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Authored by Michael Snyder via TheMostImportantNews.com,

Have you been watching the madness that has been unfolding on Wall Street?  Even though we are in the middle of the worst global pandemic in 100 years, and even though rioters and looters have been turning our major cities into war zones, stock prices have been going up day after day.  In fact, the Nasdaq closed at an all-time record high on Monday.  Sometimes people ask me to explain this rationally, and I can’t, because the Federal Reserve has transformed our “financial markets” into a total mockery at this point.  The real economy is literally collapsing all around us, but thanks to Fed intervention stock investors are doing just fine. 

It has been absolutely disgusting to watch, and if Adam Smith could see what was happening he would be rolling over in his grave.  Unfortunately, thanks to our rapidly declining system of education most Americans don’t even know who Adam Smith is anymore.

I can’t recall another time in modern U.S. history when stock prices skyrocketed as the U.S. economy plunged into a recession.  What we have been witnessing has truly been extremely bizarre, and it will be fascinating to see how long it can last.

Meanwhile, the real economy is a giant mess.  On Monday, the National Bureau of Economic Research finally got around to letting us know that a recession has officially begun…

It’s official: The United States is in a recession.

The National Bureau of Economic Research said Monday the U.S. economy peaked in February, ending the longest expansion in U.S. history at 128 months, or about 10½ years.

In truth, the announcement codifies the painfully obvious. States began shutting down nonessential businesses in mid-March to contain the spread of the coronavirus, halting about 30% of economic activity and putting tens of millions of Americans out of work.

And in other news, the sky is blue and the moon is not made out of cheese.

Anyone with half a brain can see that the economy is falling apart.  For example, we just learned that U.S. factory orders were down 22.3 percent in April compared to a year earlier…

Having collapsed by a record 10.4% MoM in March, April factory orders were expected to accelerate even lower and it did. However, the 13.0% plunge in April was modestly better than the 13.4% MoM drop expected… but is still the worst in American history.

Year-over-year, factory orders collapsed 22.3% – the worst since the peak of the financial crisis.

Of course it is not that difficult to find a number that is even worse than that.

Just look at heavy truck sales.  Last month they were down a whopping 37 percent from the same month in 2019…

The last three months have been catastrophic for segments of the trucking business, after an already tough period that started in late 2018. In May, orders for Class 8 trucks – the heavy trucks that haul much of the goods-based economy across the US – plunged 37% from the  low levels in May a year earlier, and by 81% from May two years ago, to 6,600 orders, according to estimates by FTR Transportation Intelligence today.

Not to be outdone, the number of corporate bankruptcies shot up 48 percent last month compared to the same period a year ago…

Corporate bankruptcies spiked during May as the coronavirus pandemic slammed the U.S. economy, pushing the number of filings to levels recorded in the wake of the 2007-09 recession.

U.S. courts recorded 722 businesses nationwide filing for chapter 11 protection last month, a yearly increase of 48%, according to figures from legal-services firm Epiq Global.

But every time we get another horrific economic figure, the stock market goes even higher.

The worse the news gets, the more investors seem to like it.  Week after week, we have seen unprecedented numbers of Americans file for unemployment benefits, and at this point a grand total of more than 42 million Americans have lost a job since this pandemic began.

And yet investors keep taking these job losses as signs that they should buy even more stocks.

Perhaps someone should spread a rumor that a planet-killing asteroid is about to hit us, because that would probably really get investors salivating.

Of course most ordinary Americans don’t get to live in a Fed-fueled fantasy world, and this new economic downturn is hitting most of them extremely hard.

In fact, it is being reported that approximately a third of all Americans “are now showing signs of clinical anxiety and depression”…

In the wake of the COVID-19 pandemic and resulting economic crash, which triggered depression-like unemployment with 40 million initial claims filed in ten weeks, a third of Americans are now showing signs of clinical anxiety and depression, according to new data collected by the Census Bureau. This, by far, is the most comprehensive and troubling sign yet of the psychological toll inflicted on Americans due to months of lockdowns.

The Census Bureau contacted one million households between May 7 and 12, and about 42,000 responded, said The Washington Post. The survey was about 20 minutes long and buried deep within, several questions asked respondents about depression and anxiety. Those who answered provided a laggard but clearest snapshot into people’s mental state at the tail end of the lockdown, where many folks were subjected to isolationism, virus fears, and widespread unemployment.

That is the most alarming number that I have shared with you so far in this article, but I am about to share with you some numbers that are even more alarming.

In recent days, we have watched rioters destroy large sections of our major cities all across America.  But when asked about “violent protests”, a surprising percentage of Americans actually support them…

A broad majority of Americans say the peaceful protests happening all across the country after police violence against African Americans are justified (84% say so), and roughly a quarter (27%) say violent protests in response to police harming or killing African Americans are justified. Both figures are higher than they were when similar protests rose in the fall of 2016. Then, 67% saw peaceful protests as justified while 14% felt violent protests were.

There isn’t much of a racial or partisan difference over whether peaceful protests are justified now, but the gaps are larger over violent protests. Among Democrats, 42% consider violent protests justified in response to police violence against African Americans, while just 9% of Republicans agree.

Yes, you read that last sentence correctly.

42 percent.

Unfortunately, a lot more economic pain is on the way, and that is just going to fuel even more rioting, looting and violence.

These are definitely not “the best of times” no matter what stock market investors seem to think.

We have entered a deeply disturbing new chapter in American history, and life in this country will never be the same again.

Members of the DC National Guard who responded to protests in the nation’s capital over the death of George Floyd have tested positive for coronavirus, according to McClatchy, citing a spokeswoman for the Guard, who did not elaborate on how many members were infected.

1,300 members of the DC National Guard were called up on May 31 to help law enforcement respond to riots in the area, and were reinforced by nearly 4,000 additional members from a dozen other states.

“We can confirm that we have had COVID-19 positive tests with the DCNG,” said spokeswoman Lt. Col. Brooke Davis, adding “The safety and security of our personnel is always a concern, especially in light of the COVID-19 era.”

The news follows reports that two members of the Nebraska National Guard who were activated in response to protests in Lincoln, Neb., have also tested positive.

The D.C. National Guard was supported by approximately 3,900 additional Guardsmen from Florida, Idaho, Indiana, Maryland, Missouri, Mississippi, New Jersey, Ohio, South Carolina, Tennessee and Utah to protect national monuments and ensure peaceful demonstrations as tens of thousands of protesters took to district streets last week. –McClatchy

According to the report, members of two National Guard units from Missouri and Mississippi were not wearing masks – while any Guardsmen who tested positive will be delayed from an expected Wednesday departure from the city.

“All Guardsmen who are suspected to be at high risk of infection or have tested positive for COVID-19 during demobilization will not be released from Title 32 orders until risk of infection or illness has passed,” said Davis. “Members of the Air and Army National Guard with no, or low risk of exposure, who present symptoms of infection one to 14 days after release from orders will contact their unit.”

Submitted by Peter Garnry, Head of Equity Strategy, Saxo Bank

Summary: Yield-curve control has mixed results when it comes to equities. Japan’s YCC policy since September 2016 has not been a success judging from real GDP growth and for Japanese equities which have underperformed global equities. The period 1942-1951 when the Fed had a YCC policy in place suggests a more positive picture for equities against inflation hinting that YCC can work as a crisis tool. However, the key risk related to YCC is inflation risk as our study of inflation and equity returns suggest inflation growth of 4% or higher leads to bad real rate returns for equities.

History tends to repeats itself and the FOMC Minutes have indicated that the Fed is considering yield-curve control which was last used in the 1940s. In the case the Fed hints of yield-curve control (YCC) going the same way as the Bank of Japan (BOJ) introducing YCC in September 2016 and recently Reserve Bank of Australia in March 2020 what would likely be the effect on equities.

In the recent case of BOJ the evidence suggest as a mild positive effect on Japanese equities in local currency relative to global equities. Japanese equities outperform global equities in local currency by 12% from September 2016 to November 2017. Since then Japanese equities have underperformed by 18% and Japan’s real GDP growth is slightly lower after YCC was introduced compared to the four years leading up to its introduction. One potential reason for YCC’s lackluster performance in Japan could be related to fiscal tightening in the years after 2016 relative to the period before YCC reducing public impulse into the economy.

The evidence from the US experiment with YCC in the period 1942-1951 seems much better. US equities deliver a 5.6% annualized real rate return with the years 1946-1949 of high post-war inflation being negative for equities. The period suggests that equities can thrive in a high inflationary and high debt period under YCC but investors should keep in mind that this period only represents one independent sample and that economy has changed much since the 1940s. The reaction in Japanese equities in the year following Japan’s introduction of YCC suggest that we got see a boost to US sentiment on equities from the introduction of YCC in the US.

Which sectors will benefit from YCC?

The cap on long-term interest rates will also cap banks’ profitability through an upper bound on net interest margin. However, to the extend that YCC creates growth this will grow loan books and thus market values of banks. Our view is that financials should be avoided in this environment but that growth companies with a large part of their value coming from the future should be overweight as YCC creates a low discount factor for future cash flows. Highly leveraged companies and capital intensive industries such as auto, airliners, steel, real estate, shipping, construction etc. should also outperform in this environment as YCC will set financing rates artificially low.

Inflation is the danger for equities

YCC combined with aggressive US government deficits could suddenly create inflation which history suggests has a tendency to be a wild beast when it escapes its normal ring-fencing. Higher inflationary pressures will not immediately become negative for equities as our analysis from May 2019 of equities and inflation over 105 years suggest. A mild positive inflation shock has historically been associated with positive real returns in equities. It’s actually a large deflationary shock that has been associated with negative real returns. Equities have historically delivered negative real return when inflation has sustained its growth rate above 4%. This is the real danger for equities.

How likely is it that the Fed will introduce YCC? The Fed introduced YCC in March 1942 to stabilize the bond market amid rising inflation expectations due to enormous US war deficits. This time around deflationary forces seem to be more dominant than inflationary forces due to the demand destruction from COVID-19 lockdowns around the world. Fixing the long-term yields will mostly lead to lower monthly purchases of bonds and thus lower growth of the Fed’s balance sheet while sending a signal to the Treasury to stimulate the economy through government deficits without worrying about stability in the bond market. YCC will most likely come and already this year as it’s naturally crisis tool but also an important tool to create inflation and thus dig the world out of its debt mountain. But whether it will be announced tomorrow at the FOMC meeting is more uncertain. Given the current market pricing it’s most likely that the Fed will keep this tool in the box and utilize it if the market destabilizes over the coming months.

The history of US yield-curve control

During World War II concerns over US budget deficits and inflation put upward pressure on long-term interest rates. In an attempt to stabilize the bond market the Fed capped long-term yields at 2.5% and Treasury bills at 0.375%. This operation effectively helped the US government monetize its war efforts. There are two ways to do this. Either the central bank simply buys a pre-determined amount of bonds every months (quantitative easing or QE) or it can introduce YCC which set a yield target which effectively means unlimited purchases of bonds. The findings from BOJ’s operation since September 2016 is that the quarterly bond purchases actually fell after YCC was introduced compared to the QE period from 2013-2016.

US inflation was in 1947 so high that the Fed had to raise the short-term interest rates to dampen inflation pressures but chose to keep the long-term yield cap. However, in 1951 the Fed had to abandon this target as well also called the Fed-Treasiry “Accord” ending the crisis policy during the war and post-war years. Nominal growth was significantly above the long-term interest rates and thus created a tailwind for reducing US public debt to GDP. In 1953 the Fed adopted its price stability policy combined with controlling the short-term interest rates through its bills only policy. In the years that followed public debt to GDP declined and bottomed out during the 1970s.

They say that if you repeat the same lie enough times, you start to believe it. And so it is with progressive Democrats and their refusal to acknowledge the true depth of the violence unleashed during the protests. Chicago experienced one of its deadliest weekends of violence in recent memory, but you would never guess by reading the coverage by the New York Times and Washington Post.

A particularly disturbing example of this phenomenon has just emerged out of Chicago, where a recording from a meeting between Mayor Lori Lightfoot and the City Council, where one of the mayor’s chief critics, Raymond Lopez, a fellow gay Democrat who was the first openly gay Mexican-American elected to public office in Illinois, accused her of not doing enough to quell the violence.

In the recording, which is included below, Lightfoot can be heard telling Lopez that she believed his eyewitness reports about “gangbangers with AK47s waiting to settle some scores” were “100% full of shit”.

Leaked audio of Alderman and mayor exchange in Chicago…good luck to my friends in Chicago

pic.twitter.com/olktDo8kFB

— Ed ☯️ (@DowdEdward) June 9, 2020

“Well f**k you then,” Lopez spat back as the two launched into a rancorous back and forth.

See the full transcript of the leaked audio clip below, courtesy of the CBS affiliate in Chicago:

“When downtown is in lockdown, our neighborhoods are next, and our failure to fully get ready for what’s going on in the neighborhoods, we’re seeing this destruction, and we’re thinking that it’s going to somehow end tonight. We have seen where, in other cities, this has gone on for days; and we need to come up with a better plan for days, at least for the next five days, to try and stabilize our communities,” Lopez said.

The aldermen said parts of the Back of the Yards and Brighton Park neighborhoods in his ward had become “a virtual warzone.”

“We can’t expect our police, and I don’t fault them at all, to be able to control this,” he said. “Half our neighborhoods are already obliterated. It’s too late.”

Lopez said he feared looters would eventually start targeting homes after ransacking businesses throughout the city.

“Once they’re done looting and rioting and whatever’s going to happen tonight, God help us, what happens when they start going after residents? Going into the neighborhoods? Once they start trying to break down people’s doors, if they think they’ve got something,” he said.

“We know that people are here to antagonize and incite, and you’ve got them all pumped tonight, today. They’re not going to go to bed at 8 o’clock. They’re going to turn their focus on the neighborhoods. I’ve got gang-bangers with AK-47s walking around right now, just waiting to settle some scores. What are we going to do, and what do we tell residents, other than good faith people stand up? It’s not going to be enough,” Lopez added.

When Lopez finished talking on the conference call, Lightfoot declined to respond, and tried to move on to another alderman, but Lopez demanded an answer.

“It’s not something you ignore. This is a question that I have,” Lopez said.

That’s when the call turned profane.

“I think you’re 100% full of s***, is what I think,” Lightfoot said.

Lopez was infuriated.

“F*** you, then. Who are you to tell me I’m full of s***?” he said. “Maybe you should come out and see what’s going on.”

The mayor vehemently denied protecting downtown at the expense of the neighborhoods.

“If you think we’re not ready, and we stood by and let the neighborhoods go up, there’s nothing intelligent that I could say to you,” she said. “That is the stupidest thing I have ever heard. I understand you want to preen.”

“Mayor, you need to check your f***ing attitude. That’s what you need to do,” Lopez shot back.

At that point, several other aldermen interjected in an effort to calm nerves, with one alderman telling Lopez, “Ray, cut it out, please. Calm down, please.”

It’s obvious that Lopez, who harbors ambitions to replace Lightfoot in the mayor’s chair in the not-too-distant future, leaked the clip. But as he told CBS in an interview, many small businesses in his ward won’t be reopening, largely thanks to the violence.

When we first published Kyle Bass’s “the Quiet Panic” back in April 2019, the investing community laughed off Bass’s leveraged bet against the HKD’s peg to the dollar as a novelty, and blasted Bass as a washed-up sinophobe who spends his days hanging out with Steve Bannon in an empty aircraft hanger.

When unrest erupted in Hong Kong a couple of months later, talk of financial stress was, at least initially, surprisingly muted. But Beijing’s clampdown appears to finally have brought HK’s chickens home to roost, as its currency’s peg to the dollar has come under intense strain.

During the interceding months, as Bass has admittedly focused more on politics and less on running his hedge fund, he has become so convinced that the peg will soon snap, that he’s cranked up to leverage on his long-term derivatives bet to absurd levels, hoping to reap another windfall on par with his bet against the housing market that launched him to investing superstardom.

According to Bloomberg, Bass has raised an undisclosed amount of money for a new fund under the auspices of Hayman Capital that will use long-term options contracts to place a 200-to-1 leveraged bet against the HKD currency peg.

Unfortunately for Bass, the HKD has been so strong in recent months that  HK’s de-facto central bank, the Hong Kong Monetary Authority, has sold more than HK$40 billion ($5.2 billion) since April to prevent the currency from appreciating outside the band. Others have dismissed dismissed this recent upside pressure as the calm before the storm, as the US prepares to strip HK of its special status, threatening tens of billions of dollars in bilateral trade.

Hong Kong Financial Secretary Paul Chan said this month that the city is ready to defend the exchange rate and that, if necessary, the mainland would backstop the peg via swap lines with the PBOC. Other fears of financial stress in the HK banking system and housing market have also been relatively muted.

That could be a serious problem for Bass’s investors since, as Bloomberg points out, the insane leverage ratio means that losses will be 100% if the peg isn’t broken within 18 months.

Kyle Bass is going for broke on a currency trade that has burned bearish speculators for more than three decades.

The Dallas-based founder of Hayman Capital Management is starting a new fund that will make all-or-nothing wagers on a collapse in Hong Kong’s currency peg, people with knowledge of the matter said.

Bass, best known for his prescient bet against subprime mortgages before the 2008 financial crisis, will use option contracts to leverage the new fund’s assets by 200 times, the people said, asking not to be identified discussing private information. While the strategy is designed to generate outsized gains if Hong Kong’s currency tumbles against the dollar, investors stand to lose all their money if the peg is still intact after 18 months.

Bass’s track record on HK has been impressively prescient, but still, the drawbacks to such a high leverage ratio means there’s no room for error, as BBG explains.

The trade is audacious even for Bass, who profited handsomely during the subprime crisis but has since had less success with doomsday calls on everything from Japanese government bonds to the Chinese yuan. A vocal critic of China’s Communist Party, the 50-year-old investor wrote in a Newsweek op-ed last month that Hong Kong has become “ground zero for the ideological clash between democracy and heavy-handed Chinese communism.”

And although we’re tempted to question whether his politics are coloring his judgment, if Bass does prevail, he will join a rarefied club of macro managers who have attained legendary status for reaping massive profits on macro bets, like George Soros did when he “broke the back of the pound”.

Bass reportedly told prospective investors in the Hayman Hong Kong Opportunities Fund, which launched June 1, that they could expect as high as a 64-fold return if the currency declines by 40%, according to a person familiar with the matter, who asked not to be identified because it’s private. That would be even larger than the Chinese yuan deval of August 2015.

Whatever happens with the fund, at least Bass will earn a decent profit on the management fees. Bass is charging a one-time fee of 2%, and 15% of profits, though presumably he is investing at least some of his own money in the fund, as he has in the past.

Just how forward looking are stocks? With the Rails index back to all time highs this seems like an especially appropriate question considering the fundamental data which is…. well, see for yourselves.

Consider where rail stocks are trading:

Do fundamentals justify this price? Here is the chart of total carload and intermodal traffic for 2018, 2019 and 2020.

Total U.S. carload traffic for the first five months of 2020 was 4,713,757 carloads, down 14.7 percent, or 815,413 carloads, from the same period last year; and 5,186,630 intermodal units, down 11.3 percent, or 661,703 containers and trailers, from last year.

And another way to see the unprecedented divergence:

And the details:

U.S. railroads originated 740,171 carloads in May 2020, down 27.7 percent, or 282,965 carloads, from May 2019. U.S. railroads also originated 912,922 containers and trailers in May 2020, down 13 percent, or 136,241 units, from the same month last year. Combined U.S. carload and intermodal originations in May 2020 were 1,653,093, down 20.2 percent, or 419,206 carloads and intermodal units from May 2019.

In May 2020, one of the 20 carload commodity categories tracked by the AAR each month saw carload gains compared with May 2019. It was farm products excl. grain, up 324 carloads or 10.6 percent.

Meanwhile, commodities that saw declines in May 2020 from May 2019 were coal, down a record 127,201 carloads or 40.7%; Coal carloads are down 26.1% so far this year and have declined on an annual basis for 13 straight months.

Motor vehicles & parts, down 49,341 carloads or 75 percent; and crushed stone, sand & gravel, down 18,196 carloads or 19.4 percent.

Excluding coal, carloads were down 155,764 carloads, or 21.9 percent, in May 2020 from May 2019. Excluding coal and grain, carloads were down 150,701 carloads, or 24.3 percent.

And visually:

In short, lowest rail traffic in years, and that was based on a trend even before the coronavirus, and yet rails stocks are at all time high. All we can is… “Jay’s market.”