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In his overnight market commentary, Rabobank’s Michael Every laid out an interesting hypothesis why markets continue to fade the risk of a serious escalation in tensions between the US and China: “Perhaps as within serious HK money circles there is absolute certainty that the US is now an EU-style paper tiger and has no stomach for a real fight, and that Trump is so beholden to Wall Street that he won’t dare act.”

And while Every himself disagrees with this sanguine assessment, saying this stance “captures the self-confidence in Beijing but utterly fails to capture the bipartisan anger in DC, or the fact that both sides are using Beijing as a stick to beat each other with in the 2020 presidential election, or that the US has financial weapons as fearsome as its military, or that the Fed is there to prop up the stock market anyway”, he appears to have a point regarding China’s “self-confidence.”

In an editorial published in China’s Global Times, the authors claim that Trump is indeed nothing but a paper tiger and that “US talk of Hong Kong a nothingburger” in response to Beijing’s formulation of a national security law. To be sure, the article is filled with the usual jingoist allegations, first claiming that “the US is again leading the Western camp in besieging China” a stance that is driven by the “compression of Western values”, resulting from “the rise of emerging markets and developing countries becoming increasingly independent.”

The editorial then makes a rather valid point that how China frames national security in the context of Hong Kong is entirely its own matter and not that of the US:

Fighting the national security law for Hong Kong is not a universal value and cannot withstand serious scrutiny. Isn’t national security the top priority for each and every country? Washington has always used national security as an excuse to suppress normal commercial activities. Saying that the national security law in Hong Kong hinders the city’s high degree of autonomy and ends its freedom will hardly fool all Westerners, let alone manipulate the whole international community.

China indeed has every right to pursue whatever it sees as its national interest; the real question is who will suffer more from the explicit return of Hong Kong under China rule. And while Trump has claimed that Hong Kong will be crippled as a financial gateway to China should it lose its special trade status with the US, China counters that the US is no longer a critical partners, read source of foreign funds (a curious position considering China’s capital account is about to turn negative and will, more than ever, rely on outside sources of capital). Instead, the Global Times argues that as Hong Kong’s relationship with the US fades, it will be replaced by a more powerful one with China:

The biggest pillar for Hong Kong’s status as an international financial center is its role as a window to the Chinese mainland as well as its special relationship with the mainland economy.

The special trade status given by the US is important, but is not a decisive factor to determine whether Hong Kong is a financial center or not. As long as the economy in the Chinese mainland keeps booming, Hong Kong will not decline. If the US changes its policy toward Hong Kong, that will result in a lose-lose situation. But Hong Kong will be able to adjust and maintain its prosperity with the support of the Chinese central government.

But what is most remarkable about the op-ed is the view that as a result of the US being “entangled” with the coronavirus epidemic, which has claimed 100,000 American lives, Trump will be unable to mobilize the “tools and resources” he needs to intervene externally:

As the US is entangled in the COVID-19 epidemic, its actual ability to intervene externally is weakening. The White House claimed it would impose sanctions on China, but the tools and resources at its disposal are fewer than those it could mobilize before the outbreak. It is only bluffing.   

If this is indeed the fundamental position of China’s leadership re Covid-19 which just “slipped” through in an op-ed written by a state-owned newspaper – that the US’ own fight with the pandemic has left it too weak to respond to foreign policy challenges – it would provide China with a convenient motive to make sure the pandemic which started in Wuhan goes global and cripples any ability by the US to oppose China’s imminent intervention in Hong Kong.

The editorial concludes by claiming that while the Western world appears united, when it is faced with the risk of losing the “Huge Chinese market”, any opposition to Beijing would disappear:

The entire Western world will not follow the US. China is a huge market and the US is unable to provide enough compensation to offset the losses if Western countries become alienated from China. Values still have a strong appeal, but they cannot replace the fundamental interests of a country in pursuit of development. Besides, China has not intervened in the way of life of Western countries. Taking sides based on values at a disproportionate economic cost is not supposed to be the logic of international relations in the 21st century.

The author then writes that “as long as China acts based on facts, resolutely formulates the national security law for Hong Kong, strictly limits the law’s scope to ensure both national security and the city’s stability under the “one country, two systems” principle, while safeguarding the basic rights and interests of the Hong Kong people”, which of course is all just the propaganda strawman that Xi Jinping is using to justify a historic move in Hong Kong, “China will take the initiative in Hong Kong affairs” and “the US stirring of Western public opinion will lead to nothing.”

 

A California church and its bishop have asked the US Supreme Court to step in after the 9th Circuit Court of Appeals struck down their emergency application to reopen amid the coronavirus pandemic, in defiance of executive orders issued by Gov. Gavin Newsom.

Lawyers for the South Bay United Pentecostal Church and Biship Arthur Hodges filed with the USSC after the 9th Circuit panel split 2-1, with Judges Barry Silverman and Jacqueline Nguyen – appointed by Clinton and Obama respectively – wrote in their Friday order “We’re dealing here with a highly contagious and often fatal disease for which there presently is no known cure,” adding “In the words of Justice Robert Jackson, if a ‘court does not temper its doctrinaire logic with a little practical wisdom, it will convert the constitutional Bill of Rights into a suicide pact.’”

Apparently a fatality rate below 0.3% counts as ‘often fatal,’ and it would be a ‘suicide pact’ to allow people to worship freely while accepting the well-established risks of contracting COVID-19.

The panel’s third judge, Trump appointee Daniel Collins, weighed in with an 18-page dissent arguing that Gov. Newsom’s orders intrude on religious freedom protected by the First Amendment, according to Politico.

“I do not doubt the importance of the public health objectives that the State puts forth, but the State can accomplish those objectives without resorting to its current inflexible and over-broad ban on religious services,” wrote Collins, who noted that the Governor’s orders allow many workplaces to open, while religious gatherings remain banned even if they can meet social distancing requirements imposed on other permitted activities.

“By explicitly and categorically assigning all in-person ‘religious services’ to a future Phase 3 — without any express regard to the number of attendees, the size of the space, or the safety protocols followed in such services8 — the State’s Reopening Plan undeniably ‘discriminate[s] on its face’ against ‘religious conduct,” Collins continued.

The legal dispute may turn on how much weight the justices choose to give to a 115-year-old Supreme Court precedent, Jacobson v. Massachusetts, which upheld a mandatory vaccination scheme for smallpox.

Lawyers for Newsom have argued that the decision gives states broad powers during a public health emergency and effectively supersedes typical protections for First Amendment activity, including religious practice.

While the 1905 high court ruling remains on the books with no case since where the justices have grappled with similar issues, in his dissent from the Friday 9th Circuit order, Collins sounded skeptical about the sweep of the century-old case.

“Even the most ardent proponent of a broad reading of Jacobson must pause at the astonishing breadth of this assertion of government power over the citizenry, which in terms of its scope, intrusiveness, and duration is without parallel in our constitutional tradition,” he said. –Politico

In other parts of the country, challenges to pandemic lockdowns have been met with mixed results in federal courts. For example, New Orleans’ Fifth Circuit and the Cincinnati Sixth Circuit have granted emergency relief to churches in defiance of state orders, while Chicago’s 7th Circuit joined the San Francisco-based 9tth circuit in declining to intervene.

Read the rest of the report here.

By Eric Peters, CIO of One River Asset Management

The Fed presides over the world’s largest economy. Treasury claims otherwise, but the Fed is also guardian of the world’s reserve currency. From this position of power, global central banks were drawn by force of gravity to adopt Fed policies. Over the past decade, global central banks gravitated to the Fed’s policy mix, lowering rates, expanding liquidity, spurring a historic rise in global debt and leverage. Entering 2020, the world had the most homogeneous policy mix since Roman rule. And, as in all things living, lack of diversity reduces resiliency.

Fed policy dominance had complex, unintended consequences, some of which we can observe. For instance, it relieved politicians of the task of governing. Each crisis was easily solved with monetary magic, pulling future demand to the present. This allowed politicians to avoid making tough choices between spending for today versus investing for tomorrow. Without such vital debates, we borrowed from our youth to spend on our ageing. Student debt is one of the many such manifestations. Wildly inflated asset prices are another.

Monetary policy dominance taken to its logical conclusion leads to a world where the entirety of future prosperity has been pulled to the present. At that end point, no matter how many monetary magic wands are waved, the real economy is unresponsive, monetary policy is utterly impotent. As you approach this point, monetary policy gradually losses effectiveness. Somewhere close to the end, politicians are forced to start governing again, making choices. But unlike central bankers who are all the same, each politician is uniquely different, heterogeneous.

As politicians fill the vacuum left by impotent central bankers, they deploy different tools – fiscal, tax, trade, exchange rate, regulatory, immigration and military. They try to coordinate with central bankers, but this produces only illusory benefits because monetary policy once impotent remains so until the system reboots. Today, we are transitioning from a world led by homogeneous central bankers who used a few identical policies in similar ways to one led by heterogeneous politicians who will be using a wide range of policies in wildly different ways.     

Global central bank homogeneity produced an era of policy predictability. This encouraged economic actors to leverage balance sheets and business strategies to a stable future. Their actions, like share buybacks and just-in-time manufacturing, were reflexive in that each incremental investment dampened market and economic volatility, reinforcing expectations for a stable future. Naturally, reflexive processes lead to extreme outcomes. Without quite realizing it, economic actors accepted increased systemic fragility in exchange for higher profitability.

Trends unfold when the world changes. Prices adjust as we recognize that the future is likely to look different from the past. Underlying change is often driven by natural cycles. They include cycles in weather, debt, leverage, capital investment, innovation, politics, population, international relations. In late stage, they are sometimes amplified by mass hysteria. Systematic trend-following strategies just finished their worst decade of performance in 120yrs. So did long volatility strategies. It was a decade of homogeneity, policy predictability. It’s over.

 

Perhaps inspired by our recent articles showing that “Loan Defaults Hit 6 Years High” and “Bankruptcy Tsunami Begins: Thousands Of Default Notices Are “Flying Out The Door“, Goldman writes this morning that with businesses shuttered and job losses mounting rapidly, “there is growing concern over the ability of borrowers to service their debt obligations and the resulting risks to financial stability.”

In response, Goldman “assesses the likely scale of economy-wide credit losses, the exposure of creditors to those losses, and the potential risks to financial stability and the banking sector” to conclude that “rising bankruptcies and delinquencies suggest the default cycle has started.”

How did Goldman get to that assessment?

Looking at corporate credit, the bank first looked at corporate debt, noting that nonfinancial corporate debt grew by over 60% since 2011 and recently rose to an all-time high as a share of GDP (Exhibit 1, left), leading to growing concern even prior to the virus that corporate defaults could rise dramatically in the next downturn. Meanwhile, the sharp decline in revenues across many industries has left a large share of companies with negative cash flow, and rising bankruptcy filings and cases suggest the corporate default cycle has started.

Unlike the financial crisis, the bank finds that a unique feature of this downturn “is the wide variation in industry exposure to the virus, with physical constraints on spending, occupational health risks, and geographical variation in the virus  outbreak affecting industries differently.”

Goldman then performs an analysis of which industries are most impacted by credit losses due to the coronacrisis, and summarizes the findings in the next chart, which shows a coarser breakdown of virus-impacted industries, as well as their market share in the high-yield corporate bond space.

The energy sector stands out both in terms of its size and default risks, given the collapse in oil demand, its disproportionately large footprint in the corporate bond market relative to its GDP share, and the heavy amounts of leverage in the sector. Roughly half of high-yield corporate bonds are in the energy or virus-impacted industries, according to Goldman which adds that its credit strategists “estimate that the 12-month trailing high-yield default rate will increase to 13% by the end of 2020, similar to the peak rate reached during the Global Financial Crisis (Exhibit 3, bottom).”

In addition to energy debt, another key area of concern – as we have repeatedly pounded the table in recent weeks – is commercial real estate (CRE), given signs of overheating and overstretched valuations prior to the virus, as well as the unprecedented declines in demand in industries such as lodging, healthcare, and retail.

Commercial real estate prices have outpaced single family house prices since the prior downturn (chart below, left), with CRE capitalization rates falling to historically low levels. Late payments on commercial mortgages have picked up sharply in recent months, suggesting mounting pressures (chart below, right).

Tangentially, and as also discussed here extensively before, the unique nature of this downturn suggests that “variation in virus exposure will play a large role in determining the breadth and depth of credit losses in commercial real estate.” Delinquencies by property type already show wide dispersion, with virus-exposed property types such as lodging and retail showing much higher delinquency rates than less exposed property types such as self-storage. This contrasts with the prior real estate bust, when delinquencies were roughly evenly distributed across property types. 

Overall, Goldman expects a deeper contraction of property incomes than during the financial crisis period, given the heavy stresses to rents and occupancy rates facing many properties, and overall losses on commercial mortgages similar to those observed during the financial crisis.

Meanwhile, even as consumers have been slow to telegraph stress, kept afloat thanks to hundreds of billions in transfer payments, significant downside risks to household debt also remain, particularly if unemployment insurance benefits are not extended, and if higher out-of-pocket medical expenses due to loss of employer-based health insurance push more households to default.

Who Will Bear The Losses

We next look to see where credit losses are most likely to be felt. The Fed’s Financial Accounts suggests that the banking system plays a large role in providing credit for commercial real estate and overall corporate borrowing, two areas of greater concern. Household debt is also largely held by banks, particularly residential mortgages, credit card loans, and auto loans, while student debt is largely held by the federal government.

Municipal debt, another area of concern, is largely held by households, mutual funds and pensions funds, and insurance companies, and thus likely poses a smaller threat to financial stability. Lastly, a growing share of corporate lending—especially in riskier categories, such as leveraged loans—is now done by nonbank financial institutions, including collateralized loan obligations (CLOs), asset managers, hedge funds, and private equity companies, and such lending is not well captured in the Fed’s Financial Accounts. TIC data provides some evidence that non-bank financial institutions and insurance companies own much of US CLO securities, a growing area of concern. Crucially, CLOs do not generally permit early redemptions and are thus less susceptible to runs, which is why Goldman strategists do not see CLOs posing a major risk to financial stability, “despite the likely significant pickup in defaults on leveraged loans.”

The next chart shows a breakdown of financial asset holdings by creditor, excluding financial institutions such as hedge funds and private equity companies where data is less readily available. Banks are highly exposed to many areas of credit, while households, mutual funds, and pensions are largely more exposed to equities. Insurance companies are somewhere in between, and hold a significant amount of exposure to corporate debt, including CLOs.

The bottom line is simple: contrary to conventional wisdom that banks are now far, far safer than they were during the financial crisis, they bear the broadest exposure to the coming default wave which will soon test just how safe they are.

Risks to the Banking System

As Goldman reminds us, the Fed’s Financial Stability Report warned that financial sector vulnerabilities including for the banking sector, are likely to be significant in the near term, while the April FOMC minutes indicated concern that banks could come under greater stress, particularly if more adverse economic scenarios were realized. The Fed’s Senior Loan Officer Opinion Survey (SLOOS) indicated that lending standards tightened significantly, particularly for commercial and industrial (C&I) and CRE loans, with most banks citing a less favorable or more uncertain economic outlook, as well as a reduced tolerance for risk, as reasons for tightening lending standards. Loan loss provisions across banks have increased significantly in preparation for the rise in defaults and delinquencies. 

Curiously, only a modest percentage of banks cited a deterioration in their capital position as playing a role in tightening lending standards in the first quarter. In addition, residential real estate remains the largest category of lending in the banking system by a significant margin. And while Goldman believes that given that this downturn was not precipitated by a housing crisis, losses on this particularly large category will likely be smaller than during the GFC, the question of how quickly consumer cash flows return to normal will be critical in answering just how significant residential losses will be in a few months time.

That said, one clear worry is that certain industries are heavily exposed to the virus, which may lead to larger risks to the banking system if the lending of particular banks, or the banking system as a whole, is highly concentrated in these industries.

Next, Goldman assesses the vulnerability of bank balance sheets as of 2019 Q4, and estimates the losses on total bank equity from losses across asset categories. The bank assumes similar losses on C&I and CRE lending as in the 2008 crisis, but a smaller hit on residential mortgages and consumer loans (this may be a costly mistake). The bank then calculates the estimated losses as a percent of total bank equity capital, estimating that losses on C&I, CRE, consumer, and residential real estate loans would amount to roughly 15% of total bank equity, compared to around 30% of total bank equity at risk heading into the Global Financial Crisis, using ex-post realized losses across the same categories. Two main reasons account for this difference: first, losses on the large residential real estate category are likely to be smaller, and second, bank equity levels are higher today than before the crisis. Once again, these optimistic assumptions may end up having to be substantially revised higher.

Finally, the bank looks at lending exposure of the largest banks individually: bank-level data can reveal differences across banks and highlight whether there are a significant number of banks with large exposures to at-risk categories. Naturally, using the optimistic assumptions profiled above, Goldman finds that while there is dispersion among the largest banks in their exposure to losses, almost all of the largest banks today are less vulnerable than the median large bank was prior to the financial crisis, thus invalidating the entire analysis for the simple reason that the current crisis may end up being far more dire to bank loans than 2008/2009 if an economic recovery isnt forthcoming in short notice.

In summary, Goldman finds that while financial stability concerns appear manageable, significant downside risks remain. A slower than expected recovery and a prolonged downturn would likely stress the banking system further, and a growing share of riskier lending is now done by less regulated nonbank financial institutions, where risks are harder to assess. Its conclusion: “Should a more adverse scenario arise, Fed officials have indicated the willingness to further help facilitate the provision of credit by the financial system.”

In other words, if the coming default crisis ends up being as bad as the GFC, the Fed will end up owning a whole lot more bankrupt bonds and loans than just Hertz.

Our observation that as of this moment the Fed owns, via the HYG and JNK ETFs, bonds of bankrupt rental company Hertz sparked inexplicable outrage in the bullish camp. We find this confusing: how is the Fed owning bonds either a bullish or bearish case? It merely confirms that capitalism is now dead, that we have centrally-planned, “fake markets” as Bank of America put it, and which as Deutsche Bank further clarified, “these are administered markets and market outcomes will be dictated by the policy goals of the Fed and Treasury, and the tools they select to implement policy.”

That bulls are taking this fact as an affront, simply shows just how vested they too are in perpetuating a myth that markets still exist (as if it is somehow the imploding economy and not the Fed’s $4 trillion in liquidity injections since March that has boosted the stock market) while pretending they have some idea of what happens next based on “fundamentals” or “data” when in reality the only thing that matters is how much liquidity the Fed injects on any given day, making strategists, analysts and “paywalled pundits” irrelevant (an outcome which is devastating to their financial health).

In any case, shortly after our article, the Fed apologists scrambled to write articles such as this one whose sole counterarguments are outright obtuse: the amount of bankrupt bonds held by the Fed is so small so please don’t worry, and in any event, the ETFs will likely sell them.

First of all, anyone who claims to “know” what the ETFs will do with the defaulted bonds likely has a barrel of snake oil they need offloaded with immediate delivery, and their motives should be closely scrutinized from now on. As we explicitly said in our article, it is most certainly the case that the Fed will seek to offload its exposure – similar to what the ECB did when it ended up holding bonds of bankrupt Steinhoff but not before sparking a major scandal in financial cricles – after all the last thing Powell needs is another Congressional hearing inquiring how the Fed buying junk bonds – and junk bonds from massively levered, defaulted zombie corporations at that – is helping US workers. If anything, this merely cements our core argument that the process of rushing to buy corporate bonds was a panicked scramble meant to preserve confidence in a bursting asset bubble, one that was rushed from the beginning without almost any thought as to the consequences.

And since said “paywalled pundits” appears to have missed what we said, we will repeat it: the way the Fed’s purchases of corporate bonds are structured, especially as the US nears a default tsunami, it is only a matter of time before Powell ends up holding dozens if not hundreds of defaulted CUSIPs both directly and via ETFs. Will Powell then quietly dump all of them to pretend the Fed never intended to lose the Treasury’s funds by propping up insolvent companies? He will of course try. But if he fails, and if the ETFs do not offload their exposure to defaults, the Fed will most certainly be part of the bankruptcy process, courtesy of the debt-to-equity conversion of the underlying securities.

We also eagerly look to find just which independent, third-party entity buys the defaulted Hertz bonds held by HYG and JNK on behalf of the Fed to absolve Powell of his dismal decisionmaking.

The truth is that nobody knows what happens next, now that the Fed is an active intermediary in capital markets and is purchasing highly risky paper that defaulted just days after the Fed started buying ETFs. Anyone who claims otherwise is a complete hack.

As for that other “counterargument”, that “neither the Fed nor the Treasury has significant exposure to HTZ“, well- yes of course – the program has been in operation for just over a week: it better not have significant exposure to Hertz. What about in 3 months, or 6 months or one year from now when dozens of the companies that make up the JNK and HYG ETFs also file Chapter 11? Or what about the “fallen angel” companies that sell bonds directly to the Fed and end up having to file themselves. Will it be significant then?

Here is the answer: now that the Fed has gone the path of the BOJ and is directly intervening in capital markets, if not yet buying stocks (we can’t wait for the same bulls to explain how the Fed buying the SPY is great news for everyone), we can look to the Bank of Japan for examples of just how “insigificant” its exposure to the corporate bond market is.

WEll, according to SMBC Nikko Securities analyst Riyon Matsuyama, the Bank of Japan was the biggest buyer of Japanese corporate bonds in April compared with other categories for the first time since June last year, as Bloomberg reported overnight.

That sounds pretty significant to us: when the central bank is not only the buyer of last resort, but buyer of biggest resort, that would suggest that something is very, very wrong. It also suggests that there are virtually no other buyers (although we are confident the abovementioned bulls can “explain” how this too is “not one of the things to worry about”). In any case, it would also suggest that the BOJ owns a lot of corporate bonds.

And the Fed is hot on the BOJ’s footsteps.

According to Matusyuama – who calculated using data released by the Japan Securities Dealers Association this week and BOJ – the BOJ’s purchases as a proportion of all notes transacted in April rose to 30%, the highest level since June 2018.

This surge in holdings should not come as s surprise: after all, at the end of April, the BOJ decided to double its purchases of corporate bonds and sure enough, that’s what it is doing even if it means not only crowding out all other market players, but in the process destroying what little was left of price discovery. Why? Because the BOJ buys corporate bonds with money it creates out of thin air, and with no regard for fundamentals, resulting in a complete disconnect between fundamentals and asset prices.

Maybe this is why the abovementioned “paywalled pundits” are so angry: the fact that they are now relegated to merely frontrunning central bank purchases (something which even Blackrock embraced, admitting that’s the only way to make money now adding that it “will follow the Fed and other DM central banks by purchasing what they’re purchasing, and assets that rhyme with those”) means that any of their so-called insights are nothing more than Fed cheerleading garbage. Which is fine – after all that’s the centrally-planned world we live in, but just own up to it and stop pretending to have some deep, premium-pricing insight (which costs $29.95 per month) about the US or global economy which translates into an outlook on prices, investing, the universe and everything.

Via Greg Hunter’s USAWatchdog.com,

Money printing by the Fed and Congress is off the charts. The Federal Reserve doubled its balance sheet in a matter of months, and Congress is pumping out trillions of dollars in spending bills to fight the economic crisis caused by the Covid 19 lockdown. The really scary thing is not the massive money printing, but the fact that absolutely nobody seems to care about the risk to the U.S. dollar.

Money manager Peter Schiff thinks he knows why, and explains:

“(Back in 2008-2009,) even Larry Kudlow was worried about what the Fed was doing, but nobody is worried about it now.  The reason is they have been lulled into this false sense of complacency in that we got away with it the last time… and there was no negative consequence.

We didn’t have runaway inflation and did not have loss of confidence in the dollar. So, there was no price to be paid…

Since we got away with it before, they think they will get away with it again, and I think they are completely wrong…

All we did was inflate a bigger bubble, but now this bubble has popped, and it found the mother of all pins in the Coronavirus that put a gaping hole in it, so the air is coming out much faster. Now, they are trying to reflate this thing. We are going to suffer the consequences, not only what we are doing now, but what we did back then…

When is all this inflation going to move out of the stock market and into the supermarket? I am surprised this has not already happened, but I do think we are at the end of the line… Here’s what is going on. We are going to have this massive inflation tax. We are seeing price increases at the supermarkets.”

What has to break is the U.S. dollar, and that’s coming, according to Schiff, “We are going to overwhelm with dollar supply…”

“We are printing all this money. The Fed is buying all these bonds. . . . This is it. The Fed is going all in on QE. There is no limit. They are printing all this money, and, so, ultimately, the dollar is going to tank. It hasn’t happened yet, but it will. That’s when the party really ends. That’s when there is massive pressure on consumer prices. That’s when there is massive (upward) pressure on interest rates. . . . This could be an inflationary depression. We could have hyper-inflation. We didn’t have anything like that in the Great Depression. During the 1930’s, prices went down, and people got some relief with lower prices. That made the downturn not as bad. Imagine high unemployment with the cost of living skyrocketing. That’s what we are heading for. It’s going to be the 1970’s only on steroids because it’s going to be a much deeper economic contraction with a much bigger increase in consumer prices.”

Schiff says, “When we reopen, nothing will be the same because we will not be able to reflate this bubble.”

So what do you do? Precious metals are a no-brainer investment. Schiff says,

“It’s not that gold is gaining in value, it’s that fiat currencies are all losing value. Gold is the one stable factor. It’s the one thing governments can’t create out of thin air. Every currency in the world, except the dollar, are hitting new record lows against gold. You need more Euros, Rands or Aussie dollars to buy an ounce of gold. . . . The U.S. dollar is losing value more slowly, but this is going to change. We are going to win the race to the bottom…

People need to convert their dollars now into gold or silver. If you think the price of gold is going up now, wait til the dollar is the weakest of the currencies. . . . That’s going to accelerate the appreciation of gold . . . and that’s going to put gold in the spotlight as the replacement to the U.S. dollar as the main reserve asset for global central banks.”

Join Greg Hunter of USAWatchdog.com as he goes One-on-One with money manager and economic expert Peter Schiff, founder of Euro Pacific Capital and Schiff Gold.

*  *  *

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In a follow-up piece to “NYC’s Rat Population Hit With Hunger Crisis During Lockdowns,” the Centers for Disease Control and Prevention (CDC) has published a new warning that rats across the country are becoming hangry as they scavenge for food amid the closure of restaurants triggered by COVID-19 lockdowns. 

“Community-wide closures have led to a decrease in food available to rodents, especially in dense commercial areas. Some jurisdictions have reported an increase in rodent activity as rodents search for new sources of food. Environmental health and rodent control programs may see an increase in service requests related to rodents and reports of unusual or aggressive rodent behavior,” the CDC warning read. 

The CDC said some regions have reported “an increase in rodent activity” and cautioned about their aggressive behavior. 

An urban rodentologist recently said NYC rats have become hostile and are resorting to cannibalism as food becomes scarce with restaurants closed. 

“All of a sudden New York City to some degree is cleaner than ever before,” said urban rodentologist Bobby Corrigan. “You end up with this group of disoriented, stressed rats foraging about.”

And it’s not just NYC rats posing problems amid the virus pandemic, Washington, D.C., saw an explosion of calls to the city about rat problems between March and April. Baltimore saw nearly 11,000 calls or online 311 requests about rats during the same period. 

Stressed-out and aggressive rats in major US cities could become a regular occurrence until the rat population normalizes, considering our report from several weeks ago that suggests 25% of U.S. restaurants will go out of business.

Submitted by Craig Gottwals, Esq., via Benefit Revolution

COVID-19 and the resultant business and economic freeze may very well prove to be the largest global event occurring in any of our lifetimes.  The loss of lives, livelihoods, businesses and long term effects on mental health and culture are far from complete, yet already devastating.  Now, employers grapple with the most significant decision they are likely to ever make: when to come back to work and how.

Many employers will be lured into the siren song of safety above all else and succumb to a balancing act that tips heavily in favor of control and surveillance over individual liberty.  I fully understand the impetus.  Employers find themselves in a tricky Catch-22.  They must do that which is reasonable to protect the health and safety of their workers without trampling on employee privacy, health or liberty. 

As the attorneys at Ropes & Gray LLP point out, “[e]mployers looking to introduce these apps may point to their duty under the Occupational Safety and Health Act (“OSHA”) to furnish to workers ’employment and a place of employment, which are free from recognized hazards that are causing or are likely to cause death or serious physical harm.'”  But as Americans, we have far more individual liberty protection than people in the Asian countries that are months ahead of us and have already implemented sever state, local and employer controls.  For example, “China has already introduced virtual health checks, contact tracing and digital QR codes to limit the movement of people. Antibody test results could easily be integrated into this system.”

Beyond any employer’s legal analysis (which is undoubtedly important) the cultural differences in the United States should oblige employers to proceed with more than a modicum of caution.  We have a vast network of federal, state, local and employment laws and regulations protecting our individual liberties.  What’s more is that inherent and deep love for liberty embedded in our Constitution and our core as a people.  American was founded on the concept that liberty outweighs security.  As Benjamin Franklin wrote famously in the Pennsylvania Assembly’s 1755 reply to the Governor, 

Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.

Ropes & Gray nicely summarized these points as such:  

Because of contact-tracing apps’ intrusive nature and the laws discussed above, employer-required or employer-implemented electronic contact tracing could be viewed as overreaching. These concerns would be heightened for an employer seeking to implement a blanket requirement that all employees must install and use the app, or seeking to gather and use COVID-19 data of employees when they are off duty. As such, any employer-implemented program should be carefully designed, reviewed, and vetted. In general, consent-based approaches will be easier to implement, particularly if the consent, even if opt-out, is prominent and comprehensive notice of how the information will be used is provided. …

Finally, public fear of government and corporate mass surveillance is well established. As such, employers may encounter considerable resistance if they require (or even strongly encourage) installation of these apps on employees’ personal smart phones, which have large amounts of personal data and are already subject to heightened legal protections.

Behemoth corporations are now lining up to create such apps.  Google, Apple, Microsoft and UnitedHealth are all working on projects to gather up as much as possible about your employees’ health and report some of that data back to you.  And while none of these companies have discussed going quite this far, Natalie Kofler & Françoise Baylis writing at Nature asked us to:  

Imagine a world where your ability to get a job, housing or a loan depends on passing a blood test. You are confined to your home and locked out of society if you lack certain antibodies.

It has happened before. For most of the nineteenth century, immunity to yellow fever divided people in New Orleans, Louisiana, between the ‘acclimated’ who had survived yellow fever and the ‘unacclimated’, who had not had the disease1. Lack of immunity dictated whom people could marry, where they could work, and, for those forced into slavery, how much they were worth. Presumed immunity concentrated political and economic power in the hands of the wealthy elite, and was weaponized to justify white supremacy.

Something similar could be our dystopian future if governments introduce ‘immunity passports’ in efforts to reverse the economic catastrophe of the COVID-19 pandemic. The idea is that such certificates would be issued to those who have recovered and tested positive for antibodies to SARS-CoV-2 — the coronavirus that causes the disease. Authorities would lift restrictions on those who are presumed to have immunity, allowing them to return to work, to socialize and to travel. This idea has so many flaws that it is hard to know where to begin.

Kofler and Baylis went on to list ten reasons they think immunity passports are a bad idea.  And while they are looking at a different legal and moral question (government immunity passports vs. employer health tracking apps) note how many of these reasons apply to employers as well: 

1. COVID-19 immunity is a mystery
2. Serological tests are unreliable
3. The volume of testing needed is unfeasible
4. Too few survivors to boost the economy
5. Monitoring erodes privacy
6. Marginalized groups will face more scrutiny
7. Unfair access
8. Societal stratification
9. New forms of discrimination
10. Threats to public health

On the purely legal front, here is how Ropes & Gray came down on the most prevalent question I’ve heard from employers:  

Can I require my employees to download a contact-tracing app as a condition of continued employment?

In general, private employers likely could lawfully mandate that employees utilize a contact-tracing app, provided that the mandatory program is administered in a manner that is no more intrusive than necessary to meet the legitimate business concern. The permissibility of a contact-tracing app may vary based on differing employment settings, the employer’s business necessity for employee proximity, and whether the employer can implement less intrusive measures to provide a safe environment. For instance, a professional services firm, where the vast majority of employees can (or do) work remotely and thus present no immediate danger to anyone else in the workplace, may have difficulty showing the app is a business necessity and not more intrusive than necessary. On the other hand, an industrial meat-processing plant that requires in-person presence and where the nature of the work prevents social distancing within the plant may readily make the required showing, but note that the app may not be effective if these employees do not keep their smart phones on their person during the work day and, instead, store them in a locker off the factory floor.

Further, employers must ensure that the app is used in a non-discriminatory manner and that any medical or other personal information the employer obtains is stored confidentially and separate from employees’ personnel files. Employers would likely be required to cover the costs associated with the apps or the acquisition of smart phones to run the apps for employees who do not already own smart phones. Employers should seek to obtain consent from employees that authorizes the employer to obtain, use, and disclose to public health officials employee health information and geolocation data, as well as installation of the software for contact assessment and tracing.

Public employers may also mandate use of a contact-tracing app. However, in addition to satisfying the requirements noted above, they must consider the equal protection and due process implications. In particular, with respect to due process, public employers likely must ensure that there is a post-determination appeal process for anyone who has been denied access to the workplace as a result of being identified as COVID-19 positive or at risk based on his/her geolocation contacts. Voluntary employee participation programs may be more defensible from a privacy law perspective, but will require widespread adoption for public health effectiveness.

What about an app that relies solely on an individual’s own self-reported COVID-19 diagnosis or symptoms?  This approach definitely helps to alleviate the legal and ethical burdens an employer will face in the process, but the application can only operate as reliable as the integrity of the individual inputting the data.  So while this may help an employer feel that it is doing that which is reasonable to protect other employees, it really might just be engaging in a form or modern-day, corona-security virtue signaling.   

Employers must also consider the inevitable data leaks and hacks that will arise from these third party apps.  The resultant HIPAA violations, credit monitoring, cleanup and public relations nightmare that will follow will be no small matter.  It never is after any sort of employer or third-party leak or hack.  In fact, many employers are surprised to learn that an employee’s medical record is worth more to hackers than their credit card: 

Security experts say cyber criminals are increasingly targeting the $3 trillion U.S. healthcare industry, which has many companies still reliant on aging computer systems that do not use the latest security features.

“As attackers discover new methods to make money, the healthcare industry is becoming a much riper target because of the ability to sell large batches of personal data for profit,” said Dave Kennedy, an expert on healthcare security and CEO of TrustedSEC LLC. “Hospitals have low security, so it’s relatively easy for these hackers to get a large amount of personal data for medical fraud.” …

The data for sale includes names, birth dates, policy numbers, diagnosis codes and billing information. Fraudsters use this data to create fake IDs to buy medical equipment or drugs that can be resold, or they combine a patient number with a false provider number and file made-up claims with insurers, according to experts who have investigated cyber attacks on healthcare organizations.  

Medical identity theft is often not immediately identified by a patient or their provider, giving criminals years to milk such credentials. That makes medical data more valuable than credit cards, which tend to be quickly canceled by banks once fraud is detected.

Stolen health credentials can go for $10 each, about 10 or 20 times the value of a U.S. credit card number, according to Don Jackson, director of threat intelligence at PhishLabs, a cyber crime protection company. He obtained the data by monitoring underground exchanges where hackers sell the information.

What about the strategic storage and use of your data?  Did you happen to notice that one of the giant corporations listed earlier in this post is also a massive, nationwide health insurer?  For that entity, every bit of granular data it can extract about your employees allows it to increase your premium as well as its shareholders’ profits.  Employer health plans should always follow one simple rule in health data management – never, under any circumstance, disclose more about employee health status that absolutely necessary under the law.  I generally take this rule one step further as a broker and attorney working in the field.  I never, under any circumstances, want to obtain or possess any health or private information than is absolutely necessary under the law.  Possessing or knowing that data, or, allowing it to be held in more places than necessary simply open up the employer to more liability and headaches than necessary.  

Employers will be presented with countless advertisements and arguments for installing some form of health-tracking application as we consider how to return to the workplace.  And I know that many of these arguments will be good ones.  I just fear that the counterbalancing arguments in favor of liberty, privacy and lawful data protection will be outweighed in this process as there won’t be any gigantic multinational corporations lined up to profit from the sale of common sense, individual liberty and employee privacy. 

Government officials, healthcare workers, and residents in Mexican border cities are alleging new COVID-19 outbreaks are connected with infected people crossing the border from the US. 

Municipal and state officials in Matamoros, located on the southern region of the Rio Grande, directly across the border from Brownsville, Texas, in conjunction with Mexico’s National Guard established checkpoints over the weekend at three border crossings to screen US citizens, dual nationals, and locals, a move to mitigate the spread of the virus in the country. 

City official Jorge Mora Solaldine, told AP News only one person per car is permitted across the border, and they will have to prove essential business, such as work or medical care is being done, or risk rejection.

At least 180 people were denied access at one border crossing into Mexico along the Brownsville stretch on Saturday. The municipality of Matamoros and other border towns in the area have reported an increase in COVID-19 cases. 

Along the San Diego–Tijuana border, Tijuana doctors told AP that a spike in cases is coming from dual nationals, residents, and some Americans who have crossed over: 

“There were a lot of people who emigrated here to Mexico,” Dr. Remedios Lozada, who leads government efforts in the Tijuana health district. “That was when we began facing a higher number of cases.”

Residents in Nogales, Sonora, told AP, they constructed roadblocks to prevent people from Arizona heading into Mexico back in March because Mexican government officials were doing very little to screen people coming from the US. 

President Trump has routinely praised his border wall and claimed it had stopped the virus: 

“We’ll have 500 miles [of the Southern border fence] built by very early next year, some time, so, one of the reasons the numbers are so good. We will do everything in our power to keep the infection and those carrying the infection from entering our country. We have no choice. Whether it’s the virus that we’re talking about or many other public health threats. The Democrat policy of open borders is a direct threat to the health and well-being of all Americans. Now you see it with the coronavirus, you see it,” President Trump said at a campaign rally in Charleston, South Carolina, in late February. 

Though Mexican state governors along the border said thousands of new cases developed in late March, days after President Trump closed businesses and issued public health orders for all residents to stay-at-home in the US. 

Last month, Baja California Governor Jaime Bonilla said doctors were “dropping like flies” due to the lack of proper medical gear as cases begin to rise.

Recently, the Trump administration extended strict border policies to limit inbound and outbound flow, citing the spread of the virus. All non-commercial, “non-essential” has been blocked for the time being. 

Jose Maria Ramos, a professor and researcher at the College of the Northern Border in Tijuana, said President Trump’s priority appears to be limiting migration flow rather than protecting public health. 

“We’re in a national emergency, and health has to be part of the present and immediate future,” Ramos said.

Miguel Angel Jimenez, a 57-year-old diabetic who was infected with COVID-19 in April and is now recovering, said inbound and outbound flows at border crossings ‘will never make this situation end.’ 

Several weeks back, we noted how Mexico was likely distorting virus statistics and repressing negative data, which is all suggestive that Mexican President Andres Manuel Lopez Obrador (AMLO) is trying to reopen his crashed economy, despite an ongoing pandemic.

AMLO recently said the reopening would be “cautious and gradual,” but with more than 68,500 confirmed cases and nearly 7,400 deaths, the concern is the federal government is severely underreporting the public health crisis and prematurely reopening the economy. 

AP’s coverage on Mexico City’s COVID-19 death toll and cremating bodies has been an eye-opener for anyone seeking a glimpse of the deteriorating virus crisis in the country. 

While people along Mexican border cities fear the virus is coming from the US — the examples of stricter border measures via Mexican government and residents resorting to creating walls of their own to thwart inbound traffic from the US — are all suggestive that cross-border trade between both countries will remain severely depressed for 2020. 

Authored by Charles Hugh Smith via OfTwoMinds blog,

What nobody dares whisper is ‘there is no alternative to collapse’ because the system is now too fragile and brittle to survive.

TINA–there is no alternative–is throwing an orgy of money-creation, and it’s one for the ages: The Federal Reserve has created over $3 trillion out of thin air in a few months and invited all the usual parasites, predators and speculators to the orgy.

You and I, mere taxpayers? We get to watch as our “betters” feast on the Fed’s limitless bounty of free money for financiers and other parasites and predators. Of course we don’t get a clear view of the proceedings; the orgy is all behind closed doors.

What we see is the threadbare comedy of Fed Chair Jay Powell coming out of the orgy to assure us that the orgy is all for the good of the country–ha-ha-ha. Those gorging on the Fed feast inside are in danger of laughing so hard at Powell’s comedy routine they might choke.

Your share of the orgy is a bowl of thin gruel: $1,200. That wasn’t distributed out of kindness or generosity; like all federal giveaways, it’s real purpose is to give you enough cash to make your loan payments so all the parasites and predators in the Fed’s orgy won’t experience the terrible suffering caused by debt-serfs defaulting.

The excuse for the orgy is always the same: there is no alternative. We have to bail out the greedy corporations that borrowed billions to buy back their own stocks, the corporations that sold junk debt to finance their bonuses and dividends, the financiers who bought the risky debt, the speculators who front-run the Fed’s purchases of assets and on and on in an endless parade of fraud and corruption–because if we don’t bail out the speculators and other parasites, the whole financial system will implode and that would be terrible.

Terrible for who? To answer the question, we need to ponder the fundamental nature of the Fed and our financial system, which can be summarized in one line: anything goes, and winners take all.

Anything goes, because money buys political influence and so what was once illegal–buying back your own stock, advertising medications directly to consumers, etc.– are not just made legal but normalized by constant propaganda in the corporate media that these forms of legalized looting are good for the nation because… well, that doesn’t matter, just take our word for it.

When anything goes, the winners take all. This is how we’ve ended up with a unstable, fragile economy dominated by a handful of corporations in each sector whose sole purpose is to maximize profits by any means available, and it just so happens the most profitable arrangements are monopoly and cartels, and so that’s what we have: an economy of high costs, enormous profits, low-quality goods and services for the bottom 95% and an extreme concentration of wealth and income in the hands of the winners.

This dynamic also characterizes the public sector, where anything goes if you can get away with it has generated a few winners– employees of small school districts getting salaries of $350,000 and pensions to match, and so on–and a multitude of losers as actual services for the public decay even as costs soar. Naturally, questions about this are dismissed with TINA: there is no alternative.

The fragility of such a system is so extreme that the winners’ only hope to hold onto their booty is to persuade us that the simulations of open markets and democracy they conjure up are “real” in the sense that we can’t really see the Emperor’s fine clothing but we accept that this must be a flaw in our own sight, rather than what it really is: self-serving institutionalized delusion: believe us when we assure you that there is no alternative.

So as the greediest and most parasitic few gorge on TINA’s orgy, try not to bust a gut laughing at Jay Powell’s comedy act justifying the orgy because really, there is no alternative other than a collapse of what deserves to collapse and what will collapse despite (or as a result of) the Fed’s manic money-printing.

What nobody dares whisper is there is no alternative to collapse because the system is now too fragile and brittle to survive. TINA may get the last laugh after all.

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