Category: zerohedge

Submitted by Michael Every of Rabobank

Another day, another dollar.

Of course, that’s not strictly true. For the average market economist trying to predict that dollar on waking up it is more usually 0.99, 0.98, 1.01, 1.0, 1.01 – and then out of the blue minus 6 trillion.

For the epidemiologists at Imperial College it’s also a wild ride. To recall, first of all their model said the UK only needed to wash its hands and the herd would be immune to COVID-19; then the model was tweaked and 250,000 to 500,000 were going to die; then we all locked down and only 5,700 were going to die (leading some to scream “open the economy!”); and now, echoing the Oxford University team, they estimate that up to 2.7% of the UK population may already be infected, meaning 1.8 million people, and implying that the we are totally mismeasuring how many people have a symptomless and/or pain-free virus experience, and that the COVID-19 mortality rate is really very low.

Except that is isn’t 2.7%. It’s anywhere from 1.2% to 5.4% of the population, and once again this is based on guessing the R0 rate and the virus inception date and multiplying madly. And once again it fails to account for the fact that 90% of tests being done on people who already face virus symptoms and/or are at risk are coming back negative. Faulty tests, or is it just my Rebel Sum standing up to the might of the Imperials? (“Now witness the firepower of this fully armed and operational university!”) At least the thrust of their argument is that lockdowns are necessary rather than “open the economy!”

As they argue over how many viruses can fit on the head of a pin, the daily deaths in Italy and Spain number painfully close to 1,000 and New York’s fatalities are also rising rapidly – just like we normally see at this time of year in ‘flu season – not. Indeed, the latest data from China suggest that the mortality rate is 4% for those hospitalised in their 40s and 8% in their 50s.

Meanwhile, in China we are back to a familiar world of another day, another 1.06 dollars. The official Chinese PMI for March reported that manufacturing leaped from 35.7 all the way back to 52.0, vastly higher than the 44.8 expectation. All those stories you have read about factories being shuttered because export demand has dried up? Wrong. All those reports about local officials telling people to leave lights on to boost electricity demand and let foreign satellites see a ‘working’ plant? Wrong. All the data-trackers saying China is, at best, running at 80% of capacity, so down 20% y/y from where it should be? Wrong. Even the services PMI leaped to 52.3 from 29.6, which is interesting given all cinemas are still shut and reports are flying round talking about 18m people losing their jobs and Chinese consumers retrenching. (‘As Rest of World Locks Down, China Struggles to Get Shoppers Out’ says Bloomberg today; even the World Bank is saying the best case for China’s economy is 2.3% y/y growth)

When we saw the weak February PMI and associated terrible January-February retail sales, industrial production, and investment data it seemed we were getting accurate snapshots of what was going on in the Chinese economy for once. So, back to business as usual in more ways than one? Not quite. First, the PBOC just slashed its 7-day repo rate a record 20bp and the government are talking about more fiscal stimulus being needed: that is hardly cheer-leading. Second, these PMI surveys asked Chinese firms how the feel now compared to February – NOT to how they usually operate. The exercise is therefore incompatible with the normal PMI metric – which is where the consensus forecast of a recessionary 45-ish print rightly sat.

Once again, markets are going to have to pick their way through a data asteroid field to get to an accurate understanding of what is going on.

“Sir! The possibility of successfully navigating an asteroid field is approximately 3,720 to 1!”

“Never tell me the odds!”

Meanwhile, also showing how much success they are having against the virus, and in line with what I wrote yesterday, the White House and Congress are already planning the next phase of fiscal stimulus even before the current one hits anybody’s pockets. It appears help is on the way for the mortgage market, as mortgage firms complain the Fed’s action is wiping them out, for the travel industry, and for states and local governments. Some of that will be bailouts and some of it might even be actual economic stimulus, with the total package being talked about in the range of USD600bn. Once upon a time that was a lot of money.

Allow me to repeat once again: the crucial factor for markets to consider imminently is that not all economies and currencies are created equal. Not everyone is going to be able to get away with 20% fiscal deficits paid for by central banks. Only the US is guaranteed to be able to do so without crushing its currency due to the USD reserve function. The vast majority won’t, and there will be a high price paid for any stimulus.

Let’s see how AUD and NZD and CAD and GBP, et al., ultimately fare as they go the zero rates and unlimited QE route as if there is natural market demand for them globally; and emerging markets are in a far deeper hole if they want to push back fiscally against the ‘rules of the game’ in the same way that developed economies are.

The underlying issue is still ‘another day, another US dollar’. And there aren’t that many to go round in EM space in particular, doubly so when export earnings evaporate ahead – which they will. That key dynamic is set to trigger the next round of global turmoil ahead. Coming soon: Imperial vs. Rebel sums fighting over the USD Death Star.

Until recently, funds that imposed redemption “gates” on their investors were those who had suffered a substantial mismatch between the illiquidity of their investments and the liquidity preference of their investors (which tends to be instantaneous), usually as a result of some exogenous event such as Brexit, or a media report sparking investor fears.

As a result, over the past 4 years we had seen a procession of prominent funds gating investors, starting with the junk bond fiasco at Third Avenue which led to a premature end for the asset manager, then the three largest UK property funds suddenly froze over $12 billion in assets in the aftermath of the Brexit vote; two years later the Swiss multi-billion fund manager GAM blocked redemptions, followed by iconic UK investor Neil Woodford also suddenly gating investors despite representations of solid returns and liquid assets, then it was the ill-named, Nataxis-owned H20 Asset Management decided to freeze redemptions; then the largest UK property fund, M&G, halted redemptions, and finally in December, distressed investing giants York Capital Management and Southpaw Asset Management also barred clients from redeeming money they have requested for year-end, a sign of the pressure that investors in distressed assets are facing.

All this, of course, happened before the investing world turned upside down as a result of the coronacrisis and fastest bear market in history. Yet curiously despite the furious market plunge in March, besides the occasional false rumor, there had not been any prominent hedge fund casualties, or even redemption gates.

That changed today when the WSJ reported that $7 billion hedge fund EJF Capital LLC told clients it was suspending redemptions from one of its funds for the foreseeable future because it didn’t want to be a forced seller in what it called “dysfunctional” credit markets. And so once again the liquidity mismatch strikes.

According to the WSJ, EJF founded by Emanuel “Manny” Friedman, told clients in a letter Friday it was preventing investors from withdrawing their money from its Debt Opportunities Fund which managed $2.5 billion at the end of February. What is disturbing is that while the fund received redemption requests totaling only 6% of its assets under management for March 31, the letter said, it wanted to “protect all of the Fund’s investors by not selling assets into a nonfunctioning market.”

“We are currently experiencing unprecedented volatility and dysfunction in the credit markets,” Mr. Friedman and EJF co-Chief Executive Neal Wilson wrote in the letter. “Market participants fear extreme and irreversible damage as the uncertainty emanating from the coronavirus spreads. We believe this fear of permanent economic damage, combined with an only nascent fiscal response from Congress, has led to the tightening of credit available to pooled investment vehicles such as the Fund over the past few weeks.”

This means that either the fund is telling the truth, or more likely the modest redemptions would mean that the Fund would have to drastically remark its holdings to a far lower “market”, in the process triggering ever more investor panic and redemptions. As a result, the founders “fear” not permanent economic damage, but a cascade of outflows which could lead to feedback loop which results in more firesales, more redemptions and the eventual liquidation of the fund.

The Arlington, Virginia based fund was down an estimated 15% for the month of March through March 27, and includes Anthony Scaramucci’s SkyBridge Capital as an investor.

The letter said the fund would reassess the suspension quarterly, adding it was unlikely to be lifted in time for June redemptions because of the advance notice clients are required to give. In other words, anyone who is invested and needs their money now is stuck. Unlike a mutual fund, hedge funds offer their investors only periodic opportunities to redeem, and their investors typically have to submit withdrawal requests well in advance of those dates.

EJF’s Debt Opportunities Fund holds mainly debt issued by banks and insurance companies and structured-credit securities collateralized by debt issued by banks and insurance companies, the letter said. It also holds stock in banks and other financial services firms. While the fund has kept all its financing lines, the letter said financing had “become both limited as well as more expensive” in the past few weeks. The letter also said the fund had seen and met “unprecedented margin calls” but so far been able to avoid firesaling assets.

Of course that would have changed had the fund seen a flood of redemption requests; hence the “gate.”

While hedge funds rarely suspend investor redemptions because it is unpopular with clients, we expect many more funds to follow in these footsteps as the alternative is a wave of widespread redemptions; the move prevents investors from accessing their own cash at a time when they may urgently need it. Investors in so-called structured credit funds said the funds broadly were struggling with liquidity issues as the value of assets like mortgage-backed securities had fallen rapidly and banks have tightened financing.

Meanwhile, hedge fund investors are bracing for additional managers in structured credit to make moves limiting clients’ ability to get back their own cash. One fund executive described the dynamic as a “death spiral” where margin calls were causing forced selling, which in turn was causing additional margin calls and more forced sales.

One fund which is certainly immune from the whims – and liquidity needs – of its LPs is Millennium which as we reported last month unveiled a new share class open to new investments limits the amount clients can pull to 5% of their money each quarter, meaning it would take them five years to fully cash out. The 5% quarterly redemption limit means that in a quarter in which markets tank and investors want to pull their money, they will only be allowed to pull just 5%. In other words, Millennium investors have pre-emptively agreed to be gated to at least 95% of their capital following a “market event.” And all this just to be allowed to invest in the vaunted Englander’s hedge fund.

In retrospect, now that the liquidity panic is about to hit, every other hedge fund will wonder how they didn’t think of this first.

As COVID-19 blankets the globe – now having officially infected over 800,000 people in 179 countries, causing over 39,000 deaths – scientists are tracking a multitude of strains, according to USA Today.

The virus has undergone over a hundred tiny mutations which act like genetic fingerprints – allowing researchers to see how the virus is migrating and splitting into similar but new subtypes, which can be seen at the website NextStrain.org.

(for more on “strain” vs “mutation” and why the terminology is causing confusion, see this thread from NextStrain’s Trevor Bedford)

Labs around the world are turning their sequencing machines, most about the size of a desktop printer, to the task of rapidly sequencing the genomes of virus samples taken from people sick with COVID-19. The information is uploaded to a website called NextStrain.org that shows how the virus is migrating and splitting into similar but new subtypes. –USA Today

Frequent sequencing of the virus has allowed researchers to draw several conclusions; for example, social distancing and shelter-in-place orders appear to be working in some areas, and that the virus doesn’t appear to be growing more lethal as it evolves.

“The virus mutates so slowly that the virus strains are fundamentally very similar to each other,” said infectious disease specialist Charlies Chiu of the University of California, San Francisco School of Medicine. “The outbreaks are trackable. We have the ability to do genomic sequencing almost in real-time to see what strains or lineages are circulating,” he added.

Chiu also believes that it’s unlikely that the difference in strains is responsible for the virus hitting people differently – with most some feeling only slightly under the weather for a day or two, 15% needing hospitalization, and a mortality rate that varies by country (and likely by testing rates).

SARS-CoV-2, the virus that causes the COVID-19 illness, began circulating in China around mid-November or mid-December. Its genome is made up of approximately 30,000 base pairs – while a human has over 3 billion. According to the report, the virus’s most divergent strains contain only 11 base pair changes.

So far, most cases on the U.S. West Coast are linked to a strain first identified in Washington state. It may have come from a man who had been in Wuhan, China, the virus’ epicenter, and returned home on Jan. 15. It is only three mutations away from the original Wuhan strain, according to work done early in the outbreak by Trevor Bedford, a computational biologist at Fred Hutch, a medical research center in Seattle.

On the East Coast there are several strains, including the one from Washington and others that appear to have made their way from China to Europe and then to New York and beyond, Chiu said. –USA Today

Of note, the general public should probably leave analysis of the above ‘phylogenetic tree’ to the experts, as they can be “a little dangerous” to decipher, according to professor Kristian Anderson of Scripps Research – a nonprofit biomedical science research facility in La Jolla, California.

“This is the first time phylogenetic trees have been all over Twitter,” he said, adding “Remember, we’re seeing a very small glimpse into the much larger pandemic. We have half a million described cases right now but maybe 1,000 genomes sequenced. So there are a lot of lineages we’re missing.”

Anderson added that COVID-19 does not mutate very fast – in fact, it’s 8-10 times slower than the influenza virus, and closer to other coronaviruses such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS).

Lastly, and perhaps the best news of the report – it’s not expected to spontaneously evolve into a more deadly form, as it’s under no pressure to evolve due to its hyper-virulent nature.

Read the rest of the report here.

Authored by Harris Kupperman, CIO and president of Praetorian Capital, via AdventuresInCapitalism.com,

Over the past week, I have taken my bullishness on tankers from level 10 to 11. It started with the Saudis busting out of the cartel formerly known as OPEC+ in order to dump oil and crush US shale, but it has progressed far beyond that as various US cities went into lock-down. Fair warning, I’m going to generalize, I’m going to round some numbers and if you’re an empirical purist, you’ll probably be offended.

In big round numbers, the world produces 100 million barrels of oil per day (bbl/d) and consumes roughly the same. As a result, supply and demand are usually balanced to within a few hundred thousand bbl/d at any given time. In fact, we have extreme price volatility when the balance is off by much more than that. The market was roughly balanced at the start of this year, until COVID-19 arrived in China. When the Chinese went into quarantine, their oil demand collapsed by roughly 25% and stayed suppressed for roughly two months. Even today, two months later, demand is still not back to pre-flu levels. With the rest of the world now experiencing COVID-19, I would expect global oil demand to also decline by a similar 25% in affected regions, offset by the partial recovery in China. Let’s assume that global demand is going to be off by 20% or 20 million bbl/d for the next 50 days (yeah, I’m probably wrong to within a few million bbl/d. Deal with it). In addition, I expect the Saudis along with their former friends in OPEC+ to dump an incremental few million bbl/d, hence maybe my 20 million bbl/d isn’t so far off after all. Let’s call it a total of 20 million bbl/d of surplus oil for 50 days. We’re now talking about 1 billion surplus barrels (give or take a bit). Transposing the slow pace of the Chinese recovery to the rest of the world, let’s assume that the global surplus shrinks to 10 million bbl/d after 50 days and stays at that level for another 100 days. That’s another billion barrels and together, you have 2 billion barrels of surplus oil supply over the next 150 days (5 months) that are dumped on the market. Where will it all go?

Last week, Trump bragged that we’ll fill the Strategic Petroleum Reserve (SPR) “to the top.” Sounds impressive right? Well, the richest nation on earth only needs 75 million barrels to fill the SPR. Do you see the magnitude of the problem? 2 billion barrels is a whole lot of oil. For the past decade, the world has managed with an inventory of roughly 2.5 to 3 billion barrels of oil. As land storage rapidly fills up, there literally isn’t anywhere to put this oil, except tankers.

If you knew billions more barrels were coming at you, why would you ever buy a barrel today, unless you intended to use it today? In fact, you’d almost be assured that oil would be cheaper tomorrow if you waited. So, how do you incentivize someone to buy oil today? You take the price down, way down, down so low that a trading house is willing to store it in the hope that they can sell it at some point in the future. Trading houses tend to make massive leveraged bets, they don’t want those bets to be at the whim of the oil price, they want to lock those bets in as sure things.

Fortunately, there’s a reasonably liquid futures curve.

Look at it today; you can buy physical Brent Crude today and lock in the price 12 months into the future and guarantee yourself an $16 per barrel profit…

And over the six-months, the spread has never been higher…

It’s a great return, except you have to pay someone to store it. Here’s where my tankers come in.

Interest rates are effectively zero today, so you have no finance costs, your only real cost is renting the tanker. Let’s say you put away 2 million barrels (the size of a VLCC) for a year and shorted futures to lock in a $22 million profit (2 million barrels at $11 each). How much of that profit do you think you have to share with the owner of the VLCC? If you guessed it was most of that profit, you’re qualified to work for Vitol. Remember, the guys with the tankers get to shop these against multiple firms who can take a risk-free position and leverage it almost infinitely. Say you give the traders $2 million and keep $20 million—well, that’s an insane profit. The sort of tanker that would be chartered for storage is likely only worth about $25 million and has less than $5 million of equity into it. If you own this tanker, you just locked in a four-times return on your equity in just one year. Pretty nice! Now, traders tend to get closer to the front of the curve. You make $8 for the first 6 months of storage and the 3-month curve is even steeper at $5. Imagine earning $5 per barrel, four times in a year? You make $20 in contango. As you can imagine, trading houses want to lock in the tanker and go right into the teeth of the contango. Let’s not worry ourselves with how much Vitol will make—they’re big boys and can take care of themselves. What matters is what the tanker owner makes. Let’s just say he’s making so much he doesn’t mind locking up his vessel for a very long time.

The thing is, we’re going to need hundreds of tankers to store the 2 billion barrels of excess supply. But wait, there’s more!! Think about the oil curve. If oil is in the $20s today, no one is spending cap-ex on drilling. Where do you think production will be in 2023? What about 2025? I bet it’s off by millions of barrels, maybe even tens of millions. Once the margin calls are done, where do you think 2023 oil futures will trade? $50? $75? $100? Have you seen how much stimulus they’re throwing at the global economy each day? It will take some time, but demand will come back with a vengeance. I don’t know where 2023 oil will trade, but I guarantee you it will be VERY steep to the front month. This isn’t a few month contango thing, this is going to last for a while as all that inventory keeps the front of the curve heavy. How long? A 2-billion-barrel surplus getting worked off at a 5 million daily deficit will take 400 days to work off. Meanwhile, the storage cost is going to be astronomical. The front month will be on the floor and deferred months will be into the sky. This will draw in more and more tankers playing every part of the curve with all that free Federal Reserve bailout money.

Now, let’s say that the oldest few hundred VLCC tankers go into storage trades. That seriously crimps the global fleet supply of roughly 800 actively transporting crude. When 26 COSCO tankers were sanctioned last fall, rates went to 10-year highs. What happens when a few hundred leave the transport fleet? Well, rates go to Pluto. At current daily charter rates of around $200,000 to transport oil, a VLCC earns $70 million, which is a stunning return on a 10-year vessel worth about $50 million. Even better, the owner likely only has about $20 million of equity invested. This means that at current rates, the owner makes 3.5 times his money each year. Ironically, despite all of this going on, most tanker stocks trade at roughly half of NAV. This means that they’re earning somewhere around 5 to 8 times their market caps in a year. By the way, this isn’t theoretical. There have been almost 100 fixings in the past 10 days and almost all are north of $150,000. There have been dozens of time charters for storage. It’s happening. Even if rates back off to $100,000, tanker companies will earn unfathomable returns.

WOW!!!

I have followed tankers for two decades now. Ever since 2009, every spike was short-lived as there was incessant oversupply. This one is truly different. No national leader wants to end lock-down too soon and then have people die. Instead, the incentive is to be as aggressive as possible with the lock-down, strangle the economy and look like they’re doing something to protect people from something terrifying that most people don’t understand. Which politician wouldn’t want to stand up there on national TV, flanked by important sounding people and talk about what they’re doing to protect you, while giving you free stimulus money? It’s the greatest election campaign ever. Even Trump is getting in on the act and we all know that he’s singularly focused on the stock market. What if global demand drops 30 or 40% over the next few months? What if we have 5 billion barrels of surplus crude? I don’t know how to quantify all of this, but there is a whole lot of blue-sky in terms of how badly politicians can screw up our economy and how badly demand could collapse. What if the Contango is $30 because front-month goes into the teens? I can build you scenarios where modern tankers earn $300,000 or $500,000 a day and it stays there for two years. I’ve seen quite a few fixings at the $300,000 level in the past week—clearly the guys chartering vessels think this is the new norm.

Then again, I could also argue that politicians realize that strangling the economy is a mistake and we only put away a few hundred million barrels. I try and build conservative models and tend to think rates bounce around a lot with average rates that are lower than today’s levels. Then again, as storage absorbs vessels, I struggle to understand how rates decline materially if charterers need tonnage.

Last week, I noted that tankers “may be the greatest trade I’ve ever seen in my entire investing career.” Now I’m ready to go on the record and say there won’t be a better one in decades. As the great cities of the world go into lock-down and oil demand collapses, someone has to store it. I recently put more of my money behind this and booked all of my Altisource Portfolio Solutions (ASPS – USA) and Uranium Participation Corp (U – Canada) to add more tankers. I think both ASPS and U have strong upside, but nothing has the sort of upside that tankers have. There are only a few moments in investing where you can bet it big with unusually low risk—this is the best I’ve ever seen and I have to fund it somehow—even if it means taking losses on some of my favorite positions.

I know what the obvious next question is; what if the Saudis stop flooding the market? My response is, “who cares?” We’re all on lock-down. I’m watching out my window. Car traffic is down by half. Cruises aren’t going past my pool deck as frequently and air travel is down dramatically. We’ll eventually beat this flu, but by then, there will be billions of excess barrels to deal with. The Saudis are a rounding error in all of this. Our government is saying this could go on for 18 months or longer. Are you kidding? Where will all the oil go? This is the time to be greedy on tankers.

Funds that I control are long: DHT, EURN, LPG, STNG, TNK

*  *  *

In the following fantastic interview with RealVision, Kupperman digs even deeper into the “greatest trade of his career”, breaking down the chaos coronavirus has inserted into global oil markets and provides investors with an investment thesis based on the opportunity that chaos has created. In the context of the global shutdown, Kupperman reveals how the combination of the current oil futures contango, all-time highs in tanker charter rates, and the dearth of crude oil storage could lead to never-before-seen revenues and profits for the tanking companies. He walks viewers through the numbers, explains the underpinning economics of the oil markets, and provides time horizons and potential profit multiples for those looking to find opportunity through uncertain times.

 

On a side note, if you’re not subscribed to Real Vision, you’re not taking your investing seriously. For the cost of a half-decent bottle of wine, you’re going to find that one idea that makes you a fortune (Disclosure: I’m a fully paid up subscriber).

The Conference Board’s consumer confidence survey slumped to the lowest level since June 2017 in March, as government efforts to mitigate the coronavirus pandemic shuttered many businesses and left millions of Americans unemployment.

The Conference Board’s index fell 12.6 points, the most since 2011, to 120 (still considerably better than the median estimate of 110).

• Present situation confidence fell to 167.7 vs 169.3 last month

• Consumer confidence expectations fell to 88.2 vs 108.1 last month

We suspect this has a long way to go..

Source: Bloomberg

Notably, the cutoff date for the results was March 19, before shit really started hitting the fan.

Finally, we note that just as in past cycles, the de-saving-induced euphoria in sentiment is reverting…

Source: Bloomberg

Authored by Michael Snyder via The Economic Collapse blog,

It appears that we are heading into the worst economic downturn of the post-World War II era, and that is going to be true no matter how this coronavirus pandemic ultimately plays out.  There are some that believe that this virus will only kill thousands, and there are others that are warning that it could kill millions, but everyone can agree that this outbreak is causing an unprecedented amount of fear.  And even once this pandemic starts to fade, a certain percentage of the population will continue to be afraid to go to restaurants, bars and other small businesses that are open to the public. 

Of course many restaurants, bars and small businesses were just barely scraping by during the “good times”, and so many of them will simply not be be able to survive if a substantial portion of the population is literally petrified to step through their doors for the foreseeable future.

As long as fear of the coronavirus persists, the U.S. economy is going to be in for a world of hurt, and it looks like we may still be in the very early stages of this pandemic.

In fact, we are now being told that the death toll in the U.S. “could reach 100,000 or more”…

President Donald Trump acknowledged Sunday for the first time that deaths in the United States from coronavirus could reach 100,000 or more, adding that if the death toll stays at or below 100,000, “we all together have done a very good job.”

Trump’s assertion came after he was asked about comments the nation’s top infectious disease expert, Dr. Anthony Fauci, made earlier Sunday on CNN’s “State of the Union” that based on models, 100,000 Americans or more could die from the virus.

Of course the death toll could ultimately be much lower than that if effective treatments are made widely available to the general public.

We shall have to wait and see if that actually happens.

But meanwhile, fear of the coronavirus is absolutely devastating the economy.  According to the National Restaurant Association, our restaurant industry has lost 25 billion dollars in sales so far this month…

The U.S. restaurant industry has lost $25 billion in sales since March 1, according to a survey of 5,000 owners by the National Restaurant Association. Nearly 50,000 stores of major U.S. retail chains have closed, according to the companies.

An estimated $20 billion in monthly retail real estate loans are due as early as this week, according to Marcus & Millichap, a commercial real-estate services and consulting firm. Many retailers and restaurants have said they are not going to pay their April rents, which in turn poses a threat to the $3 trillion commercial mortgage market.

As this crisis stretches on, all of the dominoes in the commercial mortgage market are going to begin to fall.

What we are watching is deeply tragic, because those that work in our restaurants are some of the hardest working people in the entire country.  At this point, 3 percent of our restaurants “have already permanently closed”, and another 11 percent “anticipate they will permanently close within 30 days”…

Three percent of restaurants have already permanently closed due to the coronavirus crisis, according to research from the National Restaurant Association. Forty-four percent of operators have temporarily closed their restaurants, and 11% anticipate they will permanently close within 30 days.

Can you imagine that?

By the end of next month, 14 percent of all restaurants in America could be gone for good.

And the longer this pandemic lasts, the higher that number will go.

We didn’t see anything like this back in 2008.  What we are now facing is truly unprecedented, and there is going to be a whole lot of vacant buildings in the days ahead.

Of course it isn’t just restaurants that are being hit extremely hard.  According to the Wall Street Journal, a wide variety of businesses all over the country are already in very serious trouble…

Companies of all sizes are feeling the squeeze, especially retailers and restaurants that have closed their doors during the outbreak. Nike Inc. is asking to pay half its rents. TJ Maxx is delaying payments to its suppliers. Victoria’s Secret and Men’s Wearhouse have furloughed thousands of workers. Cheesecake Factory Inc. closed 27 of the company’s locations and furloughed 41,000 hourly workers, nearly 90% of its total staff.

Even if all of the lockdowns all over the U.S. were immediately lifted, economic activity would not return to “normal”, because millions upon millions of Americans would still be deeply afraid of the virus.

And that isn’t going to happen anyway.  In fact, President Trump just extended the national “social distancing guidelines” through April 30th…

President Donald Trump announced on Sunday that the White House would be extending its social distancing guidelines through April 30 – a month longer than an initial 15-day timeline when they were implemented on March 16.

“The peak in death rate is likely to hit in two weeks,” Trump said. “Nothing would be worse than declaring victory before the victory is won.”

So that means that it is probably unlikely that any of the lockdowns on the state level that we have witnessed will be lifted before April 30th.

Across the Atlantic, citizens of the United Kingdom are being warned that life may not get back to normal “for six months or even longer”…

Britons should not expect to get back to ‘normal life’ for six months or even longer, the government’s deputy chief medical officer warned today.

Dr Jenny Harries told a Downing Street press conference that people should not be viewing the coronavirus crisis as something that will blow over soon.

Would they really try to keep people inside for that long?

I can promise you that people do not have that much patience.

If you doubt this, just look at what is happening in China…

Angry crowds rioted near the Chinese city of Wuhan after the region’s two-month coronavirus lockdown was lifted but residents were told they could not travel elsewhere in China.

Shocking footage showed a mob overturning a police van on a bridge linking Wuhan, which is the capital of Hubei Province, and neighbouring Jiangxi.

Here in the U.S., I have been seeing people all over social media clamoring for a return to normalcy.

Sadly, that is simply not going to happen for the foreseeable future, and the consequences for the U.S. economy are going to be extremely, extremely bitter.

Following yesterday’s record-smashing collapse in Dallas Fed’s manufacturing survey, expectations were for Chicago’s PMI to tumble after it’s surprising rebound in February (bucking the trend of all the other regional surveys).

But, in true WTF insanity, Chicago PMI printed 47.8 (smashing expectations of 40)…

Source: Bloomberg

The driver of this seemingly insane print is the same as has caused problems with aggregate PMIs – supplier delivery times rising at a faster pace – typically seen as a sign of expansion. However, in this case it is caused by collapsing global supply chains, and along with prices paid rising rapidly means a stagflationary collapse in global trade… not exactly the positive signal the index is trying to send.

• Supplier deliveries rose at a faster pace, signaling expansion

• Prices paid rose at a faster pace, signaling expansion

Everything else contracted…

• New orders fell at a faster pace, signaling contraction

• Employment fell at a slower pace, signaling contraction

• Inventories fell at a faster pace, signaling contraction

• Production fell and the direction reversed, signaling contraction

• Order backlogs fell at a slower pace, signaling contraction

And thus, Chicago fed bucks the trend in the regional surveys once again…

Source: Bloomberg

Finally, we note a new measure from The New York Fed which aims to gather higher-frequency national data (weekly) to indicate economic progress.

Economists are well-practiced at assessing real activity based on familiar aggregate time series, like the unemployment rate, industrial production, or GDP growth. However, these series represent monthly or quarterly averages of economic conditions, and are only available at a considerable lag, after the month or quarter ends. When the economy hits sudden headwinds, like the COVID-19 pandemic, conditions can evolve rapidly. How can we monitor the high-frequency evolution of the economy in “real time”?

To address this challenge, we compute a Weekly Economic Index (WEI) to measure real economic activity at a weekly frequency. Few of the government agency data releases macroeconomists often work with are available at weekly or higher frequency. While financial data, like stock market prices and interest rates, are available at high frequency, we are particularly interested in real activity, not financial conditions. For our purpose, most weekly series come from private sources like industry groups, which collect data for the use of their members, or from commercial polling companies.

They might want to disband this series stat!

Source: Bloomberg

That is not a pretty picture.

Authored by Steve Watson via Summit News,

A New York hospital executive has been fired after she posted public comments on social media fantasising about how supporters of President Trump would get the coronavirus and not be allowed to get treatment.

The executive also happens to be, unsurprisingly, a former Hillary Clinton advisor.

Laura Krolczyk, Roswell Park Comprehensive Cancer Center’s vice president for external affairs, made the incendiary posts on Facebook, first sharing an article about The White House being reluctant to foot the $1 billion cost associated with producing ventilators.

Here are the workday public Facebook posts made by @RoswellPark senior executive spokesman Laura Krolczyk, former Hillary Clinton advisor, on how to assure Trump voters get COVID19. pic.twitter.com/mX3jtHhMog

— Read/Watch The Ukraine Hoax! 🇺🇸🇺🇦 (@MichaelRCaputo) March 27, 2020

Hauptman Woodward Medical Research Institute Director of Development Lisa LaTrovato responded to Krolczyk’s post, writing “But will waste more than that on a wall and space force.”

Krolczyk, who worked as Western New York Regional Director for Hillary Clinton’s Senate office for 7 years, wrote back that “Trump supporters need to pledge to give up their ventilators for someone else … and not go to the hospital.”

“Also don’t cash your stimulus check,” she later added, writing “It’s all a hoax. Chew some ibuprofen and be on with your day.”

LaTrovato further responded “I think they should be the only ones in packed churches on Sunday,” to which Krolczyk replied, “They should barricade themselves in there and ride this out.”

Another Facebook user saw the exchange, wrote “Wow, just wow, so your saying we decide who lives and dies based on political views? Great plan (thumbs up emoji).”

Krolczyk then responded “That’s literally what he’s saying. Take your ‘wow’ and comprehend what your hero is saying. Your hero is saying YOU don’t need a ventilator. So don’t take one.”

The whole sorry conversation was then picked up by Republican strategist Michael Caputo, and the hospital was alerted.

.@HWMRI @RoswellPark Is it your public health policy to assure Trump voters are infected with COVID?

Why are your senior executives advocating this sick strategy online? For the love of God, you both exist to fight disease!

CALL THEM NOW!
HW: 716-898-8600
Roswell: 716-845-2300 pic.twitter.com/Xz6cyp85HF

— Read/Watch The Ukraine Hoax! 🇺🇸🇺🇦 (@MichaelRCaputo) March 27, 2020

While LaTrovato is still on administrative leave from Hauptman Woodward pending further action, Krolczyk has been terminated by Roswell Park.

In a statement to Buffalo News, spokeswoman Annie Deck-Miller confirmed Krolczyk had been fired.

CEO Candace S. Johnson added that “This behavior is not tolerated at Roswell Park. If any team members act in a way that does not accord with that commitment, we will take swift and appropriate action, just as we did in this instance.”

Someone ought to tell Ms. Krolczyk that when engaging in her daily two minutes of Trump derangement hate, try to do it in private, rather than on her publicly available Facebook page.

Meanwhile, she should definitely make sure she does cash her stimulus check, as it’ll be her only income for a while.

This isn’t a one off. These people are everywhere, and need to be publicly shamed.

Fresh on the heels of the largest stimulus in history, House Democrats and government agencies are already compiling their lists with what they say they need from the next package.

On Monday, House Speaker Nancy Pelosi unveiled Democratic demands for the phase-four coronavirus stimulus – which would include additional funds for workers on the front lines fighting coronavirus, and to keep essential businesses in operation via the Occupational Safety and Health Administration (OSHA). Democrats want to expand who’s covered by OSHA protections, including grocers and TSA employees.

Pelosi’s bill will also focus on infrastructure – with broadband and water resources a central focus, as well as more funds for state and local governments, paid family and medical leave, direct payments to the American public, and free treatment for coronavirus – not just free testing.

“There are infrastructure needs that our country has that directly relate to how we are proceeding with the coronavirus. Many more people are teleworking, or tele-educating or really communicating with family and friends,” said Pelosi, according to te Washington Times.

In an interview Tuesday with MSNBC, Pelosi said negotiators had already agreed that “everything will be specific to the coronavirus” in the next round of legislation and that it wouldn’t become a “wish list.”

In an interview with the New York Times published on Monday, Pelosi indicated that another possible move was getting rid of the limit on state and local tax deductions, or SALT, that was part of the 2017 tax overhaul and affects California, Pelosi’s home state, and New York. –Bloomberg (via Yahoo!)

Senate Finance Committee Chairman Chuck Grassley (R-IA) says Pelosi’s SALT plan is “a nonstarter.”

“Millionaires don’t need a new tax break as the federal government spends trillions of dollars to fight a pandemic,” said spokesman Michael Zona.

Pelosi claims she won’t rush to push the bill through and doesn’t expect the package to be ready befor Easter, according to the . Instead, it will be ready for a vote when Congress returns.

The White House, meanwhile, has compiled their own list based on what US agencies say they need totaling roughly $600 billion, according to Bloomberg.

On Monday, President Trump said that he’s considering giving healthcare professionals hazard pay in a future bill, while on Sunday, he said that he’s ordered the Treasury and Labor secretaries to work on restoring a tax break for spending on corporate restaurants which was repealed in his 2017 tax overhaul, according to the report – a move which Bloomberg kindly points out would benefit the Trump Organization, which rents space to restaurants.

Sen. Ted Cruz (R-TX) told Bloomberg Television on Monday “if the crisis continues for substantially longer I have no doubt that the Congress will have to act again.”

That said, the outlet notes that “there’s lingering friction between Trump and Pelosi over the $2 trillion stimulus, which may shadow negotiations on a fourth round.”

Democrats are angry that the president issued a statement Friday saying he’d gag a new inspector general intended to watchdog the distribution of $500 billion in aid to companies. Several White House aides were unhappy that Treasury Secretary Steven Mnuchin agreed to the oversight in the first place, according to two people familiar with the matter.

And Trump on Monday criticized Pelosi for seeking to win some Democratic priorities in the legislation he signed Friday, such as airline pollution controls. –Bloomberg

“We want to change the voting laws, we want to change this, we want windmills all over the place to ruin everybody’s house and farm. We want to do all sorts of things,” Trump told “Fox & Friends,” adding “They wanted things that were so ridiculous and had nothing to do with putting people that just essentially lost their jobs putting them back to work.”

In order to oversee the spending, the Department of Defense has appointed Glenn Fine – acting inspector general, to oversee a nine-member Pandemic Response Accountability Committee which was established under the most recent law.

That’s separate from the special inspector general the law creates at the Treasury Department, who will be nominated by Trump and confirmed by the Senate. That office, to sit inside of Treasury, will have an operating budget of about $25 million for five years and submit quarterly reports to Congress.

Trump said in his signing statement he wouldn’t allow the new IG to tell Congress it’s been stonewalled for information by government agencies without his permission, an effort by the White House to curb the watchdog’s powers. –Bloomberg

So – Democrats and US agencies are compiling their list of demands for the next coronavirus bailout as the economy continues to grind to a screeching halt – and the DoD is providing oversight. What could go wrong?

This bear market has been unusual to say the least, not because of the scale of the decline, but rather because of the speed and the volatility.

The average bear market (at least based on US history) experiences a decline of around 35% – very similar to the falls that were seen at the recent low in most markets in the current bear market.

But, as Goldman Sachs’ Peter Oppenheimer notes, the speed of the declines is what stands out as being exceptional; it is hard to believe that the US equity market was trading at a record high just five weeks ago. Its fall into bear market territory (the first 20% decline) took place in record time, just 16 trading days, compared with 44 in 1929, the previous fastest fall. Meanwhile, volatility has been at record levels.

After three consecutive days of moves of +/- 9% (the first such series since 1929), last week posted an 18% three-day rally in the US, and similar moves in many other markets. This was the strongest comparable return in the US since 1933 and in Europe on record.

So the question is – is this a bear-market rally to be faded like in 2008? Or is this is the market turn?

Goldman’s Oppenheimer weighs the bull and bear case below, and his conclusion is clear: despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high.

Reasons to be optimistic

Does the rally mark a genuine turning point for equities? The scale of the likely hit to Q2 growth would be historic. Our economists have lowered again their forecasts for Q2, and now expect annualised falls of 34% in the US (over three times worse than the previous biggest quarterly decline in 1958), and over 40% in Europe – similar to the scale of the falls that China experienced in Q1. But many investors would argue that, while unprecedented, these numbers are no longer surprising or even shocking. Most seem to agree that with over 90% of the world’s economies in effective lockdown, it is unsurprising that growth should fall significantly near term. It is what happens after the near-term collapse that the market is starting to discount. On this, there is encouraging evidence coming out of China and some other countries as production and demand start to recover (see China: Update of high frequency trackers on Chinese economic activity, 27 March 2020).

On the policy side, too, there are reasons to be encouraged. The support from both monetary policy and fiscal stimulus has been remarkable both in its size and swiftness. New initiatives have emerged at rapid speed to offset the worst impact of the downturn and to try to ensure a rapid and vigorous recovery. The Fed’s new QE programme is now uncapped and it is supporting markets it doesn’t normally support directly, in particular the commercial paper and credit markets. In effect, the Fed has taken more action than in the entire Global Financial Crisis (GFC) in just a few weeks. The ECB too, has shown more speed and flexibility than in the past. Its new QE package includes loosened criteria over how much debt can be bought in each country, allowing greater support for Italy in particular.

On the fiscal side too, our economists estimate the policy so far announced amounts to 3½% of GDP expansion globally. In addition, there have been government guarantees on loans and workers’ pay. These measures should take deficits to around 8% of GDP in Germany and north of 10% for the US and UK. Meanwhile, Japan has also launched a fiscal package that exceeds that of the financial crisis era, and China, too, is focusing on a new rescue plan. Japan’s ruling Liberal Democratic Party has proposed a stimulus package worth around US$556bn.

Reasons to be cautious

But despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high. Most equity markets, following the recent rally, are down only around 25-30% from their highs and these were highs not just in market levels, but also in valuation. While some valuation metrics have clearly come down from levels at the start of the year, the rally last week suggests that current market levels do not reflect the scale of EPS decline that we are forecasting. For example, we expect falls of 33% in the US and 45% in Europe. The bottom-up consensus numbers are as follows.

In addition, many of the valuation metrics no not look like crisis-level lows. For example, the European P/E based on consensus forward earnings is now back up to 12x 12m fwd – in the GFC and sovereign debt crisis they fell to a low of roughly 7x and 8x respectively (again both measured on forward consensus estimates).

Some valuation metrics, such as dividend yield, do look cheap, but this may not be enough. Our US strategists forecast S&P 500 dividends will decline by 25% to US$44 per share in 2020. Dividends actually rose by 9% during 1Q. However, they expect a wave of dividend suspensions, cuts, and eliminations will result in dividends declining by 38% during the next nine months so on a full-year basis dividends will be 25% below the level of 2019 — see US Equity Views: Dividends to fall by 25% in 2020: Highlighting 40 stocks for income-oriented investors (median yield of 4.0%), 30 March 2020.

In Europe, meanwhile, the French government has argued that companies in which the government has stakes should not pay dividends, and the government will vote against them during the AGM, while Norway has required financials to stop paying dividends. The German government may also impose restrictions on payouts by companies receiving state aid. Given that 10 of the 50 Euro STOXX 50 companies have government stakes, an apparently high dividend yield may not offer much support for investors.

The timing of any recovery in economic activity is also unclear. Currently our economists are assuming that recovery will start in May/June based on an assumption that we see a peak in the number of those infected and a sharp decline in new infections within the next couple of months. But this may be too optimistic. Furthermore, the rise in unemployment, particularly in the US, may dampen the speed of recovery. Last week’s jobless claims, for example, at over 3m showed the fastest rise in history – roughly 5x faster than the previous record in 1982.

The Bear Bounce

Last week, between March 23 and March 26 the MSCI AC World rallied 16% in 3 days, while the S&P’s rally of 18% was the best 3-day rally since 1933. Last week overall was the strongest weekly performance for MSCI AC World since the GFC.

Our US strategists have shown that bear market rallies are quite common, particularly during the bear market of 2008. For example, between September and December 2008, the S&P 500 experienced six distinct bounces of 9% or more, with some rallies as large as 19%, during the course of between one and six trading days. But the market low did not occur until March 2009, when the pace of economic contraction began to slow.

Below, we extend this analysis to the global equity market.

Taking the experience of the bear markets since the 1980s, including the collapse of the technology bubble in 2000-2002 and the GFC in 2008, we see a pattern of rebounds before the market reaches a trough.

For example, during the GFC there were 6 rallies similar to the one we had last week. Below we show the 18 global bear market rallies since the dot-com bubble.

• On average, they last 39 days and the MSCI AC World return is almost 15%.

• Cyclicals outperform Defensives 83% of the time and by 4% on average.

• We find a similar result at the regional level; EM outperforms DM 67% of the time and by more than 2% on average.

• There is not a clear pattern in the performance of Value vs. Growth nor Small vs. Large caps.

Why do these bear market rallies occur?

Nothing falls in a straight line, so it would be unusual if there were never rallies within bear markets (or corrections in bull markets). But there are usually two reasons for these rallies:

(i) longer-term expectations of growth are starting to rise, even if short term is still pretty negative; and

(ii) policy measures.

For example, on the second point of policy the clearest one is the rally in end-2008 to early 2009, which coincided with the start of QE: On November 25, 2008, the Federal Reserve announced that it would purchase up to US$600bn in agency mortgage-backed securities (MBS) and agency debt. But that point did not actually mark the trough in equities.

We see the BYs generally rise during these bear market rallies – suggesting the longer-term inflation/real growth expectations are turning. That said, we found that in general our activity indicators are still falling during these rallies and often still fall in the months after they finish – in other words, they are not associated with near-term growth improvement.

*  *  *

Oppenheimer reiterates his warning from above: despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high.