Category: zerohedge

Update (16:46 ET): President Trump canceled the rest of his trip “due to the scrubbing,” and will return to DC. He will not be “delivering scheduled remarks.” 

Due to scrubbing of launch, Pres Trump cancelling the rest of his visit to @NASAKennedy and will be returning to DC. He won’t be delivering scheduled remarks to @NASA personnel. Remains to be seen if Pres will return for rescheduled launch on Saturday. pic.twitter.com/Bjb3PBFeg7

— Mark Knoller (@markknoller) May 27, 2020

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Update (16:25 ET): Via NASA TV, it appears the SpaceX launch has been scrubbed due to bad weather. 

Here’s the moment when NASA determined the launch was “scrubbed.” 

“We are not going to launch today.”

Due to the weather conditions, the launch is scrubbing. Our next opportunity will be Saturday, May 30 at 3:22pm ET. Live #LaunchAmerica coverage will begin at 11am ET. pic.twitter.com/c7R1AmLLYh

— NASA (@NASA) May 27, 2020

Virgin Galactic shares moved higher on the postponement news. 

It appears the next launch attempt will be on Saturday at 3:22pm ET (19:22 UTC).

* * * 

On Wednesday afternoon, NASA is preparing to send two of its astronauts, Bob Behnken and Doug Hurley, to orbit aboard a spacecraft built by Elon Musk’s SpaceX. 

The launch will mark the first time a private US company has catapulted astronauts into space. It has also been about a decade since NASA retired its space shuttles in July 2011.

“For the first time since 2011, we are sending American astronauts back to space, on an American rocket, from American soil. And we would like you to join us for launch – at a safe virtual distance, of course,” NASA said in an announcement.

NASA’s live broadcast of the launch begins 12:15 p.m. EST with liftoff scheduled for 4:33 p.m. EST. It will be held at the Kennedy Space Center in Florida. If the weather holds up, SpaceX’s Crew Dragon will launch on a Falcon 9 rocket to the International Space Station (ISS). 

Falcon 9 rocket and Crew Dragon spacecraft this morning  

Scheduled events for today:

• 12 p.m. – Live Views of the SpaceX Falcon 9 Rocket on Launch Pad 39-A at the Kennedy Space Center for NASA’s SpaceX Demo-2 launch to the International Space Station.

• 12:15 p.m. – Coverage of NASA’s SpaceX Demo-2 launch to the International Space Station (Launch scheduled at 4:33 p.m. EDT).

• 7:30 p.m. – NASA/SpaceX Demo-2 post-launch news conference with Administrator Jim Bridenstine

NASA will stream the launch event live on YouTube 

This is a big day for Musk, considering last night his electric car company, Tesla, cut prices across the entire US lineup, as it appears a demand problem is forming. 

President Donald Trump will be in attendance today to witness the launch of the first manned space mission for the US in a decade. Vice President Mike Pence will attend as well.

The president has bragged about the public/private program for space travel, by allowing “rich guys” to bankroll the missions.

“We are letting those rich guys [Elon Musk] that like rockets, go ahead, use our property, pay us some rent,” Trump said at a rally in Tupelo, Mississippi, in Nov. 2018. “Go ahead. You can use Cape Canaveral. You just pay us rent and spend that money.”

Peter Diamandis, founder of the X Prize, the first private company to launch a rocket to the edge of space, told Financial Times if Musk is successful today, it will mark a period where space flight has become ‘reliable and cheap.’ 

 “It’s the first, fully commercially built, entrepreneurial capability,” Diamandis said. “What Elon Musk has done is nothing short of extraordinary, outpacing the US government-backed industries, Russia and China.”

Ahead of the launch, SpaceX raised $346 million, which was $100 million more than it originally disclosed in March. In the company’s existence, it has raised $3.5 billion, according to Crunchbase data.

Greg Autry, a former White House liaison to Nasa, said the commercialization of space flight is equivalent to when the internet was first created by the US Defense Department. He called today’s flight a “tipping point we’ve been waiting for in the commercial space industry for a number of years.” 

Financial Times describes the SpaceX and Boeing competition over the last decade to drive commercialization of space. 

“Nasa, which commissioned both SpaceX and Boeing seven years ago to build human launch systems, is counting on commercial incentives and market competition to drive down the price of getting into space. It has estimated that the $400m SpaceX spent to develop its Falcon 9 rocket, which has become the workhorse for lifting cargo to the ISS, was only a tenth what it would have cost Nasa itself to build a similar rocket.

“Since the Space Shuttle was retired in 2011 and the US was forced to buy seats on Russian rockets to propel its astronauts to the ISS, the cost of getting into space has risen sharply. Dennis Tito, the first space tourist, paid $20m in 2001 for a ride to the ISS on a Russian rocket. The price of a seat has now ballooned to more than $90m.

” A competitive commercial market could quickly push that price back below $50m, said Mr Autry. Boeing’s rival space capsule suffered a setback earlier this year because of software glitches but is expected to make its first manned test launch next year. Other companies, including Jeff Bezos’s Blue Origin and Sierra Nevada, a Californian company that has built a space vehicle with wings, also hope to cash in.

“As competition increases and the process for mounting human flights becomes more streamlined, the price for a trip into orbit could fall below $10m over the next decade, Mr Autry predicted.” 

Targeting 4:33 p.m. EDT today for Falcon 9’s launch of Crew Dragon with @NASA astronauts on board. Teams are closely monitoring launch and downrange weather → https://t.co/bJFjLCilmc pic.twitter.com/XyyT9YgESB

— SpaceX (@SpaceX) May 27, 2020

A boom in commercial space travel could be ahead if Musk is able to pull off today’s launch. It could signify affordable space flight is here. This could also unleash new industries such as space tourism, something that, Laura Forczyk at Astralytical, a US space consultancy, said could see exceptional growth in the 2020s. 

The next big step in commercializing space will need to be the retirement of ISS with private companies launching a new space station. That could be possible by the midpoint of the decade. 

Ahead of the launch, Musk said: “I’m Chief Engineer of the thing. If it goes right, it’s credit to the SpaceX/NASA team. Goes wrong, it’s my fault.” 

“I’m Chief Engineer of the thing. If it goes right, it’s credit to the SpaceX/NASA team. Goes wrong, it’s my fault.” — @elonmusk

💯 leadership. pic.twitter.com/tKPIpq0CRH

— Viv 🐉 (@flcnhvy) May 27, 2020

Authored by Charles Hugh Smith via OfTwoMinds blog,

Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt “normal” won’t fix what’s broken.

The stock market is in a frenzy of euphoria at the re-opening of the economy. Too bad the re-opening won’t fix what’s broken. As I’ve been noting recently, the real problem is the systemic fragility of the U.S. economy, which has lurched from one new extreme to the next to maintain a thin, brittle veneer of normalcy.

Fragile economies cannot survive any impact with reality that disrupts the distortions that are keeping the illusion of “growth” from shattering. For the past two decades, every collision with reality cracked the illusion, and the “fix” was to duct-tape the pieces together with new extremes of money-creation, debt, risk and speculative excess.

While the stock market has soared, the real world falls apart. If your region needs a new bridge built, count on about 20 years to get all the “stakeholders” to agree and get the thing actually built. Count on the cost quintupling from $500 million to $2.5 billion. Count on corners being cut as costs skyrocket, so those cheap steel bolts from China that are already rusting before the bridge is even finished? Oops. Replacing them will add millions to the already bloated budget.

Want to add a passenger stop on an existing railroad line? Count on 20 years to get it done. The complexity thicket of every regulatory agency with the power to say “no” basically guarantees the project will never get approved, because every one of these bureaucracies justifies its existence by saying “no.” Sorry, you need another study, another environmental review, and so on.

Need a new landfill? I hope you started the process 15 years ago, so you’ll get approval in only five more years. Every agency with the power to say “no” will stretch out the approval, so they have guaranteed “work” for another decade or two.

Did your subway fares double? Was the excuse repairing a crumbling system? Did the work get done on budget and on time? You must be joking, right? All the fare increase did was cover the costs of skyrocketing salaries, pensions and administrative costs. Repairs to the tracks and cars– that’s extra. Let’s float a $1 billion bond so nobody have to tighten their belts, and have riders pay for it indirectly, through higher taxes to pay the exorbitant costs of 20 years of interest on the bond.

Have you been thrown off your bicycle by the giant potholes in the city’s “bike lanes”? The city reluctantly admits that these streets that haven’t been maintained for decades–yes, decades. The city once paid for street maintenance out of its general budget, but alas, that’s been eaten up by skyrocketing salaries, pensions and administrative costs, so now we need to float $100 million bond to fund filling potholes. If all goes according to plan (ha-ha), we should be able to re-pave the streets that have been crumbling for 20 years in… the next 20 years.

These real-world examples are just four of thousands of manifestations of a broken system. Rather than make tough choices that drain power and wealth from vested interests, we simply borrow more money, in ever increasing amounts, to keep the entrenched interests and elites happy.

There are two “solutions” in the status quo: dump the debt on taxpayers or on powerless debt-serfs–for example, college students. (See chart below of the $1.6 trillion that’s stripmining student debt-serfs.)

Who benefits from selling all the municipal bonds, bundled student loans, etc. to investors starving for a yield above 0.1%? Wall Street, of course.

The problem is that while debt has soared, productivity and earned income have stagnated. The statistical narrative has been ruthlessly gamed to hide the erosion of living standards, but even with the bogus “low inflation” of official statistics, wages for the bottom 95% have stagnated for decades.

Measures of productivity have also been gamed to mask the ugly reality that the vast majority of the U.S. economy is stagnating under the weight of interest payments on debt, mal-investments in speculative gambles, higher junk fees and taxes, crushing regulatory compliance, high costs imposed by monopolies and cartels and a well-cloaked decline in the quality of just about everything the bottom 95% uses or owns.

What little productivity gains have been made have been skimmed by the top 5%. Coupled with the Federal Reserve’s single-minded goosing of the one signaling device it controls, the stock market, the top 0.1% in America own more wealth than the bottom 80%.

If productivity stagnates and winners take all, the wages of the bottom 95% cannot rise. Real wealth is only created by increases in the productivity of labor and capital; everything else is phantom wealth.

The only way stagnant incomes can support more debt is if interest rates decline. Presto, the Fed dropped interest rates to near-zero a decade ago. Of course you and I can’t actually borrow millions for 0.1%; that privilege is reserved for financiers and other financial parasites and predators.

Debt-serfs were able to refinance their crushing mortgages to save a few bucks, and so they can afford to 1) take on more debt and 2) pay higher taxes to fund the ballooning public debt.

Every one of these extremes has increased the systemic fragility of the American economy. This fragility is reflected in the impoverishment of the bottom 95%, the thin line between solvency and bankruptcy, the decay of public trust in institutions run for the benefit of entrenched interests, and the quickening erosion of America’s social contract.

Re-opening a fragile, brittle, bankrupt, hopelessly perverse and corrupt “normal” won’t fix what’s broken.

*  *  *

My recent books:

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
(Kindle $6.95, print $11.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Barely a week after a trial balloon about the Biden campaign vetting Amy Klobuchar – aka the stapler assassin – revived speculation about the doddering nominee’s hunt for a VP in the middle of a pandemic (likely dealing a serious blow to the bank accounts of big-wig political consultants) – several anonymously-sourced reports have claimed that Sen. Kamala Harris, who was among the first wave of would-be “frontrunners” to drop out of the race, is Biden’s top pick.

Oh my fuck https://t.co/AR2UUtmZL3

— Quoth the Raven (@QTRResearch) May 27, 2020

We must admit, the headline provoked a big ol’ belly laugh.

What’s so comical about all this? Well, the notion that Biden is leaning toward Harris, a faux-progressive who is widely despised by the Sanders-loving lefties he need to show up on election day in droves, seems like an obviously poor choice. Is this just the latest sign of the former VP’s purportedly deteriorating mental state?

Assuming the coronavirus doesn’t suddenly spring back to life across the US in September, Biden needs a VP who will, above all, help him pick up traction with the swing voters in the Midwest who handed Trump his upset victory over Hillary Clinton four years ago. That’s why Klobuchar was such a common-sense pick: her Midwestern roots and popularity in the region. Did the Minnesota Senator’s famously prickly personality get in the way of her prospects? And remember, Biden has already promised to pick a woman, which is why Andrew Cuomo is out of the question.

Or is there, perhaps, another motive?

Last week: Biden was vetting Klobuchar as leading VP candidate

This week: Kamala Harris now VP frontrunner

What changed? pic.twitter.com/Lnc1hVJAcR

— Quoth the Raven (@QTRResearch) May 27, 2020

For what it’s worth, the insiders at Vanity Fair predicted this weeks ago.

But is Biden really ready to let go one of the most punishing smackdowns he suffered during the debates?

Perhaps a better question: Does he even remember this?

Or maybe Harris has embraced another approach?

 

Big rollercoastery day in stocks as overnight gains in futuresville were once again erased after the open, only to be ramped back magically…Small Caps ended the day up over 3%… for absolutely no good reason at all (and don’t ask us why it was panic-bid into the close, why not!)

For some context, May has been a terrible month for anyone buying during the US day session. The S&P 500 is up 171 points during the overnight sessions and up 1.3 points during the day session…

So, adjust accordingly…

Fears over mega-tech Chinese firms delisting and increased sanctions against China over its dealings with Hong Kong, sent the yuan to its record low intraday…

Source: Bloomberg

These headlines also hit FANG stocks hard (as well as threats from Trump over social media bias)…

Source: Bloomberg

Trannies are now up around 8% on the week (as airlines take off on re-opening/vaccine “hope”), and Nasdaq scrambled back into the green on the week…

The market was helped early on when Robinhood went down and that reversed the downtrend…

Source: Bloomberg

The major reversal in momentum vs value in the last two days continues…

Source: Bloomberg

The Dow pushed up to its 100DMA today

Bank stocks surged for the second day in a row…

Source: Bloomberg

Bonds were mixed today with the long-end bid and short-end seeing modestly higher yields…

Source: Bloomberg

10Y Yields tumbled from overnight spike highs back to unch on the week…

Source: Bloomberg

Choppy day in the dollar today, but it ended higher..

Source: Bloomberg

Bitcoin appeared to benefit from yuan weakness…

Source: Bloomberg

Oil was down hard today ahead of tonight’s API inventory data after headlines about Russian production…

Precious metals were punched lower once again around the London Fix but bounced back dramatically…

Silver outperformed gold, pushing the gold/silver ratio to 98x – its lowest since 3/12…

Source: Bloomberg

Gold in Yuan fell back within its recent range…

Source: Bloomberg

Finally, this won’t end well…

Source: Bloomberg

 

Authored by Eoin Higgins via CommonDreams.org,

At least 10 local news stations around the country aired corporate propaganda from online retail giant Amazon praising the company’s worker safety protocols ahead of a shareholders meeting on Wednesday where investors are expected to demand better protections for employees from the company’s leadership, including CEO Jeff Bezos. 

“Jeff Bezos can run as many scripted news segments he wants,” tweeted advocacy group Americans for Tax Fairness. “It still doesn’t change the fact that he made $34.5 billion over the course of this pandemic while putting his workers in harm’s way and shirking on their hazard pay.” Courier journalist Tim Burke broke the story Tuesday in an article featuring a video showing anchors from the various stations parroting the script. Watch:

As Burke explained, the majority of the stations running the package did not acknowledge the material was produced by Amazon spokesperson Todd Walker or that the package came from the company:

Only one station, Toledo ABC affiliate WTVG, acknowledged that Walker was an Amazon employee, not a news reporter. WTVG and WGXA in Macon, Georgia, noted that Amazon had supplied the video.

The segments, which ran about a minute long, praised Amazon’s commitment to employee safety and the roll out of new preventive measures at facilities around the nation. The company sent a prepared script (pdf) and video package to producers, as Oklahoma City KOCO 5 anchor Zach Kael said on Twitter. 

“No,” said Kael, suggesting a different approach to reporting on the Amazon’s protocols. “Let us go inside a fulfillment centers with our own cameras.”

Just got an email from Amazon’s PR team with a pre-edited news story and script to run in our shows. They are selling this as giving our viewers an “inside look” at the company’s response to COVID-19.

No.

Let us go inside a fulfillment centers with our own cameras… pic.twitter.com/7mDk2xmf4O

— Zach Rael (@KOCOZach) May 24, 2020

The retailer has come under fire over its apparent lack of interest in protecting employee safety in the face of increased demand for products.

As the Verge reported, Amazon’s record leaves much to be desired despite the claims of its propaganda:

So far, eight Amazon workers have died of the virus, according to media reports, and countless others have been infected. Yet, Amazon has come under fire for refusing to disclose concrete numbers around COVID-19 infections, cracking down on worker protests against safety conditions and failing to inform some workers when their colleagues have become ill.

Syracuse University communications professor Robert Thompson told NBC News that there was no excuse for stations airing the segments.

“Shamelessly airing portions of something someone else produced, it would be like reporting on new studies about vaping and having it produced by Juul,” said Thompson.

Bottom line, tweeted Sen. Bernie Sanders (I-Vt.), is that there is no excuse for Bezos and Amazon to invest in propaganda rather than worker safety in the midst of a pandemic.

“Maybe Jeff Bezos, the richest man on earth, should focus on providing all his workers with paid sick leave instead of pushing out propaganda to local news stations,” said Sanders.

Approximately $150 billion of the $660 billion allocated to the Paycheck Protection Program (PPP) has gone untapped, according to data from the Small Business Administration – which shows that weekly PPP lending has “actually been negative since mid-May,” as fewer firms applied for loans and some borrowers returned funds, according to Reuters.

According to Bank of the West president Cindy Blankenship of Grapevine, TX, demand for the loans after the initial cash-grab “just dried up.”

“I think it’s a mixture of uncertainty and anxiety and fear, and the uncontrollable factor about employment and rehiring,” she added – noting that of her bank’s customers who did take out PPP loans (some $87 million), many haven’t touched them.

In total, the SBA says it approved $512.2 billion PPP loans as of May 21, which is approximately $150 billion below the amount authorized by Congress for the program.

The money left unborrowed and unspent under the program – a flagship of Congress’ $2.9 trillion effort to cushion the economic crush of the coronavirus pandemic – represents a lost opportunity. Businesses were supposed to use it to retain workers, but may have been laying them off instead of tapping the money.

Some 38.6 million people have filed for unemployment insurance since the crisis began, and the unemployment rate is expected to near or surpass the 25% record reached in the Great Depression. –Reuters

Meanwhile Ritholtz Wealth Management, a RIA led by “reformed broker” Josh Brown, and who wrote a book entitled “Bailout Nation” criticizing the United States for ‘abandoning its capitalist roots,’ was not one of the firms who passed up the program – taking out a $1.3 billion PPP loan.

By Heather Long, published in Restaurant Business

Struggling fast-casual chain Le Pain Quotidien filed for Chapter 11 bankruptcy protection Wednesday, proposing a sale to Aurify Brands for $3 million to save some of its operations, according to court documents. The chain, which had been struggling before the pandemic, closed all of its units amid the coronavirus crisis and laid off the majority of its employees.

In its filing, Le Pain Quotidien said that a sale to New York City-based Aurify Brands would allow for the reopening of at least 35 of its restaurants and avoid a liquidation. Aurify Brands is the parent company of concepts including The Little Beet, Melt Shop, Fields Good Chicken and The Little Beet Table.

In the U.S., New York City-based Le Pain Quotidien operated 98 restaurants under a licensing agreement with the Belgian brand. Last week, the parent company launched a reorganization procedure in a Belgian court. But the chain’s troubles started before COVID-19 hit the U.S., with the company mulling a possible bankruptcy during the second half of 2019. “Eroding” same-store sales, expensive leases, underperforming stores, increased competition and more issues became increasingly apparent last year, according to the bankruptcy filing.

The company generated $153 million in sales in 2019 but negative $16.8 million in EBITDA, according to the filing. 

Significant corporate turnover added to the troubles, Steven J. Fleming, the chain’s proposed chief restructuring officer, noted in the filing. He added that “a lack of investment” at the store level kept the company from keeping pace with trends or adding amenities such as a digital platform that has become competitive necessities.

To stem its losses, the chain added more grab-and-go items and worked on remodeling existing locations.

Earlier this month, Aurify Brands successfully bid for Le Pain Quotidien’s U.S. franchising rights in the Belgian insolvency case. On Tuesday, the parties signed a purchase agreement for $3 million.

In a fusion of finance (or what’s left of it in a centrally-planned world where asset prices no longer discount the future) and physics, BofA’s Claudio Irigoyen writes that the Schrödinger famous quantum physics experiment resembles the dichotomy that we find today between the state of the economy and some asset prices, in particular US stocks.

In 1935, Austrian physicist Erwin Schrödinger, trying to make the case that some people were misinterpreting quantum theory, designed a hypothetical experiment, famously known as the Schrödinger’s cat experiment. In a nutshell, the experiment goes, if you place a cat and something that could kill the cat (a radioactive atom) in a box and sealed it, you would not know if the cat was dead or alive until you open the box, so until then, the cat was in a sense both dead and alive.

The Schrödinger experiment, BofA argues, “resembles the dichotomy that we find today between the state of the economy and some asset prices, in particular US stocks” where market sentiment remains especially bearish. According to BofA’s most recent Global Fund Manager Survey (discussed here), only 10% of the respondents expect a V-shaped recovery and 75% think the recovery is likely to be either U or W-shaped. Positioning indicators also indicate maximum bearishness. Cash levels are at a record high. In line with that view, we downgraded again our global growth forecast. Now we expect a global contraction of 4.2% in 2020, down from 2.7% just six weeks ago. However, since March 23, US stocks (as measured by the S&P index) recovered 60% of the selloff that started in mid-February and are now trading just 12% below the peak before the crisis.

A natural question is then: how can we reconcile this decoupling between asset prices and expectations? Can the cat be dead and alive at the same time? Abusing the analogy, is this rebound a dead Schrodinger cat bounce? Or is there somebody making the dead cat look like it’s alive and kicking?

A natural question to ask, according to Irigoyen then, is: how can we reconcile this decoupling between asset prices and expectations? The answer, according to the BofA strategist is that “the most powerful element to explain the decoupling is the reaction function of the Fed (and admittedly of many other major central banks, including to some extent the ECB) and the expectation that this reaction function will remain unaltered in the future.” So should we just call it a Schrodinger Cat bounce then?

It’s the Fed, stupid

In order to make sense of this decoupling between expectations and asset prices, BofA notes that there is more than one element to consider.

• In the first place, positioning helps. As liquidity gradually recovered and with sentiment so bearish, people already adjusted their portfolios to the new steady state and are holding the risk they want to hold, so there are no marginal sellers. The pain trade is up, not down. But this can help explain why the market stopped falling, not so much why it rallied so violently. Indeed, extreme bearish positioning explains the recent stabilization in EM. However, the recovery in EM has been much more muted than in the US, so we cannot talk about a decoupling between sentiment and asset prices in EM.
• Another argument that could explain the decoupling is the relative composition of the S&P index, which is likely overrepresented by the relative beneficiaries of the COVID-19 shock, such as tech companies, the most overweight sector in the index. On the other hand, the SMEs, which are impacted the most by the recession, are not listed in the exchanges. Again, this argument can have some validity but is not necessarily verified in other countries also hit by the outbreak.
• A third argument has to do with investors’ expectations. If investors are too optimistic about the shape of the recovery, more inclined towards a V-shaped recovery, we could have a decoupling between the state of the economy and the stock market which is by its own nature forward-looking. Again, we have seen that this argument is prima facie inconsistent with what the GFMS revealed to us this week. In order to rescue the argument, we need to assume some sort of self-selection, in which the most bullish investors are more active than the bearish ones. “Possible, but stretched”, according to Irigoyen .

The analysis above leaves BofA with what the bank thinks is the most powerful element to explain the decoupling: the reaction function of the Fed (and admittedly of many other major central banks, including to some extent the ECB) and the expectation that this reaction function will remain unaltered in the future.

On top of the fiscal programs implemented by the governments of the main economies, central banks around the world have been flooding financial systems with liquidity. The goal has been to reestablish as quickly as possible both market and funding liquidity, with a particular focus on helping SMEs to finance working capital to avoid disruptive bankruptcies. In the case of the Fed, liquidity programs were complemented with credit programs. As part of the several funding and credit facilities implemented, the programs include buying not only Treasuries but also MBS, Commercial Papers and Corporate Debt and Corporate Bond ETFs. Not surprisingly, BofA thinks that “buying risky assets has been key to prop up asset prices and the stock market.“

In a nutshell, what all this means for asset prices is that the Fed put was increased to a record size and the market expectation is that if the economy falls even further, the Fed will step up buying more risky assets and even potentially buying equities, although the bar is very high for that to happen. The Fed is effectively intervening in the market for risky assets in a sort of “whatever it takes” type of reaction function which was strong enough to coordinate towards a stable equilibrium.

Here BofA takes a detour to clarify that “in theory”, the Fed buying program “should not affect the fair value of asset prices, which are the risk-adjusted discounted present value of cash flows, therefore independent of “supply and demand”. Since the Fed is not removing risk from the economy by buying risky assets, but just transferring the risk to taxpayers, in an economy with no market segmentation, people properly discount higher taxes to cover potential Fed losses and therefore the Fed reshuffling does not affect asset prices in equilibrium. However, if markets are segmented, as they are in reality, Modigliani-Miller doesn’t work, even if Ricardian equivalence holds. With sufficient segmentation, the effect on asset prices can be significant.

Even though the fall in interest rates naturally helps stock prices, being an endogenous reaction to a negative shock, it cannot have a first-order effect. The main channel through which the Fed affects asset prices is the risk premium channel. By effectively acting as lender and buyer of last resort, the Fed affects the risk premium and coordinates expectations towards the “good equilibrium”, avoiding endogenous runs against risky assets and setting a floor on the market, the so called Fed put.

* * *

This brings us to the next question: as part of its new “helicopter money mandate” is the Fed also doing fiscal policy?

According to BofA, the program implemented by the Fed, loosely named QE, is in fact way more than QE. Strict Quantitative Easing refers to the policy of creating reserves in order to purchase short-term government bonds. Not even buying long term government bonds represents QE, as this can be thought of the combination of QE and a swap of short-term for long-term government bonds, also known as Operation Twist. At the zero lower bound for short-term interest rates, buying long term government bonds and Operation Twist are equivalent and it can be argued that if those operations belong to the sphere of debt management (issuing short term bonds to rescue long term bonds), they should be conducted by the Treasury rather than the central bank.

If not even buying long term government bonds represents QE, much less in the case of buying risky assets. When the Fed buys risky assets, which can be called targeted purchases, it is not doing monetary policy but credit policy. It is a form of direct lending and it can be argued also that the Fed, by redistributing risks, is actually doing fiscal policy or at the very least monetizing the fiscal deficit, as the Fed could buy short term government debt that the Treasury could issue to fund targeted credit programs.

Even though the difference is subtle, it is in the realm of Congress to implement such policies rather than the Fed. Pushing the Fed to implement them and indirectly picking winners and losers can increase the implementation risks and undermine the perceived independence of the central bank, in addition to the obvious moral hazard implications, which can arguably be considered second-order given the nature and magnitude of the crisis.

This brings us to the conclusion: what are the unexpected consequences of positive surprises

According to Irigoyen, and tying the analysis back to an economy – which like Schrodinger’s cat is both alive and dead – “if the stock market is being supported by the reaction function, current and expected, of the Fed, it means that the shadow level at which the stock market would be trading absent the Fed’s support would be much lower.” That raises an interesting question: how much can the stock market rally if in the coming weeks, as lockdown policies are being relaxed, economic activity surprises positively relative to already very depressed expectations?

The answer is that certainly much less than proportionally, as the positive surprises on the one hand should lift the shadow fair value for the stock market, but on the other hand reduce the market value of the Fed put (as it would be less in the money). It could even happen in extreme that the stock market remains unaltered, only the factors explaining the observed level change. Needless to say that the short term reaction will likely be consistent with a mild rally, “but a rally that would leave the market even more vulnerable than it is now”, or as another BofA strategist, Benjamin Bowler put it, the higher stocks rise, the more fragile the market becomes.

On the contrary, if economic activity surprises to the downside, it would put significant pressure on the Fed to validate the put, which, given the arguments outlined above, might not necessarily be followed by a strong reaction, leaving the market wondering if the size of the Fed put has a limit.

Based on all of the above, BofA concludes that “the risk-reward of being long US stocks does not appear as particularly attractive.”

It looks like hell isn’t coming after all.

Just over two months after billionaire investor Bill Ackman scared CNBC’s viewers with his prediction that “hell is coming” and “America will end as we know it” unless America is shut down for 30 days – while at the same time admitting he was buying stocks hand over fist – Ackman’s “investing strategy” appears to be bearing fruit. According to Reuters, Pershing Square is up between 21% and 27% this year. On the fund’s call this morning, Ackman disclosed that his fund had exited Berkshire Hathaway (Ackman and Buffett sycophant Whitney Tilson must feel quite conflicted about this) and the position in Blackstone he had put on just months prior. Ackman also said that he exited Park Hotels & Resorts. 

As discussed previously, Ackman’s returns for the year were boosted along by a short credit hedge that Ackman, in all fairness, disclosed he was putting on well before the market reacted to the pandemic. The hedge paid off 100x, netting the firm about $2.6 billion for the fund. 

Ackman also said he added Lowe’s about 6 weeks ago and got the “bargain” of a lifetime, and said that he added Starbucks in the $60/share region.

Ackman had said earlier this month that tech companies could become even more dominant as a result of the pandemic:

“The impact of the crisis on companies like Amazon is actually a little bit of short-term negative because they’re spending a lot of money managing through this, but it’s long-term hugely beneficial to the company.”

Recall that it has barely been 2 months since Bill Ackman took to CNBC’s airwaves to proclaim that “hell is coming”, he a few days before the unofficial bottom for the Dow at 18,213 when Powell announced unlimited QE and expanded into buying corporate bonds, helping rebound the Dow above 20,000, where it has been since.  Three days later the hedge fund manager admitted  he went “all in” long on the market. 

Wednesday has been a wild day for US-China relations.

It has been a few months since we’ve checked in with Huawei CFO Meng Wanzhou, who has spent the last 16 months free on bail in Vancouver while the Canadian legal system has processed her case, as it moves to determine whether it will grant the US DoJ’s request to extradite Wanzhou in accordance with the US-Canada mutual-extradition agreement.

On Wednesday, with tensions between the US and China flaring and Huawei back in the headlines, a Canadian judge has ruled that the allegations brought against Meng by the DoJ would constitute crimes in Canada. That hurdle was a critical legal threshold: If the judge had ruled otherwise, Meng likely would have been freed, and extradition would likely be off the table.

BREAKING Judge in #MengWanzhou case rules in favour of Crown – her alleged actions would be considered a crime in Canada. Extradition process continues. #Huawei @CTVNewsVancouver pic.twitter.com/JeMweAhfTF

— David Molko (@molkoreports) May 27, 2020

Just minutes after the decision, Beijing – via the Global Times – has already responded.

Canadian court’s ruling on #Huawei exec #MengWanzhou unjustified, shows Canada’s judicial system has been hijacked by politics and #US bullying tactics, and may lead to “worst-ever” China-Canada ties: experts https://t.co/mjfnGOmErh https://t.co/gDf1OxlsM3

— Global Times (@globaltimesnews) May 27, 2020

Meng was arrested when she landed in Vancouver on Dec. 1, 2018, while President Trump was sitting down to dinner with President Xi in Buenos Aires during a notable episode that re-started trade talks between the world’s two largest economies. Shortly afterward, Trump suggested that she could become a political bargaining chip in the trade talks.

Of course, that was long before the coronavirus. We suspect that whatever happens now, if Meng lands in the US, prosecutors probably won’t be very amenable to a generous deal.