Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

TIPPING POINTS

A GUTTED WORKING MIDDLE CLASS

 
HAS COVID-19 SPRUNG THE GLOBALIZATION TRAP?
 
In this month’s UnderTheLens video we discussed a number of generally accepted definitions of a “Liquidity Trap”. In its simplest form a Liquidity Trap occurs:
 
When consumers and corporations slow their rate of spending and invest despite interest rates being at historic low levels while central bank monetary policies are ineffective in boosting economic activity because of insufficient demand.
 
Money within the US Federal Reserve System can only come into existence through the creation of Debt. Central Bankers are restricted by the fact that today debt is normally increased by increasing credit. Credit is increased by central bankers by increasing liquidity. The system however comes to a grinding halt when lenders become resistant to lending and borrowers are unable or unwilling to borrow. This has been problematically occurring on a global basis for some time due to a slowing US consumption growth rate. The slowing has been abruptly accelerated by Covid-19.
 
Though we can expect the global economy to begin a slow path to recovery, economic demand will soon be found to be insufficient to satisfy the debt servicing needs of a highly indebted and over-leveraged global financial system.
 
DEMAND IS BEING ‘STRANGLED’:
 
CONSUMERS;               Are focused on cash flow and survival and are attempting to increase saving, 
CORPORATIONS:         Are focused on Cost Savings through reduced worker hours and spending to offset cash flow                                                       reductions,
GOVERNMENTS:          Reduction in tax receipts, sales tax and property tax payments are forcing spending reductions
 
BORROWERS:               Are defaulting on Mortgages, Student Loans and Rents on a historic rate,
LENDERS:                      Are increasing both Excess Bank Reserves & Loan Loss Provisions,
                                        Are canceling Credit Cards while reducing credit lines and credit limits,  
  
  This time its even more dangerous because we still know so little about the virus 
and the complexity of this crisis on economic growth, confidence, investment and global economies.
  
SITUATIONAL ANALYSIS
 
In the last few months the US lost significantly more jobs than it created in the last decade! Firms won’t replace many of these lost full-time workers. Instead, they’ll contract casual workers and increase automation, similar to what they did after the financial crisis of 2007-8. In the process there will be less demand in the US economy as a result of less income.  In turn, less spending, less growth, less earnings globally.

 

CRIPPLED PROTRACTED DEMAND IN A POST COVID-19 GLOBAL ECONOMY
 
  • JOB LOSSES – DIRECT COVID-19 IMPACT 
    • AIRLINES: Many will not survive or will be forced to merge with job losses. The International Air Transport Association predicts airlines will lose at least
    • TRAVEL: Cruise Ships, Rail, Car Rentals all facing serious protracted problems. Hertz has filed for bankruptcy while Royal Caribbean Cruises’ Spanish cruise operator Pullmantur Cruises just became the first Cruise ship operator to file for Bankruptcy
    • HOSPITALITY: Hotels, Motels, B&B’s, Vacation Resorts will see traffic impaired.
    • TOURISM: Highly dependent areas such as Europe will be crippled. 
    • EVENT INDUSTRY: NFL, MLB, NBA, NFL etc, International Football etc will be crippled. Disney parks in the US and Europe still unable to open.
    • OTHER: The coronavirus outbreak has triggered unprecedented mass layoffs and furloughs. Here are the major companies that have announced they are downsizing their work forces.
  • JOB LOSSES – INDIRECT FROM FORCED COST REDUCTIONS
    • BANKS & FINANCIAL SERVICES: HSBC Plans To Cut 35,000 Workers: This May Be A Harbinger Of What’s To Come
    • TRADE SERVICES: Endless service providers from Law Firms to Tattoo Parlors are cutting staffs on expectations of slower revenues.
  • RETAILERS DON’ SEE DEMAND LEVELS RETURNING SOON ENOUGH
  • PUBLIC SERVICE WORKERS: Massive layoffs and pay cuts are likely coming to state and local governments as federal aid goes elsewhere. Even if government aid is forthcoming it only delays the inevitable cuts due to lost revenue (see Macro Analytics Video: Mainstreet Shock)
  • ZOMBIE CORPORATIONS: According to the Bank of International Settlements (BIS) nearly 20% of all corporations are Zombie Corporations. It is highly likely many will not survive with massive layoffs with all being forced into major job reductions as lending becomes harder and more expensive.
  • FALLEN ANGELS: Accelerating Credit rating downgrades due to expected slowing demand is lowering IG “BBB” corporations to HY credit ratings and therefore no longer allowing them to be Pension Plan and Insurance company portfolio holdings. The result is forced downsizing and layoffs!
THE US CONSUMPTION ENGINE WILL NOT SUSTAIN ITS RATE OF CONSUMPTION
 

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