The Capital Note

The Capital Note: Gold, Swedes & Guevara

Gold bars and coins are stacked in a safe-deposit-box room at the Pro Aurum gold house in Munich, Germany, August 14, 2019. (Michael Dalder/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: The New Gold Rush, Sweden’s Corporate Health, the Return of Target 2, plus some stories from around the Web and an introduction to Che Guevara, central banker.

The New Gold Rush
Gold reached a record high of $2,000 an ounce on Monday. With real yields on Treasuries at record lows, investors are turning to precious metals as an alternative store of value. Meanwhile, the trade-weighted dollar index has fallen 5 percent since its May high. Some analysts have gone so far as to forecast the decline of the dollar as the global-reserve currency.

Data: London Bullion Market Association
Graph: Daniel Tenreiro

Oh, the vagaries of markets. In March, economists were warning of a dollar shortage. A global dash for cash early in the crisis brought the dollar index up 8 percent, while Treasury yields doubled in a matter of weeks. The concern then was that monetary policy would fail to gain traction in a zero-interest-rate environment.

The Fed’s unprecedented intervention in short-term funding markets stabilized the dollar and brought yields down. It also spurred a rally in risk assets. Simultaneous strength in precious metals and weakness in the dollar indicates that central bankers succeeded in loosening credit conditions amidst global panic. If there’s depreciation in the dollar, it’s depreciation by design. Inflation is still a risk, of course. But the Fed’s successful stabilization of the global financial system should bolster the role of the greenback, irrespective of near-term weakness. While goldbugs are surely enjoying their day in the sun, it’s unclear whether this rally has legs. Gold already began paring gains this morning.

Anyway, the U.S. mint is delaying delivery of gold and silver coins because of production disruptions from the pandemic. Fertile ground for conspiracy theories, of which goldbugs have more than a few.

— D.T.

Sweden: A Corporate Health Update
Not being an epidemiologist, I am not in a good position to judge whether the less restrictive Swedish approach to the pandemic is the correct one, although I have considerable sympathy for the argument that we will not really know until the pandemic is over, not least because one determining factor will be whether the country dodges a “second wave.”

So far as weighing the effect on Sweden’s economy is concerned, matters are complicated by the fact that exports account for close to 50 percent of Swedish GDP, meaning that Sweden is unusually susceptible to economic activity (or lack of it) in other countries.

Nevertheless, the Financial Times reported recently:

From telecoms equipment maker Ericsson to consumer appliances manufacturer Electrolux via lender Handelsbanken and lockmaker Assa Abloy, Swedish companies have delivered profits well above what the market was expecting, even if in some cases that merely meant a less precipitous decline than analysts had feared….

Sweden’s coronavirus approach has been highly controversial internationally as its death rate per capita has been far higher than neighbouring Norway, Denmark and Finland. But its excess mortality levels have been lower than other European countries that have locked down such as the UK, France, Spain and Belgium.

It is a similar story in terms of the predicted economic impact. Economists and central banks forecast that Sweden’s GDP this year should decline by about 5 per cent, broadly in line with Norway and Denmark and far better than the likes of Italy, the UK or France.

The CEO of Swedbank, one of Sweden’s major banks, is quoted by the FT as saying “that large companies, which at the start of the coronavirus crisis in March had rushed to Swedbank for new loans, were beginning to repay them while smaller businesses had not borrowed as much as many had expected.”

Meanwhile, Esbjorn Lundevall, the chief equity strategist for SEB, another Swedish bank, notes a low level of bankruptcies. He also reckons that “the decision to keep schools and kindergartens open was a game-changer for those with younger children.”

Food for thought.

— A.S.

Keeping an Eye on Target 2
Two interconnected deals were struck at the EU summit in Brussels. One covered the EU’s budget for the next seven years. The other pertained to a “recovery package” of loans and grants weighted towards helping those states most affected by COVID-19. The result, predictably enough, was a boost for holders of bonds issued by Italy, the most significant of the euro zone’s “southern” laggards, a country that, by reason of its size (it is the single currency union’s third largest economy) and economic predicament is, I suspect, rarely out of the nightmares of those in charge in Berlin, Frankfurt and Brussels.


Ten-year yields in Italy – the euro zone’s biggest sovereign bond market in terms of outstanding debt – have tumbled 18 basis points this week, set for their best week in two months. When a bond’s price rises, the yield falls. The closely-watched gap between Italian and German 10-year bond yields hit 152 bps, its narrowest since late March.

EU summits, particularly when they revolve around the euro zone’s shaky financial structure, tend to set off talk, at least amongst those of us who have spent rather too much time thinking about the single currency, about an arrangement evocatively known as Target 2.

Writing for Financial News yesterday, David Blake explains:

Just as the Bank of England acts as the clearing bank for the UK’s commercial banks, Target2 acts as a clearing system for eurozone central banks. When one eurozone country needs to make payments to another country, funds are transferred via Target2. There is a difference however. In the UK case, commercial banks have to supply eligible financial assets to clear their accounts. In Target2, national central banks are allowed to accumulate debts without any requirement to repay them.

Reuters (June 8):

The Bank of Italy’s liabilities towards other euro zone central banks rose in May, reaching a new all-time high, data showed on Monday, underscoring the increasing impact of the coronavirus epidemic on the country.

Italy’s so-called Target 2 debt rose to 517.347 billion euros ($584.55 billion) from 512.899 billion euros in April, data by the Bank of Italy showed.

The European Central Bank publishes the Target balances on a monthly basis. The May data showed one other country with massive liabilities, Spain, on €451.8bn. It is no coincidence that Spain is, like Italy, on the euro zone watch list.  Germany, on the other hand, was “owed” €916.1bn, additional evidence of the fundamental imbalances in a currency union dedicated, it sometimes seems, to proving that one size cannot fit all.

Meanwhile, those looking for signs of capital flight should also keep an eye out for a sudden increase in the direction of the Italian balance that appears unconnected to the country’s overall economic activity.

— A.S.

Around the Web
From the Mercatus Center’s Adam Thierer and Trace Mitchell:

The pandemic has spurred long-overdue innovation in another important regard: Governments themselves began to innovate. Federal, state and local officials started to suspend or repeal all sorts of regulations and restrictions that were holding back sensible responses to the pandemic. Since the onset of the lockdown, Americans for Tax Reform, a politically conservative nonprofit organization founded by Grover Norquist, has kept a running tally of suspended rules. That list now includes over 600 rules and regulations, and it keeps growing.

Faster, please.

It’s not unreasonable to think that, in the end, the pandemic will change business behavior less than is currently imagined, but that it will speed up some changes that are under way:

From grocery stores and factories to meatpacking plants and food delivery, the pandemic is turbocharging the rise of robots and automation, Andrew Yang tells CNN Business.

“We’re seeing 10 years’ worth of change in 10 weeks,” the former Democratic presidential candidate said. Companies, worried about coronavirus health risks, are accelerating their plans to use robots for some jobs long done by humans.”

Measuring an economy in real time is all very well, but it can only be taken so far. The Economist rallies behind GDP and other more-traditional indicators of what’s been going on:

Real-time data, when used with care, have been a helpful supplement to official measures so far this year. With any luck the best of the new indicators will help official statisticians improve the quality and timeliness of their own figures. But, much like u2, the official measures have been around for a long time thanks to their tried and tested formula—and they are likely to stick around for a long time to come.

Will China and the US avoid an intensified trade war? In some ways, paradoxically, there is too much at stake for there not to be one. Perhaps the most interesting aspect of a Bloomberg story on how the Chinese are not living up to their commitment to “buy American” was this:

Observers are worried that even this agreement could become a victim of the worsening relationship, but China is still increasing purchases. Imports of manufactured goods took the lead in June, with vehicles, pharmaceutical products, optical and medical instruments all seeing big jumps. Purchases of integrated circuits remained above $1 billion.

Buying before China increases import tariffs or trying to keep the deal alive?

Random Walk
For many years now, the contestants for worst central banker in history have been clear. There is Russia’s Viktor Gerashchenko (hyperinflation), Zimbabwe’s Gideon Gono (hyperinflation) and, of course, Germany’s Rudolf Havenstein (hyperinflation), but who knew that Ernesto “Che” Guevara had held the top job at Cuba’s national bank for a little over a year? It didn’t work out.

Like the European Central Bank’s Christine Lagarde, Guevara had no background in central banking, but (CNBC noted): “Before he became a central banker, Guevara was in charge of killing political enemies of the new government. He oversaw the torture and execution by firing squad of hundreds of political prisoners at the notorious La Cabana prison, earning him the nickname the Butcher of La Cabana.”

Say what you will about Lagarde’s sometimes disconcerting resumé, she hasn’t done anything like that.

Guevara’s stint at the bank was predictably destructive. Years later Castro admitted to some regrets: “Why I ever did that, I don’t know, because obviously Che Guevara knew nothing about finance and banking…I put him in there because I guess I trusted him. But it was a mistake.”

— A.S.

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