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Authored by Mike Shedlock via MishTalk,

The Fed is robbing the middle class once again…

For the third time in 20 years, the Fed has targeted the middle class for the benefit of the wealthy.

Don’t believe Fed lies. Its bailout of risky debt including junk bonds helps investors, not employees. 

Once again, the Fed Punishes Prudence.

The Fed will deploy more than $1.45 trillion in support of investors in leveraged assets—more than double the size of the 2008 Troubled Asset Relief Program, and over $7,000 for each working-age American. That includes $750 billion to purchase recently downgraded junk bonds and bond exchange-traded funds—an unprecedented intervention in the private credit markets.

Pumping trillions of dollars into corporate credit and even high-yield debt will further distort markets already shaped by a decade of easy-money policies. This is no abstract concern. The result will be an acceleration of two economy-wide transfers of wealth: from the middle class to the affluent and from the cautious to the reckless.

The transfer from the middle class to the wealthy continues a trend begun in the wake of the 2007-09 financial crisis. 

But bankruptcies among highly leveraged businesses often pose surprisingly little risk to employment. More often than not, creditors choose to keep businesses staffed even when restructuring to retain value for the long-term. By preventing these bankruptcies, the Fed is doing more for equity holders and junior creditors than for employees.

Almost Spot On

Authors Sam Long and Alexander Synkov are almost spot on.

What did they get wrong?

This trend did not begin in the wake of the 2007-09 financial crisis.. Rather it’s been an ongoing process. 

Importantly, this is the third major acceleration in the process. 

1. The first major acceleration began in the wake of the dot-com bust when the Fed bailed out the lenders who made loans to worthless companies. Housing prices soared to the moon as the Fed stood by and watched. Bernanke denied there was a bubble. The transfer of wealth to the likes of companies like Countrywide Financial was massive.

2. The Second acceleration was in response to the bust. For the second time, the Fed held rates too low to long.  Asset prices went to the moon and speculation surpassed that of the housing bubble and the dot-com bubble.

3. This preposterous entry into Junk bonds and other bailouts is the third major acceleration and the Fed had to bend some rules to do so. Buying junk bonds is illegal under its actual mandate.

Pole Vaulting the Boundaries

Some claim the Fed pushed the boundaries by buying junk bonds.

I suggest When you take illegal actions and enter numerous uncharted territories on balance sheet expansion, junk bonds, and bond ETFs you are not “pushing” the boundaries, you are pole vaulting over them.

Too Big to Fail

Note my post earlier today: Carnival Deemed Too Big to Fail, Rescued by the Fed.

Carnival needed money. The Fed became the lender of last resort.

Carnival could easily file for bankruptcy reorganization and reschedule debt payments.  One of my friends commented “This is just a play to save the equity, who are Trump’s friends.” 

OK but why would the Fed do this? 

“Because he has appointed a ball-less group of wimps. It largely does what he wants. Particularly on a petty issue like this,” replied my friend.

The transfer of wealth from the middle class to the wealthy just accelerated.

What constitutes “too big to fail” keeps getting smaller and smaller. 

Why Rob the Middle Class?

Some may be wondering why the Fed has targeted the middle class. 

Because as Willie Sutton once replied when asked why he robbed banks, “Because that’s where the money is.” 

The poor do not have any assets or money left to setal. 

There Are No Temporary Measures, Just Permanent Lies

Under guise of virus support, the Fed Will Buy Junk Bonds, Lend to States to the tune of an additional $2.3 trillion in additional aid.

Dear Jerome Powell, please tell the truth. This is not virus support, it’s stock market support.

This new junk bond “tool” is now permanent.

Always remember, There Are No Temporary Measures, Just Permanent Lies.

After a dismal first quarter for US banks which saw a surge in loan loss reserves, if not nearly enough to offset the default wave that is coming…

… it was the turn of Europe’s mega banks to “open the kimono” so to speak, and what they revealed was not pretty.

On Tuesday morning, European banking giants HSBC Holdings and Banco Santander, took the biggest hits so far among European banks struggling to contain the impact of the coronavirus on their loan books, with the U.K.-based lender expecting as much as $11 billion of damage this year because of the outbreak.

HSBC slashed its first-quarter profit in half on Tuesday after reserves for bad loans surged fivefold – similar to the increase in provisions recorded at JPMorgan – prompting Europe’s largest bank to deliver a stark warning on the deep and lasting impact of coronavirus on the financial sector.

Loan provisions jumped 420% to $3BN, on track to hit the highest annual level since the financial crisis, as the bank prepared for a flood of bankruptcies and defaults caused by global lockdown measures to control the pandemic.

A large chunk of the loan losses were blamed on a single “corporate exposure in Singapore”, which the bank said was “the primary driver” of a $700MM increase in expected loan losses in the region. As the FT previously reported, HSBC has the biggest known exposure to the previously discussed Singapore oil trading giant Hin Leong at $600MM, which has filed for bankruptcy and is currently under police investigation for fraud.

Unlike US banks – who were notoriously shy about disclosing future loan loss reserve plans and rather conservative in their loss provisions as the six largest US lenders increased first-quarter loan provisions by a combined $25.4bn — a year-on-year rise of 350% – HSBC execs had not problem cautioning that this was just the beginning, with provisions set to hit $7BN to $11BN by the end of the year, causing “materially lower profitability” in 2020. To preserve liquidity, HSBC has already suspended its dividend, reducing expenses and slashing the bonus pool by a third.

Still, HSBC’s huge increase in provisions was more severe than its American rivals, with the six largest US lenders increasing first-quarter loan provisions by a combined $25.4bn — a year-on-year rise of 350 per cent.

“Loan losses are larger-than-expected but HSBC usually errs on the side of conservatism,” said Ronit Ghose, an analyst at Citigroup. “Business performance and a strong capital level is reassuring” he added, referring to the bank’s core CET1 ratio of 14.6 per cent, among the strongest of any of the world’s largest lenders.

The dismal outlook underlines the challenge facing new HSBC CEO Noel Quinn: as the FT notes, the crisis has already forced him to delay what he has described as one of the “deepest restructurings” in HSBC’s 155-year history. This saw it strengthen its focus on the lender’s pivot to Asia — where it makes the majority of its earnings — and shrink less profitable operations in Europe and the US.

“We are anticipating deep, severe recession events in western Europe and the US in the second quarter,” chief financial officer Ewen Stevenson told the Financial Times on Tuesday. The scale of loan losses depends on the “path of the economic impact and the shape of the recovery”, both of which are still unknown.

There was a silver lining, with the bank “seeing some encouraging signs of recovery in Asia . . . but as the rest of the world enters its crisis, China will not be immune from the impact of falling global demand” as “The outlook for world economies in 2020 has substantially worsened in the past two months.”

Last week, Credit Suisse saws its loan loss provisions surge by 600% albeit from a smaller base, while Italy’s UniCredit set aside an additional €900m for the first quarter. On Tuesday UBS increased provisions by a factor of 268 (1,240%), also from a lower base, while Santander posted an additional €1.6bn of Covid-19 related reserves. Santander CEO Jose Antonio Alvarez said in an earnings call that the situation is “workable” if there’s a relatively rapid recovery in the global economy as the lockdowns ebb.

“We are well prepared to face the headwinds we’re going to suffer in the coming quarters,” Alvarez said on a conference call Tuesday after the bank reported net income for the first three months plunged 82% because of its provisions.

“There are difficult times ahead,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown. “If conditions get worse from here provisions for bad loans will increase, and together with credit downgrades that will eat into capital reserves.”

At a moment total US COVID-19 cases fast approaches one million, President Trump has again lashed out at China but this time with a very specific threat to bill the county of the devastating coronvirus’ origin more that $160 billion for the ‘substantial’ amount for damages caused by the pandemic.

Trump made the comments from the Rose Garden at the White House Monday after he was pressed by a reporter over a German newspaper report suggesting that China should be issued a $160 billion invoice for the impact on Europe’s economy.

The president responded he had a “much easier” idea: “We have ways of doing things a lot easier than that,” Trump told the coronavirus press briefing. “Germany’s looking at things, and we’re looking at things, and we’re talking about a lot more money than Germany’s talking about.”

“We haven’t determined the final amount yet. It’s very substantial,” Trump added, suggesting it would be significantly more than the $160 billion floated in German media.

He argued that amid other failings, ultimately Beijing could have stopped the deadly disease at the source when it was first identified in Wuhan in December, though was present in November.

Hinting at sanctions despite also touting a positive relationship with Chinese President Xi Jinping, Trump told the briefing further, “There are a lot of ways you can hold them accountable.”

“We’re doing very serious investigations, as you probably know. And we are not happy with China. We are not happy with that whole situation,” he said. “Because we believe it could have been stopped at the source. It could have been stopped quickly, and it wouldn’t have spread all over the world.”

Meanwhile The Daily Mail reports of the original German newspaper report which triggered the exchange as follows: 

Last week German paper Bild calculated an ‘invoice’ of nearly €150billion (around $162billion) in economic damage to Germany because of the crisis. 

The idea of charging reparations to China is not endorsed by the German government, with Minister of Foreign Affairs Heiko Mass describing the concept as ‘illusory’.

Germany’s Bild: “A time is coming when those responsible will be held accountable!”

It marks the first time President Trump has gotten this specific about coronavirus ‘reparations’ paid out by China, given dollar amounts were bandied about in the press briefing.

Since last month he’s echoed that “China must pay!” when raising the issue of economic devastation suffered across the US as a result of the economic “pause” and widespread state lockdowns.

Submitted by Michael Every of Rabobank

It was another risk-off day in Asia with stocks generally down and oil prices most decidedly so. WTI was trading at USD10.89 at the time of writing when it started the year at around USD60, and Brent at USD18.89 when it began around USD64. Such is the real damage still being done by the virus regardless of New Zealand tentatively going back to work.

Work should be on our minds today. Bloomberg reports a Chinese brokerage published, and then retracted, a report saying that the national unemployment rate was now 20.5%, over three times what the official measure says, which is 5.9%. This was seen as the result of a collapse in services and small businesses, and certainly fits the pattern unfolding elsewhere absent highly-regulated labour markets. The US will likely have seen a cumulative 30 million jobless claims this week in just over a month a half; and Thailand is talking about 7 to 10 million unemployed in a country with a population a fifth of the size and a traditional (accurate) unemployment rate of around 1%. Meanwhile Singapore, who a while back was being held up as a supreme example to us all on virus-fighting, has seen its biannual MAS Macroeconomic Review expect job losses and wage cuts “which will bear the brunt of the labour market adjustment in the near term.” Won’t that be good for consumption and oil demand!

Back in the US(SR) we also had another remarkable political development – with no bleach involved. House Speaker Pelosi, who recently made a video to show how tough it is being under lockdown at home with a USD24,000 fridge packed with ice-cream, yesterday said the following on the next US stimulus package: “Let’s see what works, what is operational and what needs attention…Others have suggested a minimum income, a guaranteed income for people. Is that worthy of attention now? Perhaps so.”

In short, in the same week we get a slew of key central bank meetings from banks who are already at zero or below, and on the same day the Bloomberg market chat is talking about who in Asia is doing outright debt monetisation vs. massive QE, and who globally will have to do yield curve control too, the US Overton window is perhaps moving towards Universal Basic Income (UBI). THAT, along with oil, shows how bad things are right now out there.

Of course, we are already seeing the previously unthinkable become reality – the UK government paying private-sector wages, for example. So there are lots of seemingly crazy ideas like ‘green eggs’ being served up already. Yet now we are perhaps to see the Speen-HAM-land to go with it.

Why, beyond an abiding love of Dr Seuss, do I say this? First, because as just noted it is a sign of how terrible things are that this idea is emerging at all: it’s a desperately bearish indicator. Second, because, for those who haven’t heard this spiel before, Polanyi in ‘The Great Transformation’ details how we have already tried this policy and it is terrible: it’s a desperately bearish indicator if introduced. Which perhaps one can no longer rule out by chanting:

“I do not like green eggs and ham, ‘cos I am a Republican

I will not back them in the House; I do not wish them for my spouse

I will NOT vote green eggs and ham!”

Polanyi details the social devastation created in the UK by the ending of feudalism and the introduction of a market economy, free labour market, and industrialisation. In doing so, the poor lost access to common land which had for centuries provided shelter and food; there was official consternation that more and more paupers were suddenly appearing in towns and villages across the country; few could make the connection as to why it was happening in the face of so much progress. (A hat-tip to Henry George there, for those who notice.) In order to maintain social order and save the young market economy, as well as to salve Christendom’s conscience, the Speenhamland legislation was introduced in 1795. This provided “subsidies in aid of wages”, which was tied to the cost of a loaf of bread. Specifically, it meant that a family would get the equivalent of four loaves of bread a week regardless of whether they worked or not. In today’s far wealthier US economy we might argue this would be the equivalent of USD250 a week – though that is a purely arbitrary figure of course. Surely this is bullish for markets?

Yet in a raw capitalist economy the outcome was a disaster. Market wages started to move downwards because employers could see that the state was subsidizing them and the worker would not starve. The most productive workers saw their wages cut regardless of how well they performed, and pay rates levelled off not far above the subsidy level that the state was already paying out. That was not a problem for the employers, of course, but they were worried by the subsequent collapse in productivity, as the laziest workers also knew they were going to get a minimum income regardless of how little work they did. In short, Speenhamland failed everyone, and it was repealed in 1834.

Look around you at the vestiges of the prevailing pre-Covid political-economy with its meagre real wage gains for most workers, cheer-leading of income-slashing ‘disruption’, subsistence ‘gig’ jobs, and widespread sluggish productivity growth; add in massive unemployment due to Covid; splash a dash of ‘Singapore’-style wage cuts; throw in central banks now making UBI politically possible; and consider that the alternative recipe is a radical combination of high state investment and industrial policy and re-regulation that will have to mean further deglobalisation. Do all that and say we won’t be trying to serve the same Green Eggs and Speenhamland once again – and all choking on it as a result. Bullish this is not.

“Do you like green eggs and Speenhamland?

I do not like them Uncle-Sam-I-am.

I would not like them here or there; I would not like them anywhere.

I do NOT like green eggs and Speenhamland.”

After surging in early trading, rising as much as 400 points, the Dow Jones has given up all gains, and quick turned red, with the catalyst that sent the broad index negative a report from Dow Jones that Boeing – which yesterday warned things won’t return to normal for years – faces “criminal, civil scrutiny into years of 737 Max quality-control lapses”, after Company inspections found debris left in roughly half of undelivered 737 MAX jets; according to the report, the latest development “exposes the plane maker to greater legal liability than previously anticipated by industry and government officials.”

According to the report, “the inquiries build on a federal grand-jury investigation into hazardously designed flight-control systems” and as part of the expanded probes, Justice Department prosecutors and federal air-safety regulators have been scrutinizing potentially significant safety problems stemming from 737 MAX production missteps.

The grand jury probe has focused largely on what certain Boeing employees told Federal Aviation Administration officials about the dangers of a faulty stall-prevention feature before it led to two fatal MAX crashes in less than five months and prompted the March 2019 grounding of the global fleet, according to people familiar with the matter.

The report adds that FAA investigators have also been examining factory problems that raise red flags about the Chicago plane maker’s compliance with mandatory production rules and safeguards. As reported several months back, Boeing found debris mistakenly left behind by workers in fuel tanks or other interior spaces of approximately half of the MAX aircraft it inspected starting last November, according to a company spokesman.

The FAA is pursuing possible civil-enforcement action and is considering proposing a multimillion-dollar fine against Boeing regarding the debris issue, according to DJ sources. The agency also is drawing up plans for stepped up government oversight and enhanced assembly-line inspections amid anticipated resumption of MAX production in coming months.

The news was enough to break any upward momentum stocks may have had, with the Nasdaq slumping in the red well ahead of the Boeing news perhaps in response to the weekend’s Goldman report slamming the massive outperformance of the Top 5 tech names, which even Goldman said is unsustainable and “always ends in a steep drawdown.”

Three days after Politico dropped a ‘bombshell‘ report about President Trump owing millions of dollars to the Bank of China, they published a lengthy retraction seven minutes before midnight on Monday.

The article claimed that a $1 billion refinancing deal from several banks – including the Bank of China, was struck in 2012, in which the Trump Organization ‘has a substantial minority interest,’ and that President Trump therefore owes the Chinese state-owned bank ‘tens of millions of dollars’ on a loan which comes due in 2022.

This was absolute bullshit.

Politico admitted that they hadn’t contacted the Bank of China before going to print, and had relied on public documents. Following the report, the Bank of China told the outlet that they had ‘sold off, or securitized, its debt shortly after the 2012 deal,’ and that the bank has no current financial interest in any properties related to the Trump Organization.

Keep in mind that three journalists wrote the original article; Marc Caputo, Meridith McGraw, and Anita Kumar – none of whom thought to practice safe journalism and put the brakes on their bombshell report until contacting the Bank of China.

Of course, this massive lie percolated throughout liberal media over the weekend – and was repeated by Joe Biden in an interview with CBS Miami.

Politico admits that it didn’t seek a comment from the Bank of China before claiming that Trump owed millions of dollars on a loan partially-owned by the Bank of China. The story was false. Joe Biden repeated it in an interview with CBS Miami last night.https://t.co/5NM4z3gT9a

— JERRY DUNLEAVY (@JerryDunleavy) April 28, 2020

Politico‘s ‘gotcha’ was reduced to an ‘unresolved discrepancy’ in the form of a 2017 document filed by Wells Fargo with the NY Department of Finance listing the Bank of China as having a financial interest in the building, indicating that the state-owned bank had secured an interest in the building’s fixtures – such as its toilets and air conditioning systems – in case of a default. Except, Wells also admitted that this was an error, and is “taking steps to correct the record with an updated filing.”

A far cry from ‘the US president owes China millions.’

A massive blast has ripped through a crowded commercial hub in the Northern Syrian city of Afrin along the Turkish border.

Turkish state media initially reported at least ten civilians killed after a bomb-laden fuel tanker truck exploded. Turkey’s state-run Anadolu news agency called it a “terror attack” carried out by unknown assailants. Subsequent updated reports said there are at least 34 dead, with the death toll expected to rise as emergency responders battle the resulting blaze. 

UPDATE: 34 dead & 30+ wounded in today’s bombing in #Afrin.

Locals now suspect it was a truck/tanker loaded with explosives, which detonated near a fuel station.

Most of the dead appear to have burned to death. Horrendous. pic.twitter.com/wDTuAXtze0

— Charles Lister (@Charles_Lister) April 28, 2020

Local reports say scores are among the wounded, with Syrian opposition media group the British-based Syrian Observatory for Human Rights (SOHR) describing “The explosion was caused by the detonation an IED [improvised explosive device] on the road to Turandah, which caused material damage.”

Kurdish regional media cited a source in Afrin who said further “the blast caused a massive fire at the city’s main bazaar.”

The attack may have targeted a fuel station in order to create maximum impact, according to early reports. 

The scene is utterly horrific:

#Breaking:
At least 13 killed and 30 wounded today in Afrin, #Syria after a car bomb exploded near a market.
Among causalities there are also some children. pic.twitter.com/ah2LhKTDHf

— Ahmad Algohbary (@AhmadAlgohbary) April 28, 2020

Unconfirmed reports suggest Syrian Kurdish militia fighters may have been behind the attack. At first glance it also bears the hallmarks of an ISIS attack, given the now ‘underground’ insurgent terror group has conducted similar ‘fuel tanker attacks’ in the past.

It follows Turkey’s cross-border military operation last year dubbed ‘Operation Olive Branch’ in which Erdogan effectively annexed Kurdish enclaves on Syrian soil.

UPDATE – The #YPG-linked HRE guerrilla resistance has claimed responsibility for today’s truck bombing in #Afrin, claiming its target was an #SNA HQ.

In fact, the attack hit a market — 34+ civilians are dead, many of them women & children. pic.twitter.com/HWwt8ywTM6

— Charles Lister (@Charles_Lister) April 28, 2020

Given international tickers and headlines, including Reuters, described that it was a massive “oil tanker” blast in Afrin – which it should be noted is a completely landlocked city currently occupied by Turkish armed forces – oil prices apparently spiked on the news.

And given the liquidity issues, June is dominating the price volatility intraday…

Given the coronavirus pandemic has in the past two months dominated headlines and the fight against the virus has become a singular occupation of governments across the globe, including in the region, the Middle East has remained relatively ‘quiet’ during that time.

Tuesday’s massive and deadly blast has changed that – it appears world markets are still potentially sensitive to significant destabilizing events in the war-torn region. 

Update (1030ET): Sometimes headlines hide just how dramatic the situation really is and putting the delusion into words is hard amid two months of superlatives. However, shortly after posting out macro update, David Rosenberg tweeted the following which everyone should read and consider as they BTFD on the back of The Fed…

“The Conference Board confidence report showed that just 34% of consumers, that 70% chunk of GDP, believes that business conditions are “normal”. That jives with an 18-year high 20x forward P/E multiple how, exactly?”

WTF indeed!

*  *  *

After plunging in March, expectations were for The Conference Board confidence survey to crash even further in April as COVID concerns began to really rage and lockdowns went nationwide.

The Conference Board’s headline index plummeted by 31.9 points, the sharpest drop since 1973 to its lowest since May 2014…

Source: Bloomberg

The Present Situation crashed to 76.4 (its biggest drop ever)…

But ‘hope’ never fails, with expectations rising very modestly from 86.8 to 93.8.

Shifting from American people to American business, The Richmond Fed Manufacturing survey confirmed the utter calamity across businesses in America, crashing to its lowest on record…

Source: Bloomberg

And finally, what all of that summed up means for the overall PMI… is a disaster

(h/t @Not_Jim_Cramer)

But hey, The Fed’s got your back right?