Impact of No Deal Brexit

www.bloomberg.com/news/articles/2018-11-28/boe-warns-disorderly-brexit-could-unleash-a-savage-recession

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The recession hiding behind Wall Street’s record highs – The Washington Post

Wall Street may have set new record highs this week, but the rally is masking an uncomfortable truth: Corporate America is still in the midst of recession.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits in the Standard & Poor’s 500-stock index will fall 5.6 percent compared with a year ago — the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.”

[Dow follows S&P to record high]

Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions. Energy companies have been devastated by falling oil prices. Multinationals have been hamstrung by the stronger dollar. Banks have been hammered by ultralow interest rates.

The gloomy reality comes amid growing warnings that the risk of a full-blown recession is rising — not only for the United States, but also the broader global economy. Britain’s decision to leave the European Union is also sowing uncertainty in financial markets and threatening to undermine the recovery in the United Kingdom. One of the most pessimistic forecasts came from Deustche Bank this month, predicting a 60 percent chance of a downturn in the United States over the next year.

That all sounds pretty dismal, and it makes the record highs set this week by both the S&P 500 and the blue-chip Dow Jones industrial average even more perplexing. At least part of the rally — and, some analysts argue, most of it — is the result of the signals from the world’s central banks that the era of easy money is far from over. But investors are also betting that corporate America and the broader economy are turning a corner, if they’re not already back on track.

Many analysts think the earnings contraction that started in the second quarter of 2015 bottomed out early this year. Profits fell 6.7 percent in the first quarter compared with a year ago, which makes the 5.6 percent estimate for this quarter look a little rosier. The outlook for the third quarter is even better, with analysts forecasting a milder decline as oil prices and the U.S. dollar stabilize.
Then there was a blockbuster report from the Labor Department showing rock-solid job growth of 287,000 jobs in June. That gave many investors confidence that the U.S. economy was weathering the global storm, especially after the exceptionally weak addition of just 11,000 jobs in May. On top of that, a new prime minister has been selected in Britain, a step toward resolving the political turmoil that has roiled markets.

[Opinion: Theresa May must contain the Brexit damage — and more]

Anthony Valeri, investment strategist for LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely.

Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985, which he notes are periods in which the federal deficit was increasing, rather than decreasing as it is now.

The third is the one we’re in right now, and it is not done playing out.

 

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously
Business Insider

Global currency markets are roiling in the aftermath of Thursday’s surprise decision by Switzerland’s central bank to end a 3-year policy that limited the franc from appreciating too much against the euro.

The move sent the franc soaring, triggering hundreds of millions of dollars of losses at banks including Barclays and Deutsche Bank, and bankrupted several currency brokers overnight. Many financial observers have lambasted the Swiss central bank for failing to signal the move was coming.

Jim Rogers, however, saw all of this coming, and he wrote about it in his 2013 book Street Smarts.

“I explained carefully and at length that it was coming and why,” he said in an email to Business Insider. “I am still astonished they would ever have done something so foolish, but politicians throughout history have always done some amazingly foolish things.”

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

In the first scenario, the market will continue to buy Swiss francs, which means that the Swiss National Bank will just have to keep printing and printing and printing, and that will of course debase the currency. Now, there are major exporters in Switzerland who might benefit, but the largest industry in Switzerland, the single largest business, is finance. The economy rises or falls on the nation’s ability to attract capital. And the reason people put their money there is their trust in the soundness of the currency- they not that their money will be there when they want it, and that it will not be worth significantly less than when they put it there in the first place.

But people will stop rushing to put their money into a country where the value of the currency is deliberately being driven down. After the Second World War and for the next thirty years, people took their money out of the United Kingdom because the currency plummeted. (Politicians blamed it on the gnomes of Zurich.) London ceased to be the world’s reserve financial center because Britain’s money was no good. Similarly, if you debase the franc, eventually nobody will want it. You will have eroded its value, not simply as a medium of exchange, but also a monetary refuge. The money will move to Singapore or Hong Kong, and the Swiss finance industry will wither up and disappear.

The alternative scenario is what happened in July 2010, the last time the Swiss tried to weaken their currency. They did so by buying up foreign currencies to hold against the franc-selling the franc to keep the price down. But the market just kept buying the francs, and the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort. At that point, when the bank stopped selling it, the Swiss franc rose in value, all the currencies the Swiss had bought (and were now holding) declined in value, and the country lost $21 billion. In the end, the market had more money than the bank, and market forces inevitably prevailed.

In the late 1970s when everyone was rushing to the franc, the Swiss National Bank, to stem the tide, imposed negative interest rates on foreign depositors. The government levied a tax on anybody who bought the currency. It was their form of exchange controls back then. If you bought 100 Swiss francs, you wound up with 70 in your pocket. Today, with the rush on again, The Economist has described the Swiss currency as “an innocent bystander in a world where the eurozone’s politicians have failed to sort out their sovereign-debt crisis, America’s economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen.”

All of which is true, but I think the problem runs deeper than that. The Swiss for decades had a semi monopoly on finance. And as a result they have become less and less competent. The entire economy has been overprotected. The reason Swiss Air went bankrupt is because it never really had to compete. Any monopoly eventually destroys itself, and Switzerland, in predictable fashion, is corroding from within. As a result, other financial centers have been rising: London, Lichtenstein, Vienna, Singapore, Dubai, Hong Kong.

I still have those original Swiss francs that I bought in 1970, and since then the franc is up about 400 percent. Granted, it has been over forty years, but 400 percent is nothing to sneeze at. Plus I have been collecting interest. Had I kept the money in an American savings account, it would have gone down 80 percent against the franc.

Reprinted from “Street Smarts” Copyright © 2013 by Jim Rogers. Published by Crown Business, an imprint of The Crown Publishing Group, a division Random House LLC, a Penguin Random House Company.

Why Thomson Reuters and Markit could give Bloomberg a run for its money

The privacy scandal that shook Bloomberg in May could be coming back to bite it. Today, Markit and Thomson Reuters formally announced their new messaging system for finance professionals, Market Collaboration Services. It seems designed to compete with the chat function on Bloomberg terminals, to which Bloomberg owes part of its dominance as a data provider. The two companies said today that Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase and Morgan Stanley were all on board.

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We’ve written before that Thomson Reuters will have a hard time unseating Bloomberg. But traders, bankers, and other financial services professionals we’ve spoken to over the last few months have raised a number of points that lead us to believe that Thomson Reuters and Markit could be more successful than we thought:

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Concerns about snooping and data privacy really shook bankers up. In May, Bloomberg admitted that its reporters had access to information about its customers’ usage of their Bloomberg terminals, and there were complaints that they were using it to write stories. Though the fury may have faded, the message has not; third-party technology can pose a threat to the secrecy of the firm. The Markit/Thomson Reuters offering was created in close collaboration with banks and is more customizable, so it may enjoy a certain level of trust.

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Not everyone needs a Bloomberg. Bloomberg terminals cost around $20,000 per year, something Wall Street has long seen as a necessary evil. But maybe no longer. “For some big banks, it’s an incredibly expensive instant messaging device,” an executive at one market infrastructure company told the Financial Times (paywall). “They’re saying, ‘we’re spending $120m a year on Bloomberg. That needs to come down’.”

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Sharing is caring… about costs. Major banks have already made the decision that employees can share a terminal in some cases, and used the savings to buy cheaper plans from Thomson Reuters that can be customized to fit an employee’s role. A commodities trader, the thinking goes, doesn’t need all the same tools a banker advising on tech mergers does. By contrast, Bloomberg terminals are one-size-fits-all; if you buy a terminal, you have to take all the features it offers even if you don’t need them.

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This is already happening; one banker who was not authorized to speak on his bank’s behalf said his team had seen its number of Bloomberg terminals cut down to one, replaced by Thomson Reuters Eikon terminals. The team shares the remaining Bloomberg terminal.

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A stand-alone chat function makes a lot of sense. In an email, Thomson Reuters said it “aims to create the largest financial markets messaging community and remove barriers to cross-market communication.” This means installing the messaging service on as many machines as possible, even ones that don’t even receive data feeds. Therefore, employees across the business could have access to the secure chat feature. If fewer bankers have their own Bloomberg terminals, they will need an alternative chat service to communicate with those colleagues that don’t have them.

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Clearly, this isn’t a transition that will happen overnight. But with cost pressures mounting and reception already warm, Markit and Thomson Reuters seem to have a better shot at taking on Bloomberg than you might think.

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Bloomberg declined to comment.

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Companies Unplug From the Electric Grid, Delivering a Jolt to Utilities

BUSINESSSeptember 17, 2013, 11:05 p.m. ET

Companies Unplug From the Electric Grid, Delivering a Jolt to Utilities

By REBECCA SMITH and CASSANDRA SWEET CONNECT

Michal Czerwonka for The Wall Street Journal

At Kroger’s food-distribution center in Compton, Calif., a tank system converts organic waste into biogas to produce electricity used by the facility

On a hill overlooking the Susquehanna River, two big wind turbines crank out electricity for Kroger Co.’s Turkey Hill Dairy in rural Lancaster County, Pa., allowing it to save 25% on its power bill for the past two years.

Across the country, at a big food-distribution center Kroger also owns in Compton, Calif., a tank system installed this year uses bacteria to convert 150 tons a day of damaged produce, bread and other organic waste into a biogas that is burned on site to produce 20% of the electricity the facility uses.

These two projects, plus the electric output of solar panels at four Kroger grocery stores, and some energy-conservation efforts are saving the Cincinnati-based grocery chain $160 million a year on electricity, said Denis George, its energy manager. That is a lot of money that isn’t going into the pockets of utilities.

From big-box retailers to high-tech manufacturers, more companies across the country are producing their own power. Since 2006, the number of electricity-generation units at commercial and industrial sites has more than quadrupled to roughly 40,000 from about 10,000, according to federal statistics.

Experts say the trend is gaining momentum, spurred by falling prices for solar panels and natural gas, as well as a fear that power outages caused by major storms will become more common.

Michal Czerwonka for The Wall Street Journal

Organic waste

“The battle cry is Hurricane Sandy,” said Rick Fioravanti, vice president of energy-storage technology at DNV Kema, a Netherlands-based consulting company.

The growing number of companies that are at least partly energy self-sufficient is sending a shudder through the utility industry, threatening its revenues and growth prospects, according to a report earlier this year by the Edison Electric Institute, a trade association for investor-owned electric companies.

State and federal regulators say they are worried that utilities could end up with fewer customers to pay for costly transmission lines and power plants.

Utility executives, meanwhile, are asking themselves a disquieting question: “Am I going to just sit here and take it and ultimately be a caretaker of a museum, or am I going to be part of that business” that’s emerging, said Nick Akins, chief executive of American Electric Power Co., a big Ohio-based utility. AEP is considering helping its customers install their own generating facilities.

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On-site generation still accounts for less than 5% of U.S. electricity production. But it is peeling off some of the bulk sales that utilities find especially profitable. And some of the companies getting into the business think it is approaching a tipping point called “grid parity,” at which point power would be as cheap to make as to buy from a utility.

Since 2007, when the first solar arrays went up on its store roofs in California, the installed costs of Wal-Mart Stores Inc.’s solar systems have dropped from $6 or $8 per watt of capacity to about $3.50 per watt, said David Ozment, the company’s senior director of energy management. He said he expects the retailer to be paying as little for solar power as utility power “in less than three years,” opening the floodgates to solar expansion.

Wal-Mart produces about 4% of the electricity it uses but intends to make 20% by 2020, taking advantage of idle acreage on thousands of store rooftops.

On-site generation isn’t a new idea. It existed before the electric grid—the interconnected system of power plants, substations and transmission lines that ferry power thousands of miles—was stitched together beginning in the 1920s.

But for most of the past 50 years, the practice was associated mostly with remote locations like Alaska fish canneries or industrial facilities like oil refineries that generated lots of waste heat that could be harnessed for power production.

Almost overnight, that niche market has gone decidedly mainstream. Six years ago, Google Inc. attracted attention by installing big solar arrays atop its Silicon Valley complex in California. Other tech companies followed suit, worried about ensuring power supplies for energy-hungry server farms and achieving sustainability objectives.

Apple Inc. now gets 16% of its electricity from solar panels and fuel cells that run on biogas. Apple’s data center in Maiden, N.C., makes all the power it consumes, a company spokeswoman said.

BMW AG’s assembly plant in South Carolina, which made 300,000 vehicles last year, gets half its electricity from an on-site energy center that burns methane piped to it from a nearby garbage dump. Drugstore chain Walgreen Co., which has solar panels at 155 stores, plans to install them at 200 more.

Falling equipment prices make on-site generation increasingly attractive. From 2002 to 2012, the cost of installed solar systems fell by half, according to an August report from the Lawrence Berkeley National Lab. Companies also have the option of leasing big solar systems, rather than incurring the capital cost of buying them.

Many “clean energy” projects also qualify for federal and state subsidies. In the case of solar installations, there is a 30% federal tax credit, which is set to drop to 10% in 2017. Government officials say a shift to greener energy resources is good since it reduces the output from coal-fueled power plants, which produce about 40% of the nation’s electricity and are the most polluting.

But analysts say the importance of subsidies has been waning, overshadowed by steep declines in the cost of power-generating equipment. For example, the cost of solar modules—the biggest single component in a rooftop solar system—has dropped about 80% in the past four years, to about 65 cents a watt from about $4 a watt, said Galen Barbose, a senior researcher at the lab.

Companies also are turning to wind turbines and technologies like fuel cells, batteries, small natural-gas turbines and reciprocating engines, which are natural-gas-fueled cousins of the auto’s internal combustion engine.

Engineering and technology company SAIC Inc. is installing enough generating capacity at a data center outside New York to meet the center’s core needs, with batteries for backup power. The system uses reciprocating engines burning natural gas, an option considered reliable in storms because gas pipelines are buried.

A report released by the White House in August estimated that power outages caused by bad weather cost the U.S. economy $18 billion to $52 billion a year in lost productivity from 2003 to 2012.

Demand for fuel cells in the U.S. is coming primarily from telecom companies, hotels and universities, said David Wright, CEO of ClearEdge Power Inc., a manufacturer in Hillsboro, Ore. Many buyers want reliable on-site generation as a hedge against storm-related outages.

By next year, Verizon Communications Inc. plans to install $100 million worth of fuel cells from ClearEdge and Bloom Energy, as well as solar panels, at 19 data centers and other facilities in seven states, including New York and New Jersey.

Some traditional utility companies are edging into the on-site generation business.

Edison International, which owns big utility Southern California Edison, recently bought a Chicago-based developer of rooftop solar projects, SoCore Energy LLC, and it is an investor in solar-finance company Clean Power Finance.

As power production becomes more decentralized, “I want to make sure the company is deeply involved,” said Edison CEO Ted Craver.

Write to Rebecca Smith at rebecca.smith@wsj.com and Cassandra Sweet at cassandra.sweet@dowjones.com

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Companies Shift Cash Out of Treasurys as Fears Subside

August 7, 2013, 1:28 PM ET

Companies Shift Cash Out of Treasurys as Fears Subside

Companies moved money out of government debt and into commercial paper and corporate debt, as worries over Federal Reserve policy faded and treasurers showed a willingness to take on some risk to gain yield.

Click on the image above to view an interactive chart of corporate cash allocations.

U.S. Treasurys ended a three-month streak of increases in their share of corporate cash allocations, falling by 0.85 percentage point to represent 26.5% of corporate cash on August 1, according to data from Clearwater Analytics.

Corporate debt and commercial paper grew by .55 and .32 percentage point, respectively. Corporate debt remains the largest asset class among cash allocations, representing one-third of the total.

Worries that the Fed would reduce its bond-buying program prompted credit spreads to widen in May and June, said Rhet Hulbert, a portfolio manager at Clearwater Advisors LLC. But last month, he said, “the market settled, recognizing an over-reaction.”

Mortage-backed securities grew by .21 percentage point to 3.5% of all cash allocations.

“Mortgages had been underperforming other asset classes recently,” Mr. Hulbert said, “but investors in July moderated their views on risk and interest rates and moved some assets back into the space.”

Other asset types were mostly stable last month. Both agency bonds and CDs sank by 0.16 percentage point, but all other asset classes shifted less than 0.1 percentage point in July.