Author: admin

For months, the world watched in stunned amazement as, alongside the relentless increase in global negative yielding debt which more than doubled in 2019 from $8 trillion to $17 trillion, the Austrian century bond due 2117 exploded higher and almost doubled in price from just above par to an all time high of 220 in late August.

What a different just a few weeks – and a smattering of good news – makes the euphoria is now officially over and as 10Y Treasury yields surge to 1.90% from a record low of 1.42% on September 3, now that downward momentum has been broken and CTAs are accelerating in the other direction, the Austrian century bond is doing what its Argentina peer did last month: it is tumbling, and as of the close of trading in Europe was down over 20%, officially entering a bear market.

What about the amount of negative yielding debt? Well, after hitting a record high of $17 trillion in August, the stock of negative debt has tumbled by $2.5 trillion to $14.5 trillion, the biggest monthly drop in global negative-yielding debt on record.

The global auto industry is undoubtedly in the midst of a worldwide recession, the latest example of which we just highlighted out of China. Compounding the U.S./China trade war issue is the fact that consumers globally are, for lack of a better word, mired in debt and simply broke.

Which is why a strike at General Motors this month could truly be Murphy’s Law in practice: the worst possible outcome, at the worst possible time.

And a strike seems more possible now than ever. We reported days ago that the UAW had authorized its leaders to strike and now the chance of a strike is at a “12 year high”, according to Bloomberg. Union leaders will be in Detroit this weekend to determine whether or not they will take a proposed labor contract from GM back to their members for a vote, or if they will strike. 

There’s now “even odds” that GM will see its first walkout in 12 years. 

Over the course of the last four years, GM has delivered its “best ever” profits while consumers bought record numbers of new vehicles. This, in addition to rhetoric from President Trump, has emboldened the UAW to ask for a greater share of the spoils and ask for a guarantee of work in at least one of the four U.S. plants GM marked for closure last November. GM is bracing for an economic downturn, which is likely going to make the negotiations contentious, as we pointed out in our last article.

President Trump had previously asked GM CEO Mary Barra to either re-open or sell the company’s Lordstown, Ohio plant. 

Kristen Dziczek, vice president of the industry and labor economics group at the Center for Automotive Research commented: “It’s just difficult to see how both sides can come to an agreement. Union membership expectations are very high given how well GM has been performing.”

She thinks there is a “greater than 50% likelihood” of a strike and a production halt that could last several weeks. On the other hand, Brian Rothenberg, a UAW spokesman, said it’s premature to speculate about whether or not a strike is possible. 

Last Tuesday, the union announced that roughly 96.4% of GM members supported the authorization to strike. The UAW’s last strike at GM took place in 2007 and lasted just two days. UAW President Gary Jones called the authorization a “key tool in the toolbelt as our bargaining team sits across from the company.”

Among the points that the UAW are set to address during negotiations are:

• limiting the number of temporary workers GM is allowed to use

• giving new hires a quicker route to making senior-level wages of more than $30 an hour

• securing work for some of the plants in Michigan, Ohio and Maryland that GM hasn’t allocated future product to

• securing a cost of living allowance that would help offset inflation

• GM’s decision to idle the Chevy Cruze compact car plant in Lordstown, Ohio

• GM’s decision to schedule end of production for January at a factory in Hamtramck, near Detroit

The problem for GM is that, last year, the company had about 1 million vehicles worth of U.S. production capacity that wasn’t used. Ron Harbour, a senior partner for consultant Oliver Wyman, says more capacity is going to need to be cut unless the company can improve sales or add new models. 

During negotiations, GM will seek the use of more temporary workers. About 7% of GM’s union staff are temporary workers that the company can dismiss easier than full time workers. Temporary workers get paid as little as $15 per hour, which is about half of the wage of the company’s senior factory workers. 

Negotiations have been further complicated by a Federal probe into union corruption that resulted in UAW President Gary Jones’ home being searched two weeks ago by federal officials. 

The probe has already resulted in convictions of eight union and company officials associated with Fiat. Charges were also filed against Michael Grimes, a former UAW official that was assigned to GM’s department and who allegedly took $2 million in kickbacks from UAW vendors. Jones has not been charged. 

Harley Shaiken, a labor relations professor at the University of California at Berkeley said of the corruption charges: “Many members are angry and turned-off. It adds to an already difficult set of negotiations.”

Tim Stannard, the president of UAW Local 1853 in Spring Hill, Tennessee concluded: “It is a real possibility that the UAW could strike GM if a tentative agreement cannot be reached.”

Authored by Satyajit Das, op-ed via Bloomberg.com,

The declining economic outlook and increasing political pressure are pushing central banks into more aggressive unconventional monetary policies.

Simultaneously, fears are growing that such steps, especially negative interest rates, actually threaten the stability of the financial system. They risk setting off dangerous feedback loops in credit markets and the real economy, where the second and third-order effects are difficult to anticipate or control.

As the experience of banks in Japan and Europe has illustrated, the process follows a predictable pattern.

Low growth, low inflation, output gaps, unemployment and underemployment — combined with financial instability, especially volatile asset prices — first prompt central banks to lower rates below the zero bound. The objective is to stimulate borrowing to finance consumption and investment, thus setting off a self-sustaining growth cycle.

Typically, however, negative rates aren’t fully reflected in actual borrowing and lending rates. Regulations require banks to maintain customer deposit bases. The fear of losing customers dissuades those banks from cutting deposit rates too far. In Europe, to date, only large corporations have faced negative rates, which means they’re charged to maintain deposits.

As interest rate margins contract and profits are squeezed, banks raise fees or turn to other revenue measures to boost earnings. This keeps actual borrowing costs relatively high, undercutting the whole point of a negative rate policy.

As the economy continues to sputter, desperate policymakers slash rates more and more deeply. Government bond yields grow increasingly negative and the yield curve flattens. Banks, which hold substantial amounts of government debt, see their profits decline even further.

Weak earnings, in turn, impact banks’ share prices and raise doubts about future dividends, buybacks or capital returns. Weaker institutions run into funding difficulties. Virtually all face higher borrowing costs.

This perversely reduces the amount of credit available, which again dampens consumption and investment. Given that bank payouts make up a significant source of investor income, fears of shrinking dividends add to the gloom. Instead of stimulating the economy, negative rates increase uncertainty about the future. Households, worried about saving for retirement and other goals, spend less.

Slowing growth increases the number of non-performing loans. This further erodes bank profits and reduces lending. It also increases borrowing costs for banks, which results in higher credit margins for borrowers.

Negative rates distort incentives. Facing declining profits, banks grow reluctant to foreclose on distressed borrowers. They extend lifelines to zombie companies, which can service their debt when interest rates are so low even if they have no prospects of repaying the principal. This is an inefficient use of capital which reduces potential growth and sets the stage for long-term economic underperformance.

Struggling banks also naturally have less demand for government bonds, which restricts the ability of countries to finance their activities. In extreme cases, where banks need help to stay afloat, already heavily indebted governments must borrow to recapitalize them or guarantee deposits. Increased debt levels and rising debt-service commitments lock the state into a low or negative interest rate environment.

The ill effects of these trends will initially vary depending on how profitable a country’s banks are, as well as their interest margins and the quality of their loan portfolios. European and Japanese banks facing low profit margins and a growing pile of non-performing loans are especially vulnerable.

And, ultimately, the problems will spread. U.S. banks have begun to lower earnings guidance, blaming lower rates.

There are two primary transmission channels for negative rates between countries. As witnessed in Europe and Japan, banks faced with negative rates export capital aggressively, driving down returns elsewhere. Also, higher relative rates cause currencies to appreciate, forcing nations to match interest rate cuts in a race to maintain competitiveness.

There are few alternatives. Germany is examining whether to prevent banks from charging most retail clients for deposits. Other alternatives include creating special safe assets or savings accounts that guarantee positive rates. Both measures would undermine negative-rate policies.

Another option is for central banks to lend, either directly or through banks such as the European Central Bank’s existing targeted longer-term refinancing operations, at concessional rates. However, there may be limited demand for loans. The efficacy of these programs is, at best, modest.

The unpalatable reality is that the world still hasn’t learned the true lesson of 2008: An economic model that’s dependent on consumption and investment fueled by excessive borrowing is unsustainable. Lower rates, which are ineffective and weaken the financial system and ultimately the real economy, are merely a mechanism to maintain excessive debt levels for a little longer.

An old farmer reputedly advised a lost traveler, “If you want to go there, I wouldn’t start from here.” Policymakers missed the opportunity to make fundamental changes at the onset of the crisis. No wonder they now find themselves adrift.

A week after the death of Robert Mugabe, and just a few months after the re-introduction of the ZimDollar, Zimbabwe faces another hyperinflation scare as inflation soars and the central bank hikes rates drastically to stall the currency’s collapse.

Just three months ago, The Reserve Bank of Zimbabwe (RBZ) issued a directive banning cash withdrawals from all Foreign Currency (FCA) Nostro Accounts following the promulgation of Statutory Instrument 142 of 2019, which reintroduced the local Zimbabwe Dollar and scrapped the multi-currency regime. Nostros/FCA holders will have to liquidate their balances to be usable in Zimbabwe. As Pindula News noted at the time, what this essentially means is that if one earns USD, deposited into their Nostro account, they can’t draw the cash but will have to get it in Zim Dollar using that day’s interbank rate.

And it hasn’t helped as the black market ZimDollar has collapsed since…

Source: Bloomberg

The economy is at risk of contracting this year for the first time since 2008. Zimbabwe’s woes date back to Mugabe’s rule, when he allowed ruling party-backed militants to violently seize thousands of white-owned commercial farms starting in 2000. Agricultural exports and tax revenue collapsed, the central bank began printing banknotes so the government could pay its workers, and inflation skyrocketed to the point where prices were doubling every day.

And in an effort to counter that soaring inflation, Zimbabwe’s central bank said on Friday it had raised its overnight borrowing rate from 50% to 70%.

The central bank added, in a monetary policy statement, that it was introducing dollar-denominated savings bonds to try to stimulate greater saving.

As Bloomberg notes, Mugabe’s successor as president, Emmerson Mnangagwa, has failed to deliver on his promises of a revival.

The southern African nation suffers from spiraling inflation and chronic shortages of foreign exchange, bread and electricity, prompting protests that have been brutally repressed.

But, as Bloomberg reports, in his latest attempt to stabilize an economy in freefall, Zimbabwean Finance Minister Mthuli Ncube established a Monetary Policy Committee. The introduction of the MPC will help provide oversight of the central bank, though its mandate remains unclear, said Lloyd Mlotshwa, head of equities at brokerage IH Securities Ltd. in Harare, the capital.

“Until their terms of reference are clarified, it’s difficult to gauge how effective the monetary policy committee will be,” he said. “For example, if there is a vote on interest rates, does each member have one vote?”

Ncube reintroduced the Zimbabwe dollar, which the country had abandoned in 2009, and banned the use of foreign currency in June.

While Ncube has suspended the release of annual inflation statistics until February, economists estimate that the rate is between 230% and 570%. The nation’s 400,000 civil servants are demanding increased pay after the devaluation decimated their spending power.

Ncube’s other plans include entering into an International Monetary Fund-supervised program to reduce debt, as well as winning debt relief from the so-called Paris Club of creditors, the World Bankand African Development Bank.

Widespread frustration over rampant unemployment and poverty has boiled over into strikes and demonstrations. The round of protests in August, called by the main opposition party in the capital, Harare, saw police arrest at least 128 people and use tear gas and batons to disperse others.

Get long wheelbarrows…

And pitchforks.

Bloomberg offers some hope.

Zimbabwe has enormous economic potential, which could lift the entire region. It was a leading producer of grain before Mugabe’s rule, which began after it won independence from the U.K. in 1980. Mugabe devastated commercial farming with his expropriations, but the country remains a large tobacco producer. It also has reserves of gold, platinum, diamonds and other metals and minerals. And its 14 million people are among Africa’s best educated, although many of those with skills have emigrated to neighboring South Africa and the U.K. About a quarter of the population has gone into exile.

Via Wunderground.com,

Potential Tropical Cyclone Nine is likely to become a tropical depression or tropical storm by Friday night and will pose a threat to the Bahamas, Florida and possibly other parts of the southern United States, including areas devastated by Hurricane Dorian.

A “potential tropical cyclone” allows the National Hurricane Center (NHC) to issue advisories, watches and warnings on systems that have yet to develop but pose a threat of bringing tropical-storm-force (39-plus mph) or hurricane-force (74-plus mph) winds to land areas within 48 hours.

The NHC has posted a tropical storm warning for the northwestern Bahamas, except for Andros Island. This means tropical-storm-force winds are expected there within 36 hours.

The NHC has also issued a tropical storm watch for portions of the Florida east coast, from Jupiter Inlet to the Flagler/Volusia County line. This means tropical-storm-force winds are possible there, generally within 48 hours.

Watches and Warnings

Potential Tropical Cyclone Nine is moving very slowly toward the northwestern Bahamas and producing clusters of showers and thunderstorms over the islands. These convective clusters have become more persistent over the past day.

This disturbance is expected to resume a northwestward motion later today and an increase in forward speed is anticipated this weekend.

Current Storm Status

The NHC says environmental conditions are favorable for a tropical depression or tropical storm to form within the next day or so and gives this system a high chance of development as it crawls toward the northwestern Bahamas.

It will earn the name Humberto if it does attain tropical storm status. This system is expected to become a hurricane early next week when it is off the Southeast coast.

Projected Path

Tropical-storm-force winds are forecast to arrive in the tropical storm warning area in the northwestern Bahamas by late Friday, according to the NHC.

Those 39-plus-mph winds are then possible in the tropical storm watch area on Florida’s east coast by Saturday night.

Most Likely Arrival Times and Probability of Tropical-Storm-Force Winds

Where this system tracks has become yet another challenging forecast, in large part because the center of the disturbance is very poorly defined, so the computer forecast models don’t have much to latch onto in their analyses.

There are two basic scenarios:

1. If a tropical depression or storm forms sooner and stronger, it would favor a track farther east, over parts of the Bahamas and near Florida’s east coast, steered by upper-level south to southeasterly winds.

2. If a tropical depression or storm forms later and weaker, it would favor a track more toward the west-northwest, eventually into the Gulf of Mexico.

There has been a trend farther east and north – basically, the first scenario – suggesting a track near the Bahamas, Florida and the southeastern U.S. coast is possible this weekend into early next week. It could track far enough offshore for there to be limited impacts to the U.S.

Satellite data suggests that this system could be organizing a bit farther east, which could result in another shift in the forecast track to the right.

The bottom line is that the forecast is highly uncertain. Interests from the northern Gulf Coast to Florida, the Bahamas, Georgia and the Carolinas should monitor the latest forecast for this system closely.

Spaghetti Models

Early next week, an eastward moving trough is expected to force this system away from the East Coast into the Atlantic.

Heavy Rain Threat

Periods of gusty winds and locally heavy rain can be expected the next few days in the Bahamas and Florida. This includes areas ravaged by Hurricane Dorian in the northwestern Bahamas.

In general, the heaviest rain should fall along and to the east of the center of this system. As mentioned earlier, the track of this system is highly uncertain at this time.

The NHC says 2 to 4 inches of rain is expected over the Bahamas, with locally up to 6 inches possible. Along the southeastern U.S. coast from central Florida through southeastern Georgia, 2 to 4 inches of rain is predicted.

Localized flash flooding is possible in areas where bands of rain stall or persist over an area.

Rainfall Outlook

Higher surf and rip currents may build along the northern and eastern Gulf Coast, as well as the Atlantic beaches of Florida, Georgia and the Carolinas, into this weekend.

An isolated waterspout or tornado is also possible in Florida or the Bahamas into this weekend.