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Debt: Bubble or Tumour?

By Marius-Cristian Frunza
Weekly Briefs

The Trump administration has announced that it considers another package, not exceeding USD 1 trillion, to repair the damages made by the pandemic to the American economy. This amount will add up to the current US debt accounting as of end of June for USD 26.5 trillion. Brussels undertakes similar moves aiming to finalize a stimulus package for EU’s members, representing 500 billion euros which would flow in the European economy as grants.

Under a scenario of a GDP contraction by 10%, the debt to GDP ratio for the United States would reach almost 122%. Raising debts and printing money are seemingly the only solutions for the developed countries. It is a trend that started during the previous economic crisis and has continued ever since. Money seems to be like whipped cream, you need to pour a little bit into a mixer to make a lot.

How will this situation evolve?

Debt can inflate as a bubble and explode like it happened during the subprime crisis. Or, it can increase slowly and parasite the real economy, like a tumour does to a healthy body. Both scenarios have a similar end, but different timings. In the long-run economies will not work for growth but will work to serve the debt. The history shows that such economies are suboptimal, and they are a fertile ground for social and political anachronisms.  

Solon, an Athenian leader came with a sound solution to a similar situation that took place in the Ancient Greece.  At that time a big number of Athenian citizens were bearing massive debt and were falling into slavery. Solon understood the fact that the debt could destroy the entire City and forgave all the debtors by erasing all debts.

What are the chances to see this happening today?

No more good must be attempted than the nation can bear.
Solon, Athenian statesman, lawmaker and poet

Market overview

The volatility index is at its lowest point since the pandemic outbreak. The leading stock indices bolstered last week, accentuating the dissymmetry with the state of the real economy. The VIX level is still twice it was in the beginning of the year, and this unusual level of volatility for the stock market can lead to market dislocations over a long period.

Why should we expect a massive correction before November?

The recession is a certain fact, the only unknown being how far below 10% the GDP contraction will go. Since the Big Depression until Lehman’s default, all economic crises brought a storm on the stock market. The money printing strategy is similar for markets to the lockdown for the pandemic. It will not reduce size but will change the timing of the problem. When reality will hit the markets, it could unfold in several ways. We can expect a sudden shock which central banks try to avoid, or a decline over a longer period, scenario that seems currently more plausible.

Carlos Ghosn

"After me, the flood"

Beside Tesla, the automotive industry is lowering the flags and is trying to get all kind of bailouts from governments. Yet, one company started its inglorious decline way before the pandemic outbreak. The French champion, Renault and its CEO Carlo Ghosn followed a steep descent since 2019.

Ghosn went in only twelve months from icon to ex-con and lives currently in his native Lebanon after fleeing from the Japanese justice. He is accused of many corporate irregularities. One thing is sure, his departure did not reinsure the markets and Renault’s share price lost almost 70 % of its values since 2018. The pandemic made things more complicated and the perspectives for the leading French automotive manufacturer are pessimistic.

Focus:

Moderna’s vaccine makes big steps

ModeRNA Inc. announced big progresses on developing a COVID vaccine. The company, headquartered in Cambridge, Massachusetts, worked on a vaccine mRNA-1273 which encodes the stabilized prefusion SARS-CoV-2 spike protein¹.

The preliminary results published this week show that the vaccine induced anti–SARS-CoV-2 immune responses in all participants, and no trial-limiting safety concerns were identified. Consequently, Moderna’s stock price appreciated by more than 350% since February. If the vaccine gets the FDA approval, Moderna could rival with Amazon or Facebook in terms of market valuation.

Focus:

Twitter’s shadow

Twitter’s share prices plummeted on Wednesday by 4% as the company was targeted by hackers that had taken over the accounts of multiple high-profile users.

Barack Obama, Elon Musk, Jeff Bezos, Kanye West, Joe Biden, Warren Buffet, are only few personalities that saw their Twitter accounts posting tweets asking users to make Bitcoin donations.  The hackers took control over these accounts and tried to squeeze funds from users. The company responded promptly, but the market reacted to the news. The stock recovered partially in the following trading session.

Overall, Twitter has not surfed well enough the wave of monies’ inflow into NASDAQ. Twitter’s future may be less bright than that of its peers, but the issues is facing should be a cautionary tale for all social medias.

Focus:

WWE got slammed

COVID-19 affected massively the sport industry and professional wrestling makes no exception. With no ability to sell tickets for its historical events including “Summer Slam”, WWE’s share plummeted in the early days of the lockdown and had only a limited recovery in May. WWE and its flamboyant CEO Vince McMahon are allegedly the inventors of the pay-per-view, which is today the biggest stream of revenue in the sport industry.

Unfortunately, the organisation did not manage to push its business model further into the digital era. WWE’s revenue streams are hindered by the COVID-19 crisis and there are no perspectives to see any improvement in the foreseeable future.

Market outlook

As predicted, the Gold ounce and the Brent crude were in positive territory. The NASDAQ confirmed the support at 10,500 and but seems to not have the momentum to reach the 11,000 level. The Dow Jones touched briefly on Wednesday the 27,000 level but retreated in the following trading sessions.


General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial in- strument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

¹ An mRNA Vaccine against SARS-CoV-2 — Preliminary Report https://www.nejm.org/doi/full/10.1056/NEJMoa2022483

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