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As a result of the coronavirus outbreak, and the ensuing lockdown, the commercial property market has essentially frozen. 

Buildings that were used for all types of purposes: offices, diners, restaurants, hotels – they’ve all been shut down. And industries like the travel industry are forgoing $1.4 billion per week in revenue, according to Bloomberg. 

Source

The shutdown is also having an effect on apartment buildings and industrial properties. Nothing is off limits, and it’s sending the commercial property market into chaos.

Alexi Panagiotakopoulos, partner at Fundamental Income, a real estate strategy firm, said: “On the investor side, there’s widespread panic. There’s downward pressure on every aspect of every asset class.”

And there’s no way to value a market when you don’t have a bid and an offer – and you’re not sure when the market will “re-open”. Further, there’s no way to try and model the future value of such properties when everyone is unsure of what the real estate landscape will look like when everything is said and done. 

Scott Minerd, chief investment officer at Guggenheim Partners said: “There will likely be long-lasting changes.”

It’s estimated that investment activity in the space could fall by 45% this year, which would be further than post-9/11 or the 2008 financial crisis. 

The drumbeat of large deals has already gone silent. For example, Bloomberg reports that the Canada Pension Plan Investment Board’s planned sale of a 50% stake in the 900 million pound Nova development in London’s Victoria district collapsed on Friday. Similarly, Singapore-based ARA Asset Management Ltd., which was lined up to purchase the pension fund’s half of Nova, has balked on the deal.

Viacom also announced last week that it’s suspending its plans to sell the Black Rock building in Manhattan because potential buyers can’t visit the property. Simon Property Group’s proposed acquisition of Taubman Centers, Inc., is also now up in the air. 

More than $13 billion in funds in the UK has been frozen in property funds while appraisers warn that the virus makes it impossible to assess their value. China’s office market has been devastated with plunging rents and spiking vacancy rates, which could climb as high as 28% next year in Shanghai, according to estimates.

REITs in the U.S. have been destroyed. Names like Brookfield Property Partners, which made a $15 billion bet on malls in 2018, expects “severe consequences” in coming weeks. The company’s CEO says it has $6 billion in undrawn credit lines and cash.

Matthew Saperia, an analyst at Peel Hunt, commented on the potential threat to landlords: “The implications could be far-reaching, but quantifying these is highly speculative at present.”

As the uncertainty grows, the level of credit available begins to shrink. Financing has dried up for hotel, mall and senior living projects and it’s estimated that up to 15% of loans on commercial property could default over the next couple of years if the recession continues.  The value of commercial mortgage-backed securities is collapsing…

Mark Fogel, CEO of Acres Capital, commented: “Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it’ll affect the underlying collateral.”‘

And Minerd believes there won’t be a “back to normal” once this is all over: “I think there’s going to be a permanent change. People are more comfortable at home. Why do they need to commute?”

Amid the usual last minute negotiations in Washington, spread markets suggested an ugly open for futures but FX tradiong in Asia was relatively subdued for once.

Dow futures opened down 900 points…getting close to limit-down (in a replay – perhaps – of the failed TARP vote from 2008)…

Gold popped back above $1500…

10Y Kiwi paper yields crashed after RBNZ announced an emergency QE…

Developing…

 

 

 

 

 

 

 

Most Wall Street traders have probably seen this stock photo of the Dow Jones plunging 777 points back during the darkest days of the financial crisis…

… but what many may not recall is what prompted this then-near record drop.

The answer – it was the Sept 29, 2008 failure of the first TARP measure to pass Congress, which sparked concerns that the entire financial system could soon collapse (it eventually did pass, sparking the longest artificial, central bank-backstopped bull market in history).

So while we await if Republicans and Democrats will be able to bridge their differences and unleash the next mega bailout bill, one which grants the Fed a carte blanche to buy corporate bonds, and if Hank Paulson will need to make a cameo appearance begging Nancy Pelosi on his knees to just pass it, here is a reminder of what happened back on that historic September day when an entire generation of traders thought that it couldn’t possibly get worse… which was generally true, at least until March 2020.

Bailout plan rejected – supporters scramble

House leaders trade partisan words after historic financial rescue goes down in defeat.

In the span of just 11 days, the Bush administration and lawmakers, seeing ominous warnings in the credit markets, rushed to create legislation to prevent a potential economic meltdown. Monday, the resulting $700 billion bailout package was defeated in a dramatic House vote.

The bill was designed to get financial institutions lending again by letting the U.S. Treasury buy up their troubled assets, most of which are tied to the housing market crash.

But after much contentious debate, and the addition of several taxpayer protections, the package was rejected by the House in a vote that was 228 to 205 against. The measure would have needed 218 votes for the House to pass. The next steps were not immediately clear but supporters were scrambling to put it up for another vote.

“I’m disappointed,” said House Financial Services Chairman Barney Frank, D-Mass., talking to reporters after the vote. Noting that the Administration painted a dire picture of economic calamity if legislation didn’t pass, Frank said, “I’d like nothing better than to be proven wrong in the next few days. I was persuaded that we have a serious crisis and we’re threatened with a shutdown of the credit system when the economy is already weakened.”

The credit markets had been seized up all day Monday, and after the vote, the Dow Jones Industrial Average started to plummet and ended the day down 778 points, the worst point drop ever. On a percentage basis, though, the Dow drop was only about 7%, far less than the 22% slide on Black Monday in 1987.

Here’s a quick breakdown of some of the bill’s key provisions:

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Protecting taxpayers: The ultimate cost to the taxpayer is not expected to be near the amount the Treasury invests in the program. That’s because the government would buy assets that have underlying value.

If the Treasury pays fair market value – which investors have had a hard time determining – taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the assets, the government could be left with a net loss but would get something back on the open market for the assets when it eventually sells them.

If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

In addition, Treasury would be allowed to take ownership stakes in participating companies.

Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.

In cases where the government buys troubled mortgage loans directly from banks, it can adjust them more easily.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

They also will not be allowed to write new contracts that allow for “golden parachutes” for their top 5 executives if they are fired or the company goes belly up. But the executives’ current contracts, which may include golden parachutes, would still stand.

Overseeing the program: The bill would establish two oversight boards.

The Financial Stability Oversight Board would be charged with ensuring the policies implemented protect taxpayers and are in the economic interests of the United States. It will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury’s use of its authority under the rescue plan. Sitting on the panel would be 5 outside experts appointed by House and Senate leaders.

Insuring against losses: Treasury must establish an insurance program – with risk-based premiums paid by the industry – to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.

In this week’s Credit Bubble Bulletin, Doug Noland points out the ominous truth that the world’s governments have run out of new financial bubbles to inflate.

The result, as John Rubino sums up perfectly, “This time is different, in a very bad way.”

Here’s an excerpt from the much longer article, that should be read in its entirety:

Please Don’t Completely Destroy…

I’ve been dreading this. In the midst of all the policy responses to the collapse of the mortgage finance Bubble, I recall writing something to the effect: “I understand we can’t allow the system to collapse, but please don’t inflate another Bubble.” It was obvious early on that policymakers had every intention to reflate Bubbles.

There was a failure to grasp the most critical lessons from that terrible boom and bust episode: Aggressive monetary stimulus foments market distortions, while promoting risk-taking, leveraged speculation and latent risk intermediation dysfunction. Years of deranged finance ensured unprecedented economic imbalances and deep structural impairment. There was no predicting a global pandemic. Yet today’s acute financial and economic fragility – and the risk of financial collapse – are directly traceable to years of negligent monetary management.

I have to adjust my message for this post-Bubble backdrop: I understand we can’t allow the system to collapse, but Please Don’t Completely Destroy the Soundness of Central Bank Credit and Government Debt. Does anyone realize what’s at stake?

I don’t see another Bubble on the horizon. Each reflationary Bubble must be greater in scope than the last. Mortgage finance was used for post-“tech” Bubble reflation. Policymakers unleashed the “global government finance Bubble” during post-mortgage finance Bubble reflation. Massive international inflation of central bank Credit and sovereign debt went to the heart of global finance – the very foundation of “money” and Credit.

There is no greater Bubble waiting in the wings to reflate the collapsing one. We are instead left with desperate measures to expand central bank “money” and government borrowings that will surely appear absolutely reckless in hindsight.

Let’s touch upon prospects for Bubble reflation. There was an abundance of positive spin coming out of the previous bust period. “If only the Fed hadn’t incompetently failed to bail out Lehman, crisis could have – should have – been avoided.” Reckless home lending caused the crisis, and regulators will never tolerate a replay. Prudent “macro-prudential” policies and an abundantly capitalized banking sector ensure stability. From the crisis experience, central bankers learned to move early and aggressively to nip market instability in the bud.

The previous crisis was labeled “the 100-year flood.” Onward and upward, with enlightened central banking both leading the way and ensuring a smooth ride.

With assurances of central bank liquidity and market backstops, an unprecedented Bubble inflated throughout global leveraged speculation. Popular “carry trades,” foreign-exchange “swaps” and myriad derivatives (incorporating leverage) and such morphed during this cycle into a colossal self-reinforcing Credit Bubble. The resulting liquidity became a prominent fuel source for asset and economic Bubbles, reminiscent of the late-twenties.

Can’t a massive expansion of central bank Credit (securities purchases, lending facilities, swap lines, etc.) now reflate the Bubble? I seriously doubt it. Risks associated with various strategies have been revealed. Leverage in its many forms has been, once again, shown to be a serious problem. Rather than the proverbial “100-year flood,” for the second time in less than 12 years the world is facing the worst financial crisis since the Great Depression. Burn me once, shame on you. Fool me twice…

It’s not hyperbole today to use “depression” to describe the unfolding deep global economic downturn. Coronavirus uncertainty makes it impossible to forecast the length and severity of the economic collapse. In the best case, the rapidly expanding outbreak in Europe and the U.S. subsides over the coming weeks. Even so, economies around the world will take huge hits. And prospects for the coronavirus to reemerge next winter (and emerge more powerfully during the southern hemisphere’s approaching winter season) will keep risk-taking well-contained for many months to come.

Coming out of the previous crisis, the global economy had the benefit of a powerful “locomotive” of accelerating expansions in China and the emerging markets more generally. Importantly, post-Bubble reflationary measures came as these fledgling Bubbles were attaining powerful momentum. Beijing pushed through an unprecedented $600 billion stimulus package, while aggressive monetary policy stoked EM booms generally. Keep in mind that total Chinese banking system assets inflated from about $7 TN to $40 TN since the crisis.

Looking ahead, the global economy is without “locomotives.” It evolved into one massive global financial Bubble financing a precarious synchronized global economic expansion. And I believe speculative finance became a prevailing source of Global Bubble Finance.

Here’s where I could be wrong. I seriously doubt this Bubble is revivable. The unwind will likely unfold over weeks and months. Extraordinary central bank measures will spur rallies and hopes for recovery. At times, it will appear that liquidity is returning. Yet the Bubble will not be reflated.

Confidence has been shattered. Faith that central banks have everything well under control has been broken. Myriad fallacies have been exposed. Central banks can’t guarantee liquid markets, especially in a Bubble-induced highly levered speculative environment. The entire derivatives universe has been operating on the specious assumption of liquid and continuous markets. History is unambiguous: markets experience bouts of illiquidity, dislocation and panicked crashes. The fantasy that contemporary central bank monetary management abrogates illiquidity and market discontinuity risks is being debunked. The mania in finance has, finally, run its course.

Leverage has to come down – and I believe it will stay down for years to come. A month ago risk could be disregarded – had to be disregarded. Market, financial, economic, social and geopolitical risks matter tremendously now, and they will matter going forward. In the best-case scenario, the coronavirus peaks over the coming weeks. I don’t want to ponder the worst-case.If financial collapse can be avoided, an altered financial world awaits. The old scheme doesn’t work any longer. The era of cheap money financing massive stock buybacks has ended. Leveraged speculation creating self-reinforcing liquidity abundance and asset inflation – over. Buy and hold and disregard risk has been discredited. Blindly plowing savings to perceived safe and liquid ETFs is a thing of the past. In the new financial landscape, can derivatives be trusted? How about the private equity Bubble? The age of endless cheap finance for virtually any borrower or equity issuer (irrespective of cash flow or earnings) has reached its conclusion.

Meanwhile, “helicopter money” has arrived. Seemingly outrageous on Monday, Senator Schumer’s proposal for a $750 billion stimulus package was small potatoes compared to spending plans contemplated by week’s end. Federal Reserve Assets surged $356 billion the past week to a record $4.668 TN. Fed Assets were up $907 billion over the past 28 weeks, as it becomes clear a $10 TN balance sheet will unfold more quickly than I have anticipated.

The inexhaustible inflationists and eager MMT adherents see their opening. “Please Don’t Completely Destroy…” will haunt me – and the world. In a crisis, no one was willing to stand up to Bernanke. Today, “Helicopter Ben” looks fainthearted compared to what today’s central bankers are about to attempt. The experiment has gone terribly wrong, just as foolhardy bouts of inflationism have throughout history.

If they actually believe the massive inflation of central bank and government Credit will reflate markets and economies, they will be grievously disappointed. Government debt and central bank balance sheets have commenced what will be a frightening buildup. The inflationary consequences are today unclear. What is clear is it will be anything but confidence inspiring. The desperate inflation of perceive money-like Credit will not encourage the leverage speculating community to re-leverage. It will not entice burned investors back into perceived money-like ETFs. It will not stabilize currency markets. However, it does risk a bond market debacle.

History’s greatest Bubble is nearing the end of the line. It’s all left to central bank credit and sovereign debt – the massive inflation of Credit at the very foundation of global finance. This experimental strategy is so fraught with peril that it is difficult to believe that risk will be disregarded – that things can somehow stabilize and return to normal. Confidence in central banks’ capacity to control global markets has been irreversibly damaged – and a long overdue market reassessment of the value of financial instruments has commenced.

Trade accordingly…

(and remember around 80% of household net worth is in financial assets)

 

While Robert Reich may be very badly confused what the word “hedge” means…

Average hedge fund down 9% this year so far.

S&P 500 down 24% so far.

No way hedges could do this without inside information.

When this emergency is over, hedge funds must be investigated.

— Robert Reich (@RBReich) March 22, 2020

… his comment does touch on a valid point, even if it is diametrically the opposite of the one he had hoped to make: according to Hedge Fund Research, the HFRX Equity Hedge Fund index just suffered its worst one-month drop in history.

This is mostly the result of the continued chaos in the hedge fund worlds, where hedge funds had taken down their beta to the S&P over the past two years to the lowest level on record, as PMs have no idea what to do in this “market”:

Others, such as Goldman, blame illiquidity for the epic collapse, with Goldman’s David Kostin writing on Friday that “illiquidity likely contributed to the sharp underperformance of popular hedge fund and mutual fund stocks this week as investors reduced risk” noting that whereas “investor positioning remained unusually elevated relative to levels at the bottom of other major S&P 500 corrections”, this week those positions declined sharply.

As a result, from Monday to Wednesday, Goldman’s Hedge Fund VIP basket (GSTHHVIP) which Goldman has repeatedly praised in the past for its outperformance of the broader market, “lagged our basket of large shorts (GSTHVISP) by 850 bp (-17% vs. -8%), more than any 3-day period in the nearly 20 years of the baskets’ history.“

In other words, anyone who listened to our reco from exactly one month ago to go long the most shorted names and short the VIP stocks…

… while the GS VIP list is certainly notable, if only because everyone owns the same 50 or so top stocks, what we find far more fascinating, and a far better source of alpha, is the hedge fund top 50 most shorted – or hated – stocks, which as we have shown year after year tend to significantly outperform the market due to periodic and vicious short squeezes especially in this day and age when the link between fundamentals and asset prices has been terminally severed by central banks, something we described most recently in “Going Against The Wall Street Crowd Has Been The Most Profitable In 5 Years“

… made an absolute killing in the past month. Which is more than we can say for most hedge funds.

Actually, it’s more than we can say for virtually all funds, period. because as Goldman also notes, “Mutual Fund Overweights (GSTHMFOW) also lagged Underweights (GSTHMFUW).”

More pain is yet to come, because as Kostin concludes “Goldman’s Sentiment Indicator shows that equity positioning has plunged in recent weeks, “additional selling is likely until positioning matches lows reached at the bottom of prior corrections.”

Which brings us back to what Robert Reich said in his tweet – yes hedge funds are down less than the market, but that’s to be expected. The problem is that they are not up! After all, for the past decade, hedge funds underperformed the S&P year after year, sparking an unprecedented wave of redemptions which led to record inflows into cheaper, passive investing alternative such as ETFs. One would think that they would finally compensate investors for all this long-term pain by at least delivering a positive return when the market crashed.

But no, while hedge funds underperformed the market on the way up, they not only failed to be a real hedge on the way down, but fell the most on record. So why pay them 2 and 20 to suck all the time, failing to keep up with the S&P when stocks are rising, and then also tumble (if a little bit less) when the market crashes?

What exactly are hedge funds “hedging”?

One person who may know the answer, is the chief investment officer of Veritas Pension Insurance, who told Bloomberg he will review the firm’s hedge fund allocation amid “concerns the asset class is adding little to overall returns.“

Kari Vatanen, who started as CIO at the Finnish fund this month, said he can’t guarantee that he’ll continue to allocate 7% to hedge funds, once his review is completed later this year: “I want to see data and evidence,” he said by phone. “I fear they don’t work, but I hope to be proven wrong.”

“Of course there are good funds out there as well,” he said. But the overall takeaway is that “relative to indexes, hedge fund returns haven’t been great since the financial crisis, it’s somewhat of a disappointment,” he said.

Let’s paraphrase that: hedge funds returns have been absolutely catastrophic since the financial crisis, failing to keep up with stocks on the upside, and failing to offset drops when the market tumbles.

Vatanen is hardly the last one to re-evaluate investments in hedge funds in light of their recent catastrophic performance, amid signs that “few strategies really protect portfolios against the kind of panic-driven trading that’s gripped markets in recent weeks”, as Bloomberg wrote.

“Many investors will have to critically evaluate the role of alternative strategies in their portfolio,” Vatanen said, in what was the clearest death knell to all those $10MM+ Tribeca duplexes.

Update (1725ET): Harvey Weinstein has reportedly tested positive for COVID-19 as the number of cases in Rikers Island, where he was until recently being held, explodes.

The news comes courtesy of a local New Jersey newspaper, citing contacts in the state prison system. The report was later picked up by the New York Post.

Due to his advanced age and allegedly poor health, Weinstein would probably be considered a ‘high risk’ patient, though the US still has plenty of available beds.

*  *  *

High-profile inmate Harvey Weinstein was transferred out of Rikers Island right as coronavirus cases have begun to explode at the infamous New York prison.

On Wednesday, the 68-year-old disgraced movie mogul was transferred to the maximum security Wende Correctional Facility near Buffalo, according to state prison officials. Weinstein was sentenced to 23-years for rape and sexual assault earlier this month. According to Global News, the prison is likely a temporary stop for Weinstein – where he will be evaluated to determine which state prison is most appropriate to meet his medical, mental health, security, and other needs.

Meanwhile, COVID-19 cases at Rikers jumped from eight to 38 – with 21 inmates, 12 employees and five correctional health workers now infected, according to the New York Times citing the Board of Correction.There are also 58 inmates under observation.

Their solution? Let people go.

Board officials said there were also 58 inmates being monitored in the contagious disease unit up from 27 people on Tuesday.

A person familiar with the matter said a previously closed jails facility had been reopened to accommodate the growing number of inmates being placed into quarantine.

Dr. Robert Cohen, a member of the Board of Correction, said, “The most important thing we can do right now is discharge all of the people who are old and have serious medical issues — those people are likely to die from a coronavirus infection.” –New York Times

On Thursday, the jail system’s top doctor – Ross MacDonald – warned over Twitter “A storm is coming,” and “we cannot change the fundamental nature of jail. We cannot socially distance dozens of elderly men living in a dorm, sharing a bathroom. Think of a cruise ship recklessly boarding more passengers each day.”

A storm is coming and I know what I’ll be doing when it claims my first patient. What will you be doing? What will you have done? We have told you who is at risk. Please let as many out as you possibly can. end.

— Ross MacDonald (@RossMacDonaldMD) March 19, 2020

MacDonald joins officials led by NYC Mayor Bill de Blasio who have been encouraging state courts and city district attorneys to release vulnerable inmates – or face a public health catastrophe. 

As the Times notes, “Similar scenarios are playing out in jails and prisons throughout the state and across the country as correction staff members and inmates have tested positive for the virus. Two correction officers in upstate New York prisons, one correction officer in Westchester and an inmate in a Nassau County jail have been found to have the disease, as have two inmates in a federal prison in California.”

“These are unprecedented times,” said Queens district attorney, Melinda Katz. “We are doing this in a truncated period of time.”

That said, New York City public defenders and officials say that process of letting inmates free has been held up by red tape – with questions over who can authorize their release, as well as concerns over public safety and where to send people once they’re out.

“For everyone’s safety, this decision cannot be rushed,” said de Blasio spokeswoman Freddi Goldstein. “We need to determine both public health risk and public safety risk.”

“The most important thing we can do right now is discharge all of the people who are old and have serious medical issues — those people are likely to die from a coronavirus infection,” said Dr. Robert Cohen – a member of the Board of Correction.

Read the rest of the report here.

Fact or Fiction?

In order to alleviate the heavy damage the crucial financial sector is facing in the midst of the ongoing Covid-19 outbreak, the United States Congress announced Tuesday that they would be allocating $2 trillion in order to bail out the struggling bailout industry.

“The bailout industry is on the brink of failure, so in order to prevent a full-on catastrophe, we are setting aside $2 trillion in order to bail it out,” said Senate Majority Leader Mitch McConnell (R-KY), adding that the business of giving of massive sums of money to corporations so they can cover their losses is at the very bedrock of the U.S. economic system, and without assistance, the entire bailout industry as we know it could collapse, which could lead to another Great Depression.

“During a crisis like this, the bailout industry is often hit the hardest, so we are taking immediate action, as our economy is deeply dependent on the bailout system; if bailouts can’t function, then America can’t function. A cash injection is absolutely necessary to make sure these failing businesses can inject cash into failing businesses.”

At press time, Congress had signed a bill to allocate funds to bail out their bailout of the bailout industry.

Source: The Onion

So far in this ‘everything bubble’-burst crisis, the Fed has:

1. Cut interest rates from 1.25% to 0.15%.
2. Launched over $700 billion in Quarantitative Easing (QE).
3. Launched a $1.5 trillion repo program.
4. Launched another $1 trillion repo program…. daily!
5. Announced it will begin buying commercial paper (short-term corporate debt).
6. Allowed primary dealers to start parking assets, including stocks, as collateral in exchange for short-term credit.
7. Announced it will begin buying muni debt.
8. Opened unlimited dollar-swap-lines to the world.

And the result of all this record amount of liquidity provision – almost $30 trillion of global wealth destruction (bonds and stocks)…

And not a glimpse of deleveraging/selling pressure reduce in stocks or bonds…

And every aspect of the credit markets – from short-term munis to long-term commercial mortgage-backeds – is completely frozen.

“It’s brutal. We have never seen such a big move in such a short amount of time… This is the quickest and most severe I have ever experienced, and I was around for 2008.“

Enter former Fed Chairs Ben Bernanke and Janet Yellen, who, as we detailed earlier this week, urged the Fed to begin buying corporate debt and stocks in an op-ed piece in the Financial Times this morning the two former Fed Chairs

The Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it. The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.

Currently the Fed is forbidden from doing either as per the Federal Reserve Act. Put another way, congress would need to authorize the Fed to start buying these assets, and the two former Fed Chairs are providing the political cover to do this.

So, it should come as no surprise to anyone that Bloomberg is reporting that Congress is likely to pass legislation Monday clearing the way for more emergency action from the Fed, with lawmakers and Trump adminstration officials on Sunday signaling the package would give the Fed approval to expand its purchases of corporate bonds.

“There’s a very, very large credit facility that we’re standing up,” Pennsylvania Republican Senator Patrick Toomey said about the legislation on NBC’s ‘Meet the Press’.

“It will be done jointly with the Treasury and the Fed.”

Emergency facilities with the Fed would mobilize “up to $4 trillion of liquidity,” Mnuchin said, though it was unclear whether that included programs already announced by the central bank.

According to subsequent reports from the WSJ, the current iteration of the massive bailout Bill being mulled in Congress, has the following provisions:

The economic stabilization bill will include significant funding for the ESF so that Treasury can cover credit losses for Federal Reserve 13(3) lending facilities  

One draft of the bill would put $425 billion into the Treasury that the Fed could use to cover losses on lending facilities. Last week, the Fed launched three of these 13(3) facilities, two of them with $10 billion each from the Treasury to indemnify against losses

This would allow the Fed to stand up a new generation of emergency lending programs that could support markets for securitization, investment grade corporates, longer-dated munis or small business loans.

In other words, the Fed is about to have a green light to buy corporate bonds.

Finally, remember just a month ago, Janet Yellen suggested that The Fed should buy stocks in the next crisis.

We wonder how long before that is added to The Fed’s mandate explicitly? Of course, buying stocks worked out really well for The Bank of Japan which now faces trillions in losses on its insane ETF buying program.

So, do we go full-Einsteinian-madness – repeating the mistakes (that have not worked at all) of Japan and Europe and expect a different result, or is now the time to bite the bullet, peel off the bandaid, liquidate what has failed and – at the cost of massive political upheaval – embrace the creative destruction and prepare for a new world?

Don’t answer: that was rhetorical.

Last Friday, when Goldman predicted a 24% drop in Q2 GDP ostensibly in response to JPM’s own -14% downgrade to Q2, we were frankly shocked, and wondered who would have the guts to come out with an even more apocalyptic prediction. Well, just 48 hours later, none other than the Fed’s James Bullard has literally swept the analyst field with a forecast that – if accurate – could mean nothing short of civil war for the US.

In an interview with Bloomberg, the president of the St. Louis Fed, predicted that U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, coupled with an unprecedented 50% drop in US GDP. That would be an outcome worse not only than every prior war the US has (officially) waged, but more than twice as dire as the worst days of the Great Depression.

So what should happen for this catastrophic outcome to be avoided? While Bullard, one of the biggest Fed doves, said that the Fed is ready to do anthing, he appeared to punt to the US government, hinting that it is now up to Congress to offset the nearly $3 trillion in loast income.

Bullard called for a powerful fiscal response to replace the $2.5 trillion in lost income that quarter to ensure a strong eventual U.S. recovery, adding the Fed would be poised to do more to ensure markets function during a period of high volatility.

“Everything is on the table” for the Fed as far as additional lending programs, Bullard said in a telephone interview Sunday from St. Louis. “There is more that we can do if necessary” with existing emergency authority. “There is probably much more in the months ahead depending on where Congress wants to go.”

As Bloomberg notes, Bullard’s grave assessment “underscores the critical need for Congress and the White House to quickly find agreement on a massive aid program” especially  after the Fed restarted financial crisis-era programs to help the commercial paper and money markets, after cutting interest rates to near zero and pledging to boost its holdings of Treasuries by at least $500 billion and of mortgage securities by at least $200 billion.

“This is a planned, organized partial shutdown of the U.S. economy in the second quarter,” Bullard said. “The overall goal is to keep everyone, households and businesses, whole” with government support. “It is a huge shock and we are trying to cope with it and keep it under control.”

While this hardly needs to be spelled out, but 30% unemployment – or 50 million Americans out of a job – basically means society begins to disintegrate as this would be a world that nobody can possibly fathom.

Besides the obvious, there are two additional problems here: first, the Fed’s massive response has failed to stimulate risk appetite or to ease the massive dollar short squeeze which has sent the Bloomberg Dollar index to all time highs, sparking debate whether the Fed’s credibility is now gone as the world awaits helicopter money, and two, and perhaps far more ominous, is that as of this moment the US is reliving the darkest moment of the financial crisis – when Congress failed to pass the first TARP iteration, sending the market crashing. Indeed, as we reported earlier and as Bloomberg just confirmed…

• PELOSI: BIG DIFFERENCE BETWEEN WHAT DEMOCRATS, REPUBLICANS WANT

…  there appears to be a huge discrepancy between what Republicans and Democrats will agree on, with the former demanding a massive, no-holds-barred bailout of big corporations, while the latter seeking billions in traditionally progressive projects.

So far the two have not found a middle ground, and as we near the moment futures are set to open at 6pm ET and traders start having flashbacks to Sept 29, 2008 when Congress rejected the original TARP proposal, absent a Congressional agreement on a massive fiscal stimulus, all hell may be about to break loose, and futures may suffer their first ever 3rd level circuit breaker tomorrow (triggered at -20%) if Republicans and Democrats fail to find an agreement.