Nothing partisan here, we are just extrapolating the consequences and political analysis of the GFC to the current crisis. Think about it, last week Main Street registered another 6 million-plus hit in lost jobs and junk bond investors got bailed out of their risky and dumb-ass bets.
Op-Ed: Get ready for the recovery of the 1%
There were two important economic events on Thursday. The government reported that 6.6 million Americans filed for unemployment, an all-time record. And the Federal Reserve announced a new program to flood the economy and financial markets with $2.3 trillion in liquidity — including buying up junk bonds from debt-laden companies.
Which one moved the market? The Fed move, driving the Dow Jones Industrial Average up 500 points by midday.
The market jump, unemployment surge and Fed rescue efforts all converged to form a new split in the economy, between the asset-rich and the rest of America.
Also, seeing a lot of the privileged Bailout Queens on Twitterati taking victory laps thinking they’re geniuses — and some even grotesquely posting pictures of their steak and lobster dinners like anybody gives a shit — after the Fed has saved their bacon for the umpteenth time. Yet they have no clue of the consequences of what may be about to come. Must be the ultimate contrarian signal.
For some reason, the Bailout Queens are now mocking the bears saying they are angry about the bailouts and calling them “liquidationists,” probably as a vague reference to Andrew Mellon, President Hoover’s Secretary of Treasury when the Great Depression first broke out,
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression.
They have no clue of the anger that is about to besiege the political system. Heads are gonna roll and we doubt it will be the W.H.O. or the Chinese as some are trying to deflect to and scapegoat.
Moi?
We are bearish, angry and would like to see the pain more evenly shared this time with many more economic and Chapter 11 restructurings, which are not liquidations x/ shareholders, by the way. Otherwise, we risk losing an entire generation to stagflation and a highly indebted zombie economy, and that is if we are lucky.
If this is the case, what will really irk us, beside seeing the poor getting poorer, is to watch the Bail Out Queens continue to take their victory laps, still thinking they’re geniuses surfing the Fed liquidity, and still posting their god damn steak and lobster dinners on Instagram. Yuck, gonna hurl just thinking about it.
Why do think there was such a ginormous political shock in 2016? Much of it was because none of the banksters, who were a big portion of the nefarious group of actors that caused the Great Financial Crisis (GFC), were never criminally prosecuted. No, Virginia, it wasn’t just Lehman Brothers.
Cash And Gold
Even Arnold would love our gold and cash barbell position as we wait patiently on the virtual Venice Beach. We have zero desire to own the stock market at these astronomical valuations, 130-140 percent of GDP, which probably puts it in the 90th percentile valuation rank (back to you with confirmation) even during talk of another potential Great Depression.
With the unemployment trajectory approaching that of the Great Depression at 25 percent, albeit temporary, should stocks be trading at such valuations? Have we slipped into some alternative universe or did we miss something?
Back To The Thirties
It is interesting stocks are experiencing daily moves not seen since 1933, when FDR came to power and the Dow returned its best year ever. It was a big bounce after an approximately 80 percent flop from the September 1929 high. President Roosevelt had a lot of runway to work with back then as the national debt was low, the federal government and financial regulations, for that matter, including deposit insurance were virtually nonexistent.
The monetary authorities were also learning some very painful lesson by not providing liquidity to financial institutions during the runs and panics allowing banks, even the strong ones to fail. Milton Friedman estimated the money supply shrank 25 percent due to the bank failures and was the main cause of the Great Depression (again, we need to confirm the data as we are writing on an iPad and away from the desk).
FDR’s policies were able to bring unemployment down to about 15 percent. It didn’t eliminate the Depression but moving from 25 percent to 15 percent alleviated a hell of a lot pain and suffering. Next time you hear an ideologue call FDR a “socialist,” do us a favor and tell them to stick it where the sun don’t shine. Roosevelt saved capitalism.
Get Shorty?
Not yet. The temptation to short now is very high but don’t count out a ghoulish rally as the idjits count it a victory if the final death count comes in at, say 70K instead of the 100-240k estimate, which was very likely fake in order to manipulate and lower the bar.
The experts said they don’t challenge the numbers’ validity but that they don’t know how the White House arrived at them.
White House officials have refused to explain how they generated the figure — a death toll bigger than the United States suffered in the Vietnam War or the 9/11 terrorist attacks. They have not provided the underlying data so others can assess its reliability or provided long-term strategies to lower that death count.
Think as in “a final China trade deal is within days.” Pretty frickin’ sick.
Nevertheless, we hope and pray for not one more COVID casualty.
The flattening of the curve or whatever the market deems as turning the corner on the first order existential threat, i.e, death, is just the end of the beginning of the crisis.
We do give the the Fed credit for not letting the Titanic sink, at least not yet, but there are so many other dimensions to this crisis, 2nd, 3rd, even 7th order and more effects. It’s just mind boggling. The Fed and Congress is going to have to rethink the central bank’s mandate.
Ex Ante Structural Weakness
Contrary to the delusions of some, we would be in a much stronger position to snap back if the economy was structurally sound before the virus took it out. Take a look at those bread lines if you disagree and think it was the best economy in history pre-COVID.
Yesterday 10,000 cars in San Antonio lined up for food distribution.
49% of Americans live paycheck to paycheck. Food banks are in shortage in many cities, even here in Silicon Valley. Consider donating to your local food bank if you can. You do not have to be a doctor to save lives. #foodbanks#saveliveshttps://t.co/EzJENp5wgi
How many people sitting in those cars do you think own stonks?
Hint: Our last analysis estimated 88 percent of public equites are owned by the wealthiest 10 percent of households.
Our bet is they could give a rat’s ass where the Dow closed on Thursday and care about one thing: how they are going to feed their kids, last night, today, and tomorrow.
‘We just can’t feed this many’
Vehicles start lining up before dawn as locals hit hard by economic effects of coronavirus seek aid from the San Antonio Food Bank.
April 9, 2020
In perhaps the most sobering reminder yet of the economic fallout caused by the coronavirus pandemic, the San Antonio Food Bank aided about 10,000 households Thursday in a record-setting giveaway at a South Side flea market.
“It was a rough one today,” said Food Bank president and CEO Eric Cooper after the largest single-day distribution in the nonprofit’s 40-year history. “We have never executed on as large of a demand as we are now.
“The Largest Drawdown For Value We’ve Ever Seen”: Asset Manager Who Warned Of Crash Turns Bullish
Rob Arnott of Research Affiliates spent years warning people about crowding into stock and looming bubbles that were on the verge of collapsing. His firm had warned that U.S. large caps would see “zero return annually” for the next decade.
Then, the coronavirus hit, grinding the economy to the halt, the Dow shed 10,000 points over the course of just weeks and the Federal Reserve started immeasurable open-ended stimulus from the Federal Reserve.
Now Arnott, whose shop is a sub-adviser to names like PIMCO, has “re-calibrated” his forecast for the future and is now turning more optimistic, according to Bloomberg. Arnott is now raising his exposure to small cap U.S. equities and buying the most value stocks that their “models will allow”.
Chris Brightman, the chief investment officer of Research Affiliates, said: “In reaction to the global sell-off, we are moving from a relatively defensive position to a much more risk on position. We are selling government bonds and other defensive sorts of allocations, and rebalancing into and increasing positions in more risk on assets.”
Now, Research Affiliates forecasts real returns of 1.5% annually for stocks, favoring “large firms in developed nations outside the U.S.” and smaller companies domestically.
Rob Arnott, Research Affiliates
Brightman calls the strategy a “significant change”. The strategy may be looking appealing to the firm as Russell 2000 small caps fell 42% at their lows versus 34% for the larger S&P 500 names. Small caps have been hit harder because of the smaller firms have shakier balance sheets. But the valuations look more attractive than their larger counterparts.
But Research Affiliates is also slightly biased: the firm “specializes” in value names and offers a product called the RAFI Fundamental Index, which sorts underpriced stocks using weightings other than market caps. In November, the firm wrote a paper making the case as to why it was wrong at the time to bail on value investments.
Meanwhile the Russell Value Index fell about 39% at its lows and the Russell 1000 Growth Index fell 31.5%.
Brightman concluded:
“We are responding to the greatest drawdown of the value factor ever in history. Going into this corona crash, value was at one of the longest and one of the deepest drawdowns in its history. Now looking at data through March 31, we well and truly are in unprecedented territory with the largest drawdown for value ever seen.”
He also said the firm is raising its exposure to REITs.
“Down The Rabbit Hole” – The Eurodollar Market Is The Matrix Behind It All
Submitted by Michael Every of Rabobank
Summary
The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated.
Its origins are shrouded in mystery and intrigue; its operations are invisible to most; and yet it controls us in many ways. We will attempt to enlighten readers on what it is and what it means.
However, it is also a system under huge structural pressures – and as such we may be about to experience a profound paradigm shift with key implications for markets, economies, and geopolitics.
Recent Fed actions on swap lines and repo facilities only underline this fact rather than reducing its likelihood
What is The Matrix?
A new world-class golf course in an Asian country financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets and swapping borrowed EUR to do so. An African retailer importing Chinese-made toys for sale, paying its invoice in USD.
All of these are small examples of the multi-faceted global Eurodollar market. Like The Matrix, it is all around us, and connects us. Also just like The Matrix, most are unaware of its existence even as it defines the parameters we operate within. As we shall explore in this special report, it is additionally a Matrix that encompasses an implicit power struggle that only those who grasp its true nature are cognizant of.
Moreover, at present this Matrix and its Architect face a huge, perhaps existential, challenge.
Yes, it has overcome similar crises before…but it might be that the Novel (or should we say ‘Neo’?) Coronavirus is The One.
So, here is the key question to start with: What is the Eurodollar system?
For Neo-phytes
The Eurodollar system is a critical but often misunderstood driver of global financial markets: its importance cannot be understated. While most market participants are aware of its presence to some degree, not many grasp the extent to which it impacts on markets, economies,…and geopolitics – indeed, the latter is particularly underestimated.
Yet before we go down that particular rabbit hole, let’s start with the basics. In its simplest form, a Eurodollar is an unsecured USD deposit held outside of the US. They are not under the US’ legal jurisdiction, nor are they subject to US rules and regulations.
To avoid any potential confusion, the term Eurodollar came into being long before the Euro currency, and the “euro” has nothing to do with Europe. In this context it is used in the same vein as Eurobonds, which are also not EUR denominated bonds, but rather debt issued in a different currency to the company of that issuing. For example, a Samurai bond–that is to say a bond issued in JPY by a nonJapanese issuer–is also a type of Eurobond.
As with Eurobonds, eurocurrencies can reflect many different underlying real currencies. In fact, one could talk about a Euroyen, for JPY, or even a Euroeuro, for EUR. Yet the Eurodollar dwarfs them: we shall show the scale shortly.
More(pheous) background
So how did the Eurodollar system come to be, and how has it grown into the behemoth it is today? Like all global systems, there are many conspiracy theories and fantastical claims that surround the birth of the Eurodollar market. While some of these stories may have a grain of truth, we will try and stick to the known facts.
A number of parallel events occurred in the late 1950s that led to the Eurodollar’s creation – and the likely suspects sound like the cast of a spy novel. The Eurodollar market began to emerge after WW2, when US Dollars held outside of the US began to increase as the US consumed more and more goods from overseas. Some also cite the role of the Marshall Plan, where the US transferred over USD12bn (USD132bn equivalent now) to Western Europe to help them rebuild and fight the appeal of Soviet communism.
Of course, these were just USD outside of the US and not Eurodollars. Where the plot thickens is that, increasingly, the foreign recipients of USD became concerned that the US might use its own currency as a power play. As the Cold War bit, Communist countries became particularly concerned about the safety of their USD held with US banks. After all, the US had used its financial power for geopolitical gains when in 1956, in response to the British invading Egypt during the Suez Crisis, it had threatened to intensify the pressure on GBP’s peg to USD under Bretton Woods: this had forced the British into a humiliating withdrawal and an acceptance that their status of Great Power was not compatible with their reduced economic and financial circumstances.
With rising fears that the US might freeze the Soviet Union’s USD holdings, action was taken: in 1957, the USSR moved their USD holdings to a bank in London, creating the first Eurodollar deposit and seeding our current UScentric global financial system – by a country opposed to the US in particular and capitalism in general.
There are also alternative origin stories. Some claim the first Eurodollar deposit was made during the Korean War with China moving USD to a Parisian bank.
Meanwhile, the Eurodollar market spawned a widely-known financial instrument, the London Inter Bank Offer Rate, or LIBOR. Indeed, LIBOR is an offshore USD interest rate which emerged in the 1960s as those that borrowed Eurodollars needed a reference rate for larger loans that might need to be syndicated. Unlike today, however, LIBOR was an average of offered lending rates, hence the name, and was not based on actual transactions as the first tier of the LIBOR submission waterfall is today.
Dozer and Tank
So how large is the Eurodollar market today? Like the Matrix – vast. As with the origins of the Eurodollar system, itself nothing is transparent. However, we have tried to estimate an indicative total using Bank for International Settlements (BIS) data for:
On-balance sheet USD liabilities held by non-US banks;
USD Credit commitments, guarantees extended, and derivatives contracts of non-US banks (C, G, D);
USD debt liabilities of non-US non-financial corporations;
Over-the-Counter (OTC) USD derivative claims of non-US non-financial corporations; and
Global goods imports in USD excluding those of the US and intra-Eurozone trade.
The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus. Even if this measure is not complete, it underlines the scale of the market.
It also shows its vast power in that this is an equally large structural global demand for USD. Every import, bond, loan, credit guarantee, or derivate needs to be settled in USD.
Indeed, fractional reserve banking means that an initial Eurodollar can be multiplied up (e.g., Eurodollar 100m can be used as the base for a larger Eurodollar loan, and leverage increased further). Yet non-US entities are NOT able to conjure up USD on demand when needed because they don’t have a central bank behind them which can produce USD by fiat, which only the Federal Reserve can.
This power to create the USD that everyone else transacts and trades in is an essential point to grasp on the Eurodollar – which is ironically also why it was created in the first place!
Tri-ffi-nity
Given the colourful history, ubiquitous nature, and critical importance of the Eurodollar market, a second question then arises: Why don’t people know about The Matrix?
The answer is easy: because once one is aware of it, one immediately wishes to have taken the Blue Pill instead.
Consider what the logic of the Eurodollar system implies. Global financial markets and the global economy rely on the common standard of the USD for pricing, accounting, trading, and deal making. Imagine a world with a hundred different currencies – or even a dozen: it would be hugely problematic to manage, and would not allow anywhere near the level of integration we currently enjoy.
However, at root the Eurodollar system is based on using the national currency of just one country, the US, as the global reserve currency. This means the world is beholden to a currency that it cannot create as needed.
When a crisis hits, as at present, everyone in the Eurodollar system suddenly realizes they have no ability to create fiat USD and must rely on national USD FX reserves and/or Fed swap lines that allow them to swap local currency for USD for a period. This obviously grants the US enormous power and privilege.
The world is also beholden to US monetary policy cycles rather than local ones: higher US rates and/or a stronger USD are ruinous for countries that have few direct economic or financial links with the US. Yet the US Federal Reserve generally shows very little interest in global economic conditions – though that is starting to change, as we will show shortly.
A second problem is that the flow of USD from the US to the rest of the world needs to be sufficient to meet the inbuilt demand for trade and other transactions. Yet the US is a relatively smaller slice of the global economy with each passing year. Even so, it must keep USD flowing out or else a global Eurodollar liquidity crisis will inevitably occur.
That means that either the US must run large capital account deficits, lending to the rest of the world; or large current account deficits, spending instead.
Obviously, the US has been running the latter for many decades, and in many ways benefits from it. It pays for goods and services from the rest of the world in USD debt that it can just create. As such it can also run huge publicor private-sector deficits – arguably even with the multitrillion USD fiscal deficits we are about to see.
However, there is a cost involved for the US. Running a persistent current-account deficit implies a net outflow of industry, manufacturing and related jobs. The US has obviously experienced this for a generation, and it has led to both structural inequality and, more recently, a backlash of political populism wanting to Make America Great Again.
Indeed, if one understands the structure of the Eurodollar system one can see that it faces the Triffin Paradox. This was an argument first made by Robert Triffin in 1959 when he correctly predicted that any country forced to adopt the role of global reserve currency would also be forced to run ever-larger currency outflows to fuel foreign appetite – eventually leading to the breakdown of the system as the cost became too much to bear.
Moreover, there is another systemic weakness at play: realpolitik. Atrophying of industry undermines the supply chains needed for the defence sector, with critical national security implications. The US is already close to losing the ability to manufacture the wide range of products its powerful armed forces require on scale and at speed: yet without military supremacy the US cannot long maintain its multi-dimensional global power, which also stands behind the USD and the Eurodollar system.
This implies the US needs to adopt (military-) industrial policy and a more protectionist stance to maintain its physical power – but that could limit the flow of USD into the global economy via trade. Again, the Eurodollar system, like the early utopian version of the Matrix, seems to contain the seeds of its own destruction.
Indeed, look at the Eurodollar logically over the long term and there are only three ways such a system can ultimately resolve itself:
The US walks away from the USD reserve currency burden, as Triffin said, or others lose faith in it to stand behind the deficits it needs to run to keep USD flowing appropriately;
The US Federal Reserve takes over the global financial system little by little and/or in bursts; or
The global financial system fragments as the US asserts primacy over parts of it, leaving the rest to make their own arrangements.
See the Eurodollar system like this, and it was always when and not if a systemic crisis occurs – which is why people prefer not focus on it all even when it matters so much. Yet arguably this underlying geopolitical dynamic is playing out during our present virus-prompted global financial instability.
Down the rabbit hole
But back to the rabbit hole that is our present situation. While the Eurodollar market is enormous one also needs to look at how many USD are circulating around the world outside the US that can service it if needed. In this regard we will look specifically at global USD FX reserves.
It’s true we could also include US cash holdings in the offshore private sector. Given that US banknotes cannot be tracked no firm data are available, but estimates range from 40% – 72% of total USD cash actually circulates outside the country. This potentially totals hundreds of billions of USD that de facto operate as Eurodollars. However, given it is an unknown total, and also largely sequestered in questionable cash-based activities, and hence are hopefully outside the banking system, we prefer to stick with centralbank FX reserves.
Looking at the ratio of Eurodollar liabilities to global USD FX reserve assets, the picture today is actually healthier than it was a few years ago.
Indeed, while the Eurodollar market size has remained relatively constant in recent years, largely as banks have been slow to expand their balance sheets, the level of global USD FX reserves has risen from USD1.9 trillion to over USD6.5 trillion. As such, the ratio of structural global USD demand to that of USD supply has actually declined from near 22 during the global financial crisis to around 9.
Yet the current market is clearly seeing major Eurodollar stresses – verging on panic.
Fundamentally, the Eurodollar system is always short USD, and any loss of confidence sees everyone scramble to access them at once – in effect causing an invisible international bank run. Indeed, the Eurodollar market only works when it is a constant case of “You-Roll-Over Dollar”.
Unfortunately, COVID-19 and its huge economic damage and uncertainty mean that global confidence has been smashed, and our Eurodollar Matrix risks buckling as a result.
The wild gyrations recently experienced in even major global FX crosses speak to that point, to say nothing of the swings seen in more volatile currencies such as AUD, and in EM bellwethers such as MXN and ZAR. FX basis swaps and LIBOR vs. Fed Funds (so offshore vs. onshore USD borrowing rates) say the same thing. Unsurprisingly, the IMF are seeing a wide range of countries turning to them for emergency USD loans.
The Fed has, of course, stepped up. It has reduced the cost of accessing existing USD swap lines–where USD are exchanged for other currencies for a period of time–for the Bank of Canada, Bank of England, European Central Bank, and Swiss National Bank; and another nine countries were given access to Fed swap lines with Australia, Brazil, South Korea, Mexico, Singapore, and Sweden all able to tap up to USD60bn, and USD30bn available to Denmark, Norway, and New Zealand. This alleviates some pressure for some markets – but is a drop in the ocean compared to the level of Eurodollar liabilities.
The Fed has also introduced a new FIMA repo facility. Essentially this allows any central bank, including emerging markets, to swap their US Treasury holdings for USD, which can then be made available to local financial institutions. To put it bluntly, this repo facility is like a swap line but with a country whose currency you don’t trust.
Allowing a country to swap its Treasuries for USD can alleviate some of the immediate stress on Eurodollars, but when the swap needs to be reversed the drain on reserves will still be there. Moreover, Eurodollar market participants will now not be able to see if FX reserves are declining in a potential crisis country. Ironically, that is likely to see less, not more, willingness to extend Eurodollar credit as a result.
You have two choices, Neo
Yet despite all the Fed’s actions so far, USD keeps going up vs. EM FX. Again, this is as clear an example as one could ask for of structural underlying Eurodollar demand.
Indeed, we arguably need to see even more steps taken by the Fed – and soon. To underline the scale of the crisis we currently face in the Eurodollar system, the BIS concluded at the end of a recent publication on the matter:
“…today’s crisis differs from the 2008 GFC, and requires policies that reach beyond the banking sector to final users. These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars. Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown.
Channeling dollars to non-banks is not straightforward. Allowing non-banks to transact with the central bank is one option, but there are attendant difficulties, both in principle and in practice. Other options include policies that encourage banks to fill the void left by market based finance, for example funding for lending schemes that extend dollars to non-banks indirectly via banks.”
In other words, the BIS is making clear that somebody (i.e., the Fed) must ensure that Eurodollars are made available on massive scale, not just to foreign central banks, but right down global USD supply chains. As they note, there are many practical issues associated with doing that – and huge downsides if we do not do so. Yet they overlook that there are huge geopolitical problems linked to this step too.
Notably, if the Fed does so then we move rapidly towards logical end-game #2 of the three possible Eurodollar outcomes we have listed previously, where the Fed de facto takes over the global financial system. Yet if the Fed does not do so then we move towards end-game #3, a partial Eurodollar collapse.
Of course, the easy thing to assume is that the Fed will step up as it has always shown a belated willingness before, and a more proactive stance of late. Indeed, as the BIS shows in other research, the Fed stepped up not just during the Global Financial Crisis, but all the way back to the Eurodollar market of the 1960s, where swap lines were readily made available on large scale in order to try to reduce periodic volatility.
However, the scale of what we are talking about here is an entirely new dimension: potentially tens of trillions of USD, and not just to other central banks, or to banks, but to a panoply of real economy firms all around the Eurodollar universe.
As importantly, this assumes that the Fed, which is based in the US, wants to save all these foreign firms. Yet does the Fed want to help Chinese firms, for example? It may traditionally be focused narrowly on smoothly-functioning financial markets, but is that true of a White House that openly sees China as a “strategic rival”, which wishes to onshore industry from it, and which has more interest in having a politically-compliant, not independent Fed? Please think back to the origins of Eurodollars – or look at how the US squeezed its WW2 ally UK during the 1956 Suez Crisis, or how it is using the USD financial system vs. Iran today.
Equally, this assumes that all foreign governments and central banks will want to see the US and USD/Eurodollar cement their global financial primacy further. Yes, Fed support will help alleviate this current economic and brewing financial crisis – but the shift of real power afterwards would be a Rubicon that we have crossed.
Specifically, would China really be happy to see its hopes of CNY gaining a larger global role washed away in a flood of fresh, addictive Eurodollar liquidity, meaning that it is more deeply beholden to the US central bank? Again, please think back to the origins of Eurodollars, to Suez, and to how Iran is being treated – because Beijing will. China would be fully aware that a Fed bailout could easily come with political strings attached, if not immediately and directly, then eventually and indirectly. But they would be there all the same.
One cannot ignore or underplay this power struggle that lies within the heart of the Eurodollar Matrix.
I know you’re out there
So, considering those systemic pressures, let’s look at where Eurodollar pressures are building most now. We will use World Bank projections for short-term USD financing plus concomitant USD current-account deficit requirements vs. specifically USD FX reserves, not general FX reserves accounted in USD, as calculated by looking at national USD reserves and adjusting for the USD’s share of the total global FX reserves basket (57% in 2018, for example). In some cases this will bias national results up or down, but these are in any case only indicative.
How to read these data about where the Eurodollar stresses lie in Table 1? Firstly, in terms of scale, Eurodollar problems lie with China, the UK, Japan, Hong Kong, the Cayman Islands, Singapore, Canada, and South Korea, Germany and France. Total short-term USD demand in the economies listed is USD28 trillion – around 130% of USD GDP. The size of liabilities the Fed would potentially have to cover in China is enormous at over USD3.4 trillion – should that prove politically acceptable to either side.
Outside of China, and most so in the Cayman Islands and the UK, Eurodollar claims are largely in the financial sector and fall on banks and shadow banks such as insurance companies and pension funds. This is obviously a clearer line of attack/defence for the Fed. Yet it still makes these economies vulnerable to swings in Eurodollar confidence – and reliant on the Fed.
Second, most developed countries apart from Switzerland have opted to hold almost no USD reserves at all. Their approach is that they are also reserve currencies, long-standing US allies, and so assume the Fed will always be willing to treat them as such with swap lines when needed. That assumption may be correct – but it comes with a geopolitical power-hierarchy price tag. (Think yet again of how Eurodollars started and the 1956 Suez Crisis ended.)
Third, most developing countries still do not hold enough USD for periods of Eurodollar liquidity stress, despite the painful lessons learned in 1997-98 and 2008-09. The only exception is Saudi Arabia, whose currency is pegged to the USD, although Taiwan, and Russia hold USD close to what would be required in an emergency. Despite years of FX reserve accumulation, at the cost of domestic consumption and a huge US trade deficit, Indonesia, Mexico, Malaysia, and Turkey are all still vulnerable to Eurodollar funding pressures. In short, there is an argument to save yet more USD – which will increase Eurodollar demand further.
We all become Agent Smith?
In short, the extent of demand for USD outside of the US is clear – and so far the Fed is responding. It has continued to expand its balance sheet to provide liquidity to the markets, and it has never done so at this pace before (Figure 5). In fact, in just a month the Fed has expanded its balance sheet by nearly 50% of the previous expansion observed during all three rounds of QE implemented after the Global Financial Crisis. Essentially we have seen nearly five years of QE1-3 in five weeks! And yet it isn’t enough.
Moreover, things are getting worse, not better. The global economic impact of COVID-19 is only beginning but one thing is abundantly clear – global trade in goods and services is going to be hit very, very hard, and that US imports are going to tumble. This threatens one of the main USD liquidity channels into the Eurodollar system.
Table 2 above also underlines looming EM Eurodollar stress-points in terms of import cover, which will fall sharply as USD earnings collapse, and external debt service. The further to the left we see the latest point for import cover, and the further to the right we see it for external debt, the greater the potential problems ahead.
As such, the Fed is likely to find it needs to cover trillions more in Eurodollar liabilities (of what underlying quality?) coming due in the real global, not financial economy – which is exactly what the BIS are warning about. Yes, we are seeing such radical steps being taken by central banks in some Western countries, including in the US – but internationally too? Are we all to become ‘Agent Smith’?
If the Fed is to step up to this challenge and expand its balance sheet even further/faster, then the US economy will massively expand its external deficit to mirror it.
That is already happening. What was a USD1 trillion fiscal deficit before COVID-19, to the dismay of some, has expanded to USD3.2 trillion via a virus-fighting package: and when tax revenues collapse, it will be far larger. Add a further USD600bn phase three stimulus, and talk of a USD2 trillion phase four infrastructure program to try to jumpstart growth rather than just fight virus fires, and potentially we are talking about a fiscal deficit in the range of 20-25% of GDP. As we argued recently, that is a peak-WW2 level as this is also a world war of sorts.
On one hand, the Eurodollar market will happily snap up those trillions US Treasuries/USD – at least those they can access, because the Fed will be buying them too via QE. Indeed, for now bond yields are not rising and USD still is.
However, such fiscal action will prompt questions on how much the USD can be ‘debased’ before, like Agent Smith, it over-reaches and then implodes or explodes – the first of the logical endpoints for the Eurodollar system, if you recall. (Of course, other currencies are doing it too.)
Is Neo The One?
In conclusion, the origins of the Eurodollar Matrix are shrouded in mystery and intrigue – and yet are worth knowing. Its operations are invisible to most but control us in many ways – so are worth understanding. Moreover, it is a system under huge structural pressure – which we must now recognise.
It’s easy to ignore all these issues and just hope the Eurodollar Matrix remains the “You-Roll-Dollar” market – but can that be true indefinitely based just on one’s belief?
South Korea Says Nearly 100 Recovered COVID-19 Patients Tested Positive Again
There’s been growing concern that patients who previously tested positive for COVID-19 and eventually recovered could actually ‘relapse’ or also be ‘reinfected’ for the virus, after prior reports out of China suggested this could be possible.
Disease experts have speculated over the nightmare possibility, but now the World Health Organization (WHO) is looking into nearly one hundred cases in South Korea which may be instances of just this feared scenario.
“South Korean officials on Friday reported 91 patients thought cleared of the new coronavirus had tested positive again,” Reuters reports. “Jeong Eun-kyeong, director of the Korea Centers for Disease Control and Prevention, told a briefing that the virus may have been reactivated rather than the patients being re-infected.”
Infected person being moved from an ambulance to a hospital in Seoul, Getty Images.
The practice of health officials internationally, based on WHO guidelines, is that a patient can be discharged from the hospital and is considered free of the virus after testing negative twice. The tests must be administered at least 24 hours apart.
“We are aware of these reports of individuals who have tested negative for COVID-19 using PCR (polymerase chain reaction) testing and then after some days testing positive again,” a WHO official said from Geneva regarding the South Korea cases.
“We are closely liaising with our clinical experts and working hard to get more information on those individual cases. It is important to make sure that when samples are collected for testing on suspected patients, procedures are followed properly,” the statement said.
As global cases are now passed 1.7 million, with most concentrated in the United States, which over the weekend surpassed Italy for the first time in deaths from the disease – at over 20,600 – the possibility of the virus being “reactivated” in people would be an extremely worrisome scenario, also as world leaders look to open economies back up again based at least in part on the hoped-for assurance that already infected people would not get it again.
UK Deaths Pass 10K As Millions Of Christians Celebrate A ‘Canceled’ Easter On Lockdown: Live Update
As millions of Christians wake up to an Easter Sunday largely devoid of cherished holiday traditions (Easter Egg hunts, baskets filled with candy, gathering to celebrate with family), the UK Health Department reported some more grim news: As expected, the COVID-19 death toll in the country passed 10k over the last 24 hours, according to numbers released Sunday morning.
The UK Department of Health and Social Care revealed that the death toll rose in England by 657 to 9,594 on Sunday, bringing the total across the UK to more than 10,500. Unfortunately, the daily deaths have become part of the world’s grim routine in the coronavirus era. But at least the British people received some good news: PM Boris Johnson has left the hospital in London where he was briefly moved to the ICU about a week ago.
After Italy reported a sudden jump in deaths yesterday, ending a promising streak of declines, Spain on Sunday reported a daily death toll of 16,972, up 619 on Sunday, compared with a jump of 510 yesterday. The Saturday number was a nearly three-week low, and marked the third day in a streak of declines.
So much for that trend of leveling off that experts hailed as signs of a possible peak. On Saturday, both the Spanish and Italian governments celebrated what looked like progress in combating the virus, and assured the population that the transition back to “normalcy” would begin soon.
In the Vatican, Pope Francis spoke before an empty St. Peter’s Basilica for the annual Easter Vigil. This year, he urged Catholics celebrating the holiday weekend in lockdown to “not yield to fear”.
For the fifth day in a row, health authorities in Japan confirmed yet another daily record of new cases. Japan is roughly one week into a state of emergency that can’t be enforced by law, but appears to be setting in nonetheless, as non-essential businesses close and Japan’s students reckon they won’t return to a classroom until the fall, at the earliest. Like Trump, Japanese PM Shinzo Abe has been criticized for not ramping up testing, and for getting complacent after the “Diamond Princess” fiasco.
In the US, FDA Commissioner Stephen Hahn said the White House had targeted May 1 as the date to start relaxing stay-at-home restrictions. “We see light at the end of the tunnel,” he told ABC’s “This Week.”
Hahn, however, warned that there were many factors to take into account in finally determining when it would be safe to lift restrictions, he said
President Trump is considering May 1 as a new target for opening the country, sources tell ABC News.
Meanwhile, more attention is being paid to several other European countries, including the Netherlands, where the number of confirmed coronavirus cases has topped 25,000, health authorities said on Sunday, with the number of deaths rising by 94 to 2,737. Belgium reported 1,629 new cases and 268 new deaths on Sunday, for a total of 29,647 cases and 3,600 deaths. Portugal reported 598 new cases of coronavirus and 34 new deaths, for a total of 16,585 cases and 504 deaths.
Yesterday, Sweden reported 77 new deaths and 544 new cases, bringing the country’s case total north of 10k to 10,151. Its death toll, meanwhile, is about to cross 1k. As time goes on, how things play out in Sweden offers an interesting contrast to the US and the rest of Europe.
While Japan deals with its resurgence, across Asia, media reports and governments are looking at Indonesia, which engaged in some short-lived denialism before finally acknowledging that the virus had arrived, as the weak link in the neighborhood. A riot in a prison in Indonesia’s North Sulawesi province where at least one guard is reportedly exhibiting COVID-19-like symptoms has highlighted the risk as prisoners in overcrowded jails take matters into their own hands to avoid being infected – a phenomenon that has also played out in Italy and China.
Finally, in an interview with the BBC, Microsoft founder Bill Gates said “we find ourselves in uncharted territories” after the international community failed to properly prepare for a pandemic. Gates has emerged as a major critic of government responses, saying very few countries warrant “an A” grade for their coronavirus responses.
Gates has also advocated a mandatory 10-week strict lockdown to eradicate the virus that would likely cause immense suffering among the poorest and most vulnerable among us.
“If you wonder why we’re seeing such a HUGE divergence the past 3 weeks between the economy and where investor psychology has taken the market…just remember…it’s all about the Fed.
Market psychology is having a ‘V’ shaped recovery from total panic while the economy still looks horrible. S&P futures implied volatility is down 50% from the ‘max panic’ level it hit mid-March.
Can the ‘psychological rally’ be sustained? Is this just a vicious ‘Bear Market Rally?’ Will the ‘reality’ of a devastated global economy pull the market back down? And if market price action shows us that investors are growing fearful again will the Fed just throw up their hands and say, ‘Sorry, we gave it our best shot and that’s all we could do?’ I don’t think so. In for a penny…in for a pound.” – Victor Adair, PI Financial
“In the short-term, the Fed is massively increasing the liquidity of banks (excess reserves) through the various ‘Q.E’ facilities to stave off a second ‘financial crisis.’ Given the banks do NOT want to loan out any funds not guaranteed by the Federal Reserve, the excess liquidity flows into asset markets.”
“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.
As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.
Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”
Over the last couple of weeks, we have indeed had an extremely strong “oversold,” reflexive rally, that has now reversed the conditions that “fueled” the advance.
As shown above, all previous short-term oversold conditions have been fully reversed, with the market completing a typical 50% retracement of the previous decline. This was also a point made by my colleague Jeffery Marcus of TP Analytics this past week for ourRIAPro Subscribers (30-day Risk Free Trial)
“The S&P500 has now rallied 19% off of its low close of 2237.40 on 3/23 and 21% from its intraday low of 2191.86 on 3/23. The benchmark is now within sight of its 50% retracement.
By definition, a 50% retracement of the S&P500 would be a rally that retraced 50% (+574) of the net loss (-1148) from 2/19 to 3/23. The chart below shows that the 50% retracement level is approximately S&P500 2811 (the low of 2237 + 574 = 2811).
It is very hard in the volatile environment to be too exact, but at the S&P 500 2800 – 2830 level, the risk/return trade-off becomes bad for the market.”
On Friday, the market hit an intraday high of…2818.57 before selling off into the close.
A Look Back
Here, let me save you the trouble of emailing me.
“But Lance, like Victor says, the Fed is pumping the markets full of liquidity. So, ‘Don’t Fight The Fed.’”
Or, even tweeting me:
As noted above, excess liquidity WILL flow into markets short-term; however, eventually, the markets will reflect the underlying economic destruction.
While 2008 was bad, the impact from the “economic shutdown” due to the virus will be substantially worse for several reasons:
In 2008, the economy was already slowing down, unemployment was already on the rise, and businesses were adjusting for the related impact to earnings. Also, despite the “crisis” caused in the mortgage market, businesses and consumer activity remained “open.” Outside of the real estate and finance industries, many other sectors were only marginally affected.
In 2020, the shuttering of the economy caught many businesses “flat-footed” and ill-prepared for an involuntary “shuttering” of business.
In 2020, the surge in unemployment, combined with a shuttering of business, will have a substantially deeper impact on gross consumption in the economy than in 2008.
As opposed to 2008, there are many businesses that will not ever reopen, many more will be very slow to recover, with the rest very slow to rehire until demand returns.
The markets are currently rallying on a flush of liquidity, and a massive short-covering rally, which is likely reaching its “exhaustion” stage. Over the next few months, stocks will begin to price in the severity of the economic damage, a substantial decline in earnings, and the realization that hopes for a “V-Shaped” recovery are not likely.
While there are lots of market analogs making the rounds comparing the current crash to 1929, 1987, and a host of other periods, it is 2008, which has the most similarities. (I am not a fan of analogs, but if you want one, this is the most logical.)
In 2008, the Fed had already started bailing out banks in early March as Bear Stearns failed. The Fed was also aggressively lowering interest rates to Zero. In 2008, the Fed lowered rates by 5.25% versus just 1.5% currently. While the market initially rallied after the Bear Stearns bailout, and even set new highs shortly thereafter, the economic crisis was still revving up.
The depth of the crash came in September 2008. Importantly, after the failure of Lehman Brothers, the market rallied nearly 20% from its lows in late October as the Federal Reserve, and the Government through fiscal policy, and an alphabet of bank support programs, began to intervene aggressively. That rally took markets back to a short-term overbought condition.
Following that rally, the reality of the economic devastation began to set in as unemployment skyrocketed, consumption and investment contracted, and earnings fell nearly 100% from their previous peak. The market declined 26% into late November until the Federal Reserve launched the first round of Quantitative Easing.
With liquidity flooding into the system, stocks once again staged an impressive rally of almost 25% from the lows.
Yes, the bull market was back!
Except that it wasn’t.
Over the next few months, the market once again sold off, falling 28.5% from the prior “bear market rally” high.
By the time the end of February 2009 came, it was widely believed that “NOTHING” would save the markets. Headlines from the media were filled with stories that the Dow would fall to zero.
Most importantly, there was NO ONE that wanted to “Buy The Market.”
That all happened despite the Federal Reserve’s, and Government’s, intervention programs. As noted in our #MacroView:
“The problem with monetary policy, in all of its forms, is that it disincentivizes capitalism.
Zero-interest rates, excess liquidity, and a closed-loop between the banks and the Fed, removed all incentives to “take risks” of lending money to businesses and individuals to create economic growth. Instead, that liquidity, fueled asset prices, stock buybacks, and corporate debt which engendered a wealth gap never before seen in history. In fact, there is no evidence QE leads to increased monetary velocity, or rather the transfer of liquidity into the economic system, at any level.”
Still A Bear Market Rally?
Yes, we have had a very strong rally on hopes that Federal Reserve unprecedented interventions will fix the problem. Not unlike the “bear market” rallies seen each time in 2008, the current rally has taken the market back to more extreme short-term overbought conditions.
While there are many suggesting the markets are “looking past” the current quarter, I would suggest such really isn’t the case.
This has been an oversold bounce, fueled by a lot of “short-covering,” in the most heavily shorted stocks.
What markets have not done is to price in the economic devastation that is coming from:
A complete shutdown of the economy.
15-million jobless claims in 3-weeks
20%+ unemployment
20-25% negative GDP growth
30% of mortgages in forbearance
A dramatic drop in both personal and corporate consumption
A massive reduction in capital expenditures and private investment
A crushing of consumer and business confidence
A depletion of consumer and corporate savings
More importantly, markets are still operating on expectations the “hit” to “reported earnings” is going to be extremely small. Using Q4-2019 as the last viable reporting period.
Q1-20 earnings are expected to only decline by 2.36%
Q4-20 earnings will decline just 2.71%, and;
Q4-21 earnings are expected to surge by 19.62%
Such small reductions in “estimates” hardly account for economic weakness, let alone the devastation that is occurring, and will continue.
Furthermore, as I penned last week in “Aannd It’s Gone,” share buybacks, which have been a primary support of the financial markets and specifically earnings per share, are now gone.
If we “round-up,” and use 2800 as Friday’s close, current valuations, according to S&P, are 20.56x. (Still expensive, but lower than recent peaks)
However, if earnings ONLY decline to just $100/share, which is optimistic, then valuations are 28x earnings.
No “bear market,” in history, for any reason, ever ended with valuations between 20-28x earnings.
“Valuations drive stock markets and returns over time. Famed investor Jack Bogle stated that over the next decade we are likely to see two more 50% declines. A 50% decline from the all-time highs would put the market at 1600.”
If you are hoping the “bear market” is over, and have jumped “back in” with all your capital, you are in “good company,” as many others, judging by my twitter feed, have done the same.
Just be prepared to be disappointed in the months ahead.
In the meantime, we choose to continue to manage our risk, and our client’s capital, cautiously, and judiciously.
Courier With Coronavirus Samples Crashes On I-195 In Massachusetts
As the US scrambles to ramp up both testing capacity and the speed at which results are delivered, one courier in New England was perhaps taking this directive a little too seriously when he crashed on Interstate I-195 in Seekonk, Mass, near the Rhode Island border on Tuesday morning. However, in some long overdue good news, none of the test samples inside the car were damaged, according to CBSN Boston.
Massachusetts State Police sent a hazardous materials team to examine the samples and the team determined that they “were not compromised” and the container holding them was intact.
The courier, who was driving a Honda Civic, bumped into a tractor-trailer on the westbound side of 1-95 at Exit 1 around 7:50 am. The contact caused the Honda to spin out and hit an ambulance carrying a 70-year-old patient. Fortunately, no one was hurt.
“Initial observations of a liquid spill led first responders to suspect the samples may have spilled and a state hazardous materials response team responded to the scene,” State Police spokesman Dave Procopio said in a statement.
“Further investigation by the hazmat team revealed that the spilled liquid was the Honda driver’s coffee, and that the container holding the samples was intact and undamaged, as were the samples inside.”
The driver, a 49-year-old woman from Rhode Island, was taken to the hospital as a precaution for potential exposure to the virus.
Another courier was called and ended up delivering the samples to their destination.
It wasn’t immediately clear if there is now an Uber Delivery service for coronaviruses (although we are confident a lightbulb is going off above the head of some cash strapped San Fran VC) or why couriers carrying biohazardous equipment are taking leisurely strolls in Honda Civics. Then again, imagine if the woman was driving a Tesla…
Lenin said nothing can happen for decades, and then decades can happen in weeks. Yes, a pandemic pulls the future forward, and there’s a lot to learn. Another phenomenon that forms rain clouds of perspective is, wait for it … death. Or, specifically, being close to it.
My father is approaching 90, recently divorced (for the fourth time), and spends his days watching replays of Maple Leafs games and abusing Xanax. His affinity for Xanies is a feature, not a bug, since at the end of your life “long-term effects” lose meaning. He’s near the end, exceptionally intelligent, and high. In sum, he’s my Yoda.
Our calls are mostly me yelling short questions (“HOW ARE THE LEAFS LOOKING FOR NEXT YEAR?”) and waiting for something profound in return. Occasionally he delivers.
“You must unlearn what you have learned!”
Just kidding, Yoda did actually say that. But when I asked him what he thinks makes America different, he said:
“America is a terrible place to be stupid.”
That’s why he immigrated here. A pillar of capitalism is you can’t reward the winners without punishing the losers. I worry our government has been co-opted by the wealthy and is focused on protecting the previous generation of winners, even if it means reducing future generations’ ability to win. Aren’t we borrowing against our children’s prosperity to protect the wealth of the top 10, if not 1, percent?
In Depression-era Scotland, my dad was physically abused by his father. His mother spent the money he sent home from the Royal Navy on whiskey and cigarettes. He took a huge risk and came to America. My mom took a similar risk, leaving her two youngest siblings in an orphanage (her mom and dad had both died in their early fifties), and bought a ticket on a steamship. She had a small suitcase and 110 quid that she hid in both socks. Why? Because they wanted to work their asses off and be rewarded for the risks they were willing to take.
This is capitalism, a beacon of hope for people who are smart, hard working, and comfortable with risk, promising a greater share of the spoils than those who are not.
However, no more.
Modern-day “capitalism” in America is to flatten the risk curve for people who already have money, by borrowing from future generations with debt-fueled bailouts for companies. We have consciously decided to reduce the downside for the wealthy, thereby limiting the upside for future generations.
CNBC guest: Equity holders deserve to get wiped out.
CNBC host: Why does anybody deserve to get wiped out in a crisis like this? This is a natural disaster, why does anybody deserve to get wiped out? Wouldn’t that be immoral in and of itself?
“Immoral,” here we go.
Morality for CNBC, and the current administration, is not capitalism but the worst type of socialism, cronyism.
Rugged individualism and capitalism on the way up, privatizing the gains – and then socialism/cronyism on the way down as we socialize the losses with bailouts.
Red Envelope
In 1999, the firm I co-founded, Red Envelope, was drafting an S-1 in anticipation of an IPO. At 31, I stood to register $30-60 million on the IPO. The bursting of the bubble damaged us, but the injuries weren’t fatal, and we were the only retail IPO of 2002. In 2008, a longshoreman strike left all our holiday merchandise hostage on a cargo ship 8 miles off the shores of the port of Long Beach. Then, as the credit crisis began to take hold, a prescient analyst at Wells Fargo decided to pull our credit facility. Within 90 days we were Chapter 11. That event, combined with divorce, reduced my net worth 97%.
I didn’t deserve to lose near-everything. What happened wasn’t my fault — ok, maybe the divorce. Regardless, was this fair or (im)moral? Just as there’s no crying in baseball, there’s no fairness in shareholder accretion or destruction. Looking at jets at 31 wasn’t moral or fair either. So, what happened? Exactly what’s supposed to happen in a market economy — downside registered against commensurate upside.
Red Envelope went through something also uniquely American … and productive — bankruptcy. The equity holders (e.g., yours truly) were wiped out (#bummer). However, we did our duty as board members and found a buyer, Liberty Media, who paid our vendors and kept the employees. No job loss, all debtors paid. When a 31-year-old is shopping for jets in November, part of the agreement with the invisible hand is he may lose most/all of it by March. There’s a word for that … capitalism.
The capital structure of private firms is meant to balance upside and downside. CNBC/Trump want to protect current equity holders at the expense of future generations with rescue packages that explode the deficit. They also want to protect airlines, who spent $45 billion on buybacks and now want a $54 billion bailout, disincentivizing other firms (e.g., Berkshire Hathaway) that have built huge cash piles foregoing current returns.
The rescue package should protect people, not businesses. From 2017 to 2019, the CEOs of Delta, American, United, and Carnival Cruises earned over $150 million in compensation. But, now … “We’re in this together” (i.e., “bail our asses out”).
And what happens if they (gasp!), go out of business? Simple, the equity holders, and unsecured debt holders, get wiped out. These are the cohorts who, despite the recent meltdown, have registered a 3.3x increase in the Dow since the lows of 2008.
As long as they keep making old people, and younger people want to take their kids to Disney’s Galaxy’s Edge, there will be cruise lines and airlines. Since 2000, US airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards/CEOs of the six largest airlines have spent 96% of their free cash flow on share buybacks, bolstering the share price and compensation of management … who now want a bailout. They should be allowed to fail. Bondholders will own the firms. Ships and planes will continue to float and fly, and there will still be a steel tube with recirculated air waiting for you post molestation by Roy from TSA.
The Lie
Trump/CNBC have adopted a narrative that this is about protecting the most vulnerable. No, it’s about buttressing the most wealthy. Pandemics typically result in higher wages over the next several decades as we recognize that essential workers (the gal/guy delivering your Greek yogurt and placing your Indian food in the backseat of your car) should be paid more. A good thing.
Letting firms fail, and share prices fall to their market level, also provides younger generations with the same opportunities we, Gen X and boomers, were given: a chance to buy Amazon at 50x (vs. 100x) earnings and Brooklyn real estate at $300 (vs. $1,000) per sq. ft. Just as we pretend our service men and women are heroes, and then treat them like chumps, CNBC advertisers and Peter Navarro want to pretend they give a sh*t about younger generations so they can protect the wealth of old people and management/advertisers. Enough already.
Earlier this week, I was on MSNBC with an early Uber employee, who reminded us, “We’re all in this together.” What bullsh*t. My guess is this executive registered $10-100 million in equity crafting software that figured out an elegant way to pay their 3.9 million “driver partners” less than minimum wage, ensure Uber isn’t obligated to provide them with health insurance, and avoid paying payroll taxes to adequately fund the CDC. But Dara Khosrowshahi and his several-hundred-strong comms department wrote a compelling letter to the government urging them to help his driver partners.
Dara, pay your “partners” before picking up the pen again.
Walking the Walk — PPP
We recently founded Prof G, a firm attempting to disrupt graduate business education. We offer online business/strategy sprints that aim to provide 30-50% of my classes at NYU Stern for 7% of the price. We are eligible for some of the $350 billion federal PPP program. With a modest amount of paperwork, in 7 days or less, we’d receive a loan for approximately $250,000. If we don’t lay off any employees, most of the loan would likely be forgiven. This is meaningful cabbage for us.
We are not going to apply for the program.
Our backers are wealthy, and if we can’t make this work — pandemic or not — then we don’t deserve to be in business. Yeah, our demise wouldn’t be our fault, nor is most success. Like steroids for the body, the moral hazard of government assistance only leaves the economy less healthy in the long run.
Just as death is a key part of life, so is the demise and reinvention of firms that can’t endure tropes. Covid-19 is no more historic than an 11-year bull market. With dangerous disregard for future generations we’ve decided that hundreds of thousands of people dying is meaningful, but the NASDAQ going down would be worse. The rescue package is $2.2 trillion. The annual CDC budget — $6.6 billion.
We. Have. Lost. The. Script.
To be clear, socialism may be a better way to go, as evidenced by the study showing 4 of the 5 happiest nations are socialist democracies. However, unless we’re going to provide universal healthcare and universal pre-K, let’s not embrace The Hunger Games for the working class on the way up, and the Hallmark Channel for the shareholder class on the way down. The current administration, the wealthy, and the media have embraced policies that bless the caching of power and wealth, creating a nation of brittle companies and government agencies.
The terrible thing about crises is they always happen. The wonderful thing is they always end. As we fight to bring this crisis to an end, let’s re-embrace capitalism and foster a future generation of leaders and firms that are soldiers, not hoarders. Yes, America is a terrible place to be stupid. It will be a worse place if we replace capitalism with cronyism.
[Kansas Governor Laura Kelly’s] EO 20-18, which by its terms takes effect today, revises guidance for religious gatherings while it remains in effect. Its key changes are:
“Churches or other religious facilities” are now expressly covered by the prohibition on “mass gatherings” rather than being exempted as they were previously.
More than 10 people are prohibited from convening “in a confined or enclosed space at the same time,” including in churches or other religious facilities.
“Churches or other religious services or activities” are prohibited from having more than 10 congregants or parishioners in the same building or confined or enclosed space, but a larger number of persons who are conducting the service itself may gather provided social distancing and similar requirements are maintained.
… EO 20-18 does not prohibit Kansans from leaving their homes to perform or attend religious or faith-based services or activities, nor does it impose the new prohibition on gatherings exceeding 10 persons on religious gatherings that are not in “the same building or confined or enclosed space” (e.g., outdoors)…. {Requirements for social distancing, hygiene and other COVID-19 prevention measures remain in effect for all gatherings, including religious gatherings not subject to the new 10-person limitation.}
The Kansas Preservation of Religious Freedom Act … provides: “Government shall not substantially burden a person’s civil right to exercise of religion even if the burden results from a rule of general applicability, unless such government demonstrates, by clear and convincing evidence, that application of the burden to the person: (1) Is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.” … It protects the “exercise of religion,” which is defined broadly and expressly includes “the right to act … in a manner substantially motivated by a sincerely-held religious tenet or belief,” which certainly includes attending … worship. It restrains government from “substantially burden[ing]” the exercise of religion, and “burden” specifically includes “assessing criminal … penalties.” …
[W]e have no doubt the restrictions on religious gatherings in EO 20-18 may serve a compelling governmental interest of protecting the public health by slowing the spread of COVID-19. But the executive order also must be the “least restrictive means” of furthering that compelling interest. And the burden is on the government to prove by clear and convincing evidence that no less-restrictive means is available.
It is doubtful the government can meet that burden here.
First, the government cannot show by clear and convincing evidence that it is currently necessary to subject every church or other religious services or activities throughout the state to the requirements in EO 20-18 to slow the spread of COVID-19. Current Centers for Disease Control guidance for faith-based organizations recommends a graduated approach based on community risk. That individually tailored less-restrictive means is absent from the blanket statewide approach of EO 20-18.
Second, EO 20-18 exempts 26 categories of activities or facilities from its mass- gathering prohibitions, see EO 20-18, paragraph 2.a-z, just as the prior version of the mass-gatherings order (Executive Order 20-14) had also exempted religious activities. Indeed, only religious activities (and non-religious funerals) are singled out for increased regulation under EO 20-18—while other indoor gatherings that invite similar interpersonal interaction and thus pose similar public health risk (such as gathering in shopping malls or other retail establishments or in libraries) remain unregulated except by the less-restrictive means of general social distancing and hygiene guidelines.
Third, EO 20-18 offers no justification for why voluntary compliance had failed to satisfy the compelling public health interest or why criminal penalties are now necessary to promote compliance by Kansans engaged in religious services or activities (but not, e.g., by those engaged in shopping, child care, providing government or legal services, or being detoxified). Indeed, the continued reliance on social-distancing and hygiene restrictions for mass gatherings in at least 26 other categories suggests the new burdens on religious services or activities—under penalty of arrest, imprisonment or criminal fine—are not the least-restrictive option to satisfy the State’s compelling interest.
Separate from the Religious Freedom Act, … Section 7 of the Kansas Bill of Rights provides (emphasis added):
“The right to worship God according to the dictates of conscience shall never be infringed; nor shall any person be compelled to attend or support any form of worship; nor shall any control of or interference with the rights of conscience be permitted, nor any preference be given by law to any religious establishment or mode of worship. No religious test or property qualification shall be required for any office of public trust, nor for any vote at any election, nor shall any person be incompetent to testify on account of religious belief.”
Kansas courts interpreting this provision have adopted a version of a strict scrutiny test substantially similar to that in the Religious Freedom Act….
To help prevent the spread of COVID-19, the Office of the Attorney General advises Kansans to adhere to the limitations on religious and faith-based gatherings set forth in Executive Order 20-18. However, for the reasons set forth above, the provisions of the governor’s order that purport to criminalize certain gatherings for religious services or activities likely violate both state statute and the Kansas Constitution, which would render them void and unenforceable. Because no Kansan should be threatened with fine or imprisonment, arrested, or prosecuted for performing or attending church or other religious services (which even during the current state of disaster emergency remain an “essential function” recognized by EO 20-16), law enforcement officers are advised to encourage cooperative compliance with the new provisions of EO 20-18 and to avoid engaging in criminal enforcement of its limitations on religious facilities, services or activities.
I think the AG’s analysis is correct, given the way the Governor’s order works; but I think it’s worth elaborating further on this.
In Employment Division v. Smith, the Court held (rightly, I think, for reasons I discuss at length here) that the Free Exercise Clause bans discrimination against religious practice, but doesn’t require religious exemptions from generally applicable laws.
Some courts and academics have taken the view that, whenever a law bans an activity but allows some secular exemptions, it stops being “generally applicable,” so that religious exemptions are indeed presumptively required. The most prominent example is the opinion of then-Judge Alito in Fraternal Order of Police v. City of Newark, who held that the Free Exercise Clause required religious exemptions from a no-beards policy for police officers, because the department provides an exemption for officers who had medical reasons not to grow a beard:
[Under the Free Exercise Clause, the government may not decide] that secular motivations are more important than religious motivations…. [T]he Department’s decision to provide medical exemptions while refusing religious exemptions is sufficiently suggestive of discriminatory intent so as to trigger [strict scrutiny]. [T]he medical exemption … indicates that the Department has made a value judgment that secular (i.e., medical) motivations for wearing a beard are important enough to overcome its general interest in uniformity but that religious motivations are not…. [W]hen the government makes a value judgment in favor of secular motivations, but not religious motivations, the government’s actions must survive heightened scrutiny.
But I don’t think that’s consistent with the Court’s decision in Smith. Most laws have many exemptions, including ones that offer favored treatment to certain secular motivations. Title VII of the Civil Rights Act generally bans employment discrimination, but not by small employers, or when a provision is a “bona fide occupational qualification” (a narrow exemption, but an important one); these provisions are broader than the narrow exception that the Court has recognized under another Free Exercise Clause theory for ministerial employees of churches. The Copyright Act restricts certain uses of others’ copyrighted works in § 106, and then has more than 15 sections (and many more subsections) of exceptions in §§ 107-122. Trespass law has exceptions for necessity, for adverse possession, for eminent domain, and for other reasons.
Likewise, battery is a crime—but it has exceptions, including for necessary defense of person, necessary defense of property, performing a lawful arrest, and more. I take it we’d agree that the government shouldn’t allow me to punch you as retaliation for your blasphemy; but that means that it treats a secular motivation (protecting my property) as more important than a religious motivation (protecting God against insults, if that’s how I conceptualize blasphemy). I don’t think the Free Exercise Clause condemns the denial of religious exemptions in such cases. More broadly, I don’t think that my religious motivation for punching you, for infringing your copyright, or for discriminating against you in employment.
Yet when a legislature expressly enacts a Religious Freedom Restoration Act, it is indeed calling for broad protection for religious practice; and it’s reversing the power (since a RFRA is just a statute) to exclude a law from the RFRA exemption regime, when it thinks that religious exemptions really shouldn’t be authorized. And when the government has a broad range of exceptions for secular activities that are pretty similar to their religious analogs, or perhaps even more risky, then it does seem likely that denying a religious exemption is not “the least restrictive means of furthering [the] compelling governmental interest.”
And this applies, I think, to the Kansas Governor’s order. The order exempts, among other facilities,
schools,
shopping malls,
libraries,
restaurants and bars,
manufacturing, processing, distribution, and production facilities,
at least so long as they maintain suitable social distancing measures.
This suggests that exempting churches, so long as they maintain similar social distancing measures (e.g., “[p]reserve … 6 feet between people,” which is the spacing required between tables or bar stools at restaurants and bars, or not being “within arm’s length of one another for more than 10 minutes,” which is required for shopping malls), would not unacceptably undermine the compelling government interest.
Again, I don’t think the compelling interest test should be applied to generally applicable laws under the Free Exercise Clause, and I think the Governor’s order, despite its exceptions, is still generally applicable for Free Exercise Clause purposes.
But the Kansas Legislature provided religious objectors with presumptive protection that goes beyond the minimum that the Free Exercise Clause requires. The Legislature (like many others, including a nearly unanimous Congress in 1993, in a statute that remains applicable as to federal laws) required the government to grant religious exemptions when they don’t unacceptably undermine a compelling government interest. The Legislature could exclude emergency statutes from that rule, but it hasn’t. That appears to be the law in Kansas, and the Governor’s orders should comply with it.
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[Kansas Governor Laura Kelly’s] EO 20-18, which by its terms takes effect today, revises guidance for religious gatherings while it remains in effect. Its key changes are:
“Churches or other religious facilities” are now expressly covered by the prohibition on “mass gatherings” rather than being exempted as they were previously.
More than 10 people are prohibited from convening “in a confined or enclosed space at the same time,” including in churches or other religious facilities.
“Churches or other religious services or activities” are prohibited from having more than 10 congregants or parishioners in the same building or confined or enclosed space, but a larger number of persons who are conducting the service itself may gather provided social distancing and similar requirements are maintained.
… EO 20-18 does not prohibit Kansans from leaving their homes to perform or attend religious or faith-based services or activities, nor does it impose the new prohibition on gatherings exceeding 10 persons on religious gatherings that are not in “the same building or confined or enclosed space” (e.g., outdoors)…. {Requirements for social distancing, hygiene and other COVID-19 prevention measures remain in effect for all gatherings, including religious gatherings not subject to the new 10-person limitation.}
The Kansas Preservation of Religious Freedom Act … provides: “Government shall not substantially burden a person’s civil right to exercise of religion even if the burden results from a rule of general applicability, unless such government demonstrates, by clear and convincing evidence, that application of the burden to the person: (1) Is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.” … It protects the “exercise of religion,” which is defined broadly and expressly includes “the right to act … in a manner substantially motivated by a sincerely-held religious tenet or belief,” which certainly includes attending … worship. It restrains government from “substantially burden[ing]” the exercise of religion, and “burden” specifically includes “assessing criminal … penalties.” …
[W]e have no doubt the restrictions on religious gatherings in EO 20-18 may serve a compelling governmental interest of protecting the public health by slowing the spread of COVID-19. But the executive order also must be the “least restrictive means” of furthering that compelling interest. And the burden is on the government to prove by clear and convincing evidence that no less-restrictive means is available.
It is doubtful the government can meet that burden here.
First, the government cannot show by clear and convincing evidence that it is currently necessary to subject every church or other religious services or activities throughout the state to the requirements in EO 20-18 to slow the spread of COVID-19. Current Centers for Disease Control guidance for faith-based organizations recommends a graduated approach based on community risk. That individually tailored less-restrictive means is absent from the blanket statewide approach of EO 20-18.
Second, EO 20-18 exempts 26 categories of activities or facilities from its mass- gathering prohibitions, see EO 20-18, paragraph 2.a-z, just as the prior version of the mass-gatherings order (Executive Order 20-14) had also exempted religious activities. Indeed, only religious activities (and non-religious funerals) are singled out for increased regulation under EO 20-18—while other indoor gatherings that invite similar interpersonal interaction and thus pose similar public health risk (such as gathering in shopping malls or other retail establishments or in libraries) remain unregulated except by the less-restrictive means of general social distancing and hygiene guidelines.
Third, EO 20-18 offers no justification for why voluntary compliance had failed to satisfy the compelling public health interest or why criminal penalties are now necessary to promote compliance by Kansans engaged in religious services or activities (but not, e.g., by those engaged in shopping, child care, providing government or legal services, or being detoxified). Indeed, the continued reliance on social-distancing and hygiene restrictions for mass gatherings in at least 26 other categories suggests the new burdens on religious services or activities—under penalty of arrest, imprisonment or criminal fine—are not the least-restrictive option to satisfy the State’s compelling interest.
Separate from the Religious Freedom Act, … Section 7 of the Kansas Bill of Rights provides (emphasis added):
“The right to worship God according to the dictates of conscience shall never be infringed; nor shall any person be compelled to attend or support any form of worship; nor shall any control of or interference with the rights of conscience be permitted, nor any preference be given by law to any religious establishment or mode of worship. No religious test or property qualification shall be required for any office of public trust, nor for any vote at any election, nor shall any person be incompetent to testify on account of religious belief.”
Kansas courts interpreting this provision have adopted a version of a strict scrutiny test substantially similar to that in the Religious Freedom Act….
To help prevent the spread of COVID-19, the Office of the Attorney General advises Kansans to adhere to the limitations on religious and faith-based gatherings set forth in Executive Order 20-18. However, for the reasons set forth above, the provisions of the governor’s order that purport to criminalize certain gatherings for religious services or activities likely violate both state statute and the Kansas Constitution, which would render them void and unenforceable. Because no Kansan should be threatened with fine or imprisonment, arrested, or prosecuted for performing or attending church or other religious services (which even during the current state of disaster emergency remain an “essential function” recognized by EO 20-16), law enforcement officers are advised to encourage cooperative compliance with the new provisions of EO 20-18 and to avoid engaging in criminal enforcement of its limitations on religious facilities, services or activities.
I think the AG’s analysis is correct, given the way the Governor’s order works; but I think it’s worth elaborating further on this.
In Employment Division v. Smith, the Court held (rightly, I think, for reasons I discuss at length here) that the Free Exercise Clause bans discrimination against religious practice, but doesn’t require religious exemptions from generally applicable laws.
Some courts and academics have taken the view that, whenever a law bans an activity but allows some secular exemptions, it stops being “generally applicable,” so that religious exemptions are indeed presumptively required. The most prominent example is the opinion of then-Judge Alito in Fraternal Order of Police v. City of Newark, who held that the Free Exercise Clause required religious exemptions from a no-beards policy for police officers, because the department provides an exemption for officers who had medical reasons not to grow a beard:
[Under the Free Exercise Clause, the government may not decide] that secular motivations are more important than religious motivations…. [T]he Department’s decision to provide medical exemptions while refusing religious exemptions is sufficiently suggestive of discriminatory intent so as to trigger [strict scrutiny]. [T]he medical exemption … indicates that the Department has made a value judgment that secular (i.e., medical) motivations for wearing a beard are important enough to overcome its general interest in uniformity but that religious motivations are not…. [W]hen the government makes a value judgment in favor of secular motivations, but not religious motivations, the government’s actions must survive heightened scrutiny.
But I don’t think that’s consistent with the Court’s decision in Smith. Most laws have many exemptions, including ones that offer favored treatment to certain secular motivations. Title VII of the Civil Rights Act generally bans employment discrimination, but not by small employers, or when a provision is a “bona fide occupational qualification” (a narrow exemption, but an important one); these provisions are broader than the narrow exception that the Court has recognized under another Free Exercise Clause theory for ministerial employees of churches. The Copyright Act restricts certain uses of others’ copyrighted works in § 106, and then has more than 15 sections (and many more subsections) of exceptions in §§ 107-122. Trespass law has exceptions for necessity, for adverse possession, for eminent domain, and for other reasons.
Likewise, battery is a crime—but it has exceptions, including for necessary defense of person, necessary defense of property, performing a lawful arrest, and more. I take it we’d agree that the government shouldn’t allow me to punch you as retaliation for your blasphemy; but that means that it treats a secular motivation (protecting my property) as more important than a religious motivation (protecting God against insults, if that’s how I conceptualize blasphemy). I don’t think the Free Exercise Clause condemns the denial of religious exemptions in such cases. More broadly, I don’t think that my religious motivation for punching you, for infringing your copyright, or for discriminating against you in employment.
Yet when a legislature expressly enacts a Religious Freedom Restoration Act, it is indeed calling for broad protection for religious practice; and it’s reversing the power (since a RFRA is just a statute) to exclude a law from the RFRA exemption regime, when it thinks that religious exemptions really shouldn’t be authorized. And when the government has a broad range of exceptions for secular activities that are pretty similar to their religious analogs, or perhaps even more risky, then it does seem likely that denying a religious exemption is not “the least restrictive means of furthering [the] compelling governmental interest.”
And this applies, I think, to the Kansas Governor’s order. The order exempts, among other facilities,
schools,
shopping malls,
libraries,
restaurants and bars,
manufacturing, processing, distribution, and production facilities,
at least so long as they maintain suitable social distancing measures.
This suggests that exempting churches, so long as they maintain similar social distancing measures (e.g., “[p]reserve … 6 feet between people,” which is the spacing required between tables or bar stools at restaurants and bars, or not being “within arm’s length of one another for more than 10 minutes,” which is required for shopping malls), would not unacceptably undermine the compelling government interest.
Again, I don’t think the compelling interest test should be applied to generally applicable laws under the Free Exercise Clause, and I think the Governor’s order, despite its exceptions, is still generally applicable for Free Exercise Clause purposes.
But the Kansas Legislature provided religious objectors with presumptive protection that goes beyond the minimum that the Free Exercise Clause requires. The Legislature (like many others, including a nearly unanimous Congress in 1993, in a statute that remains applicable as to federal laws) required the government to grant religious exemptions when they don’t unacceptably undermine a compelling government interest. The Legislature could exclude emergency statutes from that rule, but it hasn’t. That appears to be the law in Kansas, and the Governor’s orders should comply with it.
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