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Category - Global Middle Class

How London Transport Is Preparing for Life After Lockdown

This article from Bloomberg highlights just difficult social distancing is in a dense city environment. Here is a section:

According to the city’s transit manager, Transport for London (TfL), maintaining social distancing means that buses and London Underground trains will only be able to carry around 13–15% of the 9 million passengers who use the services daily. One of eight carriages on a Central line train can carry 131 people in a typical peak hour crush. Only 7% of these passengers could travel if 2-meter distancing was achieved.

TfL has imposed a limit of 20 passengers on its double-decker buses, that can usually carry up to 87.

To help alleviate this precipitous drop in passenger capacity, TfL and London Mayor Sadiq Khan unveiled their ‘London Streetspace’ program in May, which aims to accommodate a possible 10-fold increase in cycling and a fivefold increase in walking. “Many Londoners have rediscovered the joys of walking and cycling during lockdown and by quickly and cheaply widening pavements, creating temporary cycle lanes and closing roads to through traffic we will enable millions more people to change the way they get around our city,” Khan said.



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Fed Sees Zero Rates Through 2022, Commits to Keep Buying Bonds

This article by Craig Torres and Matthew Boesler for Bloomberg may be of interest to subscribers. Here is a section:

“We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”

The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.

A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.

“Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
 



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Speculative Fervor in U.S. Stocks Surges to 'Stunning' Levels

This article by Cormac Mullen for Bloomberg may be of interest to subscribers. Here is a section:

At the heart of the speculative activity are smaller investors, according to Sundial. Small trader call buying made up more than 50% of total volume last week, the highest since 2000, it said.

Past instances when bullish small trader positions made up 45% or more of volume preceded a median loss for U.S. stocks of about 3% in two months time and 15% in a year, according to the note.

“Small traders are pushing their luck in a major way,” said Goepfert. “It seems increasingly risky to try to chase this rally along with traders who have traditionally been extremely reliable contrary indicators.”



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Shell's CEO Worries About a Disorderly Energy Transition: Q&A

This interview of Shell CEO Ben van Beurden for Bloomberg may be of interest. Here is a section:

Assuming you don’t get government support to advance research in hydrogen production and carbon capture and storage, what will you have to do to make those viable?

Stay with the program a little bit longer. That’s exactly what we’re doing. You could take a negative view and say we knew that hydrogen was a good thing and we knew that CCS [carbon capture and storage] was needed, but it hasn’t happened. I’m not signing up for that approach. We need a lot of hydrogen in the mix. We need significant CCS. My prediction is that in the next few years you will see CCS projects come off the ground. You will see very large-scale hydrogen projects come off the ground as well. And I hope we will be associated and involved in each and every one of them.



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1968 Was a Horrendous Year But 2020 May Be Worse

This article by Niall Ferguson for Bloomberg may be of interest to subscribers. Here is a section:

As a white, middle-aged, upper-middle-class immigrant, I’m hardly the person to speak to the politics of race in America.  So I turned to an African-American friend, the economist Roland Fryer, whom I’ve known since we were colleagues at Harvard.

In 2016, he published a brilliant but controversial paper which argued that the police did not disproportionately use lethal violence against black people, though they were more likely to use non-lethal force against them. (A paper published last year in the Proceedings of the National Academy of Sciences lent strong support to Fryer’s thesis.) He has a new, unpublished paper that looks at a perverse effect of investigations into police shootings. I asked Fryer to walk me through the argument.

“If you have a police shooting that goes viral online but isn’t investigated,” he explained, “then nothing changes — levels of police activity and crime are about the same. But if you have a viral shooting that is investigated, then police activity plummets, and crime goes up dramatically.” In just five cities – Baltimore; Chicago; Cincinnati; Ferguson, Missouri; and Riverside, California -- this led to excess homicides of almost 900 people in the subsequent 24 months, 80% them black, with an average age of 28. It's a dangerous Catch-22: You're damned if you don't investigate “viral” incidents, and in even worse shape if you do.

How does Fryer interpret the current protests? “People are fed up,” he told me. “They are frustrated by the disparities they see in educational outcomes. Frustrated by the disparities they see in criminal justice. Frustrated by racial disparities in life expectancy. We are all to blame — this happened on our watch.” And when you add to that the fact that Covid-19 disproportionately affected the black community: “Folks have had enough. People are very much on edge.”



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Email of the day - on the potential for inflation to surprise on the upside or the downside

Greetings Eoin. Firstly, thank you for the daily commentary and Big Picture Long Term view. They remain the highlight of my weekend and are greatly appreciated. I’m interested in your comments regarding future expectations of inflation.

I hope I’m summarising you accurately, but in essence the thinking runs that the provision of vast amounts of monetary liquidity from Central Banks, combined with Government fiscal spending will at some point come home to roost, and drive up inflation.

If so, why then did we not see an inflation spike following the 2007/08 GFC, where massive (at the time) injections of liquidity and fiscal spending should have delivered the same result?

One view is that we did get inflation following the GFC, just that it showed up in asset prices, not in consumer prices. Equities, bonds, property, luxury goods, art and even later on precious metal prices all benefited from the increased liquidity following 2008. As you have previously highlighted, massive advances in technology, changes to the way we work and live, outsourcing of jobs to lower wage economies, and historically low interest rates have all combined to keep consumer inflation in check over the same period.

Are we to assume that this time is different, and we should expect consumer price inflation at some point, or is it safer to expect history to rhyme and that inflation will again show up in asset prices? If so, should we presume the liquidity will chase better returns and lower P/E multiples of Europe and Emerging Economies this time around? And finally, when investing I’m always conscious of the wise words from the famous British Economist, John Maynard Keynes “The market can stay irrational longer than you can stay solvent”. Spoken nearly a century ago, and never more relevant than today! Many thanks for your time



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Email of the day on caution at potential areas of resistance

“You have been calling for some ‘consolidation’ for equity markets for a number of weeks now (which I expected too), but this just hasn’t come to pass. Instead we have seen a relentless charge higher in virtually every market. You’ve stated that it’s liquidity driven which until recently at least, little participation from the professional money managers. Short term yields no longer can be relied upon as a risk indicator with the Fed deliberately compressing yields at the front end. To what extent, if any, has this recent episode viewed the way you look at markets through a charting lense. A despondent sceptic of this rally here, it seems the only winning strategy is just to ride the liquidity train, and rotate one’s positions towards riskier assets (travel, emerging etc) as the new safe havens (tech) reach maturity.



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U.K. on Collision Course With China From Hong Kong to Huawei

This article by Alan Crawford for Bloomberg may be of interest to subscribers. Here is a section:

Jeremy Hunt, a Conservative lawmaker and former foreign minister, opened a new front on Thursday with an op-ed in the Times of London warning that Taiwan, the separately ruled island that China regards as part of its territory, “should worry us more.”

“In its willingness to abandon Hong Kong’s ‘one country, two systems’, China may also be signalling that it has given up hope of a peaceful reunification with Taiwan in favour of a military solution,” Hunt wrote. “Were that to be the case the implications for western democracies would be extraordinarily dangerous.”

One potential bonus for Johnson in escalating tensions with China lies with the U.S., where the Trump administration has been prodding allies globally to adopt a more skeptical stance to Beijing. That includes shunning technological advances such as the 5G capabilities offered by Huawei, which Washington says are a security risk.



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Global Asset Allocation: A Quiet Dollar Devaluation

Thanks to a subscriber for this report from Jeffries which may be of interest. Here is a section: 

Without much fanfare, a second global monetary easing was unleashed in May as the dollar fell without anyone appearing to notice. The fact that the greenback fell of its own volition suggests that the unprecedented risk aversion seen in March is really beginning to unwind. If so, then the US$1.2trn sitting in US money market funds since February will be itching to find a home or asset class that can hold its value (see Global Asset Allocation: Too Much Money Chasing Too Few Assets). Throughout 2019, US money markets only accumulated US$555bn.

As fears of the COVID-19 pandemic recede, the Federal Reserve is continuing to add dollars to the global monetary system at an unprecedented rate (see RHS chart). Just as importantly, US implied inflation expectations, as measured by the 10-year breakeven inflation rate, are rising after lurching into deflation. Coincidentally, this is occurring as the futures markets price in the probability of negative US rates. One of the most important turning points for the direction of equity markets is the shift into inflation (see US: Market Bottoms).



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Hong Kong Stocks Rally After Trump Holds Fire on Retaliation

This article by Jeanny Yu for Bloomberg may be of interest to subscribers. Here is a section:

While the U.S. President Donald Trump’s speech Friday was heated in rhetoric, it lacked specifics around measures that would directly impact the city. He announced the U.S. would begin the process of stripping some of Hong Kong’s privileged trade status without detailing how quickly any changes would take effect and how many exemptions would apply.

“Trump’s comments gave no immediate measures on Hong Kong and leave room for negotiations with Beijing,” said Castor Pang, head of research at Core Pacific-Yamaichi International. “Trump’s comments have eased investors’ concern about the impact of potential sanctions on the Hong Kong economy.”



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