Category: zerohedge

Authored by Michael Snyder via The Economic Collapse blog,

What the head of the UN’s World Food Program just said should be making front page headlines all over the globe.  Because if what he is claiming is true, we are about to see global food shortages on a scale that is absolutely unprecedented in modern history.  Even before COVID-19 arrived, armies of locusts the size of major cities were voraciously eating crops all across Africa, the Middle East and parts of Asia, and UN officials were loudly warning about what that would mean for global food production.  And now the coronavirus shutdowns that have been implemented all over the planet have brought global trade to a standstill, they are making it more difficult to maintain normal food production operations, and they have forced countless workers to stay home and not earn a living.  All of this adds up to a recipe for a complete and utter nightmare in the months ahead.

David Beasley is the head of the UN’s World Food Program, and on Tuesday he warned that we could actually see famines of “biblical proportions” by the end of this calendar year.  The following comes from ABC News…

The coronavirus pandemic could soon double hunger, causing famines of “biblical proportions” around the world by the end of the year, the head of the World Food Programme, David Beasley, told the U.N. Security Council on Tuesday.

Beasley warned that analysis from the World Food Programme, the U.N.’s food-assistance branch, shows that because of the coronavirus, “an additional 130 million people could be pushed to the brink of starvation by the end of 2020. That’s a total of 265 million people.”

He described what we are facing as “a hunger pandemic”, and he insisted that urgent action must be taken in order to avoid a nightmare scenario.

But in some parts of the globe a nightmare scenario is already unfolding.  For example, close to half the population of South Sudan is currently facing starvation, and for many of them the only food that is available is what gets dropped from the sky…

The villagers hear the distant roar of jet engines before a cargo plane makes a deafening pass over Mogok, dropping sacks of grain from its hold to the marooned dust bowl below.

There is no other way to get food to this starving hamlet in South Sudan. There are no roads, and the snaking Nile is miles away.

Over in South Africa, the “chronic food shortages” have already become so severe that they are starting to spark rioting, looting and civil unrest…

UNREST broke out in parts of South Africa amid chronic food shortages sparked by the coronavirus pandemic.

Looters raided shops, attacked each other, the army and police after breaching one of the strictest lockdowns in the world.

Police fired rubber bullets and teargas to disperse the mobs but local community leaders fear more outbreaks of violence are imminent.

Here in the western world we don’t have to worry about such things yet, but without a doubt the number of needy people is rapidly rising.

This past Saturday, vehicles literally began lining up at 2 AM in the morning for a food distribution event at the San Antonio Food Bank…

The San Antonio Food Bank teamed up with Atascosa County to feed meals and hope to hundreds of people Saturday morning. Vehicles began to line up around 2 AM Saturday outside the county courthouse, winding through neighborhoods at least two miles away.

I have never heard of people lining up so early before.

I have heard of vehicles lining up at the crack of dawn around the country in recent days, but 2 AM is absolutely nuts.

But these people realize that when the food is gone there will be no more handouts that day, and there are many that are absolutely desperate to get something to feed their families.

As this coronavirus pandemic has created an enormous amount of fear all over the country, empty shelves have been reported in frozen food sections all over the nation, and the fact that an increasing number of meat processing plants are being temporarily closed down is certainly not helping things.  According to CBS News, at least 17 meat processing plants in the United States have been shut down so far…

Coronavirus infections in at least 17 meat processing plants across nine states are contributing to a spike in confirmed cases in the Midwest. Although 13 plants are already closed temporarily or operating at reduced capacity, Iowa Governor Kim Reynolds says shutting down plants would hurt farmers and the national food supply.

In a desperate attempt to keep as many facilities in her state open as possible, Iowa Governor Kim Reynolds has enlisted the help of the National Guard…

Hundreds of National Guard personnel are being activated in Iowa as coronavirus sweeps through meat-processing plants in a state that accounts for about a third of U.S. pork supply.

Iowa Governor Kim Reynolds said 250 National Guard members have been moved to full-time federal duty status and could help with testing and contact tracing for workers at plants operated by Tyson Foods Inc. and National Beef Packing Co.

The good news is that authorities are telling us that any product shortages should just be temporary and that all of these processing plants will eventually be brought back on line.

But for the planet as a whole, life is not going to be getting back to “normal” any time soon.

In fact, Takeshi Kasai of the World Health Organization is warning that we need to accept “a new way of living” until a vaccine finally arrives…

“At least until a vaccine, or a very effective treatment, is found, this process will need to become our new normal,” he said.

“Individuals and society need to be ready for a new way of living.”

But now that scientists have discovered approximately 30 different strains of this virus, that is going to greatly complicate matters.

Coming up with a successful vaccine for any coronavirus would be a historic feat, and now scientists also have to hope that they will pick the particular strain of COVID-19 that will become dominant in the future.

And of course many people around the globe will not want to take any vaccine that is developed under any circumstances.

So those that are thinking that there will be an easy way out of this crisis are likely to be deeply disappointed.

Meanwhile, the global economic downturn is getting deeper with each passing day, and global food supplies are getting tighter and tighter.

A global famine is coming, and the UN is sounding the alarm.

Unfortunately, most people in the western world are still not listening.

More than 125 years ago, the American financial press emerged from the primordial ooze with a simple mission: To help even the playing field between retail investors and professionals. The theory was that by lessening the ‘informational asymmetry’ that gave insiders an insurmountable edge over retail investors (or at least creating the illusion of a kind of informational equality), more workers would feel comfortable plunking their savings in the public securities markets. The financial press developed in tandem with securities regulators and – of course – the Fed, and has for years been part of the Wall Street firmament.

But unfortunately, nowadays, financial media organizations like CNBC mostly exist to serve their corporate masters (NBCUniversal in CNBC’s case) with an unceasingly bullish tilt, pumping markets with a never-ending barrage of ‘commentary’ from strategist/pitchmen, and offering little in the way of deeply researched reporting, other than the occasional scoop. We think that’s why our coverage of a particularly heated interview involving CNBC’s Scott “The Judge” Wapner, and Silicon Valley VC Chamath Palihapitiya, elicited such an intense reaction.

In a now-famous clip, Wapner, stunned by Palihapitiya’s assertion that the government shouldn’t bail out the airlines, demanded an explanation from the VC.

After dismissing the idea that Chapter 11 leads to mass layoffs as “a myth perpetuated by Wall Street,” Palihapitiya explained that the underlying business typically continues to run as normal during a corporate bankruptcy. That, after all, is the point of the whole process – otherwise companies would just go straight into liquidation to pay off creditors.

The video of the interview was evidently a hit on CNBC’s site, where Wapner said it attracted more than 10 million views. And so Palihapitiya was invited back to “The Halftime Report” on Wednesday afternoon – this time via video link – for a follow-up interview with Wapner to further explore some of his comments from last time.

Essentially, Palihapitiya doubled-down on his criticisms of government bailouts for wealthy private investors while delving into a new topic: The almost criminal stupidity of corporate stock buybacks. 

Public companies are supposed to act in the best interest of their shareholders, Palihapitiya explained. However, in recent decades, the distortion of what is ‘in the interest’ of shareholders has taken on a distinctly short-term bias. This has tended to reinforce some of the worst tendencies of American corporations – namely short-term thinking and practices like share buybacks which obviously do nothing for a company other than enrich its executives and shareholders by driving up the stock price and ideally juicing EPS. Thousands of the companies lobbying the government for bailouts have spent billions on bailouts over the last decade – many public companies even issued debt to finance their stock buybacks with the full blessing of the Ratings Agencies.

Any CFO could probably tick off a litany of reasons why stock buybacks make sense. If you asked, a business school professor might tell condescendingly explain how buybacks return capital to shareholders in a more tax-effective form than dividends (as long as equity prices are going up), while also contributing to the ‘efficient’ distribution of capital via free and open markets.

However, Palihapitiya points out that this type of reasoning – which depends on the categorical assumption that equity markets are always efficient distributors of capital – has enabled companies to borrow billions of dollars to buy back their shares, a practice that is obviously harmful to a company’s long-term odds of survival, yet excellent for goosing short-term profits.

“Executives who encourage buybacks and excessive debt-issuance are not exercising good long-term judgment,” Chamath said, adding that “in my opinion, buybacks are evidence of a growing strain of incompetence among CEOs and boards…and times like this is when it gets exposed.”

“The capital markets are efficient so when we do buybacks we allocate capital efficiently…my rebuttal is it’s clearly not true…at a time when we need our economy to be  efficient, we have people out making masks out of socks…and the profiteers buying beachfront condos.”

Though many CNBC viewers might be hearing this for the first time, it’s not exactly a novel view. Below our several of our many articles on the subject:

Big Tech’s Big Lie: Instead Of Hiring, Tech Companies Spent Tax Savings On Buybacks

Corporate Share Buybacks Looking Dumber By The Day

Buybacks Must Continue: AAPL, IBM Unveil Major Debt Issuance To Fund Shareholder-Friendliness

Chamath even cited IBM as an example.

For IBM The Buyback Frenzy Ends With A Bang As Q4 Revenues Plunge Most Since Lehman

For the morons who defend buybacks, consider this:

IBM bought back $140 billion of stock over last 20 years

IBM market cap is now $105 billion.

IBM just reported its lowest revenue since 1998.

How is this winning, again?

— Chamath Palihapitiya (@chamath) April 21, 2020

Now, the virus has exposed these inefficiencies, and in a particularly brutal and painful way – a way that will make it difficult to cover them up again (though one should never underestimate the capacity of the American people’s “built-in forgetter”). And if anything, it shows us why those arguing for restrictions or an outright ban on some or all buybacks might have had a point.

“Buybacks are the primary example of a growing strain of incompetence amongst CEOs and amongst boards,” Social Capital CEO Chamath Palihapitiya says. “And it’s where we need to start thinking about how the rules need to change.” https://t.co/dIbizumtqG pic.twitter.com/rCqkiyMxY7

— CNBC (@CNBC) April 22, 2020

While he doesn’t believe they should  be banned outright, stock buybacks should be prohibited in the ‘open market’, Palihapitiya said. Instead, companies should only be able to buy up shares via a tender offer to shareholders, just like they used to be. Remember: 2019 was the ‘year of the buyback’, the second-biggest on record after 2018. Trillions was spent, most of it fueled by debt. And now that these companies need savings to ensure their long-term survival, they’re turning their pockets inside out and insisting “we don’t have it.”

Most major American companies should have been extremely well capitalized after a record bull market. But for some inexplicable reason, they weren’t.

Buybacks have become such an intense fixation for corporate boards and executives, Palihapitiya said, that only one-third of companies in the S&P 500 even spend money on research and development. “So much of the infrastructure of this country has been left to decay and die in the hands of these profiteers,” said Chamath, who has accepted responsibility for being ‘one of them’ in the past.

“Equally as they are efficient, [free markets] are inefficient in other ways, and in those ways, there are rules that can be changed to make things more reasonable, so that when an exogenous shock happens, we, as a society, are not all left holding the bag,” Palihapitiya said later.

While discussing these “profiteers”, Wapner brought up the fact that Silicon Valley VCs, aka Palihapitiya’s peers, are some of the worst of the bunch, and how many who read VC legend Marc Andreessen’s latest screed scoffed at the idea of the man behind Juciero lecturing the world about innovation.

Chamath’s relationship with Sir Richard Branson is another reason why his comments about bailouts were of interest to CNBC’s producers. Branson is, of course, offering a private island as collateral for a UK government bailout for Virgin Atlantic, which is actually mostly owned by Air France and Delta. Chamath is chairman of one of Branson’s other companies, Virgin Galactic.

Asked about whether his friend’s airline should get a bailout, Chamath demurred.

But when pressed about Wednesday’s blank-check offering, Palihapitiya said he vetted every investor committed to buying large chunks of shares during the roadshow phase.

“I picked and approved every single line item before we closed the deal. When we priced this deal, I picked every single name. And that’s what you’re supposed to do. You’re supposed to partner with folks who you know are trusty and reliable and long dated.”

One reason Palihapitiya apparently scheduled his interview for Wednesday was because he was finally bringing his new “blank check” firm public. But we don’t really have time to go into all that now.

Moving on, after expanding on his criticism of stock buybacks, Palihapitiya laid into another favorite target: the Fed. He accused the central bank of playing a dangerous game with its rescue programs. Wapner seemed to take umbrage at this, and insisted that Chamath wouldn’t have been able to get his deal done if the Fed hadn’t LBO’d the entire market.

“That’s not true,” Chamath replied, before explaining that while the central bank managed to save the equity market (for now, at least),  “many of the consequences [of what the Fed did] will only be visible in the medium to long term”

“The stepping in to the repo market was already showing that the industry has a problem with leverage,” he added. Ultimately, the system of money printing and debt monetization simply reinforces the buck-passing and refusal to accept the negative consequences of investments and actions that has become endemic in the US.

“Buying billions and billions of dollars in junk debt? I’m not sure what the long term consequences of that are…I don’t think it has much of an effect on good companies running there business.”

But by far some of Chamath’s most scathing criticisms were directed at the government’s bailout plans, which he said would leave millions of consumers with too little, and too many companies that don’t need the money sticking it in the bank instead of spending it.

“We really need to think about more direct payments to people…70% of GDP is consumer spending…in the US the consumer has a tremendous capacity of leading the way. Instead were giving money to companies to give to consumers,” he said.

What’s more, the money being handed out to companies will do nothing to fix companies’ capital structure: It won’t alleviate any debt. To keep the money, companies only need to keep their employees on until September. Chamath believes that once September arrives, and heavily indebted companies are still facing a recessionary environment, a delayed round of additional layoffs will begin.

“I think we’ll see large waves of layoffs heading into Christmas 2020,” he said. The response to the virus is one example of where developing nations responded much more efficiently and effectively than large nations, Chamath said.

Instead of corporate handouts and a poorly functioning small-business bailout program, the White House could have simply cancelled the $1 trillion in student debt sitting at the DoE, a decision that at the very least would have boosted consumption, which represents 70% of US GDP is consumption based. The government also could have directly handed out money to people via the IRS.

But for whatever reason, those straightforward solutions weren’t politically feasible – even in a time of unprecedented crisis – and instead, America’s leaders opted for corporate handouts, a policy that’s fundamentally flawed. In the end, Chamath estimated that only 5 cents of every federal dollar spent will find its way into the hands of an actual consumer.

“When the money gets spent and the people still get let go…people will wonder…what did we accomplish?” Chamath said. Instead of handing out money to consumers, the Fed and the government decided to bailout corporations once again.

“There’s nothing stopping us from saying here’s two months, or here’s six weeks. Instead, we continue to defend practices that were not justifiable at any point in time where we can see that an entire US economy was completely unprepared…[for] an exogenous shock.”

And now millions of poor Americans will be forced to risk their health and their lives to go back to work if they need the money and earn, while the white collar workforce will remain cocooned and well-protected at home.

One easy fix to force companies that received bailout money to be more responsible would have been to require them to spend some of the money in improving their capital structure. Instead, companies will simply exhaust their lifelines and face the same reckoning…only a few months later.

As the interview drew to a close, Wapner lobbed one more softball Palihapitiya’s way, asking him whether equity valuations made any sense to him. Palihapitiya replied that he has no idea what’s going on with the equity market, which is trading as if it’s completely “divorced from reality.”

“I don’t understand particularly what’s going on and I think right now Wall Street is entirely divorced from mainstream. In my opinion, the stock market and the bond market should reflect actual affairs on the ground, and right now…[they don’t].”

And looking ahead to the end of the year, Palihapitiya doesn’t see too much promising news coming down the pike.

“Here’s what I see. I see delinquencies ticking up…I see hundreds of thousands of people getting furloughed…I see us appraoching 25% unemployment…and I see the stock market largely because of the practices of the Fed ignore what is happening.”

Watch a clip from the interview below:

After two days of carnagery, everything (almost) was up today…

Oil futures rallied across the complex led by the June contract that ripped higher across the US cash equity market open…

June WTI managed to squeeze up to $14…

But, in another lesson for the retail bagholder, as they ate the contango losses, USO (the Oil ETF), plunged 9% today…

Gold futures surged 3% higher – tagging $1740…

Silver also soared…

US equities managed gains on the day – after two ugly down days – with Nasdaq (again) squeezed over 3% higher as Trannies were unable to hold green… (weak close, perhaps after an unexpected jump in California COVID deaths)

But none of it was enough to get green on the week…

The Dow bounced 500 points hihger but was unable to get back to its critical 50% retrace levels…

The S&P 500 was unable to reach its 50DMA once again…

VIX was down on the day but held above 40 and remains in backwardation with a kink in the curve around the election…

Source: Bloomberg

Traders were very excited at NFLX streaming subs last night but as they realized the malarkey that saw subs double expectations but revenues only meet, they sold… (as someone said this morning, forgive us for not remembering – “if they only got an extra7MM subs during the biggest pandemic of all time, their growth is over…”

The Dollar rebounded notably intraday, higher for the 3rd days in a row…

Source: Bloomberg

Cryptos all rallied strongly on the day…

Source: Bloomberg

But…

Bonds were lower (in price) with 2Y, 5Y, and 7Y yields now flat on the week (30Y was worst performer on the day, up 6bps)…

Source: Bloomberg

10Y bounced off recent lows again…

Source: Bloomberg

Gold is at a record high against the yuan…

Source: Bloomberg

And extends its record run against the euro…

Source: Bloomberg

Finally, we note that the S&P 500’s dividend yield has never been so high relative to 10Y TSY Yields…

Source: Bloomberg

Are dividends all about to be slashed? Or are yields just too damn low?

And while stocks may have bounced recently, implied correlations suggest systemic risks remain extremely high…

Source: Bloomberg

While nobody knows when the US economy will fully recover from the coronacrisis pandemic, what the economy will look like, or where the S&P will be one year from now, we do know how much money the current bailout has cost. And, at over $10 trillion to date – and counting – the Covid-19 bailout is now officially the biggest bailout in history.

Deutsche Bank’s Jim Reid has put together the following chart graphing the history of global moral hazard all large  bailouts/interventions, covering both government and central bank moves, seen each year since 1970 in US inflation adjusted terms.

There is also a graph on a log scale so as to better identify the earlier bailouts and get a rough feel visually for the numbers.

For the 2020 bailout, DB has aggregated the fiscal and monetary support programs announced so far from the US and the largest economies in Europe, which means that the final cost of the current crisis could be substantially higher: “Obviously we won’t know how much will be used until much further down the road but these are the main commitments undertaken so far as we see them.”

Reid has also added overall G7 debt (private and public) to GDP to the charts to point out the patently obvious, namely that as global debt gets higher so does the level of bailouts/intervention needed to protect the system. The strategist also made a rough approximation for G7 debt/GDP for 2020.

Some more observations:

• Most bailouts before the GFC tended to be less than $10bn in today’s inflation adjusted terms. The S&L ($293bn in 2020 inflation adjusted terms) and Peso  ($93bn) crises saw higher numbers but still relatively small for more recent times.
• The GFC moved us from ten billion being a big number to a trillion being the new bail-out currency.
• This Wu Flu crisis has moved us towards ten trillion plus being the bailout currency globally.

As Reid puts it, “the prior 20-25 year bailout culture and extremely low policy rates has left us with ever higher and higher debt requiring the bailout numbers to also go higher and higher on any outside shock.” And the punchline:

“Even without the covid-19 shock, the next recession would have likely required multiple trillion dollars of intervention to protect the current system.”

Which, of course, is correct, but why not use the “crisis” to unleash the biggest intervention in history and institutionalize helicopter money in the process, a key event that will allow the establishment to kick the can for several more years.

And while Reit would stress “the extraordinary nature of the covid-19 shock”, the point is that we are once more in too big to fail territory and the authorities are doing everything they can to minimise defaults in this crisis – defaults which somehow are nobody’s fault yet the world has never had more debt making it the most prone to even the smallest shock. As such to say that the aftermath of the coronacrisis is nobody’s fault is a borderline crime – it is the fault of everyone who believed that the Fed has made any future crashes impossible… starting with the Fed itself. After all who can forget Janet Yellen’s idiotic declaration that there will be no more crises in our lifetime. Well, why not just issue record amounts of debt in that case. Fast forward 3 years later and all that debt needs to be bailed out.

Additionally, as Reid concludes, “what the massive crisis does to productivity in the future is an open question as is whether we can ever see proper capitalism again with current levels of global debt/GDP.”

Spoiler alert: no.

Update (4/22/2020): After all after coming under pressure from President Trump, Treasury Secretary Steven Mnuchin and Education Secretary Betsy DeVos, Harvard has announced that it won’t take coronavirus stimulus funds after all, a reversal from their prior position that they would use the money set aside in the coronavirus stimulus for “direct assistance to students.”

“There has been confusion in recent days about funds allocated to Harvard as part of the CARES act,” reads a statement,” which notes that the funds were automatically allocated to them, and that they “did not apply for this support, nor has it requested, received or accessed these funds.”

Harvard confirms it won’t take federal stimulus money after pressure from Trump, Mnuchin and DeVos.

“Harvard has decided not to seek or accept the funds allocated to it by statute,” per university statement (via @biancaquilan) pic.twitter.com/cRjwDFQ8xS

— Michael Stratford (@mstratford) April 22, 2020

*  *  *

The resentment against publicly-traded companies and major corporations and enterprise who abused the Treasury’s $349 billion small and medium business bailout by applying for the Paycheck Protection Program is growing.

Earlier today, we reported  that over 80 publicly listed companies tapped the PPP – which is really a grant if used to pay wages – which not surprisingly ran out of funds just days after it was launched. The most prominent public company to take the funds was Shake Shack, which sparked backlash after receiving $10 million in PPP funds through JPMorgan. Sensing pitchforks in its its immediate future, the company announced on Monday that it would be returning the funds. It then sold 3.4 million shares of stock  raising $136MM in gross proceeds.

Another company which tapped into the PPP was Ohio-based biotech Athersys, which received $1 million through the program despite raising nearly $60 million in a Monday stock offering after its shares have nearly doubled YTD. Meanwhile Nikola Motor – backed by Fidelity and hedge fund ValueAct, announced a $4 billion valuation in early March when it announced a merger with VectoIQ. The company borrowed $4 million from the PPP according to a disclosure. Ruth’s Chris steakhouse made $42 million in profit on $468 million in revenue last year, yet tapped $20 million from the PPP.

The figure below lists the 40 largest PPP loans that inexplicably went not to small businesses but to major corporations which not only have access to institutional debt capital markets – unlike most mom and pop shops – but can also sell stock and raise cash overnight, a luxury that America’s small business – which employ over half the US labor force -do not have.

One especially large organization that supposedly received millions in bailout loans was none other than Harvard. 

Yesterday we reported  that as part of the $2 trillion CARES Act, $14 billion was set aside to support higher education institutions – ostensibly those without billions already in the bank. Harvard, which has a $40 billion endowment, was set to receive $8.7 million in federal aid. Harvard points out that at least half of which has been mandated for emergency financial aid grants to students, which we would note that they can cover themselves

Hilariously, Harvard’s Crimson pointed to the risk that their endowment could shrink due to market volatility – maybe it will request a bailout next too? – and that the University’s financial situation is “grave.”

None of the made an impression on President Donald Trump, however, who during Tuesday’s Wu Flu briefing, said he plans on asking Harvard University to give back more than $8 million given to them under the CARES ACT.

“I’m going to request it,” Trump told reporters at the White House, singling out the Ivy League school. “Harvard is going to pay back the money. They shouldn’t be taking it.”

“I’m not going to mention any other names, but when I saw Harvard — they have one of the largest endowments anywhere in the country, maybe in the world. They’re going to pay back the money,” the president added.

Asked if he was confident he would be successful in asking Harvard to return the money, Trump said that if the university “won’t do that, then we won’t do something else.” The president also noted the size of the university’s $40 billion endowment.

President Trump: “Harvard’s going to pay back the money… They shouldn’t have taken it.” pic.twitter.com/moC8WrWJ54

— The Hill (@thehill) April 21, 2020

Harvard responded shortly after Trump’s demand, saying it did not receive funds through the Paycheck Protection Program and that the school is committed to using all of the funds to cover financial assistance to students.

“Like most colleges and universities, Harvard has been allocated funds as part of the CARES Act Higher Education Emergency Relief Fund. Harvard has committed that 100% of these emergency higher education funds will be used to provide direct assistance to students facing urgent financial needs due to the COVID-19 pandemic,” Harvard spokesman Jonathan Swain said. Again, it was unclear how said funds were so critical to the Harvard educational system – which charges $70,000 a year (for video conferences) and has $40 billion in its piggybank – that the college would be unable to provide “assistance” to students facing financial needs if it did not get money that could have gone to some other business that actually needs it.

“This financial assistance will be on top of the support the University has already provided to students – including assistance with travel, providing direct aid for living expenses to those with need, and supporting students’ transition to online education,” Swain added.

So, basically, bailout funds that are footed by the US taxpayer – in the form of trillion in new debt that will be repaid by all Americans, are now going to poor Harvard students. Wait, did we say “poor” Harvard student? According to the NYT, the median family income of a student from Harvard is $168,800 (95 percentile), and 67% of students come from the highest-earning 20% of American households. About 15% come from families in the top 1% of American wealth distribution.

* * *

Harvard is just one example of the thousands of companies which used their banker connections to get to the front of the line in getting “much needed” stimulus funds, even as millions of small business are waiting to this day for their loans. 

“I will comment there have been some big businesses that have taken these loans. I was pleased to see that Shake Shack returned the money,” Mnuchin said. “The intent of this was not for big public companies that have access to capital.”

Mnuchin also said he wanted to give companies the “benefit of the doubt” by assuming they didn’t understand the requirements but warned of consequences for large businesses that take advantage of the program. Asked to expand on what those consequences could be, Mnuchin did not provide any specifics.

“We’re going to put up very clear guidance so that people understand what the certification is, what it means if you are a big company,” Mnuchin said.

Some have called for reform to the program, run by the Small Business Administration, in order to ensure that the funds go to small businesses in need.

The good news is that so far there has been little rampant fraud as some feared. Instead, the crony capitalism that the US has become so famous for was on full display, and instead of bailing out the poor, the US government – together with the Fed – has once again bailed out those who spend $10 million for their annual private jet maintenance.

In short, nothing has changed.

Authored by Steve Watson via Summit News,

As PC plods in the UK and keystone cops in the US continue to bumble around trying to operate Chinese made drones, numerous tech companies are developing more sophisticated tools that will allow big brother law enforcement to more effectively police social distancing rules.

Californian software developer Landing AI has created video surveillance software that watches people and sounds the alarm if they get too close to one another.

“Landing AI has developed an AI-enabled social distancing detection tool that can detect if people are keeping a safe distance from each other by analyzing real-time video streams from the camera,” the company proudly boasts in a statement.

Watch:

Landing AI explain that the system works by using an artificial ‘neural network’ to detect each person and puts them (oh the irony) in a box. Then, if two boxes get too close to each other they change from green to red. At that point it will be up to the police to send in compliance robots, kill squads, or whatever they have decided we deserve.

A similar technology is already being introduced by Amazon in its warehouses, with the company threatening workers with the sack, if they violate social distancing “guidelines”.

Police in Westport, Connecticut are also going to be testing a “pandemic drone” that monitors citizens’ temperatures from almost 200 feet away and detects sneezing and coughing as well as heart and breathing rates.

Developed by Draganfly Inc., the software loaded onto the drone cameras also identifies individuals, whose safe distance areas turn red if they get too close to each other.

With the justification of the Chinese coronavirus now firmly embedded in society, there is a rush on to profit from stripping away privacy and personal freedoms.

If this is our future, we truly have arrived at the prison planet.

By now even the 165,727 “professional investors” who are long the USO ETF on the free, glitch-prone platform Robin Hood, are aware that the problem facing global oil production is that there is simply no storage where to put all the physical oil (as we warned in late March).

And if even the army of Robinhood-ers now know how impossible it is to find space for physical oil on the continental US, then Saudi Arabia – which sparked the current crude crisis and which will not stop until shale is completely crushed – is certainly aware.

Which is why with the US unable to store its own output, some 50 million barrels of Saudi oil are on their way to the United States and due to arrive in the coming weeks, piling even more pressure on markets already struggling to absorb a glut of stocks, Reuters and MarineTraffic reported.

Shipping data showed the more than 20 supertankers – each capable of carrying 2 million barrels of oil – were sailing to key U.S. terminals, especially in the U.S. Gulf. Three separate tankers, also chartered by Saudi Arabia, were currently anchored outside U.S. Gulf ports.

According to Reuters sources, the kingdom had tried to seek storage options for the cargoes from tanker owners when the ships were chartered last month, but many pushed back given booming rates and not wanting tied up vessels.

The result was an outpouring of anger from the increasingly political hedge fund manager, Kyle Bass, who tweeted earlier that “the Saudis and Russians have declared war against US shale energy companies. It seems they weren’t happy with American energy independence. Storage full..largest glut in history..Saudis are sending us a 50 million barrel oil bomb. How negative will June crude go?”

The Saudis and Russians have declared war against US shale energy companies. It seems they weren’t happy with American energy independence. Storage full..largest glut in history..Saudis are sending us a 50 million barrel oil bomb. How negative will June crude go? #Oil #USOIL https://t.co/oiNfkI2pfM

— 😷Kyle Bass😷 (@Jkylebass) April 22, 2020

The anger at the incoming Saudi “bomb” has spread all the way to Washington, and U.S. officials said in recent days that Washington is considering blocking Saudi shipments of crude oil, or putting tariffs on those shipments, adding to difficulties for the cargoes now on the water.

U.S. senator Ted Cruz said on Twitter on Tuesday: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”

20 tankers—filled w/ 40mm barrels of Saudi oil—are headed to the US. This is SEVEN TIMES the typical monthly flow. At the same time, oil futures are plummeting & millions of US jobs in jeopardy. My message to the Saudis: TURN THE TANKERS THE HELL AROUND. https://t.co/gYoQzvHAEQ

— Ted Cruz (@tedcruz) April 21, 2020

In response, two sources said Saudi Arabia was looking into whether it could re-route the cargoes elsewhere if the United States halted imports.

Oil traders active in European and Asian markets said there was expectation that the Saudis would look to divert the cargoes to other markets if a ban was imposed… which in turn would put huge pressure on storage tanks in those two regions, and depress local oil benchmarks.

“Europe looks full, but surely if the Saudis offer it at really cheap levels, buyers would take it,” a source with an international trading firm told Reuters. “Some still have storage spaces or may agree to float it for some time.” A source at a separate oil trading firm active in Asia said they expected many of the barrels that were bound for the United States to flow to the region if exports were blocked.

* * *

“This could prove to be a very expensive exercise for Saudi Arabia as whatever happens with the cargoes and the tanker owners will need to be paid demurrage (for the ships) and those costs would have been locked in when the market was higher to secure the charters,” a shipping source said. “While this is an expensive gamble for the Saudis, shutting off production would have been proved even more costly.”

Additional costs – or demurrage – were estimated at $250,000 a day based on rates last month when a lot of vessels were booked. Daily tanker rates soared to nearly $300,000 in the past month and though they have retreated to $150,000 a day this week, they are still significant and would be in addition to other costs including insurance if the ships are held up.

Even if the Saudi tankers make it to the US, it is not clear who would want their cargo. With the economy shut down, driving virtually non-existent and gasoline demand falling off a cliff, refiners have been absent from oil markets in the United States in recent days as they slash processing rates and as demand dries up, physical oil market sources said. “There is more reluctance now with fresh shipments as refiners in the U.S. have no homes for the oil,” another shipping source said.

Marathon Petroleum, Exxon Mobil, Chevron and Phillips 66, which traditionally among the biggest U.S. buyers of Saudi crude, have gone radiosilent.

As Reuters adds, most of the large buyers of Saudi oil are along the West Coast. The region accounts for about half of all Saudi crude imports to the United States, according to the EIA. Storage there was already 65% full as of April 10; two weeks later and that number is approaching 100%. The Gulf Coast – which is the second biggest US destination for Saudi oil – was about 55% full.

The imminent arrival of the Saudi tankers comes at a time when the main U.S. storage hub in Cushing, OK, is expected to be full within weeks.

The question reached the very top on Monday, when President Trump said he would “look at” possibly stopping Saudi shipments to the United States. While it wasn’t clear what Trump had in mind, last week, Frank Fannon, the U.S. assistant secretary of state for energy resources, said tariffs were a possibility.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Pulling the sleeve down to hide the tracks doesn’t mean the addict is cured.

Just for a change of pace, can we be bluntly honest about the U.S. economy? It’s difficult to do because we’ve chosen to ignore all the realities, much like a family that hides all the addictions, drunkenness and lies in a dysfunctional household to maintain the outward illusion of a happy functioning family.

It’s extraordinarily costly to maintain such a demanding masquerade. The psychological toll is immense, and the financial ruin that’s always threatening to collapse the flimsy facade feeds the most destructive coping strategies.

Please don’t claim that Daddy and Mommy aren’t really addicts, addicted to lies, cheating and stealing to fund their corruption and maintain the absurdly threadbare happy-story facade of normalcy.

Being honest is painful but freeing. Once all the ugliness is exposed to sunlight, then healing becomes possible. As long as reality is cloaked, hidden, explained away, etc., the destruction only deepens until complete collapse of the masquerade is the only possible outcome.

We’ve reached that point: we can no longer deny the U.S. economy is little more than a grab-bag of skims, scams, fraud and corruption. Even if Covid-19 vanished from the Earth tomorrow, or the entire economy opened tomorrow, the collapsing of the fraud bubble cannot be reversed, any more than the addict can be “cured” with some makeup to mask the devastation and clean clothing to hide all the tracks.

Let’s start with the most risible fraud: “value.” Every skim and scam claims to be “creating value” for shareholders, customers, the planet, etc. But it’s all fraud and lies. No value is being created; what’s really happening is entrenched insiders have established corrupt relationships that funnel income streams into their own pockets at the expense of everyone else, who must be kept in the dark about how the skim/scam actually works.

“Value” is now defined as private gains skimmed under the false claim of “value to customers.” Behind the bogus PR, product quality is ruthlessly slashed, quantity reductions are hidden by larger packaging, planned obsolescence is the Prime Directive of every corporation because all these frauds increase profits, which flow to an increasingly thin slice of America’s financial elites.

The entire stock market rally of the past 20 years is nothing but a gigantic fraud based on stock buybacks funded by debt. Stocks go up because the majority owners of the stock borrow money from a banking sector that gives nearly free money to financiers and corporations. The corporate insiders buy back shares with the borrowed money, and the company services the loan.

The company’s income is devoted to paying the debt taken on to boost the personal wealth of insiders. That’s fraud. Or if you prefer, embezzlement.

Take away the stock buyback scam and the U.S. stock market collapses. Take away a Federal Reserve devoted to lavishing nearly free money on financiers and corporations and the buyback scam collapses.

Consider WeWork, all the scooter start-ups, Netflix and Tesla. WeWork was a scam from the start, but there was so much money to be skimmed in selling the fraud to the public that everyone in Wall Street and the corporate media promoted the scam by refusing to look at the actual business.

The same dynamic fueled the absurd explosion of scooter start-ups, as if the business model could ever be profitable. No, the business could never be profitable, but unloading worthless shares in multiple rounds of venture capital was extremely profitable–for insiders.

As for Netflix and Tesla, the more money they lose, the more valuable they become. The key fraud here is “disruption.” If a company can be promoted as a “disruptor,” the sky’s the limit, Baby, because “disruptors”, well, disrupt, and presto-magico, somewhere down the road they become immensely profitable because, um, they disrupted something or other.

The greater the emotional pull of the scam, the easier it is to promote. Garsh, isn’t it wunnerful how a college degree guarantees a lifetime of high earnings and financial security. Except that isn’t guaranteed at all. What’s guaranteed is insiders are skimming fortunes in the higher education cartel and its fraudulent handmaiden, the student loan industry.

Then there’s sickcare, Corporate America’s rip-off skimming operation masquerading as “healthcare.” Caring has nothing to do with it; the driver is greed, maximizing profits by establishing corrupt relationships with politicos and regulators to insure staggering sums of federal monies are sluiced into sickcare’s insatiable maw.

National defense is another emotional cover for boondoggles and insider profiteering. We won World War II, doggonnit, so just ignore the $1,000 hammers and the $100 billion over-runs.

Every institution in America is little more than a cover for insider profiteering via skims, scams, rackets, fraud and embezzling schemes, all sanctified as “legal” via a thoroughly corrupted legal system and judiciary.

Debt-serfdom is packaged and sold as a “middle class lifestyle.” Political neutering, i.e. powerlessness, is sold as “party loyalty.” And so on, in an endless parade of skims and scams packaged and sold to cloak the ugly ascendancy of greed, fraud and lies.

We live in a constantly distorted house of mirrors devoted to maintaining useful illusions of “democracy,” “free markets” and other fairy tales we tell ourselves to reduce the pain of living a vast, all-encompassing fraud in which everyone who isn’t a grifting insider is the loser.

We don’t just have financial bubbles that are popping; we have bubbles in trust and credibility that are popping, too. All the lies, skims, scams, excuses, frauds, bezzles, artifices, profiteering, promotional schemes and rackets are unraveling, not because the virus shut down the economy but because the enormity of all the corruption, lies and fraud is now so great that the entire status quo is collapsing under its own weight.

Pulling the sleeve down to hide the tracks doesn’t mean the addict is cured. The illusion, the facade, the masquerading of normalcy, are no longer sustainable. The Monster Id can no longer be hidden, and simulacra no longer substitute for reality.

Trust, credibility, transparency and accountability have all been sacrificed for personal gain, at the expense of the stability of the entire system.

Once the system collapses, we all lose, even the insiders who have traded every shred of their soul for financial gains, at the expense of everything that was once held dear.

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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.

Update (1450ET): Just as we suspected and detailed below, The ECB has followed The Fed’s path by accepting junk debt as collateral for its lending facilities.

In an effort to mitigate impact of possible ratings downgrades on collateral availability, the European Central Bank says it will “grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements.”

As we noted below, this is all being done to avoid (among other things) a potential catastrophe when Italy is downgraded to junk (expected Friday).

Full ECB Statement below:

• ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements

• Appropriate haircuts will apply for assets that fall below the Eurosystem minimum credit quality requirements

• Decision reinforces broader package of collateral easing measures adopted by the Governing Council on 7 April 2020, which will also remain in place until September 2021

• ECB may decide further measures, if needed, to continue ensuring the smooth transmission of its monetary policy in all jurisdictions of the euro area

The Governing Council of the European Central Bank (ECB) today adopted temporary measures to mitigate the effect on collateral availability of possible rating downgrades resulting from the economic fallout from the coronavirus (COVID-19) pandemic. The decision complements the broader collateral easing package that was announced on 7 April 2020. Together these measures aim to ensure that banks have sufficient assets that they can mobilise as collateral with the Eurosystem to participate in the liquidity-providing operations and to continue providing funding to the euro area economy.

Specifically, the Governing Council decided to grandfather the eligibility of marketable assets and the issuers of such assets that fulfilled minimum credit quality requirements on 7 April 2020 in the event of a deterioration in credit ratings decided by the credit rating agencies accepted in the Eurosystem as long as the ratings remain above a certain credit quality level. By doing so, the Governing Council aims to avoid potential procyclical dynamics. This would ensure continued collateral availability, which is crucial for banks to provide funding to firms and households during the current challenging times.

The following decisions have been taken:

• Marketable assets and issuers of these assets that met the minimum credit quality requirements for collateral eligibility on 7 April 2020 (BBB- for all assets, except asset-backed securities (ABSs)) will continue to be eligible in case of rating downgrades, as long as their rating remains at or above credit quality step 5 (CQS5, equivalent to a rating of BB) on the Eurosystem harmonised rating scale. This ensures that assets and issuers that were investment grade at the time the Governing Council adopted the package of collateral easing measures remain eligible even if their rating falls two notches below the current minimum credit quality requirement of the Eurosystem.

• To be grandfathered, the assets need to continue to fulfil all other existing collateral eligibility criteria.

• Future issuances from grandfathered issuers will also be eligible provided they fulfil all other collateral eligibility criteria.

• Currently eligible covered bond programmes will also be grandfathered, under the same conditions.

• Currently eligible ABSs to which a rating threshold in the general framework of CQS2 applies (equivalent to a rating of A-) will be grandfathered as long as their rating remains at or above CQS4 (equivalent to a rating of BB+).

• Assets that fall below the minimum credit quality requirements will be subject to haircuts based on their actual ratings.

Non-marketable assets are not part of the scope of the temporary grandfathering. All measures will enter into effect as soon as the relevant legal acts enter into force. The measures will apply until September 2021 when the first early repayment of the third series of targeted longer-term refinancing operations (TLTRO-III) takes place. The same end date will also apply to the collateral easing measures announced on 7 April 2020.

The ECB may decide, if and when necessary, to take additional measures to further mitigate the impact of rating downgrades, particularly with a view to ensuring the smooth transmission of its monetary policy in all jurisdictions of the euro area.

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In English, the excuse for allowing junk-rated debt is that any downgrades to junk (or current junk ratings) may be ‘transitory’ due to the virus.. and thus The ECB will look through the cycle (hoping that the ratings will magically recover)… all of which is farcical since ratings by their nature look through the cycle anyway. But that’s not really the point is it – just enable the credit to flow.

 

*  *  *

Now that the Fed has opened the pandora’s box of moral hazard by purchasing select junk bonds, every other central bank would like a piece of the action. And sure enough, as Bloomberg reports, on Wednesday evening the ECB will hold a call where they may discuss whether to accept junk-rated debt as collateral from lenders.

Translation: the ECB is about to announce it will accept junk bonds as eligible collateral, and why not: the Fed is doing so, so it makes sense for everyone else to pile on.

According to Bloomberg, in a step similar to the Fed’s backstopping of fallen angel high yield paper, the ECB’s conference could be “intended to head off concerns that some sovereign and corporate bonds will soon be downgraded to non-investment grade because of the cost of fighting the coronavirus pandemic.”

Already a storm is brewing: on Friday S&P is set to review credit rating, which it currently ranks two notches above investment grade with a negative outlook. A downgrade would be a step toward potentially excluding the euro zone’s third-largest economy from the ECB’s refinancing and asset-purchase programs, precipitating a crisis.

Yields on Italian debt have risen in recent days. The premium investors demand to hold 10-year Italian debt over Germany’s soared 25 basis points on Tuesday to 263 basis points, despite the country managing a successful bond sale. In raising more than 110 billion euros ($119 billion), it reminded investors just how much it needs the cash. Barclays Plc sees outflows of as much as 200 billion euros if the nation’s rating is cut below investment grade.

As we discussed over the weekend, ratings have become a pressing concern in markets as lockdowns spark the biggest recession in decades. Moody’s Investors Service, which will review Italy in May, rates the nation at its lowest investment grade. While the ECB’s current rules mean Italy would have to be cut to junk by each of S&P, Moody’s Investors Service, Fitch Ratings and DBRS to be excluded from its operations, the prospect of downgrades is unnerving investors. A cut in the sovereign would flow through to the corporate bonds and commercial paper that the ECB also buys and takes as collateral.

Last week, Moodys reported that its “B3 Negative and lower list” soared to its highest tally ever — 311 companies. That tops a former peak of 291 companies, reached during the credit crisis of 2009 and the commodity-related downturn in April 2016. At 20.7% of the total rated spec-grade population, the list also shot up above its long-term average of 14.8%, and closing in on its all-time high of 26.1%. This spike is the result of the confluence of a coronavirus outbreak, plunging oil prices, and mounting recessionary conditions, which created severe and extensive credit shocks across many sectors, regions and markets, the effects of which are unprecedented.

Unconvinced by the recent run up in shares, Bank of America has downgraded Tesla to “Underperform” Wednesday morning and moved their price target to $485 from $500. 

Even though analyst John Murphy referred to Tesla as a “trailblazer” in the EV market, investors can’t ignore ongoing and future production challenges, a “spike/burnout” pattern for new models and the company’s continued cash burn, Murphy said. He also pointed out low production/deliveries and elevated costs, especially costs associated with the company’s new facilities.

In other words, Murphy seems to be embracing a bit of reality – not something that Tesla analysts (or shareholders) are especially well-known for doing. The fact is that Tesla remains shut down in Fremont, as it has for the better part of the month, and that Q2 has likely already been severely impacted, despite Tesla’s 88,000 Q1 deliveries number they somehow were able to post.

Murphy is also cautious of the competitive EV landscape in his note. He put a $485 target on shares, saying:

“Our $485 PO is based on a probability-weighted scenario analysis, applying average EV/Sales (0.3x/2.5x/4.5x) and EV/EBITDA (3x/9x /17x) multiples from a set of comparable companies to our 2021-2022 estimates.

We assume a 60% probability for our Base case, 30% probability for Bull case, and 10% for Bear case given TSLA’s admirable progress over the past several years.” 

Murphy also cut his global volume forecasts for autos, saying he believed the recovery will be “tepid” U-shape as economies are reopened.

Recall, just 5 days ago, Morgan Stanley came out and expressed similar doubts. As we noted then, when Adam Jonas is coming out and pouring cold water a Tesla rally, you know things must really be getting out of hand.

But such was the case last Friday when Jonas called the recent move higher in Tesla shares “excessive” given the company’s earnings and demand headwinds this year. 

Jonas wrote in his note that the stock is discounting volume of roughly 4 million units by 2030 by pricing the stock at nearly $750. Jonas’ price target of $440 is based on slightly more than 2 million units, he noted.

Jonas was quick to point out that investors view Tesla’s valuation as reasonable because they are comparing it to megacap technology stocks. He warned that investors need to consider significant inherent differences between Tesla’s business model and the capital intensive nature of the business. 

He concluded his note by reminding readers that Tesla faces execution risk to many of its business objectives that could be higher than many mature companies. 

Regardless, Tesla will open up for trading Wednesday about $230 higher than the mean price target from Morgan Stanley and B of A.