Attack of the Zombies

From Bloomberg, 17 Nov 2020, by Lisa Lee and Tom Contiliano:

…many of the nation’s most iconic companies aren’t earning enough to cover their interest expenses ( …zombie status).

Almost 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic… In fact, zombies now account for nearly 20% of [the top 3,000] firms.

… they’ve added almost $1 trillion of debt to their balance sheets… bringing total obligations to $1.36 trillion. That’s more than double the roughly $500 billion zombie companies owed at the peak of the financial crisis.

The consequences for America’s economic recovery are profound.

The Federal Reserve’s effort to stave off a rash of bankruptcies by purchasing corporate bonds might very well have prevented another depression. But in helping hundreds of ailing companies gain virtually unfettered access to credit markets, policy makers may inadvertently be directing the flow of capital to unproductive firms, depressing employment and growth for years to come…

A representative for the Fed declined to comment…


Asia signs on…

From The Australian, by Amanda Hodge:

Thai Prime Minister Prayut Chan-O-Cha beside Prime Minister Scott Morrison and Japan’s former Prime Minister Shinzo Abe at the 2nd Regional Comprehensive Economic Partnership summit (RCEP) in 2018. Picture: AFP

An Asian mega trade pact representing to 30 per cent of all global output is to be signed into force this weekend …amid [China’s] ongoing trade war with the US, and as its neighbours seek to diversify supply chains outside China’s sphere.

All 10 ASEAN nations, plus China, Japan, South Korea, Australia and New Zealand, are ­expected to sign off on the ­Regional Comprehensive Economic Partnership (RCEP) agreement …

China’s determination to drive RCEP into force [is] a response to the Obama administration’s TPP (…Trans-Pacific Partnership), which deliberately shut Beijing out of the world’s then biggest proposed trade deal.

Instead, the US finds itself on the outside of both pacts (Australia is in both)…

The new RCEP bloc… seems also to run counter to recent political rhetoric in Australia, Japan and India around efforts to ….diversify supply chains away from China.

Instead, analysts expect the deal to strengthen trading ties between China, ASEAN and the other members …

Whether that will help ameliorate the escalating bilateral trade and diplomatic tensions between Canberra and Beijing remains to be seen.

… ANU emeritus professor of economics Hal Hill told The Weekend Australian that RCEP was unlikely to change much..

“We have (our own free trade) agreement with China which, in the current environment, appears to be non-functional.”

While some modelling has suggested China could gain as much as $US100bn a year by being in the bloc, and Australia up to $US1bn a year, Professor Hill said RCEP was likely to be of only “marginal benefit”.

Wage freeze

From a report in The Australian, by TOM DUSEVIC

More Australian workers will have their pay cut or wages frozen as the nation emerges from the COVID-19 recession.

55% of companies surveyed by the RBA have implemented a wage freeze or will implement one in the coming year. Furthermore, some companies have imposed temporary wage cuts, mostly for senior staff.

In addition, the RBA expects unemployment to peak at 8 per cent this quarter; it will be no lower than 6 per cent by the end of 2022.

Where’s the Gold?

Germany has the second largest gold reserves in the world at 3,366 tonnes.

1,698 tonnes (50%) of Germany’s Gold reserves are stored on its own soil, 1,236 tonnes (37%) stored in the U.S., and 432 tonnes (13%) in the U.K. 

During the hostage crisis (1979) the U.S. blocked Iran’s gold account in New York. Germany wants to avoid being subject to such pressure. The more of its gold reserves Germany stores at the Federal Reserve Bank of New York, the more leverage the U.S. has over Germany. 

Germany repatriated 300 tonnes from New York in 2013 to decrease its dependence on the US. If the US-German relationship further deteriorates, this may motivate further repatriation of Gold reserves. 

Is Inflation the way out of this?

10-year Treasury Inflation-Indexed Securities (“real interest rates” ) are now negative. Hanging on to cash, costs money….

US federal debt is at the highest levels in over 100 years…

Will the US Government impose austerity measures to build surpluses and repay debt…

…or allow inflation to pump up GDP relative to debt (as it did after WW2)?

Kalgoorlie Golden Mile becomes a Global Top-10 Mine

6 October 2020

Northern Star Resources Ltd (ASX: NST) and Saracen Mineral Holdings Ltd (ASX: SAR) have announced their merger.

The transaction will will unlock AUD1.5-2.0B in synergies and create a Top-10 global gold company valued at AUD16B. The merged entity will target a production of 2 Million oz per annum of gold, exclusively in Tier-1 locations.

For the first time in its +125 year history, a single entity will own the Kalgoorlie “Golden Mile”.

And from The Australian today, by Nick Evans and Bridget Carter:

Northern Star founder Bill Beament will remain the company’s executive chairman until mid-2021, before moving to a non-executive role, with Saracen boss Raleigh Finlayson acting as its managing director.

Mr Beament said in a statement the merger would create “an abundance of value” for shareholders of both companies. “Our position as joint venture partners at KCGM, the close proximity of the majority of the combined company’s assets and a host of other synergies makes this a unique opportunity exclusive to Saracen and Northern Star shareholders”.

Mr Finlayson said the deal was the “one of the most logical and strategic M&A transactions the mining industry has seen… The benefits which will flow to Saracen shareholders from this merger are significant. The pre-tax synergies alone are expected to be worth in the order of A$1.5 to A$2.0billionover the next 10 years”.

The announcement comes as gold miners continue to experience buoyant conditions thanks to the soaring price of the commodity.

The Australian gold price hit a record of $2873.56 per ounce on August 6, driven by the weakening US dollar and the search by investors for diversification.

At that time, gold was up 33 per cent from the start of the year.

Are Bonds still a Safety Net When Stocks Fall?

From the Wall Street Journal, 5 Oct 2020, bPaul J. Davies:

“…The wave of central bank stimulus unleashed to combat the Covid-19 crisis has repressed government bond yields in the U.S. and elsewhere, and threatens to keep yields trapped at low levels for years to come. Even as stock markets have recovered since April, 10-year Treasury yields have barely budged.

The fear is that when stocks next take a tumble, bonds won’t cushion the fall. Investors have been left hunting for another simple way to balance risks.

It is rare for stocks and government bonds both to fall in value together, but that happened in March: A basic 60% stocks-40% Treasurys portfolio suffered one of the worst single-month losses since the 1960s, according to Goldman Sachs. The only worse returns occurred in 2009 and 1987.

March’s falling bond values “added insult to injury instead of helping to balance a multiasset portfolio,” said Stéphane Monier, chief investment officer at Lombard Odier in Switzerland. “This experience could repeat itself more often in future because we have reached an effective lower bound for government bond yields.”

Mr. Monier of Lombard Odier has been looking for income in markets like Chinese government debt, where 5-year bonds pay about 3% versus the less than 0.3% available on 5-year Treasurys.

He also favors gold as a store of value. In a world where many bonds’ real yields are negative, the fact that you have to pay to store gold doesn’t matter like it used to, Mr. Monier said...

CPI – where to from here?

Bond yields continue to drop below 1%pa. They are now at 0.7% (see the Green Line below).

Last time Bond yields (the Green Line below) were so low was in the 1970s and again in the 1980s . Look at what happened to the CPI (Purple Line below) then….