–The global market structure is not quite right. It’s staying that way until after this year’s elections…apparently. We need interest rate cuts now.
Opinion by Mathew Carr
May 1, 2024 — I did a little survey yesterday (Tuesday) to try to find people who think the Biden administration has appetite — the bravery — to pitch a little tax reform to voters, companies ahead of presidential elections in November.
I could not find any takers.
Don’t say it too loud … but tax-increase pitches are not election winners, even though everyone knows the US is in desperate need of higher tax receipts.
That’s because it’s currently borrowing to pay government debt and higher interest rates boost the cost of doing that. This is not sustainable because the USD is slowly but systematically losing its global economic heft as other currencies rise.
The superficial reason why interest rates will not drop as fast as expected this year in the US is that inflation is staying higher for longer. (Actually, corporations and banks are not being regulated properly and are price gouging.)
Even Starbucks is noticing people cutting back on coffee.
And the the real reason why interest rates will remain high in America is that Mr Biden isn’t doing the tax reform that he knows is necessary ... eventually at least …and taxing or regulating bad corporate behavior can only be put off one more US electoral cycle (and it should not be being deferred again this year tbh… because the widening inequality has gone too far).
We will get some indication of the Biden administration’s way forward later today (Wednesday) as the US Fed makes some noise…but the bottom line for me is higher interest rates will slow climate action and protect oil companies.
The shift away from this profit-only model needs to accelerate.
The world is switching away from the US dollar, slowly. Last year China’s yuan cross-border receipts and payments totaled 52.3 trillion yuan ($7.2 trillion), an increase of 24.2 percent year-on-year, according to a People’s Bank of China (PBC) report on the yuan’s internationalization: see this news item. Yet at less than 5% it’s still tiny vs the USD at nearly 50%.
During this shift, G7 nations seem to be protecting the oil market, yet the US might be OK about nations buying commodities in other currencies.
Is the US more on the backfoot on this than mostly reported in the mainstream press?
Craig Shapiro, a macro analyst/trader, seems to think so …the market for Treasuries could continue its rocky ride, or worse:
“If the US allows holders of UST(reasuries) to purchase oil in currencies other than the US$ (in their local currency), these countries will not be forced to sell USTs aggressively like we saw in the August-October period last year when oil prices were rising quickly. They can simply price oil in local currency, trade with oil exporters for goods in local currency, and settle excess trade balances in gold. This system seems like it was accelerated last fall post the BRICS meeting in August which exacerbated the US bond selloff.“
New Era
What we appear to be entering is an era where US dominance is being eroded, yet that won’t harm the whole US economy too much … immediately at least …and nor the global economy … though some industries will be hurt more than others.
Commercial real estate and banking may be in some trouble.
But food companies such as Coca-Cola are in a better shape to weather the evolution (because they have strong immediate cash flow to deal with higher interest rates) …oil companies are also OK.
Check out this podcast, with Lyn Alden, a geopolitical financial analyst.
Here is an extended snip of what Lyn has to say (I added emphasis) beware AI interpretation … it shows the US is still focussed on money, oil and not on protecting nature:
“If you’re in commercial real estate, it’s catastrophic. If you’re Coca Cola, you’re fine. Right? So if you’re, if you’re an investment grade company, but fairly modest debt ratios, fairly long, low rate durations, you know, they can they can reduce their debt over time with incoming cash flows. You know, they can just choose not to refinance or choose to refinance minimal of it and you know, they don’t get the tail when they had before, but they don’t really have a huge headwind either.
“On the other hand, if you’re not investment grade, if your business operations are already challenged, if interest expense is a meaningful part of your income, that’s when it’s an issue. And so you get a bigger than normal divide between different sectors.
Oil companies
“You know, funny thing about some of the big oil companies, they’ve got, you know, long duration debt, and then also a bunch of cash and cash equivalents. And so they’re in the opposite position of banks that, you know, they’re … borrowing long at at low interest rates, and then they’re holding cash at high interest rates. So the higher interest rates go, they’re actually like, okay, ‘we’re just getting paid more on our spread.’
“And so it really comes down to sector by sector, and it’s useful to quantify it because … so in the US, there’s something like $140 trillion of estimated household wealth you know, that’s real estate, that stocks that that’s bonds, that’s that’s all sorts of different assets, business equity, all those things. So when you hear, you know, one and a half trillion of commercial real estate equities wiped out, you know, that that’s somewhere in the ballpark of 1% of kind of aggregate net worth that we have.
“In addition, we’re dealing with, you know, one and a half or $2 trillion fiscal deficits, and so you have these kind of bubbles of problems, and in isolation, those are disinflationary and locally catastrophic.
“But in the grand scheme of things, they’re absorbable because of this fiscal dominance, large structural fiscal deficits that we were writing elsewhere, and so that’s why I think it really comes down to sector by sector, where you have some sectors that are literally (in) an outright recession …and have been …and other ones that are that are doing fine.
Stagflation coming
“And I think that the net result is something akin to stagflation, where you have maybe low positive real growth or flattish real growth and that you have decent nominal GDP numbers, because inflation component is fairly high because of, you know, fiscal spending to politically support supply chain frictions, kind of a whole tailwind of globalisation, which was disinflationary, it’s also kind of slowly, you know, maybe it’s not unravelling, but it’s just no longer accelerating, let’s say, — kind of the conservative case.
“And without that, that’s another kind of cost friction that’s happening. And so I think, I think that’s where we’re on is a somewhat more (of a) stagflation type of situation, which you often see in emerging markets, when they have recessions or when they have issues.
G7 with emerging-market characteristics
Lyn: “They often look different than developed markets have looked over the past, you know, call it 40 years. And I think we’ll basically have developed markets with certain emerging market characteristics.“
So this outlook is an evolution to a multi-polar world from US dominance.
And while the terms recession and stagflation both describe situations in which economic conditions are declining, stagflation is a much rarer — yet potentially an even more damaging economic state (Google). (tweaked to make more clear May 16, 2024)
This is why Biden or Trump if he’s the replacement needs to lift the game on regulation and tax reform.
This podcast in the Financial Times backs up Lyn’s view to some extent:
“When we project the current state of the US economy out, we should do so right now with low confidence.” FT’s Robert Armstrong…This is from an audio transcript of the Unhedged podcast episode: ‘Why the US dollar is the world’s problem’
——-
And the G7 document from April 30 shows the urgency of needed change (to the global financial market structure and beyond).
Climate impacts could sting
I recognize that structural market change needs to happen, or the climate as we know it and the depreciation of nature will get even worse.
See this:
The G7 document from April 30 on climate shows how urgent change is:
Accelerating the G7 Net-Zero Agenda 1.
Keeping 1.5°C within reach – We note with deep concern the findings of the GST (global stock take of climate effort) that there is a significant gap between current emissions trajectories and those required to keep the limit of 1.5°C global average temperature rise within reach.
March 2024 was 1.7C above pre-industrial levels
This is why lower interest rates would help — clean energy requires big upfront investment
G7:
“In this context, we fully recognise the urgent need for deep, rapid, and sustained reductions in global GHG in line with 1.5°C pathways in this critical decade.
“We remain committed as G7 to providing a substantial contribution to efforts to reduce global GHG emissions by around 43 percent by 2030 [only a 2% reduction is expected at the moment – a HUGE GAP] and 60 percent by 2035, relative to the 2019 level, in light of the latest findings of the IPCC AR6. We underline that this is a collective effort and further actions from all countries, especially major economies, are required in order to peak global GHG emissions by 2025 at the latest and achieve global net-zero emissions by 2050.“
So while we may have higher interest rates for longer after today … the fallout may be contained only in a few industries … eg banking and commercial real estate.
However the reckless increase in GHG emissions could prove devastating for everyone…oil’s being protected and higher interest rates make climate action more expensive. It’s not hopeful.
NOTES
US:
https://www.concoda.com/p/the-repo-market-exodus-part-ii
Hypothesis: The US used to fight wars to prevent the world from trading oil in currencies other than the US$. Now it seems like it has become in the strategic interest of the US to encourage the world to trade energy away from the US$. The reason for this is that more expensive oil in US$ terms forces foreign UST holders to have to sell down their USTs in order to procure the US$ necessary to buy the oil. This UST selling by foreign holders, commensurate with a Treasury that has to finance 6%+ deficits with over $500bn in net duration securities every quarter, creates an awful lot of supply pressure on USTs like we saw in the August-October period last year.
Since the US decided strategically to expropriate Russian UST reserves (and reserves of other enemies of the US), it must know now that no country is going to trust us enough to continue to build UST reserves over time.
As a result, the US must now plan to slow down the selling of these USTs to buy time before they can transition back to UST being forced back on to bank balance sheets or ultimately the Fed. Enter non-USD energy transactions to the mix.
If the US allows holders of USTs to purchase oil in currencies other than the US$ (in their local currency), these countries will not be forced to sell USTs aggressively like we saw in the August-October period last year when oil prices were rising quickly. They can simply price oil in local currency, trade with oil exporters for goods in local currency, and settle excess trade balances in gold. This system seems like it was accelerated last fall post the BRICS meeting in August which exacerbated the US bond selloff.
This is what scared the Treasury and the Fed to pivot in October/November in an attempt to buy time to weaken the dollar and lower interest rates to help the US government’s finances out. We know that China and India are already doing this buying of oil in their local currency. I am starting to think that Japan is doing this as well and over time, Europe is likely to begin too. Gold has been re-inserted into the game here and will continue to grow its share as global neutral reserve asset over time. Powell’s performance at the press conference last week, where he spoke dovish in the face of accelerating growth and inflation data, suggests his primary role of ensuring smooth UST market functioning is in play. The US government needs a weaker dollar and lower interest rates to survive and the Fed will help accommodate that. I expect more commodity transactions to be done away from US$ over time now that the US Govt is aware that it is in its strategic interest to support non-dollar commodity trading to prevent accelerating UST sales going forward. Although we went to war in Iraq and spent trillions of dollars fighting the battle to prevent oil from being priced in dollars, it seems as though we finally understand the error in that thinking and that allowing for multi-lateral energy pricing which weakens the US$ over time, improving our competitive positioning to rebuild domestic supply chains, is in our best interest. Let me know what you think.
