The Weekly : 2020 #51

Latest report sees “cliff edge” of insolvencies approaching

The latest Group of Thirty report paints a grim outlook for 2021 as the S&P signals a warning

December 24, 2020 / 2 min read

Latest report sees “cliff edge” of insolvencies approaching

A recent report by global research body Group of Thirty paints a troubling picture heading into 2021. Describing an impending and inevitable insolvency crisis it calls for a change in approach to better support the corporate sector.

“Policymakers need to act urgently, as the solvency crisis is already eroding the underlying strength of the business sector in many countries. The problem is worse than it appears on the surface, as massive liquidity support, and the confusion caused by the unprecedented nature of this crisis, are masking the full extent of the problem, with a “cliff edge” of insolvencies coming in many sectors and jurisdictions as support programs lose funding and existing net worth is eaten up by losses.”

Reviving and Restructuring the Corporate Sector Post-Covid: Designing Public Policy Interventions, December 2020

The apparent false sense of security created by all the recent government spending is ominous. It outlines the need to allow “creative destruction” in order to reflect new business realities rather than simply preserving the status quo, recommending that public resources not be used to prop up companies already doomed to fail but rather to let market forces operate, intervening only “to address market failures that create substantial social cost”.

With fresh lockdown measures announced in the UK after the emergence of a new apparently more contagious strain of the virus, the economic damage looks to have barely begun.

S&P flashes a warning

If the fundamentals weren’t challenging on their own, the bearish divergence on the S&P remains strong. The last time we saw a divergence of similar strength was back in 2018 which preceded a 20% correction.

Source: Trading View (SPX)

The dislocation between the real economy and stock market is stark, but with stimulus set to continue its hard to bet against the upward trend continuing for now.

To round things off before moving on, oil continued to trend higher after a U.S stockpile drawdown, gold saw continued strength reclaiming its previous trading range, and the dollar kept falling – further fuelling strength in commodities.

Bitcoin hits new all time highs

Bitcoin has seen an explosive move recently smashing through previous all time highs, topping out at just over $23.5k – a 20% climb in the space of a week. It appeared overextended and vulnerable to correction a month ago at 55% above the 20-week EMA, but at a little over $23k at time of writing that’s now 63%.

To put that in perspective, in 2019 that figure reached 130% before correcting, and at the 2017 peak it was an astonishing 215%, so there’s plenty of precedence for it to keep climbing. Naturally any top is almost impossible to predict but clearly the risk is rising, and the higher and faster the current trend continues, the more violent the proceeding correction will be when it arrives.