Hey there. This is issue #044 of the abroaden weekly insights newsletter (formerly WTF is Going on with the Economy?!) where we talk about economic cycles.
ECB bond purchase increases🇪🇺💶
It’s bold to lead off a newsletter with the latest from a central bank. We at abroaden believe in bold, so here goes!
As the masters of eurozone monetary policy, the European Central Bank (ECB) announced late last week that it would accelerate its corporate debt purchases. This tool, known by its completely not-technical name of “quantitative easing,” is one of the main ways central banks control interest rates.
Right now, interest rates in many parts of the world are going up. Last week, we reported that ‘yields’ (aka interest rates on bonds) in the United States are already back to where they were before the pandemic. While investors like getting a higher return for lending money, central banks aren’t such fans, particularly during a pandemic.
When interest rates go up, investors prefer to park their money instead of investing it. In turn, people and companies pay more interest to finance their projects. When you want the economy to recover — say from a once-in-a-lifetime pandemic recession — you want people borrowing money cheaply.
The ECB had to act now as the European economy is still preoccupied with fighting yet another wave of the novel coronavirus. Until the EU catches up with the UK and the US in the vaccine race, Europe can’t unleash its economy. When that happens, interest rates need to be low enough to make borrowing easy. Finger’s crossed that the EU gets its vaccine issues figured out before other parts of the world leave the old continent economically behind.
Pandemic inequality rears its ugly head.😲
Recessions are bad for numerous reasons. Aside from the economic damage they do, recessions also make income inequality worse. The pandemic recession is no exception to this rule. Sadly, a combination of the way policymakers locked-down society and pre-existing societal flaws makes the gap between the haves and have-nots even wider.
Bloomberg Businessweek is covering this topic in sobering details. Their article cites numerous disturbing statistics, such as school children losing 3% of their lifetime income due to a lost year of in-class learning.
It’s not just Bloomberg talking about this problem. The Economist pointed out the devastating effects pandemic had on women, creating the first female recession in a half-century. Policymakers want us to build back better. They must tackle these glaring problems or face an even more bipolar society.
Get the latest from us right when we publish
Greensill Capital Going Broke🏚️
You might not have heard about it, but Greensill Capital is stealing headlines in the financial media. Here’s why.
Greensill Capital was a B2B FinTech created ten years ago by an Australian entrepreneur named Lex Grensill. The company set out to “disrupt” supply-chain finance. If you’re not familiar with the concept, multinational firms have extensive supply chains. To keep things moving, these companies will borrow money to pay different suppliers. The lender gets a small cut for their services.
Greensill saw an opportunity to offer these services to smaller-sized businesses. Investors like Japan’s SoftBank (you might remember them as they got burned investing in WeWork) liked the idea and poured billions into the startup. The company flourished, eventually buying a small German bank to make even more loans, with hedge funds and giant banks like Credit Suisse providing the capital.
However, last week, Greensill declared itself insolvent. As it turns out, the company was making questionable loans to personal friends of the founder. If that wasn’t enough, the company wasn’t forthright with the regulators about what it was doing. With the company broke, its investors are left with almost nothing, while regulators wonder how they missed the warning signs.
This tale might sound familiar to you. Last year German FinTech darling WireCard collapsed after years of committing undetected financial crimes. Will we see more ugly cases like Greensill and WireCard as the economy sorts itself out? We shall see.
NASDAQ and the Cycles 🚲🤖
One of the primary economics laws is that economies always run in cycles (although confusingly, economists call them “business cycles”).
Generally, they go like this:
- Expansion (growing or “bull” as they call it)
- Boom (peak)
- Recession (contracting or “bear”)
- Market bottom
During these cycles, ambitious ‘tactical’ investors move their money between different sectors. The idea is that, as the economy changes, consumers and companies shift their business to other industries.
For example, when an economy enters a recession, tactical investors put their money into more ‘defensive’ sectors, like healthcare, utilities, and consumer staples. Investors like these sorts of companies since everyone needs electricity, healthcare, and toilet paper (see this time last year), regardless if the economy is good or bad.
By the time the market hits the bottom, tactical investors tend to have a lot of cash. Here, they start making bets on high-growth/high-potential sectors like tech companies. Tech does well in these periods since these businesses tend to move faster than other sectors.
To the surprise of no one reading this newsletter (you rock for that, btw), tech stocks have crushed it during the past 12 months. As the pandemic forced people to stay home, tech giants and other startups facilitating the ‘new normal’ (think: Zoom) saw their value increase wildly.
Last week, though, many investors began selling their tech stocks, sending the benchmark NASDAQ to correction territory. In other words, tech stocks outperformed due to investor hype in the recession. Now, prices of tech company shares are back to ‘normal.’
Despite the scary-sounding name, this correction is good news. Investors leaving tech means that they believe the economy is about to start a strong growth phase. Like economic clockwork, the money went from recession-friendly tech stocks to energy and mining, as well as industrial manufacturers.
No one can predict the future. However, seeing that investors are optimistic in the near-term is a reason for us to be confident about the recovery.