Dec 6 FT Weekend Covid & the recovery, Inflation, Inflation and US$ slipping , Chinese light and mirrors , Retail and more.

06 Dec

On Monday I’ll be on  MONEY TALK ON RTHK RADIO 3 - Mon 7 Dec 2020 at 8amPeter Lewis the host sent this around The #US added 245,000 jobs in Nov, far below the 469,000 expected by economists  & the smallest gain since the labour recovery started in May.

The latest #Covid19 data shows infections in the US have now surpassed 14.7 million, with more than 285,000 deaths. Friday saw a record number of cases, deaths and hospitalisations.

In #HongKong, the territory has seen 100+ new cases for 2 days in a row. The government announced a one-time mandatory test for taxi drivers who planned to work between Christmas & Jan 23, beginning Dec 9.

Index provider FTSE Russell said it would remove 8 companies named by the US government as having ties to the Chinese military from some of its indices.

Talks between the #EU & #UK on a Brexit trade deal have been given one last chance following a telephone call between UK PM Boris Johnson and European Commission president Ursula von der Leyen.

Energy shares helped push US stock indices to new records Friday.

On Monday’s Money Talk, we’re joined by Alex Wong, Director of Asset Management at Ample Capital and Andrew Sullivan, Editor of Making Market Sense. With a view from mainland #China is Ben Cavender, Principal at the China Market Research Group.

Front Page
Covid surge threatens US recovery  The US only added 245k jobs in November raising fears that the labour market has lost momentum in the face of record new covid cases and a lack of new stimulus from the Government.  There are fears that numbers will continue to rise as the impact of Thanksgiving travel surfaces in the next week or so.  That will coincide with many Americans starting to travel for Christmas. Many took Friday’s job number to be good on the basis that it will put more pressure on politicians to agree a new stimulus package.  Many also think the move in Treasury yields reflects the fact that a new package is expected but whether it will be enough is still open to debate.  The wider jobs situation will be a big challenge for  Biden, he want more spending to restart the economy but without control of Congress that could be difficult to secure.

China uses lights and mirrors to match Google’s lead in quantum computing. Looks at the report that a team from the University of Science and Technology of China in central Hefei, completed a calculation almost 100tn times quicker than existing supercomputers, according to a paper published in the journal Science.Whilst the use of quantum machines to actually solve practical problems is still years away their is fierce competition to gain advantages in encryption and complex problem solving. Xinhua claimed the computer, which comprises lasers, mirrors, prisms and photon detectors, could process 10bn times faster than the quantum computer unveiled by Google last year.  Google’s machine used ultra-cold superconducting chips.But whether quantum computers will become a reality is still in question.

Taxpayers in Tokyo will pay highest bill for Olympics move to 2021. The delay will cost Yen 294bn ($2.8bn) which will be split three ways: Tokyo organising committee paying ¥103bn, the city government providing ¥120bn and the national government ¥71bn.  'Tokyo City has also agreed to underwrite the organising committee’s share of the cost, eliminating the need for upfront commitments by corporate sponsors who are reluctant to pay for the Olympics all over again.’Tokyo’s governor said that taxpayers will not feel any pain as the money will come from last years underspend and careful examination of spending this year, including efforts to cut costs.The whole event though has been plagued by doubts especially as sponsors have seen their own profitability hurt by the pandemic.  The benefits of sponsorship are also likely to be reduced as the event will still be subject to social distancing restrictions.Whilst the residents of Tokyo may not feel the pain directly the fact that additional money is being spent with the promise of less return which means they will suffer because money now being spent on the Olympics will not be spent on other services or reducing the overall cost burden of the city.  Going forward it raises the question of whether the costs of running such events is really justifiable.  

Editorial Inflation fears should not hold back the recovery. Deflation is still the bigger risk for a heavily indebted world economy.  Notes that various indicators are suggesting inflation will return, like the price of inflation-linked government bonds and the US T10.  At a time when central banks are still flooding their financial systems with liquidity couple with the prospect of economies re-opening as vaccination programmes get underway.  It warns that to remove support too quickly could undermine a success recovery. It notes that deflation has been the biggest fear this year, but that is now receding.Notes that 'Headline inflation measures during the pandemic may also have been misleadingly low, not reflecting the true changes in the cost of living’   For example price falls in airline tickets and holidays where consumers have been forces to cut back. It says ' Overall, though, these effects are likely to be minimal: an alternative inflation measure by the European Central Bank that tries to take account of different spending patterns in the pandemic is running only about 0.2 percentage points higher than the official index; wage growth, the biggest source of inflationary pressure, is absent.’So it suggests that central banks should not be eager to fight inflation in the short term as long as expectations don’t get out of control.  It says excessive zeal on flighting inflation would be a big macro economic policy mistake.  Removing support too early could derail the recovery and results in permanent scarring. I think the fact that the Fed has indicated its prepared to allow the economy to run hot means it is unlikely to tighten too aggressively especially with the prospect of Janet Yellen as Treasury Sec and Powell remaining at the Fed.  Equally with the ECB and BoE signs are of tolerance. Certainly there are plenty of examples of when a too aggressive policy has caused problems.  In Asia, we saw China crack down on the credit growth in 2013 just as the world economy was recovering from the eurozone debt crisis.  Again in 2018 when Beijing cracked down on shadow banking.  In January 2020 the government quickly eased in response to covid.  Currently total social financing is growing at 38%pa which cannot continue forever.  With the recent defaults and concerns over credit levels the additional worry is when and by how much will China look to tighten. PBoC policy looks set to remain in its current loose state for Q1 & 2 of 2021 but past that it is difficult to know.  Other risks in China are asset inflation; especially property and the risk of excessive speculation in the stock markets.  Shenzhen hit a 5 year high this week. Investors will need to be cautious and watch the Yuan strength vs the USD for signs of policy change.

Read also Investors seek inflation protection with rush to Tips funds as outlook brightens. Looks at how more money is going into funds that buy US Treasury Inflation-Protected Securities (Tips). 'A stronger, more rapid rebound, coupled with a Fed that has signalled a willingness to let inflation run above the 2 per cent target on a sustained basis, has put many fund managers on edge, fearing inflation could erode the real value of already low returns on bonds.’

Also connected  Dollar slides for third week on vaccine recovery bets 'Investors have shifted away from the haven dollar as they have turned more hopeful that vaccine breakthroughs will lift the world from its pandemic-induced malaise by the middle of next year.’ Against the backdrop of the Fed remaining accommodative in its policy; which most think will continue for years.  The recent move in the Euro is likely to be discussed at this weeks ECB meeting.

In a similar vein; Beware of hubris when betting on a ‘roaring twenties’. 'When the conviction of the market crowd is as bullish as it is now, some long-term investors find it hard not to feel a twinge of unease.’  Looks at the widely held view that equities will benefit as vaccines allow economies to re-open; releasing pent up demand and triggering an unlocking of recently increased household savings.  But some are cautioning that it might not be plain sailing.  Delays to vaccine rolls, the fact that many people may be cautious about being vaccinated with vaccines that has so quickly developed.  It notes 'Investors are buying into analyst expectations of a chunky 20 per cent recovery in global corporate earnings growth next year, mindful that, coming out of a recession, those countries hit the hardest usually benefit the most.’A bumpy recovery could also highlight the impact of increased debt levels and it also highlights 'Some investors are mindful that the 2008 financial crisis was followed by debt aftershocks convulsing the euro-zone from 2010-12 and then a credit crunch in emerging markets in 2013 and 2014.’It ends with a good quote 'The sheer amount of stimulus and pandemic disruption opens the door to what David Bowers, co-founder of Absolute Research Strategy, calls “a range of outcomes for equity investors that are maybe much broader than many realise”.’Markets rarely follow exact patterns and in reality modern markets have never experienced a pandemic before.  I also thinking that many households have not managed to build up savings and those that have will be cautious about spending them. If things do accelerate quickly company growth will be hampered by having to service the increased debt levels that they have amassed.  Without doubt 2021 will be as interesting as 2020 has.

Christmas shopping rush strains air cargo operations to the limit. Grounding of long-haul fleets leaves specialist jets struggling to fill gap while demand soars. Freight capacity is -25% YoY prompting a spike in freight rates.  Freighter aircraft are carrying 80%-90% of the freight vs the normal of 50%.  Some airlines are converting or adapting passenger aircraft to try and meet demand.  But the increase in demand will do little to offset the loss of passenger traffic.  The key is that historically cargo has been the icing on the cake; with the potential to  make airlines a profit as passengers pay the bills.The other key point is that the withdrawal of some passenger routes has killed some businesses; like cut flowers and fresh food supply chains. The viability of those businesses will really depend on the speed with which passenger travel and tourism rebounds.  For other businesses like high value products like electronics it is a matter of finding space more than the cost.  The article says 'Although less than 1 per cent of goods go by aircraft, it accounts for more than a third of trade by value.’Some of the vaccines being promoted are going to need very specialist airfreight conditions and already some airlines are gearing up for that.But overall the outlook for the sector is going to remain very uncertain for sometime to come.  I think they could improve that outlook by insisting on pre-flight covid testing as a way to regain passenger confidence. Finding an industry standard my be a challenge though.Short term there will be more failures and restructurings; Norwegian filed this week and others will follow.  There is also the risk that we see inflation before we see a resurgence in passenger uptake which could mean that servicing the recently recently acquired debt becomes a problem.  That in turn could knock onto the banks and leasing companies.  A number of the Asian Airlines have already rebounded strongly but I think there could be more problems ahead.

For interest 
Robo-surveillance shifts tone of CEO earnings calls. Trading algorithms spur executives to place a deeper focus on the spoken word.  Looks at how machines are not only reading company reports but listening to the conference calls too; “natural language processing”.  Looking for key words that could influence buy or sell decisions and even at the tone of the speakers voice.Refers to a recent paper by the US’s National Bureau for Economic Research. — How to Talk When a Machine Is Listening:Corporate Disclosure in the Age of AI.It notes how company reports have been adjusted since 2011 to show themselves in the best light to machines and how that is now spreading to conference calls and the like.  It notes that there is now a published dictionary.  'Not coincidentally, 2011 was when Tim Loughran and Bill McDonald, two finance professors at the University of Notre Dame, first published a more detailed, finance-specific dictionary that has become popular as a training tool for NLP algorithms.’It notes that this is a cat and mouse game, each side trying to get the advantage. For investors the real key is whether the company is run well and that comes from knowing the company.  A! Can highlight potential opportunities but researching due diligence is still required.

FT BIG READ. UK BUSINESS. Can the UK high street survive the retail crisis?I have looked at the fact that other countries face similar issues, including those in Asia.
The collapse of Debenhams and Arcadia this week will create even more empty stores in already struggling town centres. With few possible replacement retailers, some areas will need a new purpose.  Looks at the issues facing a lot of UK towns key being that there is just too much retail space be it in town or out of town.  UK planning rules and thinking created the current situation and government action will be required to revitalise it.  It cites the example of Basildon that was designed in the 1950’s as a new town to cope with London’s postwar overspill, I remember going there as part of school project and then later as a chartered surveyor.  The grand and at the time radical planning has not stood the test of time well.  It’s also interesting because it doesn’t have a high street but was built around a shopping complex.  It's also suffered from Lakeside which was developed in 1990 and is easily accessible by car.But many High Street’s have suffered usually from the push in the late 1980’s and 1990’s to provide ‘comprehensive town centre redevelopment’ to try and compete with the growth of out of town schemes.  That was the radical change for the UK and as the article points out it was in pursuit of maximising returns and providing large store operators with space and with little regard fo a lot of smaller businesses. Now as those businesses restructure; town centres are suffering.  Of concern will be the impact on the investors who developed or now own such schemes and whether the rental incomes will be enough to cover the loans and for pension companies whether there will be enough income to pay pensions.Whilst the article looks at the UK it is the same issue that is facing many other countries too.  The US is facing similar issues a few weeks ago an article on small specialty stores like toy shops having to close due to lockdowns.  This week an article about shops in Paris needing to repurpose too.  Hong Kong is facing a problem with its retail sector too; largely due to the down turn in mainland visitors over recent years which was exacerbated last year with the anti government protests.  China is one country that still seems to be seeing growth largely as its population becomes wealthier and it builds new towns and cities.  But in time that could also face problems, especially with as the issue of ageing populations.  Something that Japan is all too aware of in many of its smaller towns.Retail has changed as shopping has migrated to online but lots of people still enjoy going to the shops, Simon Smith of Savills Research in Hong Kong points out that the social aspect of shopping is still important and that shopping centres will need to become more ‘entertainment’ orientated in the future, and include features like cinema’s, fitness, restaurants and shops. A number of Hong Kong’s shopping centres are like that. It then becomes a matter of how many such centres can a city support.  For institutional investors direct property investment has always been a useful element to their portfolio’s and looking forward it will continue to do so, especially if as I expect (as does the Editorial), we see an increasing inflation trend but as with everything it is a matter of being aware of changing trends and demands.  When I was an investment surveyor in London in the early 1990’s out of town retail was the hot sector.  Today in Asia its data centres and logistic warehousing.  It is constantly changing so constant monitoring is needed.

Electricity grid operators search for ‘inertia’ to power a greener future. Looks in a bit more detail at what will be required from the electricity systems as countries move to greener, carbon neutral systems.  An interesting read.

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