (at par), the volume of issued debt in bonds within the dollar financial system was $59.4 trillion,
of which $55.6 trillion was the debt of national issuers and $50.1 trillion was the debt of the non-financial sector ($19.1 trillion private sector and $30.1 trillion public and quasi-public sector).
Treasury public debt is estimated at $24.3 trillion, MBS and agency paper at $12 trillion, municipal bonds at $4 trillion, corporate bonds at $15 trillion ($11.6 trillion domestic issuers, $6.9 trillion non-financial business), and corporate promissory notes at $1.4 trillion.
Over the last 15 years, there has been a substantial shift in the structure of debt generation, with a greater emphasis on public debt. The financial crisis of 2008-2009, the COVID crisis of 2020, and the inflationary and debt crises of 2021-2023 have all occurred since Q1 2008.
Domestic issuer debt has nearly doubled since Q1 2008, increasing by 27.5 trillion ($28.1 -> $55.6 trillion), with government debt (treasuries and municipal bonds) increasing by $20 trillion and quasi-government debt (MBS and agency papers) increasing by $4.5 trillion.
Financial sector bonds decreased $1.4 trillion due to Fed policy overfunding, while corporate bonds climbed $4 trillion.
Bonds were not in demand in mid-2022 because of a historic disparity between market rates and inflation; but, when rates increased and inflation fell, demand gradually restored to normal amid a redistribution of liquidity from deposits.
Non-financial sector bonds at a par value increased by $2.1 trillion from Q1 2022 to Q1 2023, up from $2.9 trillion a year earlier (net issue, the difference between placements and redemptions), but the growth is entirely concentrated in treasuries - $1 trillion - and MBS and agency papers - $1.1 trillion.
Because mortgage loans are static, MBS will no longer rise in this manner.
Municipal bonds are down $32 billion for the year, as are corporate bonds (down $127 billion) as a result of a $360 billion drop in foreign bonds.
The COVID craze has passed, and the AI craze has begun
The capitalisation of US public firms (national issuers - residents) as of June 12, 2023 was $44 trillion, a 12.5% gain from December 31, 2022 - a $4.9 trillion increase - the highest since mid-April 2022.
As of June 12, deals were made on 4,255 companies in the trading system of American stock exchanges.
Changes in the number of companies since the beginning of 2023 have been nearly even, but not in terms of contribution - 2193 companies have shown growth, increasing their capitalization by $6.7 trillion, and 2062 companies have fallen in price since December 31, 2022, resulting in a cumulative negative result of $1.8 trillion.
Since the beginning of 2023, 437 firms have contributed over $1 billion in capitalization increase, boosting the value by $6.4 trillion, for a total capitalization of $26.4 trillion.
Only 63 firms contributed a large gain in the capitalization of more than $10 billion, adding $5.3 trillion in capitalization with a total worth of $18.8 trillion, i.e. As can be seen, all of the good outcomes are clustered among major corporations.
The most intriguing fact is that only 35 US public businesses contributed $4.9 trillion to the total nationwide gain in market capitalization, with ten flagships contributing about $4.1 trillion (84% of the total increase)
among these firms are:
Without these ten enterprises, market growth would be only 2%, not 12.5%!
In terms of losers, 269 corporations with a capitalization of $11.6 trillion (minus $1.5 trillion in losses) experienced a capitalization decline of $1 billion or less. Large losses of more than $10 billion for 39 corporations (minus $821 billion), or a total worth of $6 trillion. The greatest losses incurred:
The COVID craze has passed, and the AI craze has begun.
Hyperconcentration Syndrome
The hyperconcentration of madness (10 companies account for 85% or 10.5 percent of the 12.5% increase in the shares of American companies since the beginning of 2023) only shows that there is still a lot of easy money in the system, and thus - the inflationary background, as well as pressure on deposit base, will continue, at least until deposit and bond rates normalize and excess liquidity is dumped.
As fantastic as the AI concept is, the fact that only one business (Nvidia) is listed at a p/s of 38 and has over 200 million in annual earnings is a strong indication of an abnormality.
There could be no talk of Nvidia with a P/e of over 200 and Apple with a valuation of less than $3 trillion if there was a liquidity crisis or a liquidity deficit in the system.
Corporate multiples are absolutely inadequate and out of touch with reality in terms of return on investment, revealing a liquidity mismatch with a strong bias toward duplication.
The "complete insanity" mode search for investments/locations of capital investment with capitalization inflation reveals that there is still a lot of dope, and investment folly always follows liquidity. When it finally hits, it will not be worth $3 trillion. Apple.
Market growth is not linear - 9 of the 20 sectors' capitalization has been dropping since the beginning of the year ($623 billion in total losses, while expanding ones give over $5.5 trillion).
All of the "bravado about success" is focused on the top 35 firms out of 4300 traded in the United States. If we omit the most successful TOP 35, the composition will be very different, with 10 expanding sectors and 10 decreasing sectors, but the overall result will be balanced, i.e. near zero.
All of this implies that there is no genuine and sustained market growth. This is entirely supported by cash flows. Growth was frontal and organic in 2020-2021, supported by hundreds of billions of dollars in capital flows from individuals.
Growth is now very focused, concentrated, and fragmented, fueled by a small circle of interested individuals in a small sample of enterprises.
When will the US stock market crash?
Ten firms accounted for 10% of the 12.5% market increase, while the top 35 companies accounted for the whole market growth.
You must understand that a 12.5% increase in the stock market is pretty unusual. For example:
At the same time, technology firms have grown by more than 36% since the start of the year - the last time this happened was in 1999!
Under what circumstances is the market expanding?
Lack of market interest on the side of the primary long-term buyer - US families - against the backdrop of historical liquidity redistribution in bonds. Only a fundamental shift in the Fed's monetary policy can alter the situation.
All of this should affect the system's liquidity balance in the second half of 2023.
With hyper-concentrated and extremely fragmented market growth in 2023, the stupid and cheap money locked up in IT businesses will feel the pinch very soon. It should be pretty turbulent in the second part of 2023...
The United States has a budget imbalance
The US budget deficit from October 2022 to May 2023 (Fiscal Year 2023) was $1.16 trillion, which is a huge amount
(it was the third greatest deficit after $2.06 trillion in FY2021 and $1.88 trillion in 2020). From 2016 to 2019, the average deficit was $527 billion, but from 2009 to 2011, it was $950 billion at par.
In comparison to the previous year, the decline is rather noticeable. Revenues plummeted 11.3% year on year in FY2023, while spending increased 9.4% year on year (the deficit was only $426 billion last year), and the higher you go, the worse it becomes.
In May, receipts declined 21% year on year while spending increased 20% year on year, resulting in a $240 billion deficit compared to a $66 billion deficit the previous year.
Annual expenses diverge significantly from the 2014-2019 trend (approximately 18% higher than the trend), and comparable to December 2019, expenses increased by 25% adjusted for inflation.
Annual revenues, on the other hand, tend to fall - a 10% increase by December 2019.
The inflation-adjusted 12-month deficit is comparable to the peak deficit during the crisis in 2009-2010, but it is half the size in mid-2021.
The tendency is as follows: a considerable decline in revenue, faster spending growth, and an unusually dramatic acceleration of the deficit, akin to crisis periods.
Given the decline since October 2022, which occurred under the debt ceiling, there is reason to think that the deficit from June to December 2023 will be large.
The deficit from June to December in 2022 was $1.37 trillion, $1.09 trillion in 2021, $1.82 trillion in 2020, and an average of $500 billion at par from 2016 to 2019.
The deficit at the lower boundary is very likely to be $1.2 trillion this year, but there could be surprises.
Fiscal 2023 spending growth (all items plus $359 billion) with the largest gains:
Inflation in the United States has slowed
Inflation in the United States is moderating - the general consumer price index (CPI) grew by 0.12% month on month and 4.1% year on year, as forecast in March. The core inflation index, which excludes volatile components such as energy and food, increased by 0.44% month on month and 5.3% year on year.
The overall CPI slowdown is quite justified; in June of last year, monthly growth reached an incredible 1.19%, and annual inflation just peaked at 8.9% (in the top ten most intensive monthly increases over the past 70 years), so as the high base fades, inflation is slowing in the face of sustained energy deflation.
The CPI will finish falling in July 2023 and settle in the 4.2-4.5% range, at least until September.
There is a clear issue with core inflation. The monthly inflation rate has been 0.41% for the last three months, 0.42% for the last six months, and 0.43% for the year. As can be seen, there is no slowdown, with an average monthly growth of 0.15% from January 2010 to December 2019. As a result, current backdrop inflation is 2.8 times higher than the historical average.
The category "housing and hotel rent" adds around 0.2 percentage points to the monthly increase in inflation, being the heaviest (biggest among all inflation components - up to 1/3 in the CPI) and most stable (highest inertia).
The average monthly rate of price growth for this category over the last three months was 0.51%, for half a year it was 0.64%, for the last year - 0.65%, and the historical standard was 0.21% m/m.
This is the fundamental issue in US underlying inflation that will persist for a long time, as the difference between home prices and rents remains significant (53% in the Rent and Home Price Index), and historical history suggests that the gap is always absorbed, but it takes years.
The problem is inertia - this is not energy, which has an impact lag of 1-3 months, everything here will be extremely long and painful, which will keep an excess of 0.1-0.2 points in monthly inflation.
Eurostat calculation wizard
In Europe, there are no obvious indicators of a crisis. The industrial production index for the EU-27 countries climbed by 0.6% year on year as of April 2023, a rise of 0.4% year on year compared to February 2020, and a 3.6% increase compared to the pre-crisis January-April 2019 period.
Balancing takes place near historical highs. Eurostat is responsible for the correct integration and weighting of the index's cross-country, cross-sectoral, and sectoral components; yet, official statistics show that all of the major aspects of the 2022 crisis and harmful triggers have gone undiscovered.
The dynamics are multidirectional, according to the components of the industrial production index:
Energy-intensive production in Europe is dropping, returning to multi-year lows, while the consumer sector is fundamentally quite stable and non-durable products output is expanding rapidly. The emphasis in the capital production section is on science-intensive production.
The Fed gave up
Powell delivered one of the weakest news briefings in recent memory, highlighting the Fed's complete lack of knowledge of what is going on, as if explaining the necessity for a pause.
It came out so skewed and absurd that it's difficult to imagine anything worse.
The speech's objective and tone were fairly clear: we're going with the flow, not knowing where everything is heading, and hoping that our efforts would allow us to taxi along a safe trajectory.
It's difficult to count how many times Powell said "We need time", "we don't understand", "difficult to estimate", and "it's too early to give forecasts", but uncertainty and uncertainty came through every shaking of the air.
The Fed hasn't appeared this powerless in a long time. On the other hand, the projection of the Fed's objectives is a little more certain.
To begin with, there are no intentions to drop the rate in 2023 (this was said publicly and openly), but the rate could be reduced if there is a market shock or a dramatic downturn in the economy.
As a result, a substantial and tangible deterioration of economic and financial conditions serves as the trigger for monetary policy change.
Second, the Fed looks at core inflation and waits for signs, but there are none and will not be because, for a long time, rent will be standardized in accordance with the value of the real estate.
Housing contributes the most to inflation, accounting for more than 2.5 percentage points. Even if all other components are zero, housing alone will push core inflation above the upper target.
As a result, if inflation is used as a trigger for modifying monetary policy, we should not expect a slowdown this year.
All of this implies that the Fed's trap is closing. They will continue to be impolite for a long time, at least until the economy crashes. What makes this so remarkable?
The Fed corrected monetary imbalances 1.5 years late, missing the best window for inflationary stabilization.
The Fed will now be late in normalizing tight financial conditions, causing severe imbalances throughout the institutional actors' chain of command.
There was some doubt about whether the Fed would engage proactively. The answer is no, it will not.
QE will be slapped, and rates will be cut as soon as the economy staggers, but if the system staggers, the imbalances will be the size of a black hole by this moment.
It appears to be an empty news conference, but it provides so many answers.
It's odd that sales execs in the Private Banking segment for wealthy clients are selling the idea that high rates are no longer scary and monetary policy can be ignored because "the economy turned out to be incredibly resilient and stable" and "does not operate according to the laws that worked before." Finally, you can buy anything! If you begin peddling such rubbish information, it's time to "dry the oars."
Since the beginning of the year, the NASDAQ has increased by 40%. Only three times in the last 25 years has the market grown in this manner: in the late 1990s during the terminal phase of the dot-com bubble, in mid-2009, and in mid-2020 against the backdrop of unlimited monetary frenzy and a V-shaped economic recovery. Everything is now absolutely different.
This demonstrates how stupid and myopic the market and investors are.
The market consistently underestimated the inflation element in 2021, and it now underestimates the factor of tight financial circumstances. Good luck, everyone.
Retail Sales in the United States
Retail sales in the United States increased by 30% at par (from February 2020 to May 2023) following the post-Covid fiscal and monetary frenzy amid abundant savings.
At first, anti-COVID policies helped by preventing spending in the services sector, which generated a savings buffer (unspent money in the service sector was shifted to goods), and online trading in goods locked in excess demand.
The first phase of the inflation storm in 2021 was caused by disruptions in supply chains, logistics, and supply chains as a result of a sharp and largely unsupported consumer urge. Inflation subsequently spread like a virus to other links in the chain, worsening against a backdrop of labour market imbalances and diminishing productivity.
Retail sales in real terms have increased by 11.7% since February 2020, although there has been a sustained stagnation with a negative slope since Q1 2021. Retail sales at par climbed 11.6% between May 2021 and May 2023, but actual sales declined 1.3%. Over the year, nominal growth fell to 1.7%, but real growth fell by 2.4% y/y.
This is the fourth month of real-term retail sales falls - by an average of 2.3%, which is far better than the 2008-2009 crisis, when retail sales plummeted by an average of 10.6% in real terms from November 2008 to May 2009.
It is worth noting that there has only been one fall in retail sales for four or more months in a row in the last 30 years (the 2008-2009 fall).
The post's introductory section was offered for a reason: the current reduction is occurring on a very high base, in fact, on poorly inflated consumption, including through helicopter money.
Current real sales are 6-7% greater than the 2010-2019 trend, indicating that there is still excess consumption. Nonetheless, the downward tendency is present and becoming more pronounced.
Current demand is being maintained by a significant reallocation of costs from gasoline and food.
The industrial sector in the United States is slowing
The US industrial sector is resetting the 2020-2022 recovery fuse and slipping into stagnation, then contraction.
Over the year, US industrial production increased by 0.2%; in two years, it increased by 3.9%; from pre-Covid February 2020, it increased by 1.4%; over ten years, it increased by 4%; and over fifteen years, it increased by 2.9%.
Can the dynamics described above be termed progress? Although 3% growth in 15 years is not outstanding, there are significant sectoral developments within the industry.
For the past 30 years, the industry has not been a driver of US economic growth since, as a result of globalization, the entire low-profit and low-margin industry has been pushed to Asia and the periphery.
In terms of gross value added, the manufacturing industry accounts for 11.3% of the US economy, while the mining industry accounts for 1.8-1.9%, for a total of slightly more than 13%, compared to 15.4% in 2008 and more than 30% 50 years ago.
Although the industrial sector is linked to around a quarter of the US economy, it is not decisive in the US economy; yet, the figures are valuable in terms of industry shifts and business cycles, because industry is the first to respond to crisis processes.
Since February 2020, the science-intensive sector has been the leading growth engine in terms of industry shifts:
The manufacture of furniture and accessories, textiles, woodworking, publishing, and printing enterprises are all in severe decline.
Return your focus to Europe
Europe has stepped back from the spotlight, despite the fact that its issues may be far more severe than those in the United States due to a significantly narrower margin of safety, deeper and more complicated structural imbalances, and severe regional fragmentation.
The European Central Bank boosted benchmark lending rates to 4-4.25%, the highest level since September 2008. The deposit rate is currently 3.5%, the highest since May 2001! This is the ECB's ninth rate hike in a row and the fastest tightening in its history.
Deposit rates were minus 0.5% in July 2022, and the ECB offered loan programs at 0.5-0.75%. Because they entered the red zone of high rates (over 3% for lending) only in February 2023, the detrimental effect of high rates has not yet had time to affect economic agents.
The ECB anticipates inflation to continue high for a long time: 5.4% on average in 2023, 3% in 2024, and 2.2% in 2025, implying that inflation will revert to the target limit no sooner than in two years. Excluding energy and food, the spread is negligible: 5.1, 3.0, and 2.3%, respectively.
The ECB has stated that the tight policy will stay as long as it takes to restore inflation to 2%, but, like the Fed, it is prepared to change the program in response to incoming data and financial stability risks. In other words, if the seams crack, they will apply the brakes.
In July, another 0.25 percentage point increase is possible based on objectives.
The ECB will discontinue reinvesting in the Asset Purchase Program (APP) in July 2023 but will continue to reinvest in the Pandemic Asset Purchase Program (PEPP) until December 2024.
Banks are gradually lowering lending; during the pandemic, they raised ECB lending by 1.6 trillion euros in stages and have already reduced it by 1.1 trillion. The decline in securities was symbolic, amounting to 63 billion euros less than the maximum.
As a result, the ECB's balance sheet declined from its peak by 1.1 trillion euros to 7.7 trillion, then during the epidemic, the balance increased by 4.2 trillion euros, leaving it still plus 3.1 trillion to February 2020.
THE END OF THE REPORT
Stay tuned.
Regards, Negorbis.
The key info about the financial and banking crisis can be found in three issues dedicated to this subject:
Part I "Falling Bank Chronicles"
Part II "Crisis of Confidence & Regionalization"
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