The money glut is driving stock markets and gold. Gold shares are likely to benefit particularly if monetary policy remains expansive. As long as the virus continues to spread, the FED and other central banks will continue the "war on their own paper currencies" with undiminished vigor.
High growth of monetary aggregates in the euro area
The latest publications show that the money supply M1 (money stock of an economy owned by non-banks) increased by 12.5% compared with the previous year. The more comprehensively defined money supply M3, which also includes shorter-term bank deposits and other short-term money market paper, grew by almost 9%. The high money supply growth coupled with an increase in the private savings rate led to a rise in excess liquidity and fueled the stock markets. The flip side is that the high growth of narrowly defined money supply in particular is a sign of significant stress in the real economy. Lending to "non-banks," demand deposits held by "non-banks" "exploded," indicating panic demand in the real economy for liquidity sought to survive the lock-downs and future measures. Many businesses are skeptical about future ability to obtain credit and liquidity and want to "strike now while they can."
Debt problem worsens
The BIS, the "private bank of central banks" has published its data for 2019, including global debt ratios. The ratio of gross debt to world gross domestic product increased from 216.4% (2018) to 220.9% (2019). This exceeded the 2016 record high of 218%. While the debt situation of households improved minimally in aggregate (-0.6%), virtually all debt ratios of the corporate sector and public budgets deteriorated significantly. In aggregate, the debt-GDP ratio increased by 11.1% (corporate sector) and 11.9% (public budget). Within the corporate sector, banks scaled back their leverage, while "non-banks" massively expanded their credit.
It is troubling that the deterioration in the debt situation occurred before the Covid-19 crisis, during a period of expansion.
The overall debt situation improved in the last 10 years only in Germany, Spain and India. The ratio of gross debt to GDP (excluding the financial sector) rose most sharply in China, France and Switzerland, although Switzerland as a whole started from a low level. At best, the high debt ratio of Swiss private households at 132% could be problematic. By way of comparison, the ratio in the USA is "only" around 75.4%, in Spain 56.9%.
With the exceptions of Turkey, Sweden and Germany, governments have unfortunately not used the years following the "Great Financial Crisis" to reduce their public debt. The debt situation with which the world started into the "Covid-19 crisis" is unfortunately a bad starting point. The gigantic government bailouts and the revenue slumps in the corporate sectors will lead to a significant increase in debt ratios in 2020! That is why practically all central banks of this world have "declared war" on their own paper currencies.
COVID-19 problems in the southern states of the USA
Unfortunately, due to insufficient lock-downs in terms of consistency and duration, the virus is spreading rapidly in the southern states of the USA.
In Arizona,Texas, Kansas, Louisina, North Corolina opening plans had to be postponed. In California, too, further restrictions had to be implemented, including Walt Disney's decision to postpone the reopening of the theme parks indefinitely.
So far, the pandemic has claimed half a million lives. The cumulative number of Covid-19 cases is over 10 million. The virus is currently spreading rapidly, particularly in South and Central America.
Much of the measured increase could be attributed to more testing.
On the positive side, death rates have fallen significantly in virtually all countries. One example: According to a study by Oxford University, mortality in English hospitals fell from 6% (peak) to 1.5% in June.
Germany is once again on the verge of a triple capitulation
The project to issue Corona bonds with joint liability is gaining momentum. Germany wants to raise 146 billion euros in debt in Q3 to stabilize the economy.
Capitulation with regard to the goals of austerity, debt communitization and fiscal stimulus could be imminent. The Federal Constitutional Court (BVG) in Karlsruhe is likely to be on the losing end, with little support from realpolitik. The CDU, the Greens and the FDP have drafted a motion that would give explicit political blessing to the ECB's asset-buying programs. Presumably, the German parliament is likely to approve it. This is then likely to decide the conflict between the SNB and the ECB at the SNB's expense. For Euroland equities, this would be positive in the short term, but negative in the long term.
In the medium term, the AFD will benefit from "unconditional surrender" to debt communitization. In the long term, a system that communitizes debt without those who provide the credit having a say in national budgets cannot work because, unfortunately, it will lead to a political radicalization (Weimaization) of voters in the creditworthy countries.
A system in which the "creditworthy" would have co-decision rights on the budget of the "credit-unworthy" could work, but is not supported by the voters and politicians in these countries.
Increased Geopolitical Risks...
The tensions of the triangle Hong Kong, USA, China have risen sharply once again. China's influence on legislation in Hong Kong is growing stronger. For example, the Standing Committee of the People's Congress finally passed the controversial "National Security Protection Law" in Hong Kong. Critics see this as endangering autonomy and a violation of treaties ratified before the former British crown colony was returned to China. The Chinese government naturally sees this differently and argues that the constitution gives it the right to enact appropriate laws in matters of national security for Hong Kong as well. The new law would serve precisely to protect the principle of "one country, two systems," because in the future it could be used to punish separatist or aspirations and thus protect the civil order from violence. In response, the U.S. plans to restrict or even completely abolish Hong Kong's special status.
... also between China and India
The deadly border skirmishes between China and India prompted India to ban the use of dozens of Chinese software applications and prepare further measures.
And now - what is the conclusion?
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
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