Media

Bloomberg Opinion: Everything's Too Expensive and Nothing Can Be Done | Oct 21, 2020

October 21, 2020,  John Authers

From Hope, Fear and Covid Set Free

It’s not the despair, it’s the hope. Variant Perception has produced much interesting research over the last few months suggesting that panic over the coronavirus has been exaggerated. The research group’s latest bulletin argues that the greatest reason for fear is fear itself. Research from the International Monetary Fund shows that during the first 90 days of the pandemic, “voluntary social distancing”  had a greater impact on mobility than formal government lockdowns:

This suggests that the focus on mandatory lockdowns per se is overdone. There are exceptions, but as a rule people aren’t stupid. If there is a risk of catching a potentially deadly virus, they will modify their behavior. Further IMF charts show that a lockdown had far less effect on mobility than a doubling in coronavirus cases:

Not only that, but lifting a lockdown generally had a far more limited impact than imposing one. For all the passionate opposition they have sparked across the world, ending lockdowns hasn’t tended to have much effect on how people behave. This suggests that the virus itself, or at least the fear of it, is more impactful on the economy. That in turn leads Variant Perception to say that the prevailing negative coverage of Covid needs to be lightened:

As long as policymakers and the media present a more alarmist view of the virus’s impact than can be justified by a dispassionate analysis of the data, recoveries will continue to stutter. On the other hand, an easing of the fear portrayed would likely allow recoveries to accelerate at a much faster rate.

While this is true, the debate in the last few weeks has grown to include far more voices suggesting that we should move more freely, just as infections have risen again. Journalists need to be confident that it is responsible to tell people it’s safe to go back in the water. Otherwise the consequences become hard to contemplate.

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Bloomberg Opinion: A Forgotten Tail Risk Rears Its Head Again | Sep 16, 2020

September 16, 2020,  John Authers

…the latest trade data suggest that the sudden stop caused by Covid-19 has intensified the imbalance between the world’s two biggest economies. Generally, most countries have seen imports and exports decrease by the same percentage, which means that their balances, whether positive or negative, have tightened. This is true of Canada, Japan, the U.K. and Germany, as Variant Perception illustrates below. But China and the U.S., whose balances had narrowed slightly during the Trump era, have bucked the trend., The Chinese trade surplus is widening, and the U.S. deficit is deepening:

Meanwhile in the U.S., support for people idled by the Covid shutdown has translated into sharply higher personal incomes. Thus, for now, American policy has backed retail over industry, tending to pull in more imports, while China’s policy of boosting manufacturing rather than consumers has buoyed its exports:

If Americans truly want to avoid a trade deficit with China, then, this is a problem. (It’s not clear to me that the deficit as such should matter much, but evidently plenty of American politicians disagree.) The most likely way to see this change would also involve pain; if politicians cannot find a way to extend the benefits passed to aid people through the Covid slowdown, and the pandemic continues to slow activity, then there is likely to be much less consumer demand, which will feed through into lower imports. But this wouldn’t be a good solution, and indeed Variant Perception suggests that it would probably lead to yet more easy money from the Federal Reserve, which would suck in yet more imports.

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Bloomberg Opinion: Robin Hood Is Pillaging the Sheriffs of BlackRock | Jul 29, 2020

July 29, 2020,  John Authers

Summertime, and the Trading’s Not Easy….

August is almost upon us, and the northeastern U.S. is now uncomfortably, not to say disgustingly hot. Even if it is harder for people to escape on vacation this year than usual, it seems reasonable to expect markets to give us a dose of calm for the next few weeks.

Unfortunately, history suggests that Augusts aren’t always that sleepy. This chart, produced by Variant Perception with Bloomberg and Macrobond data, shows average monthly returns over the last 30 years for a range of assets.

August turns out to have been the best single month for the VIX volatility index and for the dollar, and the worst month for 10-year Treasury bonds (meaning yields tend to go up). It is also the best month after January for gold.Why so many fireworks amid the blue sky of summer?

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Grant's Interest Rate Observer: Money Gusher | Jun 12th, 2020
June 12th, 2020, Grant’s Interest Rate Observer

Bloomberg Opinion: Crash Lesson No. 1? Don't Ignore the Fed's Gusher | Jun 9th, 2020

June 9th, 2020, John Authers

For another way to ram home just how unusual and different the Fed response was this time, take a look at this extraordinary chart of how excess liquidity grew during each of the last four bear markets, from Variant Perception. It is usual for the Fed to make liquidity available in difficult times for the stock market, and it has been harshly criticized for the way it did so after the last crash; but nothing compares to what has just happened:
 
 
In the context of such an enormous gush of liquidity it is clear at an intellectual level that there was immense pressure on share prices to rise. That doesn’t make this surge any easier to process at a personal level, and it doesn’t banish the fear that it cannot be sustained once the market has to confront underlying economic and corporate fundamentals. The same applies in the terrible event that human beings put their immune system into a second great contest with the novel coronavirus.
 
Financial Times: Federal Reserve has encouraged moral hazard on a grand scale | Apr 13, 2020

April 13, 2020, Jonathan Tepper

After a decade of economic growth and generous tax relief, US companies should have held cash piles to sustain them for short periods without revenue. But most borrowed all they could and never saved for a rainy day.

 

Today credit spreads are increasing, indicating a higher probability of default. However, the anomaly is not the current levels of stress but the unnatural calm that came before. Research by Variant Perception shows that, historically, companies with high levels of net debt compared with their cash flows have had higher costs of funding. But this relationship broke down after the last crisis. It is only now, during the coronavirus crisis, that fundamentals are reasserting themselves and terrible companies are seeing their spreads widen.

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WSJ: How Much Will U.S. GDP Decline in the Second Quarter? | Mar 23, 2020

March 23, 2020, Lev Borodovsky

8. Is recession risk fully priced in? According to Variant Perception, markets have often waited for tangible improvement to the underlying event that caused a sell-off before a tradable bottom occurs.

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WSJ: European High-Yield Bond Rally May Be Over-Hyped | Jan 22, 2020

January 22, 2020, Paul J Davies

Simon White, managing editor of research firm Variant Perception, expects spreads for both U.S. and European speculative-grade bonds to move slightly higher this year, although not as much as for investment-grade bonds.

“There are clear signs that the credit cycle is maturing,” Mr. White said.

“The fact is that investors are looking through the fundamentals, but central banks remain willing to support markets,” he said.

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WSJ: The Fed Is Pausing on Rate Cuts | Oct 31, 2019

October 31, 2019, Lev Borodovsky

The rise in the Variant Perception’s unemployment breadth index could signal higher volatility ahead.

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Real Vision: The Central Banks' Monetary Policy Is Backfiring | Sep 18, 2019

September 18, 2019

Simon White, co-founder of Variant Perception, explains his view that as interest rates approach the zero bound, conventional monetary policy tools do not achieve their intended goals, but instead create deflationary pressures. He argues that in a negative-rate world, the private sector increases savings rates to combat their lack of income – causing an even bigger deflationary push. White believes that conventional monetary policy is nearing its limits, and MMT will unleash a flurry of inflation as politicians take control of policy. Filmed on September 13, 2019 in London.

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