Category: zerohedge

From Michael Every of Rabobank

For once there are headlines that are not 100% virus-focused. First, the US presidential election officially became a two-horse race when Bernie Sanders decided to follow the advice from The Highlander: “You know what they say? It’s better to Bern Out than fade away.” So now there is only The One – Joe Biden. (Who, like Bernie, one could believe if uttering the words “I am Connor MacLeod of the Clan MacLeod. I was born in 1518 in the village of Glenfinnan on the shores of Loch Shiel.” – for the wrong reasons.)

Earlier in the year we had written a Through The Looking Glass report imagining what a Sanders presidency might look like – that is not going to happen. Yet we already have multi-trillion USD fiscal deficits and the Fed and Treasury inserting themselves into the very middle of every economic pie in what looks a lot like the MMT we suggested Bernie would be open to: we even have cheques being sent out to virtually everyone – as the smaller part of the bailout. Bernie, like Moses, led the US to the Holy MMT Land but didn’t get to go in.

As to the US election in November, will Bernie voters back Biden, or Trump, or Bern Out completely? And what position is Biden going to take on de facto MMT? ‘Let’s get back to small government’ or ‘we do big government better’? Of course, he’s also got another decision to make: does he cede the China card to Trump, or go the same way? A Washington Post survey yesterday showed that 77% of respondents blame China for the coronavirus, including 67% of Democrats; 71% say US firms should pull back manufacturing from China; 69% support Trump’s tough trade policies; and 54% say China should pay reparations(!) This is not a backdrop that suggests US-China tensions are going to be easing any time soon.

Tensions that are easing, apparently, are on the oil front. Today will see the key meeting that will decide if global oil output is slashed or not – and suggestions are that this time Russia will agree to it, which just leaves the wild-card Saudis, who started the whole race to the bottom of the bottom. Oil prices are up in the Asian session on the presumption that something gives here. If true, it is obviously good news for oil producers – and it’s another kick in the teeth to oil consumers. One of the only economic stimulants that people were able to feel in recent weeks, even if they could not get out and benefit from it directly, was lower oil prices: now they may re-set back to a more normal recent range….which will up the ante on the government to do even more fiscally, of course. So more MMT.

The Fed’s minutes last night surprisingly had nothing to say about how they see this all working out economically. As our Philip Marey notes, “The most conspicuous aspect of these minutes is not what is in them, but what is not: the first set of FOMC projections in 2020. Perhaps they don’t want to further undermine economic confidence, and blend in later with the range of gloomy projections by private sector forecasters that are already out there, but this is a notable deviation from the usual transparency in the post-Greenspan Fed.” Well, there are lots of central-bank deviations happening as we move from Bagehot to Bags-o’-money.

And there need to be. The UK’s lockdown is set to be extended beyond next week, which should not be a surprise with a PM still in intensive care; the WHO, making themselves even more unpopular with the White House, have warned that it is still far too soon to be looking to ease lockdowns in places like Europe; Tokyo’s governor has said PM Abe’s COVID-19 measures aren’t tough enough and wants more businesses closed; and a study based on China’s experience published in The Lancet claims that levels of lockdown cannot properly end without a vaccine – a point echoed by Bill Gates in a recent interview, although he refers to ”mass gatherings”. (Or even The Gathering.)

So to those markets eagerly pricing for full recovery – “Patience, Highlander.”

Which is also appropriate advice for those watching Europe, where we are apparently no closer to any political resolution on the Coronabonds issue that will allow the Eurozone to act as aggressively on the fiscal front as the US and UK, among others, are doing. Yesterday had a Reuters source story suggesting the ECB has told the Eurogroup that EUR1.5 trillion is needed as fiscal support to keep Europe above water, and that Germany and the Netherlands replied that a maximum of EUR500bn would be on offer. “There can be only one” springs to mind – and that someone thinks they are immortal.

Former 2016 Trump campaign adviser George Papadopoulos was secretly recorded by a FBI confidential source (CHS), two weeks before the election, where he denied that the campaign was involved in obtaining the DNC’s emails which were later published by WikiLeaks, according to CBS News, which has reviewed a transcript of the conversation.

CHS: You don’t think anyone from the Trump campaign had anything to do with the fucking over the, at the DNC? 

Papadopoulos: No

CHS: Really?

Papadopoulos: No. I know that for a fact.  

CHS: How do you know that for a fact?

Papadopoulos: ‘Cause I go, I’ve been working with them for the last nine months. That’s (unintelligible) And all of this stuff has been happening, what, the last four months? 

Papadopoulos was then pressed on whether someone from the Trump campaign might have been secretly involved, “like under, undercover or anything like that?”

To which he replied “No, I don’t think so…..There’s absolutely no reason…First of all, it’s illegal, you know, to do that shit.”

The conversation between Papadopoulos and the CHS was documented in the DOJ Inspector General’s report on FBI surveillance, however this is the first time we have seen excerpts of the actual conversation. Of note, the former Trump adviser’s conversation with Australian diplomat (and Clinton ally) Alexander Downer – where he repeated information that Russia had dirt on Hillary Clinton (told to him by Clinton Foundation member Joseph Mifsud) sparked the FBI’s investigation into the Trump campaign, dubbed “Operation Crossfire.”

The failure by government investigators to include key sections of the Papadopoulos transcripts in the warrants, including denials the campaign “was collaborating with Russia or with outside groups like Wikileaks,” to surveil Page was listed among the 17 inaccuracies and omissions documented by Horowitz in his December report. He described the omission this way: “Papadopoulos’s statement to an FBI CHS (confidential human source) in late October 2016 denying that the Trump campaign was involved in the circumstances of the DNC hack.” –CBS News

Papadopoulos was also asked about Russian election meddling earlier in the conversation:

CHS: You think Russia’s playing a big game in this election?

Papadopoulos: No.

CHS: Why not?

Papadopoulos: Why would they?

CHS: Don’t you think they have special interests?

Papadopoulos: Something like that (Banging sound) I don’t think so. That’s all bull****. No one know’s who’s hacking— them.

CHS: You don’t think that they, that they hacked the, the DNC? Who hacked the f***ing DNC then?

Papadopoulos: Could be the Chinese, could be the Iranians, it could be some Bernie, uh, supporters. Could be— Anonymous.  

The FBI informant then pressed Papadopoulos on Russia’s alleged interest in Trump:

CHS: Do you think they have interest in Trump?

Papadopoulos: They, dude, no one knows how a president’s going to govern anyway, You don’t just say, oh I like —

CHS: He is very limited in what he can do anyways so like (laughs)…

Papadopoulos: I mean, the r-the Congress is very hostile with Russia anyways, so…I don’t know, I don’t know. And even Putin said it himself (unintelligible) (rustling) It’s all, it’s like conspiracy theories.

The FBI went to great lengths to entrap Papadopoulos during Operation Crossfire Hurricane – sending longtime spy Stephan Halper in with an FBI agent posing as his “honeypot” assistant under the name “Azra Turk” to try and pump the Trump aide for information.

Halper was paid over $1 million by the Obama DoD, nearly half of which was for activities surrounding the 2016 US election. Halper contacted Papadopoulos on September 2, 2016 according to The Daily Caller – and would later fly him out to London under the guise of working on a policy paper on energy issues in Turkey, Cyprus and Israel – for which he was ultimately paid $3,000. Papadopoulos met Halper several times during his stay, “having dinner one night at the Travellers Club, and Old London gentleman’s club frequented by international diplomats.” 

During the IG investigation, the FBI said that they discounted Papadopoulos’ denials for several reasons – though a footnote to the OIG report says that the agent realized in hindsight that they were relevant and should have been shared with the DOJ’s office of intelligence “in order for OI to make the determination whether [those denials] should be in the application” for Carter Page’s FISA warrant.

Horowitz noted in his report intelligence received from a friendly foreign government that Papadopoulos “suggested the Trump team had received some kind of suggestion from Russia that it could assist this process with the anonymous release of information during the campaign that would be damaging to Mrs. Clinton…”

Faulting the FBI, Horowitz wrote that because the surveillance target has “no defense counsel,” there is a special obligation on the FBI and Justice Department to “over tell” the story and include a “full and accurate” presentation of the facts to meet the bureau’s standard of “scrupulously accurate.” –CBS News

Still, despite serious errors by the FBI, Horowitz wrote in his report that “we concluded that the quantum of information articulated by the FBI to open the individual investigations on Papadopoulos, Page, Flynn, and Manafort in August 2016 was sufficient to satisfy the low threshold established by the Department and the FBI.”

Read below:

Senate Democrats blocked an urgent small business relief package on Thursday after their demands for double the funding and an increased scope went unheard by GOP leadership, according to the Washington Examiner.

Majority Leader Mitch McConnell, responding to a request from Treasury Secretary Steven Mnuchin, hoped to quickly pass a bill to replenish a small business aid program with an infusion of $250 billion in federal funding.

But Democrats blocked the Kentucky Republican’s unanimous consent request to pass the measure out of the Senate and proposed their own $500 billion measure. –Washington Examiner

“The Democratic leadership has suggested they may hold Americans’ paychecks hostage unless we pass another sweeping bill that spends a half a trillion dollars doubling down on a number of parts of the Cares act, including parts that haven’t even started to work yet. The country cannot afford more wrangling or political maneuvering. There is zero chance the sprawling proposal Democrats have gestured toward could pass either chamber by unanimous consent this week. No chance,” said McConnell in a statement.

According to Democrats, the GOP bill fell short by not providing adequate funding for small business owned by ‘groups that have traditionally had difficulty obtaining loans,’ as well as hospitals, and state and local governments.

Sen. Ben Cardin (D-MD) introduced the Democratic counterproposal, which increases spending to $500 billion – allocating $100 billion to healthcare facilities and $250 billion on state and local governments. Cardin, who serves on the Senate Small Business panel, also wants to waive work requirements for food stamps while increasing food stamp benefits.

The Democratic bill would set aside half of the small business spending to smaller community based lenders and credit unions and minority depository institutions.

Cardin called the Republican bill “a political stunt” that he said “will not address the immediate needs of small businesses.”

The battle over the small business package came after new unemployment figures showed 6.6 million people filed for unemployment in the United States due to the coronavirus outbreak. –Washington Examiner

The $250 billion GOP plan, requested by Mnuchin, was meant to replenish the Paycheck Protection Program which was signed into law by President Trujmp on March 28, and supplied with $350 billion in quickly evaporating funds according to the Treasury Secretary. It allows small business to take out forgivable loans as long as they keep the majority of their staff employed.

According to McConnell, 30% of the initial funding for the program was used up in the first few days.

“We need more funding and we need it fast,” he said.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Put another way: eras end.

While the mainstream media understandably focuses on the here and now of the pandemic, some commentators are looking at the long-term consequences. Here is a small sampling:

Coronavirus, synchronous failure and the global phase-shift

Coronavirus Will Require Us to Completely Reshape the Economy

Florence Hit by the Coronavirus: The Curse of Hyperspecialization

We’re not going back to normal: Social distancing is here to stay for much more than a few weeks. It will upend our way of life, in some ways forever (MIT Technology Review)

While each of these essays offers a different perspective, let’s focus on the last two: Ugo Bardi’s essay on Hyperspecialization and the technological responses described in the MIT Technology Review essay.

As readers of the blog know, I’ve been differentiating between first-order and second-order effects: First order effects: every action has a consequence. Second order effects: every consequence has its own consequences.

We can think of these as direct (first order) and indirect (second order) effects.

The MIT Technology Review article focuses on direct effects, i.e. how to deploy technology to identify people with the virus, track their recent movements and who they might have exposed to the disease, tech-driven regulations that would limit the movements of infected (such as we see in China now), etc.

Bardi’s first-hand account from Northern Italy touches on an indirect effect: the profoundly negative impact of a hyperspecialized economy that is suddenly disrupted. In this case, the specialization is tourism, but there are other examples, many driven by hyper-globalization.

Specialization has long been central to capitalism’s relentless drive to increase efficiencies and thus profits, and globalization has pushed specialization to extremes globally dominant corporations can arbitrage currencies, wages, political corruption and lax environmental standards in ways that localized competitors cannot.

The net result is increasing reliance on one globally competitive industry for jobs, tax revenues, etc.–in essence, the modern-day equivalent of a monoculture plantation or single-industry factory town.

When the plantation or factory closes, there’s no economically diverse ecosystem to pick up the slack.

If tourism doesn’t rebound very quickly, all the local economies that became hyperspecialized to serve global tourism (enabled by low-cost airfares and credit cards) will be gutted.

The second order effect of the pandemic will be the wrenching transformation of these local economies into a much broader economic ecosystem that will have to be moated from globalized competition. For example, grapes flown in from locales 3,000 miles away will be banned or heavily taxed so local grapes can compete.

A great many inefficiencies have been sustained by hidebound, self-serving institutions and cartels which have moated their industries from competition. These include higher education, healthcare, the defense sector and the recent crop of Big Tech monopolies (Facebook, Google, et al.).

A number of people have already noted that remote online classes have become the norm out of necessity, and this has revealed the incredible inefficiency of maintaining enormously costly campuses and bureaucracies for coursework that can be completed anywhere.

I wrote an entire book outlining how a superior education could be delivered for 10% of the current cost (roughly $120,000 for a four-year state college diploma). (The Nearly Free University and the Emerging Economy)

While the large research universities need students to physically be present to operate the machinery of experiments and research, the vast majority of undergraduate coursework does not require physical presence. In many lab settings, whatever physical presence is required could be drastically compressed in time or shifted to remote control of lab tools.

The same transition will occur in Corporate America as managers accept that there are few absolutely essential reasons to demand workers squander huge amounts of time and money transporting themselves to centralized workplaces.

The trend to remote work is not new, but it is now being accelerated past the point that hidebound managers will be able to demand a return to the inefficiencies of the former status quo.

This shift to decentralized, networked remote work will have a devastating impact on the commercial office sector. A very large percentage of the already-excessive supply of office space will be surplus, and it won’t be cheap or easy to transform offices into residential living spaces.

(An entire floor of office space might have one set of bathrooms and a single utility kitchen; every living unit will of course require its own bathroom and kitchen.)

The financial fragilities and vulnerabilities that are now becoming apparent are not limited to hyperspecialization and globalized monoculture economies. The cost structure of most small enterprises was burdensome even in the best of times: rent, utilities, fees, taxes, regulatory compliance, insurance, labor overhead and so on are now crushingly costly, and once revenues decline by even modest amounts, the small businesses are no longer viable.

Costs such as rent, healthcare insurance, local fees and taxes are notoriously “sticky,” meaning the default setting is to ratchet ever higher. These costs don’t drop unless there is a full-blown crisis such as mass bankruptcies of commercial landlords and cities.

Thus we can anticipate a culling of all the marginal, struggling small businesses in the pandemic recession, and a weak or non-existent emergence of new businesses in the future to replace those lost, as revenues will remain weak while costs will only increase.

Few observers are pondering the psychological changes that the pandemic have unleashed. To take an obvious example, consumers will no longer be able to maintain confidence in their incomes or the market value of their labor and assets. This uncertainty will naturally encourage savings rather than frivolous spending and debt, and this change will depress consumption.

Status quo policies such as lowering interest rates will not change this psychological shift in the tides.

Lowering interest rates to zero won’t mean credit cards, auto loans and mortgages will be interest free, and lower rates won’t change the reality that incomes and asset prices may decline or remain uncertain for years to come.

The world has changed, and the only things we know with certainty are 1) a return to the pre-pandemic status quo is not possible and 2) this is a positive development.

Put another way: eras end. No matter how glorious or inglorious they may have been, eras end and a new era begins. Welcome to 2020.

This essay was drawn from Musings Report 12. The Musings Reports are emailed weekly to subscribers and patrons. To subscribe or become a patron, please visit how to subscribe/become a patron.

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With the virtual OPEC+ meeting starting the headlines and notorious jawbones and trial balloons are coming in fast, and Reuters reports that Saudi and Russia have reached a deal on deep oil output cuts, according to OPEC source while a senior Russian source says the two sides have agreed to remove their main obstacles to agreeing a new deal. As a reminder, earlier we reported that the two main sticking points between Saudi and Russia was the oil production date to use as a benchmark (with Saudi wanting April and Russia a average of Q1) as well as the size of the production cuts that are to be undertaken.

While details remain scarce, according to the WSJ’s Summer Said, Russia has agreed to a deal under which it would cut 2MM B/D. And while there is no confirmation there is speculation that Saudi Arabia would cut an additional 4MMB/D; it is unclear where the rest of the cuts will come from.

##Saudis, Russians Agree in Principle on Cut Deal, Under which, #Russia Would Cut 2M B/D-Sources #OOTT

— Summer Said (@summer_said) April 9, 2020

Separately, a Russian source said that OPEC+ is discussing oil cuts as large as 20mln BPD, with the caveat that this figure is just for discussion, and without any details on the breakdown.

Yesterday, Goldman said that any cuts beyond 10mmb/d would disproportionately impact Saudi Arabia which would have to shoulder the bulk of the cuts, so we would discount this particular news, although the oil market appears to be taking it at face value and oil surged on the news, although it has since pared some of the gains as rational minds realize that a 20mmb/d cut is virtually impossible without the participation of the US which as we know is not happening, at least not today.

One wildcard to keep in mind is that as Bloomberg notes, the OPEC+ meeting has been preceded by huge political pressure from the U.S. From President Donald Trump to Republican and Democrat lawmakers, everyone in Washington has pointedly asked Saudi Arabia to cut output and lift oil prices. The American political discourse has been colored by the experience of the 1973-74 oil crisis for 50 years. Since then, the U.S. has been against foreign oil and for cheap crude. The U.S. now accepts that ultra-low oil prices aren’t in its interest.

But if Saudi Arabia is indeed aiming to crush shale as Putin recently admitted, why would Saudi Arabia agree to cut production without a similar action by the US?

We’ll find out soon.

As we detailed last week, since 2017, we have been following the bread-crumbs of the mysterious VIX-whale nicknamed “50-Cent” – so-called for his habit of scooping up super-cheap VIX calls at a price around 50c (and with very good timing):

• April 2017 – Who Is The Real “50 Cent” – A Mystery Trader Is Systematically Betting Massive On A VIX Spike

• Feb 2018 – VIX-Trader ’50Cent’ “Steamrolls” XIV-Traders To $200 Million Gain

• Jul 2019 – Is VIX Whale ’50-Cent’ Back? Volatility Collapse Sparks Huge Bearish Bets

• Dec 2019 – VIX Options-Whale ’50 Cent’ Re-Emerges As New Short-Vol ETF Appears

He is among several VIX whales discovered in recent years.

And then,  according to The FT, the real ’50-cent’ has stepped forward as Jonathan Ruffer – a London-based fund manager for investment firm Ruffer Capital… and  as The FT reports, Westminster-based Ruffer, which has about $23bn under management, made roughly $2.6bn on a series of trades in March, offsetting losses stemming from the global sell-off sparked by COVID-19 and the oil price war.

The fund said it made more than $800m from a $22m purchase of VIX-related derivatives, and a further $1.8bn gain came from other equity, gold and credit derivatives that insulated against the manager’s losses.

Rather notably, these massive gains offset losses leaving Ruffer’s flagship Total Return fund down 0.8% at the end of Q1.

Of the hedge gains, the fund made $1.3 billion from CDS – protecting against credit weakness:

“I think the US is going to see a massive default cycle,” Ruffer told the FT.

“It’s too big of a shock to cushion. You cannot just put the whole economy on a cryogenic freeze.”

But, as we noted previously, we may have seen the last ’50 cent’ footprint in the VIX markets.

“I won’t say I’ll never use VIX again but I don’t think I will for some time. This was a regime-change moment,” he said.

“The essence of this was protection. We have performed in a lacklustre way for years and part of the reason for that is because we were worried about a sell-off like this.”

In sum, Ruffer noted that “the catastrophe insurance did absolutely everything that might be expected of it. And it is now spent. It is likely to be some time before this insurance again prices at levels that makes it attractive as a defensive investment.”

So what is that new protection?

“Our investments in credit spreads have protected the overall values of the portfolios, as conventional asset prices have tumbled. As I write, there still seems a good deal more mileage in this idea – we had positioned ourselves just outside the ‘safest’ corporates, as these could be the beneficiaries of Federal Reserve intervention. The Fed has intervened, and it will be interesting to know whether this does in fact stabilise the corporate bond market.

But we think gold is the right place to be for the battles ahead.

Any loss of confidence in the value of the collateral will manifest itself in a fear of inflation, since money is an expression of confidence in a token (fiat money, it is called – the divine ‘let it be’) – and if that confidence is lost, it ceases to do its job as a store of value.

What is clear is that central banks and governments will use whatever firepower they have – even if it turns out that their cheques are blank.

Accordingly, we have increased again our holdings in inflation-linked bonds (notably in the US). These will be a proper protection against a grinding bear market in money, in savings, in prosperity. The time is moving on from a world where we had to protect against sudden shocks – catastrophe insurance is behind us, job done. The investment landscape is going to become much more familiar, but it will only be a homecoming to the greybeards (what’s the gender neutral word for this? The mind boggles) who have lived it before.

Thirty-three years is a long detour – and for many it will have proved a cul-de-sac. It is difficult to master old tricks, secondhand, but my prediction is that it will prove a valuable quality over the next longish while.

His firm’s philosophy is built around the fact that clients love making money, but they hate losing it more than they like making it… something we suspect many “gurus” who have ‘come-up’ in the last decade of central bank largesse are about to discover this lesson the hard way.

Finally – Ruffer had one piece of advice for today’s non-veteran traders – “The biggest danger comes from an overwhelming desire in all of us to ‘buy the dips’.”

Well that’s not supposed to happen…

Nasdaq has puked back all The Fed gains…

For now, The Dow and S&P are holding gains…

HYG is still up massively but is fading…

If this move by The Fed doesn’t work… there’s only one thing left for them to buy – Stocks! Just as Yellen had suggested (and all you have to do is look at the Nikkei to see how well that has worked over the past decades).

Authored by Bill Blain via MorningPorridge.com,

“And all I ask is a tall ship, and the wheel’s kick and the wind’s song and white sail’s breaking….”

Another day in lockdown begins.

When they come to make the film of this crisis, it will quickly become apparent the Virus is just the McGuffin, the plot device behind the most massive economic calamity of all time. 

I started the morning reading through emails and newspapers. The news is? Dismal. Depressing. Scary. Frightening. And occasionally something rational. Yet stocks are 20% up since the low a few weeks ago – a bull market? What have I learnt? Nothing I hadn’t already figured out. Markets and reality remain disconnected. I could be writing exactly what I said on Tuesday’s Porridge Lite-Bite video clip – see it here.

But the sum total of all the news is a growing awareness of the potential consequences – which is why it feels the ongoing market euphoria is unlikely to last. Surely even the most rabid market bull can’t ignore reality this bad, and its likely to get worse. As the real economic news gets worse.. reality bites.

Unfortunately, that is not how markets work. Markets price the opportunities that stem from manipulation and distortion. Central banks and the Authorities have done everything possible to support the global economy. Markets are delighted at the buffet of opportunities that have been created! 

Among the many games to play are junk bonds. European Banks in particular hold a stack of junk debt – having expected to have sold it to yield hungry investors. If these junk names widen, or look more likely to default, it’s going to trigger yet another banking crisis. The ECB can’t afford that, and in the spirit of “Whatever it takes” will mumbleswerve some accommodation to buy junk under some new programme. What does that really do? It encourages bankers to take more junk risk, secure in the knowledge central banks will bail them… and risk remains mispriced. No wonder we are in trouble.. 

Consequences, Consequences… Someday there will be a terrible price to pay.. 

Meanwhile we are learning what is working, what is not, and how the consequences are crashing light lightning through every aspect of our modern, complex interconnected society, and ripping it apart.  It’s going to be a hell of a job to put it all back together again.. when this is over. And over it will be.. sometime. Just not tomorrow, or the day after that.. 

And putting it back together is why I’m still hopeful about finance – we are going to have a massive and very rewarding job to do building a new global economy. 

This morning’s crop of market stories confirm the growing economic nightmare: 

There will be no Coronabonds to bail out poor Europe, recession across the continent looms. Spain will fare worst. Investors are feeling the pain from gated property funds, difficulties accessing pension accounts, and a collapse in dividend income.

A modicum of good news for my chums at the UK Debt Management office – they won’t need to sell as many Gilts as quickly as they feared. The Bank of England has extended the UK’s overdraft facility, allowing Govt to borrow/print directly. House markets are crashing.

Even the end of the Wuhan Lockdown isn’t proving terribly useful to Chinese citizens trying to get home and finding they have to spend 14 days in a state quarantine hostel first. Other parts of Asia are isolating again…

I don’t need to list all the bad news. Just open any financial news wire to hear more bad news. The whole planet is a bit of a mess, but the fact oil prices are on the rise will probably be enough for Wall Street to light up a fat cigar and declare it a buy day!…. 

What’s the Good News?

Markets adapt faster than we think. 

Already we’re seeing the likely shape of the new post-virus economy. For instance, hedge funds stepping into buy distressed cash poor tech companies at “more” realistic valuations – see AirBnBraising new cash y’day. Go figure what that means for every It and other deals are signals there is rationality out there – as smart investors start to anticipate what the future looks like. 

And that is what makes finance interesting – the markets may be stupid, irrational, and daft, but they are cunning. There is always something smart to focus on. 

I’m working on funding deals for SMEs, asset back deals in aviation and corporate lending, seeking to finance a critical but ESG difficult economic resource, looking at building new infrastructure and a host of other things – all of which will become part of the new Post-C19 economy.. Or so I hope… 

It’s going to be exciting…

While not entirely surprising, the scale and suddenness of the collapse on confidence among American consumers is stunning.

The latest data from University of Michigan is a bloodbath…

• The preliminary University of Michigan consumer sentiment survey for April fell to 71.0 vs. 89.1 prior month, largest monthly decline on record

• Current economic conditions index fell to 72.4 vs. 103.7 last month; 31.3-point drop nearly double prior record decline of 16.6 points set in Oct. 2008

• Expectations index fell to 70.0 vs. 79.7 last month

This is the biggest crash in the current conditions index ever…

Indeed, the peak decline in the Expectations Index recorded in December 1980 reflected a relapse following the end of the short January to July 1980 recession, signaling the start of a longer and deeper recession that lasted from July 1981 to November 1982.

“When consumers were asked about their financial prospects for the year ahead, 38% expected improvement, barely below February’s 41%, suggesting a temporary virus impact.”

Social-distancing measures and closures of non-essential businesses across most U.S. states have resulted in an unprecedented 16.8 million applications for jobless benefits in the past three weeks. Consumer spending is projected to collapse and the economy is likely in a recession.

“Surging unemployment was spontaneously mentioned by 67% of consumers, just below the all-time record of 74% in February 2009.”

Buying Conditions have collapsed to the weakest since the 80s…

While the declines in vehicle and home buying attitudes were not as steep, the share of consumers who cited income uncertainty as the primary cause for postponing purchases of vehicles and homes was also the highest level ever recorded.

The survey was conducted March 25 through April 7, a period that includes the record surge in applications for jobless benefits and stock-market volatility.

“Consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick and robust economic recovery,” said Richard Curtin, director of the survey, in a statement.

“Sharp additional declines may occur when consumers adjust to a slower expected pace of the economic recovery.”

“When asked about prospects for income gains during the year ahead, the expected median change in income was a negative six-tenths of a percent, the largest decline ever recorded.”

Finally, one-year-ahead inflation expectations have also crashed to their lowest since 2009 at +2.1%.

HYG – the largest, $15 billion high yield bond ETF – is up a stunning 8% this morning the most since January 2009, after the Fed surprised the market with its new “we’ll buy any old crap” policy, or specifically expanded its corporate bond buying program to include debt from companies that recently lost their investment-grade rating. The announcement also gave a boost of the same magnitude to the $8.5 billion SPDR Bloomberg Barclays High Yield Bond ETF, or JNK.

This is the biggest daily jump since Oct 2008…

Echoing what we said previously, Seema Shah, chief strategist at Principal Global Investors said that “Fears about how the high-yield market would absorb the likely wave of oncoming ‘fallen angels’ has been weighing heavily on the market. The announcement is a significant relief, as reflected in the HY market’s response.”

The broad credit market is seeing massive spread compression…

As we noted earlier, with this intervention in the equity-like junk bonds, there are no more free markets as what today’s action means is that the Fed’s nationalization of stocks ust now just a matter of time.