“A Moment Of Truth For The Euro”: ECB Preparing To Run QE Without Bundesbank Tyler Durden
Tue, 05/26/2020 – 12:05
The shape of Europe’s massive monetary injection may change dramatically in the coming months. According to Reuters, citing four sources, the ECB has drafted contingency plans to carry out its multi-trillion QE programme without the Bundesbank in case Germany’s top court forces the main participant in the scheme to quit.
Not only is the European central bank planning on how to continue QE without German – mostly by having other European central banks step in although it is unclear just how effective this would be – but, in a worst-case scenario, the ECB would also launch an “unprecedented legal action against the German central bank, its biggest shareholder, to bring it back into the program.”
According to Reuters, such a moves would mark “a moment of truth for the euro”, testing Germany’s commitment to a currency it played the biggest role in creating (for a simple reason: Germany was the primary beneficiary for years as eliminating the chronically strong Deutsche Mark allowed German exports to flourish), and forcing it to tackle some deep-seated reservations within the country about ECB policies.
As reported earlier this month, Germany’s constitutional court gave the ECB an ultimatum until early August to justify its massive buying of government bonds or continue the scheme without the Bundesbank, which carries out more than a quarter of the bond purchases. Without the Bundesbank, the ECB’s QE is effectively done.
While consensus remains optimistic, expecting the legal challenge from the court in Karlsruhe to be resolved by the Bundesbank itself by demonstrating that the policy was appropriate and addressing concerns about its side effects, staff at the ECB and the euro zone’s national central banks are preparing for what one source described as the “unbelievable”: a scenario in which the court bans the Bundesbank from taking part in the purchases.
In that case, the ECB, or less likely the other euro zone central banks, would take up the Bundesbank’s quota in the Public Sector Purchase Programme (PSPP) and buy German bonds, although with far fewer non-German bonds in private hands in Europe, the European QE program would have to be forcibly shrunk on very short notice.
There is one loophole: to allow other central banks to buy Bunds, Europe’s “no risk sharing” principle – one which the Bundesbank itself insisted upon when the programme was launched in 2015 – would have to be broken. Until now each national central bank bought its own government’s bonds and the risk is shared over the limited amount of debt bought by the ECB itself.
The ECB has slowed down German bond purchases since the start of the coronavirus pandemic to focus its firepower on Italy, which has come under pressure in the bond market as the outbreak has savaged its already shaky public finances. Indeed, according to Reuters, Bundesbank purchases of German sovereign debt, or Bunds, totaled just 628 million euros ($688 million) in April, or just 2.3% of the government bonds bought under the PSPP that month.
There is a bigger problem: even if the Bundesbank quits the scheme, leaving Germany’s Bunds out is “not an option” given that they serve as the de facto euro zone benchmark for private investors thanks to their top-notch credit rating and ample availability. Nobody would buy Italian debt just because German bonds were not available.
But the biggest risk should this plan be activated is that cutting off Germany from the ECB’s flagship stimulus program would invite speculation about a euro zone break up, which the ECB has been trying to quash since the euro crisis of 2010-12. In the meantime, the ECB would probably launch an infringement procedure against the German central bank for failing to fulfil its obligation as a member of the Eurosystem if it has to stop buying bonds, the sources said.
If the Bundesbank then failed to comply, the ECB could take the matter to European Court of Justice (ECJ), in what would be the first such case since the euro was created in 1999. The ECJ has already upheld the ECB’s QE but its ruling was disregarded by Germany’s constitutional court, opening a further conflict German and European Union institutions.
All of this is a worst case scenario: the German government has shown optimism that any such scenario can be avoided. Chancellor Angela Merkel told senior officials from her party earlier this month that the issue was “solvable” if the central bank explained the plan.
via ZeroHedge News https://ift.tt/36u4ua4 Tyler Durden
This past weekend, I asked if the decline in March was a bear market or just a big correction. The debate that ensued was polarizing, to say the least. However, defining the market using long-term analysis is essential in determining the current trend, potential outcomes, and portfolio assumptions.
“Such brings up an interesting question. After a decade-long bull market, which stretched prices to extremes above long-term trends, is the 20% measure still valid?
To answer that question, let’s clarify the premise.
A bull market is when the price of the market is trending higher over a long-term period.
A bear market is when the previous advance breaks, and prices begin to trend lower.
The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and useful.”
“This distinction is important.
“Corrections” generally occur over very short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
“Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.
Using monthly closing data, the ‘correction’ in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trend line holds.
However, I have noted the market may be in the process of a topping pattern. The 2018 and 2020 peaks are currently forming the “left shoulder” and “head” of the topping process. Such would also suggest the “neckline” is the running bull trend from the 2009 lows. A market peak without setting a new high that violates the bull trend line would define a “bear market.”
Defining Long-Term Market Cycles
That analysis brings up an interesting question.
What if the secular bull market that began in 1980 is still in process?
Before you adamantly deny this possibility, we need to consider the context of both long-term investor psychology cycles and valuations.
Let’s start with the following chart of investor psychology.
This chart is not new, and there are many variations similar to it, but do not dismiss the importance. Throughout history, individuals have repeatedly responded to market dynamics in the same fashion. At each delusional peak, it was always uttered, in some form or variation, “this time is different.”
“Long-term investment success depends more on the WHEN you start investing. Such is shown in the chart of valuation cycles.”
“Here is the critical point. The MAJORITY of the returns from investing came in just 4 of the 8-major market cycles since 1871. Every other period yielded a return that lost out to inflation during that time frame.”
However, by looking at each full-cycle period as two parts, bull and bear, it obscures the importance of the “full cycle.” What if instead of there being 8-cycles, we look at themasonly three?
Note in the chart above that CAPE (cyclically adjusted P/E ratio) reverted well below the long-term trend in both prior full-market cycles. When viewed in this manner, we see the full-market cycle encompasses many bull and bear market cycles, but only completes when valuations are reset.
While valuations briefly dipped below the long-term trend in 2008-2009, they did not revert to previously low levels. Given valuations have remained elevated since 1982; it suggests the full-market cycle has yet to complete. Such a reversion would align the fundamental and psychological underpinnings seen at the beginning of the last two full-market cycles.
Long-Term Analysis – Is The 80’s Bull Still Running?
We can further examine the idea of long-term market cycles if we overly the psychological and time-frame analysis. The first full-market cycle lasted 63-years from 1871 through 1934. This period ended with the crash of 1929 and the beginning of the “Great Depression.”
The second full-market cycle lasted 45-years from 1935-1980. This cycle ended with the demise of the “Nifty-Fifty” stocks and the “Black Bear Market” of 1974. While not as economically devastating as the 1929-crash, it did greatly impair the investment psychology of those in the market.
The Running Bull Market
The current full-market cycle is only 38-years in the making. Here is a short-list of what prices are pushing up against:
Elevated valuations
Collapsing economic data
Declining earnings and corporate profitability
Weak economic growth
Surging debt levels
Deflationary economic pressures
Suppressed wage growth
Weakening demand from consumption
Even this short-list of headwinds makes it worth questioning whether the current full-market cycle has completed. Such is particularly the case when Central Banks are required to maintain ever-increasing levels of monetary interventions to keep financial markets functioning.
The idea of the “bull market,” which begin in 1980, is still intact is not a new one. As shown below, a chart of the market from 1980 to the present suggests the same.
The long-term bullish trend line remains, and the cycle-oscillator is only half-way through a long-term cycle. Furthermore, by the time the market resolves itself, a 61.8% retracement would reset markets back to the 1999 levels. Such is based only on the assumption that the long-term full market cycle has not yet completed.
I am NOT suggesting this is the case.
Instead, this is a thought-experiment about the potential outcome from the collision of weak economics, high levels of debt, valuations, and investor’s “irrational exuberance.”
Yes, this time could entirely be different.
It just never has been before.
Using Long-Term Analysis To Measure Potential Outcomes
Regardless of whether you agree with the premise, do not completely dismiss the importance of long-term price cycles. Currently, it is “in vogue” to believe it is only monetary policy driving markets now. Over the long-term, there have been many excuses for rising prices, which eventually gave way to “fundamental gravity.”
One of the most interesting emails I received in response to my monthly analysis above was from Jim Colquitt, President of Armor Index, Inc. To wit:
“If we draw the ‘Head & Shoulders’ pattern you described above, we find an interesting symmetry. The distance from the beginning of the left shoulder (September 2017) to the end of the left shoulder (December 2018), is the same distance (15 months) from the end of the left shoulder to the end of the head (March 2020).
If we assume this symmetry remains intact, it will allow us to complete the right shoulder of the head and shoulder pattern 15 months later in June 2021. Such would be somewhere in the price range of ~2,030 or roughly ~31% lower than current levels.”
Where Do We Go From Here
What does this analysis suggest if the market breaks below the neckline? Or, what if markets bounce off of the neckline as support?.
‘Head & Shoulder’ pattern theory suggests a move to the downside would put the target price at the equivalent of the distance from the head to the neckline as measured from the neckline. A break would equate to roughly ~840 on the index, or ~72% lower than current levels (see “Chart 2”).
Conversely, if the neckline is rejected, pattern theory suggests the distance above is used but is added to the top of the right shoulder. Such would equate to an index level of roughly ~4,160 or ~41% higher than current levels (see “Chart 2”). However, such a rise would likely come after testing the neckline (~2,030) and would equate to more than a 100% return from that point.
It is also interesting that current market levels are almost perfectly in line with the left shoulder peak in September 2018, the resistance/support levels from April through July 2019, and February through April 2020. Such could be the top for the right shoulder.
Should we test the lows of the worst case scenario, pattern theory puts the target range at levels, which are almost perfectly in line with the lows of the 2002 and 2008 recessions (see “Chart 3”).
Jim is correct in the analysis. We certainly hope markets don’t revisit the lows of the previous two bear-markets. For investors that is the worse possible outcome. However, such an outcome does have historical precedents within the context of completing a full-market cycle.
Conclusion
There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. After a decade long bull-market cycle, fueled by Central Bank liquidity, it is understandable why mainstream analysis believe markets can only go higher.
Bear market cycles rarely end in a single month. There is much “hope” the Fed’s flood of liquidity can arrest the market decline. However, there is still a tremendous amount of economic damage to contend with over the months to come.
When analyzing the markets using monthly data, it certainly appears as if the long-term bull market that began in 1980 remains intact currently. However, we have roughly a decade of potentially hard times ahead of us if we are early in the process of completing the second half of the full-market cycle.
If you are a short-term market trader, this analysis likely has little importance to you. It also doesn’t mean market returns over the next decade are negative every single year. What it does suggest is that investors will face increased volatility and low average rates of return.
For most investors, a “buy and hold” investment strategy will likely leave you far short of your goals.
That is just what this particular set of analysis suggests. There is an unlimited number of potential outcomes that can occur over the next decade. Some of them good, some of them bad. Such is why it is important to measure the amount of risk being taken to achieve financial goals and manage that risk accordingly.
Or, you can disregard the analysis entirely and continue hoping for the best.
However, if investing worked as the media tells you, then why, after three major bull markets in the last 30-years, are 80% of Americans still broke?
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In Fulton v. City of Philadelphia, the Court is considering whether to reverse Employment Division v. Smith, the case holding that (generally speaking) religious objectors aren’t constitutionally entitled to exemptions from generally applicable laws. I have long been one of the few law professors who (1) thinks Smith is right, but (2) thinks that jurisdiction-by-jurisdiction Religious Freedom Restoration Acts are generally a good idea. I wrote an article about that in 1999 (A Common-Law Model for Religious Exemptions), and now an amicus brief in Fulton (with the help of my students Robert Bowen, Delaney Gold-Diamond, and Caleb Mathena).
The amicus brief is on my own behalf, so there are no reasons for me to keep it confidential before I file it (it’s due next Wednesday, June 3, but I’d like to file it a couple of days early), and every reason not to: If there are any errors, small, medium, or large, in my thinking on this, I would love to have a chance to fix them. So if any of you are interested in having a look and giving me your suggestions, I’d much appreciate it. (Note that the brief has not yet been cite-checked or fully proofread, though I’d be glad to know of proofreading glitches as well as about more serious ones.) I include the Summary of Argument below, but you can read the whole brief here.
[1.] Justice Scalia was right: Courts should not be constantly “in the business of determining whether the ‘severe impact’ of various laws on religious practice” suffices to justify a constitutionally mandated exemption from a generally applicable law. Employment Division v. Smith, 494 U.S. 872, 889 n.5 (1990). “[I]t is horrible to contemplate that federal judges will regularly balance against the importance of general laws the significance of religious practice.” Id.
Indeed, overruling Smith would revive all the flaws of a broad substantive due process regime: It would require courts to routinely second-guess legislative judgments about the normative foundations for a wide range of laws, and about the laws’ practical necessity.
For instance, should people have a right to assisted suicide? This Court in Washington v. Glucksberg, 521 U.S. 702 (1997), refused to recognize such a right under substantive due process, and upheld an assisted suicide ban under the rational basis test. But if Smith were overruled, any person who claims a religious obligation to assist in suicide would trigger the very sort of strict scrutiny inquiry that Glucksberg forecloses.
Likewise, this Court has rejected heightened scrutiny of economic regulations, such as minimum wage laws. But if Smith were overruled, a person who claims a religious obligation to hire people but for less than minimum wage would be entitled to an exemption, unless the regulation passes strict scrutiny. And the list could go on.
Of course, it is appealing to protect religiously motivated action (or inaction) that does not really hurt anyone. But what constitutes “hurting anyone” is a hotly contested issue, as this very case shows. It is contested normatively. (Should refusing to deal with a same-sex couple qualify as hurting them? Is paying people a supposedly “exploitative” wage, even with their consent, hurting them?) And it is contested practically. (Would allowing assisted suicide end up pressuring people into choosing death even if they would rather not?) This Court’s rejection of a general right to liberty under the rubric of substantive due process wisely recognizes that these questions should ultimately be left to the political process.
[2.] To be sure, normative and pragmatic judgments about which actions hurt others are familiar to courts. Much of the common law of tort, contract, and property reflects such judgments.
But such decisions are only tentative, because they can be overruled by legislatures. Judges have the first word on these matters, but not the last. That makes common-law decisionmaking legitimate even when aggressive use of substantive due process would not be.
Indeed, decisionmaking under RFRAs is in this respect similar to such common-law decisionmaking. Because RFRAs (state or federal) are mere statutes, they give judges authority to create exceptions but subject to possible revision by legislatures.
Thus, for instance, this Court concluded in Gonzales v. O Centro Espírita Beneficente União do Vegetal that, in effect, hoasca was not so harmful as to justify denying an exemption request, 546 U.S. 418 (2006)—but if Congress had disagreed, it could have exempted the hoasca ban from RFRA, and thus had the last word on the subject. But if Smith were overruled, this Court’s estimate of harm would have been final, unrevisable without an Article V constitutional amendment.
[3.] Some substantive constitutional rights, of course, do require courts to evaluate the normative and pragmatic justification for restrictions on those rights, and the test in those cases often is strict scrutiny. But Smith was correct in concluding that claims of those rights are quite different from claims of religious exemptions, 494 U.S. at 885-86. Those rights require second-guessing legislative judgments only for specific, well-defined zones of regulation (e.g., content-based speech restrictions), where such judicial decisionmaking is especially justified. Overruling Smith would require courts to consider overriding legislative decisions as to a vast range of generally applicable laws.
[4.] Nor should this Court limit Smith to laws that lack secular exceptions. A law can be generally applicable if it does not single out religious behavior for special burdens, even if it does include exceptions for certain kinds of secular behavior. Indeed, a vast range of important laws have many exceptions—trespass law, the duty to testify, antidiscrimination law, copyright law, contract law, and many others.
[5.] This brief takes no position on whether statements of government officials and the shifting legal basis for the government’s actions may indicate that the City of Philadelphia singled out Catholic Social Services for different treatment on the basis of religion. Pet. Br. __. The brief argues only that this Court should reaffirm the Smith principle that, absent such intentional discrimination, the Free Exercise Clause does not provide a presumptive constitutional right to religious exemptions from government actions.
[Footnote:] This brief also does not discuss the original meaning of the Free Exercise Clause, a matter treated in Justice Scalia’s and Justice O’Connor’s opinions in City of Boerne v. Flores, 521 U.S. 507 (1997), and likely in other forthcoming amicus briefs in this case.
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Last week, four Republican senators co-sponsored legislation “to let states approve and distribute diagnostic tests when the state or federal government has declared a public health emergency” because—in the words of their press release—“our federal bureaucracy simply has not moved fast enough during this crisis.” It was an explicit rebuke to the Centers for Disease Control and Prevention (CDC) for botching COVID-19 testing and for standing in the way of state governments, universities, and private labs that were willing and able to do the job.
Implicitly, it was a shot from the president’s own party at the Trump administration’s incompetent handling of the pandemic. The senators could easily have broadened the targets of their bill; this year has seen the president, governors, and government officials of all types go out of the way to turn a health crisis into a larger catastrophe through bungling, malice, and overreach.
That the CDC dropped the ball is no secret. Early testing kits produced by the agency were contaminated by bad procedures and then bureaucratic delays hampered efforts to fix the problem. Amidst ample evidence of in-house incompetence, the feds then tried to make sure nobody else could show them up.
“Agencies within the Department of Health and Human Services not only failed to make early use of the hundreds of labs across the United States, they enforced regulatory roadblocks that prevented non-government labs from assisting,” CNN noted last month.
Was the CDC’s incompetence and obstructionism a result of inadequate resources? Nope. “The CDC’s budget has ballooned from $590 million in 1987 to more than $8 billion last year. If the agency had grown with inflation since 1987, it would have a budget of about $1.3 billion today,” Reason‘s Eric Boehm reported. The agency has all the money it needs for good or ill—and it’s done ill in spades.
Perhaps inspired by the CDC’s example, the Federal Emergency Management Agency (FEMA) has also done its best to impede pandemic response by stealing medical supplies before they can reach hospitals and clinics. FEMA “is quietly seizing orders, leaving medical providers across the country in the dark about where the material is going and how they can get what they need to deal with the coronavirus pandemic,” the Los Angeles Timesreported back in April. Desperate state officials and medical providers turned to smuggling shipments to avoid federal hijacking.
The vast, powerful, and incredibly intrusive federal bureaucracy is headed by Trump, who also petulantly invokes the Defense Production Act to forcibly reshape the production and distribution of goods in ways that are already underway, or else that make no sense and threaten to do more harm than good. No wonder lower-ranking federal officials feel obliged to get in everybody else’s way. Federal seat-warmer see, federal seat-warmer do.
In an understandable search for a more-competent counterpart to the president, journalists and pundits have, less understandably, turned to state governors. In particular, they developed something of a shared crush on Andrew Cuomo. The New York governor and Democrat has become “the appointed darling to step into the ring and serve as pugilist against Trump in this crisis,” as DePauw University communications professor Jeffrey McCall put it. CNN even indulges cringe-worthy “interviews” of the governor by his brother that would be considered clumsy even at Pravda-style media operations.
But while many journalists may prefer Cuomo’s political affiliation and semi-coherent presentations over those of Trump, the governor has his own significant failings. To applaud Cuomo’s handling of the pandemic is to praise his personal approach to snatching medical supplies and his proven ability at killing granny.
New Yorkers who won’t ever again vote for anybody include nursing home residents who died of COVID-19 as a result of the state’s arrogance-fueled venture into inadvertent biological warfare. “More than 4,500 recovering coronavirus patients were sent to New York’s already vulnerable nursing homes under a controversial state directive that was ultimately scrapped amid criticisms it was accelerating the nation’s deadliest outbreaks,” the AP reported last week.
That revelation prompted the governor to back off his earlier vow to investigate nursing home conduct and penalize those that had put the elderly at risk. After all, the investigation threatened to implicate its instigators—especially since nursing home operators had warned that his policy was deadly.
“Multiple states are considering adopting an order similar to what was issued in New York that requires every nursing home to admit hospital patients who have not been tested for COVID-19 and to admit patients who have tested positive,” cautioned the American Health Care Association on March 28. “This approach will introduce the highly contagious virus into more nursing homes. There will be more hospitalizations for nursing home residents who need ventilator care and ultimately, a higher number of deaths.”
Sure enough, as of May 23, close to 6,000 people in New York nursing homes were confirmed or presumed dead due to Covid-19, according to state figures—about one-fifth of the state’s total dead from the pandemic.
If Trump is a walking, talking disaster as executive leaders of crisis responses go, and if Cuomo offers only a more crowd-pleasing brand of bungling, where do we look for competence? As is often the case when leaders seem determined to guide their followers over a cliff, wisdom can best be found among those who reject such leadership and set out to do things on their own, in voluntary cooperation with others.
Helen Chu, director of the Seattle Flu Study, ignored federal rules to identify the presence of the novel coronavirus in Washington state.
Businesses and hobbyists donated personal protective equipment to medical providers to make up the shortfall (my son’s school used its otherwise idled 3D printers to produce hundreds of face shields for medical providers).
Parents and students explored learning at home when schools shut down—and many decided they like it and might continue in the future.
And so much more …
Throughout this pandemic, competent and responsible responses have come not from presidents and governors, but from people and organizations taking the initiative to help each other and themselves. Absent political officials to boss us around and lead us down blind alleys, it turns out that we do pretty well. We might do even better if presidents, governors, and other officials would stay out of the way.
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By 1920, former New York Yankees outfielder George Halas’s baseball career was finished.
Halas had only played 12 games as a professional when a hip injury abruptly ended his dream of making it big.
Being a baseball player was all Halas really knew, and with his career finished, he had limited prospects.
Eventually he was able to find steady work in Decateur, Illinois, a small town about 3 hours from Chicago, where he took a job with the A.E. Staley Company.
The company’s founder, Augustus Staley, loved sports, and he recruited some of his employees to play on a company team that competed in a regional gridiron football league.
The team was known as the Decateur Staleys, and Halas became the manager.
Halas didn’t have much football experience, but he did well as team manager. The Staleys earned a 6-1 record in their first season and won the central Illinois Football Championship.
But Augustus Staley lost a ton of money.
Game attendance was pitiful, so his football team brought in almost zero revenue. But he had to pay the players, pay for the equipment, pay for team travel, etc.
Staley knew if things continued that way that he’d lose a fortune. He didn’t want to shut down the team that he loved, but he didn’t want to continue losing money.
So in 1921, Augustus Staley PAID George Halas $5,000 (which was a lot of money back then) to take the team off his hands.
George Halas jumped at the chance. He took the team (and the money) to Chicago, and eventually renamed it the Chicago Bears.
Today the team’s estimated worth is nearly $3.5 billion. But its remarkable to think that a century ago the team actually had NEGATIVE value.
This isn’t incredibly common, but it does happen from time to time: businesses can be worth less than zero. And most of the time they don’t have such a remarkable turnaround story.
Case in point: Hertz, the rental car company, has $14.4 billion worth of vehicle loans according to its most recent financial statements.
But the company estimates that its vehicles are actually worth LESS than the debt they owe. This means that Hertz’s rental cars have negative equity.
Including the company’s other assets and liabilities, Hertz has NEGATIVE $2.8 billion in net tangible assets… so the entire company is worth less than zero.
They’re also quickly burning cash with no end in sight. Unsurprisingly, Hertz filed for bankruptcy a few days ago.
Similarly, the retail chain JC Penny also recently filed for bankruptcy. According to its financial statements, JC Penny has an accumulated deficit of MINUS $3.7 billion, and negative net tangible assets (including interest rate derivatives).
WeWork hasn’t declared bankruptcy (yet). But the company barely has any assets at all despite having an unbelievable $47 billion in lease liabilities.
So WeWork is probably also worth far less than zero.
Frankly it’s not unreasonable to think that a LOT of companies are in this position right now.
Stock markets around the world are surging higher because investors are looking for any excuse to believe that everything is about to be back to normal.
That’s human nature; our ‘normalcy bias’ warps our brains into completely ‘misunderestimating’ obvious threats and full-blown disasters.
Right now as I write these words, in fact, the US stock market is worth roughly the same amount as it was in early 2019.
That strikes me as completely ridiculous.
In early 2019 there weren’t tens of millions of unemployed, countless businesses shuttered, and unfathomable looming bankruptcies.
Plus today we have to contend with the obvious risks of subsequent virus outbreaks, more shutdowns, travel and trade barriers, the looming Cold War between the US and China, and higher tax rates to pay for all the bailouts.
It’s fair to say that economic conditions and earnings prospects today are completely different (and a lot uglier) than they were in early 2019. So how can stocks possibly be worth the same amount?
And again, if you dive a little bit deeper, you might find that a number of big companies are actually worth less than zero.
In normal times, investors typically value a business based on a certain multiple of its cashflow… or at least its future cash flow.
But these aren’t normal times. And valuing a business based on pre-Covid projections is just silly.
A lot of companies will have a long-term hit to their revenues and profits. Some might not be able to operate at all.
So a safer bet is to value a company based on its assets; in other words, how much are the company’s business assets worth, minus the liabilities?
If the answer (like Hertz) is less than zero, then you might just want to consider avoiding the investment altogether.
Hertz is definitely not going to be the last big company to file for bankruptcy. There are a lot more retailers, travel companies, etc. that are on the brink.
At this point, any highly leveraged (i.e. heavily indebted) business might just be worth less than zero. So be cautious before following the crowd and rushing back in.
Remember this if you’re thinking about buying an index fund; there are literally hundreds of companies in that index, many of which might be worth less than zero.
Longer term, great businesses, both public and private, will do very well and be in much better shape than before Covid; economic downturns and financial crises actually help solid businesses rise to the top.
Companies with high quality products or services, talented management, and sensible finances are able to navigate the challenges and emerge stronger than ever. They eventually consolidate market share from weaker competitors who don’t make it, and they end up becoming even more profitable.
Last week, four Republican senators co-sponsored legislation “to let states approve and distribute diagnostic tests when the state or federal government has declared a public health emergency” because—in the words of their press release—“our federal bureaucracy simply has not moved fast enough during this crisis.” It was an explicit rebuke to the Centers for Disease Control and Prevention (CDC) for botching COVID-19 testing and for standing in the way of state governments, universities, and private labs that were willing and able to do the job.
Implicitly, it was a shot from the president’s own party at the Trump administration’s incompetent handling of the pandemic. The senators could easily have broadened the targets of their bill; this year has seen the president, governors, and government officials of all types go out of the way to turn a health crisis into a larger catastrophe through bungling, malice, and overreach.
That the CDC dropped the ball is no secret. Early testing kits produced by the agency were contaminated by bad procedures and then bureaucratic delays hampered efforts to fix the problem. Amidst ample evidence of in-house incompetence, the feds then tried to make sure nobody else could show them up.
“Agencies within the Department of Health and Human Services not only failed to make early use of the hundreds of labs across the United States, they enforced regulatory roadblocks that prevented non-government labs from assisting,” CNN noted last month.
Was the CDC’s incompetence and obstructionism a result of inadequate resources? Nope. “The CDC’s budget has ballooned from $590 million in 1987 to more than $8 billion last year. If the agency had grown with inflation since 1987, it would have a budget of about $1.3 billion today,” Reason‘s Eric Boehm reported. The agency has all the money it needs for good or ill—and it’s done ill in spades.
Perhaps inspired by the CDC’s example, the Federal Emergency Management Agency (FEMA) has also done its best to impede pandemic response by stealing medical supplies before they can reach hospitals and clinics. FEMA “is quietly seizing orders, leaving medical providers across the country in the dark about where the material is going and how they can get what they need to deal with the coronavirus pandemic,” the Los Angeles Timesreported back in April. Desperate state officials and medical providers turned to smuggling shipments to avoid federal hijacking.
The vast, powerful, and incredibly intrusive federal bureaucracy is headed by Trump, who also petulantly invokes the Defense Production Act to forcibly reshape the production and distribution of goods in ways that are already underway, or else that make no sense and threaten to do more harm than good. No wonder lower-ranking federal officials feel obliged to get in everybody else’s way. Federal seat-warmer see, federal seat-warmer do.
In an understandable search for a more-competent counterpart to the president, journalists and pundits have, less understandably, turned to state governors. In particular, they developed something of a shared crush on Andrew Cuomo. The New York governor and Democrat has become “the appointed darling to step into the ring and serve as pugilist against Trump in this crisis,” as DePauw University communications professor Jeffrey McCall put it. CNN even indulges cringe-worthy “interviews” of the governor by his brother that would be considered clumsy even at Pravda-style media operations.
But while many journalists may prefer Cuomo’s political affiliation and semi-coherent presentations over those of Trump, the governor has his own significant failings. To applaud Cuomo’s handling of the pandemic is to praise his personal approach to snatching medical supplies and his proven ability at killing granny.
New Yorkers who won’t ever again vote for anybody include nursing home residents who died of COVID-19 as a result of the state’s arrogance-fueled venture into inadvertent biological warfare. “More than 4,500 recovering coronavirus patients were sent to New York’s already vulnerable nursing homes under a controversial state directive that was ultimately scrapped amid criticisms it was accelerating the nation’s deadliest outbreaks,” the AP reported last week.
That revelation prompted the governor to back off his earlier vow to investigate nursing home conduct and penalize those that had put the elderly at risk. After all, the investigation threatened to implicate its instigators—especially since nursing home operators had warned that his policy was deadly.
“Multiple states are considering adopting an order similar to what was issued in New York that requires every nursing home to admit hospital patients who have not been tested for COVID-19 and to admit patients who have tested positive,” cautioned the American Health Care Association on March 28. “This approach will introduce the highly contagious virus into more nursing homes. There will be more hospitalizations for nursing home residents who need ventilator care and ultimately, a higher number of deaths.”
Sure enough, as of May 23, close to 6,000 people in New York nursing homes were confirmed or presumed dead due to Covid-19, according to state figures—about one-fifth of the state’s total dead from the pandemic.
If Trump is a walking, talking disaster as executive leaders of crisis responses go, and if Cuomo offers only a more crowd-pleasing brand of bungling, where do we look for competence? As is often the case when leaders seem determined to guide their followers over a cliff, wisdom can best be found among those who reject such leadership and set out to do things on their own, in voluntary cooperation with others.
Helen Chu, director of the Seattle Flu Study, ignored federal rules to identify the presence of the novel coronavirus in Washington state.
Businesses and hobbyists donated personal protective equipment to medical providers to make up the shortfall (my son’s school used its otherwise idled 3D printers to produce hundreds of face shields for medical providers).
Parents and students explored learning at home when schools shut down—and many decided they like it and might continue in the future.
And so much more …
Throughout this pandemic, competent and responsible responses have come not from presidents and governors, but from people and organizations taking the initiative to help each other and themselves. Absent political officials to boss us around and lead us down blind alleys, it turns out that we do pretty well. We might do even better if presidents, governors, and other officials would stay out of the way.
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However, The FT is now reporting that Merck chief executive Ken Frazier has cast doubt on the 12 to 18-month timeframe to develop an effective coronavirus vaccine, describing the widely-mooted schedule as “very aggressive”.
“It is not something I would put out there that I would want to hold Merck to,” the US pharmaceutical group’s boss told the Financial Times, adding that vaccines should be tested in “very large” clinical trials that take several months if not years to complete.
“You want to make sure that when you put a vaccine into millions if not billions of people, it is safe,” he said.
This took the shine off the market, modestly…
Shifting S&P Futs back to 3,000. But, of course, there will be another vaccine hope tomorrow to lift things ever higher.
via ZeroHedge News https://ift.tt/2M0qobr Tyler Durden
French Intelligence Warned Of ‘Catastrophic Leak’ From Wuhan Lab Tyler Durden
Tue, 05/26/2020 – 11:10
Eleven years before the joint construction of the Wuhan Institute of Virology, French intelligence services warned Paris that China’s reputation for poor bio-security could lead to a ‘catastrophic leak,’ according to the Daily Mail.
In 2004, the EU’s chief brexit negotiator, Michael Barnier, ignored those warnings – signing off on the lab’s construction when he was the French foreign minister.
According to the report, French intel also warned that Paris could lose control of the facility, and that Beijing could even use it to make biowarfare weapons. And in 2015, as the laboratory prepared to open, those concerns were realized after the French architects of the project saidthe CCP had shut them out. In fact, 50 French scientists were supposed to help the Chinese run the laboratory properly, but never ended up going.
The Mail discovered Barnier’s involvement in the Wuhan Institute of Virology during an in-depth investigation into French connections to the lab – where many believe the coronavirus escaped from, as the WIV housed a group of scientists who received international condemnation for creating chimeric strains that could infect humans. Under the ‘escaped’ scenario, an infected WIV employee unknowingly brought it into the Wuhan wet market, exposing what would become roughly half of the first known cluster of cases.
Biologists who carried out a landmark study say they were ‘surprised’ to find the virus was ‘already pre-adapted to human transmission’.
Jacques Chirac, the French president at the time of the deal, pushed for the Wuhan institute to be set up after the 2003 SARS outbreak, which affected 26 countries and resulted in more than 8,000 cases and 774 deaths. Mr Chirac, along with his pro-Beijing prime minister Jean-Pierre Raffarin, promised French funding and expertise in return for a share of the intellectual copyright on the lab’s discoveries. –Daily Mail
France’s Chirac government saw the deal to construct the WIV as a way to strengthen trade with China, despite warnings from its own intelligence, the French equivalent to MI6, which repeatedly raised concerns over lack of international control and ‘transparency’ issues.
“What you have to understand is that a P4 [high-level bio-security] laboratory is like a nuclear reprocessing plant. It’s a bacteriological atomic bomb,” said one source, adding: “The viruses that are tested are extremely dangerous – diving suits, decontamination airlocks etc must be followed to the letter.”
Alain Merieux, the French billionaire who was instrumental in setting up the Wuhan laboratory in partnership with his Institut Merieux in Lyons, abandoned the project in 2015, saying: ‘I am giving up the co-chairmanship of [the] P4 [laboratory], a Chinese tool. It belongs to them, even if it was developed with technical assistance from France.’
According to Le Figaro, a diplomat with a close knowledge of the deal added: ‘We knew the risks involved and thought that the Chinese would control everything and quickly eject us from the project.
‘We believed that providing this cutting-edge technology to a country with an endless power agenda would risk exposing France in return.’ –Daily Mail
And in 2015, concerns were validated after China implemented their new policy of ‘dual use’ technologies, which allows for the military use of civilian technology.
“The aim was to develop vaccines following the SARS crisis between 2002 and 2004,” said the Mail‘s source. “There was much co-operation on a range of issues between France and China at the time, and Michel Barnier was implementing government policy.”
“The issue of bio-security was certainly a cause for concern within agencies including the DGSE,” the source added.
Meanwhile, the WIV’s Shi Zhengli – known as “bat woman” for her controversial experiments creating bat coronaviruses that can infect humans – and who swore ‘on her life’ that the COVID-19 isn’t from her lab, said in a recent interview on Chinese state television that viruses being discovered now are “just the tip of the iceberg.“
“If we want to prevent human beings from suffering from the next infectious disease outbreak, we must go in advance to learn of these unknown viruses carried by wild animals in nature and give early warnings,” Shi told CGTN, adding “If we don’t study them there will possibly be another outbreak.“
Will be, or won’t be another outbreak?
via ZeroHedge News https://ift.tt/2X1DUlq Tyler Durden
Global equities continue to perform well as reopening optimism remains the primary driver and S&P 500 futures breached the 200-day moving-average to trade >3000 for the first time since early-March. Trading off the same underlying impulse, the Treasury market has seen yields edge higher; albeit within a definable range – one which has kept 10-year rates at ~70 bp and squarely locked into the 54 bp to 78 bp zone. We’ve been on about these specific trading parameters for several weeks at this point and maintain that the longer the levels holds, the more difficult a meaningful challenge becomes. The persistence of the range despite the ability of the S&P 500 to reverse nearly ~70% of the March crash is very telling and presents an uncomfortable scenario in which ‘the facts have changed more than the prices’ – which is a classic precursor to a breakout.
The performance of risk assets implies any such breakout would be a bond-bearish event; although we’re far less convinced on the inevitability of this outcome. In fact, the bid for stocks and reluctance of US rates to venture to a higher plateau are based on a key underlying assumption; the Fed will continue to use its balance sheet in support of easier conditions for the foreseeable future and expand further when the time comes. There is a collective understanding that such a time will eventually come; after all, the ranks of those who believe in a V-shaped recovery are dwindling to the point that this degree of optimism is the exception, not the norm.
Nonetheless, stocks >3000 marks an important milestone – recall that July 2019 was the first time the S&P 500 broke into the land of the 3-handle and it wasn’t until Q4 of last year when 2-handles became a thing of the past… well, until 2020.
What pandemic? The achievement is rather staggering when put in the context of Q2 real GDP estimates in the -30.5% (NY Fed) to -41.9% (Atlanta Fed) tracking range. Whether the realized contraction of the US economy is simply dismissed as priced-in or if it shocks risk assets off their upward trajectory will largely be a function of investors’ interpretation of the Fed’s reaction-function to additional weakness as the post-pandemic landscape comes into focus. Powell & Co. haven’t come close to exhausting their toolbox, therefore our assumption is that there will be greater policy accommodation in the offing; level-specific forward guidance followed by yield curve caps. This is fairly consensus at this point; although the estimates of the timing vary. The FOMC has a strong incentive to keeping something in reserve once V-shape recovery ambitions are fully abandoned.
More immediately germane to trading in the Treasury market will be this morning’s round of economic data – the most meaningful of which being the 10am release of Conference Board confidence and the new home sales series. If the confidence reads from Germany overnight are any indication, the lows are in for the pandemic inspired rebasing of the global economic outlook. While this doesn’t imply the depths of the recession are as of yet known, the willingness of investors to move forward remain notable. In this regard, the consensus -23.4% drop in new home sales during the month of April speaks the relevance of April in marking the bottom for the data – a key underlying assumption supporting the summer-bounce scenario. As has been the case throughout the majority of the pandemic, the incoming reports have proven to be far less tradable events than the outright numbers would imply.
Our take remains that the magnitude of the contraction is so extreme as to truly lack any context and therefore the mid-March repricing stands as the benchmark for and adjustment to the outlook going forward. While this diverges materially from any attempt on the part of the market to correlate a specific level of output or inflation expectations (to say nothing of PE multiples) to an outright yield level or equity valuation, it does confirm an appropriate degree of relevance to the extremes of the moves during March.
via ZeroHedge News https://ift.tt/3epzniJ Tyler Durden
Trump Doubles Down As Widower, Media Demand “Inhumane” Scarborough Murder Tweets Be Deleted Tyler Durden
Tue, 05/26/2020 – 10:30
Update (1035ET): Twitter has broken its conspicuous silence over Trump’s controversial Scarborough tweets and confirmed that it has no plans to comply with the request to remove Trump’s tweets, though the company said it’s working “to expand products and policies” to more effectively address this issue – whatever that means.
Twitter has demurred on removing Trump’s tweets, saying it’s “deeply sorry” about the pain the tweets were causing, adding that it’s “working to expand existing product features and policies” to “more effectively address things like this going forward.” https://t.co/JccvPOVknW
We look forward to Kara Swisher expanding on her argument about why Twitter has a moral obligation to delete every offensive tweet during her next appearance on CNBC.
* * *
Over the weekend, President Trump elicited another round of sanctimonious outrage, including a WaPo opinion piece entitled “Can We Stop Pretending Trump Is Fit To Be President?”, after tweeting about a years-old ‘conspiracy theory’ regarding MSNBC “Morning Joe” host Joe Scarborough, who, prior to his career in television, was a member of Congress from the Sunshine State.
The theory contends that Scarborough was somehow responsible for the death of an intern, with whom he was rumored to be having an affair.
Trump said in a tweet sent on Friday that there seemed to be “a lot of interest” in the story.
A lot of interest in this story about Psycho Joe Scarborough. So a young marathon runner just happened to faint in his office, hit her head on his desk, & die? I would think there is a lot more to this story than that? An affair? What about the so-called investigator? Read story! https://t.co/CjBXBXxoNS
To be fair, Trump didn’t start this rumor. It has been kept alive for years by right-leaning conspiracy theorists. Trump has referenced it in the past, and even tweeted about it on May 12 without triggering the level of backlash we’re seeing today.
When will they open a Cold Case on the Psycho Joe Scarborough matter in Florida. Did he get away with murder? Some people think so. Why did he leave Congress so quietly and quickly? Isn’t it obvious? What’s happening now? A total nut job!
“Concast” should open up a long overdue Florida Cold Case against Psycho Joe Scarborough. I know him and Crazy Mika well, used them beautifully in the last Election, dumped them nicely, and will state on the record that he is “nuts”. Besides, bad ratings! #OPENJOECOLDCASE
Perhaps since it was a holiday weekend, reporters were desperate to gin up those traffic. And Trump’s unhinged Scarborough tweets were a gift they simply couldn’t ignore. What’s more, the family of victim Lori Kaye Klausutis, who was just 28 when she died, sent a letter to Twitter CEO Jack Dorsey asking that he remove Trump’s “offensive” tweets.
The letter, signed by Timothy J. Klausutis, Klausutis’s widower, and dated May 21, urges Twitter to remove Trump’s “offensive” tweets.
Mr.Dorsey:
Nearly 19 years ago, my wife, who had an undiagnosed heart condition, fell and hit her head on her desk at work. She was found dead the next morning. Her name is Lori Kaye Klausutis and she was 28 years old when she died. Her passing is the single most painful thing that I have ever had to deal with in my 52 years and continues to haunt her parents and sister. I have mourned my wife every day since her passing. I have tried to honor her memory and our marriage. As her husband, I feel that one of my marital obligations is to protect her memory as I would have protected her in life. There has been a constant barrage of falsehoods, half-truths, innuendo and conspiracy theories since the day she died. I realize that may sound like an exaggeration, unfortunately it is the verifiable truth. Because of this, I have struggled to move forward with my life. The frequency, intensity, ugliness, and promulgation of these horrifying lies ever increases on the internet. These conspiracy theorists, including most recently the President of the United States, continue to spread their bile and misinformation on your platform disparaging the memory of my wife and our marriage. President Trump on Tuesday tweeted to his nearly 80 million followers alluding to the repeatedly debunked falsehood that my wife was murdered by her boss, former U.S. Rep. Joe Scarborough. The son of the president followed and more directly attacked my wife by tweeting to his followers as the means of spreading this vicious lie. I’msure you are aware of this situationbecausemediaaroundthe world have covered it, but just in case, here it is:
My request is simple: Please delete these tweets. a research engineer and nota lawyer, but reviewed allof Twitter’s rules and termsof service. The President’s tweet that suggests that Loriwas murdered without evidence and contrary to the official autopsy)—is a violation of Twitter’s community rules and termsof service. An ordinary userlikemewould bebanished from the platform forsuch a tweet but I am only asking that these tweets be removed. any I am now angry as well as frustrated and grieved . I understand that Twitter’s policies about content are designed to maintain the appearance that your hands are clean you provide the platform and the rest is up to users. However, in certain past cases, Twitter has removed content and accounts that are inconsistent with yourtermsof service.
I’m asking you to intervene in this instance because the President of the United States has taken something that does not belong him — thememory ofmy dead wife and perverted it for perceived political gain . I would also ask that you consider Lori’s niece and two nephewswho will eventually comeacross this filth in the future. They have nevermet their Aunt and itpainsmeto think they would ever have to abouther this way. Mywife deserves better. Thank you for your consideration .Ilook forward to hearing from you soon . Sincerely, Timothy J. Klausutis, Ph.D
Klausutis’s cause was taken up by Recode editor and New York Times opinion writer Kara Swisher, once considered “the dean of tech journalism”. Swisher has long been a proponent of increasing censorship across social media platforms, and her latest piece urging twitter to finally ‘do something’ about its most ‘problematic’ user’ reads like just another hypersensitive, overblown piece of clickbait trash, with Swisher describing Trump’s tweets as “inhumane” – yes, she used that word – as if he had signed off on the napalming of a small village in Vietnam, instead of firing off a handful of tweets, which would have only been seen by a small fraction of his 80 million users if ‘reporters’ like Swisher hadn’t chosen to write about it.
Trump offered a defense of his tweets Tuesday morning.
….about whether or not Joe could have done such a horrible thing? Maybe or maybe not, but I find Joe to be a total Nut Job, and I knew him well, far better than most. So many unanswered & obvious questions, but I won’t bring them up now! Law enforcement eventually will?
At one point, twitter considered affixing warnings to Trump tweets deemed inappropriate, or in violation of their terms of service.
As the Washington Examiner points out, Twitter has yet to issue a statement or a reply on the controversy. Though Mika Brzezinski, Scarborough’s co-host and romantic partner whom Trump once accused of showing up to a party “bleeding from a facelift”, also insisted she would contact Dorsey.
I will be reaching out to head of twitter about their policies being violated every day by President Tump. Hope my call is taken. Please retweet if you agree
Many moons ago, young American children were taught a nursery rhyme that goes something like this: “Sticks and stones will break my bones, but words will never hurt me”.
100,000 Americans have died from an unprecedented global pandemic unleashed by a hostile foreign superpower, and this is what they’re choosing to spend their time on?
via ZeroHedge News https://ift.tt/3ex8wRZ Tyler Durden
