Tag: finance

By Ali Mecklai of Mises Institute

Recent data published by Yardeni Research Inc., Bank for International Settlements (BIS), the Institute of International Finance (IIF), and in the Federal Reserve Bank of St. Louis Economic Data (FRED) database offers an insight into the true extent of central banking practices before and during the covid-19 pandemic.

The wide-ranging implications of this can be seen through several critical dimensions. But first we must understand the destructive nature of central banking.

If we accept the main premise of central banking, that the central bank is the lender of last resort, it follows that in this last resort event the central bank must have a pool of wealth to lend from. After all, in order to lend to someone, you have to own something of value. In this situation, the central bank prints money, which, to that extent, is where it derives its pool of assets for lending from, taking from people via inflation. Paradoxically, the central bank therefore lends to banks by stealing from the people, whereas the banks are then expected to loan that money back to people. This theft is, however, subtle, not seen as a direct tax or immediate confiscation, but through the destruction of real savings and purchasing power.

From the beginning of this year to June, the total assets of major central banks (the Fed, ECB, BOJ, PBOC) have jumped by a near $6 trillion. This rapid ascent is likely going to continue as the year progresses. Similarly, in Q1 of this year, global debt rose to $258 trillion, representing an all-time high of 392 percent of GDP. Households, businesses, and governments are taking on more debt in hopes of offsetting the acute economic pains of the crisis. But the false sedative of debt will soon dissipate, revealing the true pain behind all these distractions. Make no mistake, what is being done by governments and enabled by central banks is akin to paying credit card debt with more credit cards.

This data should alarm you and the immediate question should be, Who’s going to pay for it, and who benefits? In the bizarre world of negative interest rates, however, that question becomes all the more complicated.

Artificially low interest rates have enabled the longest bull run in US history (2009–20). Cheap borrowing has propped up unprofitable zombie corporations which rely on loans to pay back loans. In conjunction with quantitative easing efforts, the S&P 500 has not only recovered since the covid March meltdown but surpassed its all-time high.

Low interest rates have historically made it cheaper to mortgage a house, finance a car, and pay for student debt—in the long term, however, it has made all of these more expensive. By enabling cheap borrowing to finance spending, particularly on assets such as housing and in the equities market, central banks have infused those markets with artificial demand which in turn causes prices to skyrocket.

By indirectly monetizing and devaluing the real value of debt, central banks have cut the brake wires off government spending.

Its no coincidence that the moment the Fed started to unwind its balance sheet in 2018 markets went berserk. When the Fed shrank its assets by just around 6 percent between early 2018 and February 2019, the market plummeted by twice that.

The most recent market faltering in March was a very real indicator of upcoming economic trouble. It was all covered up by the Fed, however, which bought $500 billion in Treasury securities and $200 billion in mortgage-backed securities to provide so called “emergency liquidity.”

In effect, the Fed’s actions diverted scarce resources from productive sectors to monetize government debt, inflate a chaotic asset bubble, and send the bill to everyone else. Importantly, this has created an environment of haves and have-nots. So, although so-called conservative politicians are scratching their heads about the popular rise of socialism, should we really be that surprised?

The true mark of economic recovery should not be measured nominally in dollars and cents, but in terms real interest rates. When markets, not bureaucrats and central bankers, set interest rates, markets equilibrate, allowing for productive and allocative efficiency. The true sign of a growing and healthy economy should instead be a positive real interest rate set by market forces.

Positive real interest rates indicate that investments/savings are yielding positive returns and thus creating wealth. This means that people, businesses, and governments are rewarded for saving. In the world of negative interest rates, the opposite is true.

When real interest rates are negative, they create distortions in markets. Consider that between March 23 and the day I write this (August 8), nearly every popular US asset has inflated. Equities such as the NASDAQ and S&P 500 have risen by 61 percent and 50 percent respectively, bitcoin by 81 percent, and gold by 36 percent. Through the manipulation and debasement of currency, however, this asset inflation should be a warning signal to everyone not that their assets are necessarily worth more, but their dollars worth less.

This asset inflation coincided with a sharp M2 money supply increase (roughly 20 percent year over year).

Nonetheless, when real interest rates are negative, bubbles are to be expected. Since the covid crisis, ten-year inflation-indexed bond yields have crashed, falling even below –1 percent.

Unsurprisingly, these rates have dropped so low not particularly because their yield is negative (although they did dip below that level slightly in March), but because inflation is higher than the yields.

This is something that the traditional CPI (Consumer Price Index) will fail to capture. Using irrelevant baskets of consumer goods such as air travel, nightclubs, and hotels among other things paints a false picture. Of course, now more than ever there is more money chasing fewer goods, with many businesses being closed and stimulus checks coming in. The recent sharp increase in the money supply will therefore drive real inflation even higher and real interest rates lower.

Real negative rates serve to accelerate global indebtedness and solidify zombification. As the balance sheets of central banks grow, so does the indirect subsidization of inefficient corporations. By taking out corporate loans at a real interest rate of below zero, zombie corporations manage to have their lender of circumstance actually pay them for taking on debt. By keeping inefficient players in the marketplace, innovative entrepreneurs are blocked from creating wealth and market barriers to entry are raised through a slow and steady engulfment of scarce resources, furthering an unprecedented inequality of wealth via central bank–induced monopolization.

In 2019 the BIS determined that over 10 percent of the publicly traded firms of fourteen developed countries were zombies. My assessment is that by the end of this crisis that statistic will be much higher. In the US, the number is nearly 20 percent according to Deutsche Bank Securities.

When borrowing money is so cheap (in fact, they pay you!) zombification is an inevitable process. Analyzing quarterly data from 1998 to 2020, 8 percent of the variance of corporate debt levels as a percentage of equity can be directly attributed to changes in M2 levels. Utilizing regression analysis, the null hypothesis of this relationship (that the variables are unrelated) has a p-value of 0.0000 and a t-score of 588, or in other words there is an almost 100 percent chance that the relationship between these two variables is statistically significant.1

Japan is the historical home of zombies and is still suffering from the peak of its crisis in the eighties. As of 2018, Japanese corporations had taken out $4.59 trillion in loans, the highest amount since 1997. Japan’s myriad economic problems not only include the zombification of its companies but also of its people, as they face the challenges of an aging population. As its balance sheet surpasses 100 percent of GDP, the BOJ is essentially doubling down on past failed policies.

Keeping inefficient zombie corporations may boost short-term employment by avoiding the general turnover of firm market share; however, in the long term they massively drain resources and block future employers out of the marketplace. The BIS writes:

Specifically, the estimation results suggest that a 1 percentage point increase in the narrow zombie share in a sector lowers the capital expenditure (capex) rate of non-zombie firms by around 1 percentage point, a 17% reduction relative to the mean investment rate. Similarly, employment growth is 0.26 percentage points lower, an 8% reduction. However, under both definitions we find that non-zombie companies invest more and have higher employment growth.

Following the 2008 crisis a radical experiment of depressed and even negative interest rates was employed by the Fed, BOC (Bank of Canada), ECB (European Central Bank), and other central banks. Now, however, the resources that were previously available to fight recessions have been totally depleted combating the last recession. Fighting debt with debt is irresponsible and unfair to future generations—clearly fiscal and monetary restraint is needed.

The interplay between rising debt levels, negative real interest rates, and zombification should concern us all—especially in the context of global lockdowns. But it should not be capitalism which we blame for this crisis. Quite the contrary, in fact; we should blame central banking and its destructive economic capabilities.

Three people have been hurt following a ‘stabbing’ near a high school in Stockport, according to the Manchester Evening News.

Emergency services were called to the scene, and three people have reportedly been taken to the hospital with serious injuries, but not much else is known about the case, according to media reports.

Some reports claimed an arrest has been made, but the facts remain unclear.

A GMP spokesman said “[p]olice were called to reports of a stabbing off The Fairway in Offerton, Stockport on Tuesday, Sept. 1.”

“Emergency services attended and three people have been taken to hospital with injuries.”

Details about the attacker, including their gender, age, race and motive, remain a mystery. According to reports, officers left the scene less than an hour ago.

This latest attack comes just 2 days after a woman was slashed by an unknown assailant, for reasons that haven’t been determined. The incident took place on Rudheath Avenue in Withington, south Manchester. The 24-year-old young mother had been walking with her son when a man approached her with a knife then suddenly stabbed her before running off.

A few days before that, two men were stabbed at a Manchester restaurant.

Knife crime has become an increasingly troubling public hazard across Britain, but particularly in cities like Manchester and London.

The trend has prompted some knife makers to explore unorthodox solutions.

 

 

 

 

 

 

 

 

Despite the objections of Wisconsin Gov Tony Evers and the city’s Democratic mayor, President Trump flew into Wisconsin and is visiting Kenosha on Tuesday afternoon to survey the damage from a week’s worth of street protests, violence and vandalism – a destructive rampage that culminated in the killing of 2 men by a teenager with an AR-15.

* * *

Here’s Trump’s schedule for the roughly two hours he will spend in Kenosha. (remember, all times in CT):

By 11:55 a.m. President Trump arrives at the Waukegan National airport. Ten minutes later, he is scheduled to leave the airport en route to Kenosha.

By 12:35 p.m., Trump is scheduled to arrive in Kenosha prior to surveying property damage as a result of last week’s civil unrest.

From 12:40 p.m. to 1 p.m., Trump is scheduled to survey the damage.

According to Trump’s schedule, he is expected to conclude surveying local damage and appear at Mary D. Bradford High School starting at 1:10 p.m.

According to Trump’s schedule, he is expected to tour the Emergency Operations Center by 1:15 p.m.

At 1:30 p.m., Trump is scheduled to participate in a roundtable discussion on Wisconsin Community Safety, where he is expected to give remarks.

By 2:20 p.m., Trump is scheduled to leave Kenosha on his way back to Waukegan.

And for the geographically challenged among us, here’s a map:

Evers, whom Trump has blasted on twitter and accused of enabling the violence, sent the president a letter last week urging him not to visit.

“I, along with other community leaders who have reached out, are concerned about what your presence will mean for Kenosha and our state,” Evers wrote. “I am concerned your presence will only hinder our healing. I am concerned your presence will only delay our work to overcome division and move forward together.”

Other Dems have accused Trump of endangering lives with his posturing, claiming the president is “filming the commercial” for his reelection campaign.

During his time in the area, Trump will survey the property destruction and damage, before participating in a round-table discussion on community safety, during which he will give brief remarks.

Just as Treasury Secretary Steven Mnuchin was sitting down for legally mandatory testimony before the Democrat-controlled House subcommittee investigating the federal response to the coronavirus pandemic, the committee tried to sandbag him by releasing a report alleging billions of dollars of “waste, fraud and abuse” in the $659 billion taxpayer-funded Paycheck Protection Program – or PPP.

According to the report, more than $1 billion of the money – a drop in the bucket, or a fraction of a percentage point – allegedly went to applicants that triggered red flags. These included receiving multiple loans – in violation of the program’s rules – or receiving loans despite having been disciplined for a given transgression. $3 billion went to businesses that had been flagged as potentially problematic by the government.

At the same time, the program only doled out the full requested amount for 12% of black and hispanic-owned businesses.

For some of these “suspicious” cases, there might be perfectly reasonable explanations: perhaps a change of address, or a clerical mixup – it could be any number of things. But the Democrat-controlled panel found more than 600 examples where loans went to companies that had been barred from doing business with the federal government. Another 350 loans went to companies with past ‘performance problems’.

The subcommittee’s researchers found evidence that as few as 12% of Black and Hispanic business owners received the full funding they requested. The analysis examined data for more than 5.2 million ‘PPP’ loans worth some $525 billion that were doled out by banks in cooperation with theSmall Business Administration and the Treasury.

Outside their own research, the subcommittee noted that the SBA’s internal watchdog had also found “strong indicators” of potential PPP fraud.

Then again, even these flaws aren’t especially damning. As one reporter points out, the Dems latest attempt at crying “waste, fraud and abuse” rings hollow once again.

Two new subcommittee reports (D and R) on PPP today. Neither really backs up its claims.

Dems decry “waste, fraud & abuse) but the largest concrete example is $1b to cos w/ multiple loans (out of $500b in loans)

Rs claim 51m jobs supported, but only source is Trump admin.

— Jim Tankersley (@jimtankersley) September 1, 2020

And while the Republican report referenced above may exaggerate the impact of the PPP, quibbling with Trump over exaggerated numbers is so a pretty superficial criticism.

While the Trump Administration talks its book by trying to pass off the 51 million number as credible factoid, the mainstream media has come up with its own set of specious figures.

The Trump administration says the PPP has saved some 51 million jobs at a time when much of the U.S. economy has been shuttered due to the coronavirus. Economists say the actual impact is far lower, likely between 1 million and 14 million jobs.

1 million jobs saved? That sounds like a lowball. Then again, the final tally isn’t really in yet, as we wait for the impact of the most recent fiscal cliff to reverberate across the economy.

At any rate, the Dems ulterior motive was laid bare by Committee Chairman Jim Clyburn during the opening minutes of Treasury Secretary Steve Mnuchin’s testimony Tuesday afternoon…just hours after Mark Meadows affirmed a new GOP plan calling for another $500 billion in spending to revive the enhanced unemployment checks.

.@COVIDOversight Chair @WhipClyburn to Sec. Mnuchin as today’s hearing begins – “I hope you will return to the negotiating table prepared to find common cause on legislation that meets the pressing needs of American families and communities that are hurting from this crisis.”

— Nicholas Wu (@nicholaswu12) September 1, 2020

Comes as the Committee released a report earlier today showing what Dems called potential “fraud, waste, and abuse” in the implementation of the PPP loans – e.g. over $1 billion in loans going to companies that got multiple loans

— Nicholas Wu (@nicholaswu12) September 1, 2020

So Dems are accusing the administration of “waste, fraud and abuse” to try and pressure them into approving even more wasteful spending…got it.

On Monday, in a tweet that went viral, we showed that the market cap of Apple was on the verge of overtaking the entire Russell 2000 index of small-cap companies.

AAPL just 2% away from surpassing the entire Russell 2000. This is absolute insanity pic.twitter.com/mblZO5TAZv

— zerohedge (@zerohedge) August 28, 2020

Well it’s now official, and as of Tuesday’s 4.3% jump in AAPL stock price largely on the back of the latest upgrade from Bank of America, which raised its price target to $140 post-split citing an even greater multiple expansion as the catalyst (because there is nothing else really)…

… which helped propel Apple’s market cap to $2.3 trillion, Apple’s market cap is now greater than the entire Russell 2000 for the first time ever.

The next chart shows the historical transformation of Apple as not only the biggest company in the world, but also the one company which now has the biggest impact on pretty much anything market-related.

We previously discussed the unprecedented negative put-call skew, which we said will keep pushing AAPL even higher due to the layered gamma which is creating an upward feedback loop, and sure enough this is still the case.

And since nothing else has changed and we already showed what is going on from a delta- and gamma-hedging perspective…

… we will give the last word to the Bear-Traps report which describes the “Insanity” in Apple Options:

The convexity skew picture on big-name equities like Apple $AAPL has gone parabolically stupid. Let’s keep this simple and draw a conclusion.

• Apple $AAPL Stock near $130
• Jan $180 Strike Calls costs $4
• Jan $80 Strike Puts costs $1

*Both options are $50 out of the money, approx data, BUT it is nearly 3x more expensive to buy upside risk in AAPL equity. What does this mean?

Apple closed near $130, while the cost of speculative upside calls is weighted heavily against the buyer. Someone must have reached out to Buffett today because he can make a fortune in selling $AAPL upside calls. Let us explain.

Highly unusual activity, we have a higher stock price in Apple AAPL with a much higher cost of equity upside. Equity vol usually explodes higher in market crashes, NOT bull markets. As you can see above, in normal Apple equity bull markets – see all of 2019 – AAPL implied vol has been CHEAP!

In our institutional client chat on Bloomberg, a hedge fund put on this trade and we are sharing it with permission.

Think of the January 2021 expiration. The client bought the $200 call and sold the $250 call, 1 x 4, and got paid $3.50 to put the trade on.

Apple was worth $1.5T at the end of July and today she stands tall at $2.2T. In order for the client to lose money* at January expiration, the stock has to breach $270 ($129 today), which would put the company’s market capitalization very close to $5T, by January 2021, that is a little over four months away.

*The mark to market in the short run can be extremely painful though – if Apple equity soars another 10-20% (Apple is up 50% since late July), that is indeed the catch. AAPL is trading nearly 65% above its 200-day moving average vs. 42% in February’s great bull run.

There are a handful of quant funds pushing around a few stocks (with high impact on QQQ, NDX, SPY) in the options markets. The dealers are getting very nervous.  Last 15 days – Imaging being a large market maker in Apple and Tesla equity options. You make a market, bid – offer, you get lifted and lifted over and over again by buyers to the point where you have raised the price of calls vs puts to multi-year extremes. How short is the Street gamma? VERY.

When call vs. put skew gets this extreme it can be a solid leading risk indicator. 

A 23-year-old Wisconsin man carrying a flamethrower, smoke grenades and fireworks during a Saturday night demonstration in Green Bay ‘dropped into the fetal position and began crying‘ after he was chased down by police.

Matthew Banta of Neenah, WI – who is “known to be a violent Antifa member who incites violence in otherwise relatively peaceful protests,” was one of four individuals walking towards a protest with baseball bats, according to ABC2.

Green Bay police say they were called for “a whole bunch of white people with sticks, baseball bats and helmets headed… towards the police” on Walnut St. near Webster Ave.

A responding officer says he saw four individuals walking towards a protest with baseball bats. One man was wearing a metal helmet with goggles and military-style gear with multiple pouches, and was carrying an Antifa flag. When the officer pulled his squad car in front of the group, they ran away. The officer caught Banta, who was carrying the flag, and says Banta “dropped into the fetal position and began crying.” He accused the officer of lying on him; the officer replied nobody was on him. –ABC2

As suspected, Matthew Banta is a hardcore antifa militant. He goes by the online moniker “The Commander Red.” Extremely disturbing that he goes to antifa protests armed w/a loaded rifle. He appears to be friends w/violent Portland antifa suspect Alex Dial aka “Beta Cuck 4 Lyfe.” pic.twitter.com/6pzD9jywDP

— Andy Ngô (@MrAndyNgo) August 12, 2020

Banta claims he wasn’t planning to incite a riot (with his flamethrower, smoke grenade and fireworks).

The three other individuals Banta was with were caught trying to break into a house. When officers apprehended them, they dropped what they were carrying, with one of them telling the police that they were simply bringing items for self-defense.

Last month, Banta was charged in Waupaca County with second-degree recklessly endangering safety and four other charges for pointing a loaded gun at a police officer, and biting and kicking another.

More evidence of Matthew Banta’s explicit #antifa ties. He’s the militant arrested for allegedly attacking police in Wisconsin with a loaded rifle and knife at a protest. pic.twitter.com/5OeeYflOWc

— Andy Ngô (@MrAndyNgo) August 12, 2020

Authored by Bill Blain via MorningPorridge.com,

“Ritalin is a class 2 addictive drug that helps hyperactive children become compliant. It works. At what cost?”

In a normal year, September 1st would mark the opening of the Autumn financial season. Summer would quickly become a distant memory as activity in financial markets steps up a couple of notches, marked by a deluge of new debt, a surge in IPOs, and a wave of M&A activity. It would be a three-month dash into December – the best time to make your bonus targets – before we all traditionally downed tools for a month of partying in December. 

It’s different this year. 

Whatever the Citigroup panic/euphoria model says about this being the longest bull-sentiment run this millennia, I can’t recall ever feeling this level of disbelief in prices. As we argued about getting kids back to school and wondered when we’re going to get back to the office, August 2020 proved to be the best month for markets in nearly 40 years. 

• If you aren’t concerned by the mismatch between where how the pandemic is stifling economic activity and the surging levels of global stocks – then we need to talk. 

• If the level of bubblicious markets, burgeoning company debt or the sustainability of economic recovery in the face of growing corporate insolvency doesn’t cause you pangs of worry – then I really need to know the name of your pharmaceutical supplier. 

• If exploding government debt and the consequences of soon-to-end furloughs doesn’t jolt you, then you need to dig yourself out of whatever complacent hole you’re hiding in. 

• If you believe governments in the UK, Europe and USA have the competency to see through the pandemic and sustained recovery – then please share what I’m missing. 

Yet, I am not warning of imminent market meltdown or catastrophe – although all the numbers scream it should be happening. Unlimited liquidity means it’s not – apparently – an issue.  

That said, a number of chartists are warning over signs and symbols the current consensus is vulnerable. When the five largest tech firms are 20% of the total market, and have a larger market cap than the whole EU, you have to wonder. Apple is worth more than the whole FTSE! When Tesla is up nearly 500% this year and 15% this week after stock split… I don’t need to say more. 

The world has clearly changed. 

There are positive stories out there; how the pandemic accelerated windfall adoption and profits for new services and firms like Zoom as demand for their video conferencing went through the roof. (Windfalls are sometimes just windfalls; when this is over how much business will Zoom retain?) 

Change is not all positive – for every billion consumers spent on the internet, another High-street name went to the wall costing jobs, lease defaults and multiplier waves of pain. For every positive equity story out there, there are half-a-dozen other firms that are skating on thinner ice, less solvent, and causing their banks to hike their Non-Performing Loan Provisions.

The degree to which banks have already battened down their lending ahead of massive expected credit event losses is in direct contradiction to the investment banks telling us to buy high-yield junk debt. 

For the next few months the economic news is likely to get bleaker and bleaker as more companies let furloughed staff go and scale back. Taxes are likely to rise – and unrest widen.

Forget the economy or the virus, but the US election looking likely to be a battle on Law and Order.

None of the disconnect between market prices and the real world is new. Its been underway since 2008.  We’ve been waiting for a correction for the last decade. Analysts and strategists like myself have repeatedly warning how frothy valuations have become, how mispriced risk is. Yes, we’ve predicted 10 of the last 2 market crashes – but we’re thankful to Central Banks saving us each time. We’ve underestimated just how happy markets are to take free money from the Central Bankers. 

And today, it’s not just the professional market that’s taking central bank liquidity largesse in its stride. Some 6 million Americans are now actively trading through sites like RobinHood. There is a great article on BBerg this morning – Robinhood Rise Brings Setbacks…  It just seems too obvious how it’s going to end – badly. It so obvious we’re oblivious to it. 

Such is the way of blindingly obvious market corrections. They are just too big to see. 

They key issue is the current overriding central banking imperative: avoiding further destabilisation, which is most likely in the wake of an over-heated market unravelling. After spending so much on rescuing the world after the 2008 Lehman moment and subsequent global financial crisis through long-term monetary experimentation specifically focused on maintaining the semblance of market stability, they will do anything to nip any new crisis at source. 

The result is we are all now addicted to QE Infinity, the Umpty Candy of the modern financial age, the Ritalin for easily distracted traders.

How might it unravel? 

First, I don’t expect a complete collapse. Not at all. There is much positive going on in terms of new energy, new tech and solid businesses. There is a pandemic crisis in some sectors – like tourism and aerospace. A correction which takes out a large degree of the over-saturation of excess liquidity into the market may be a good thing (except for the 4 million RobinHood users likely to be hosed.)

Recovery may be slower than we saw from March.

The number of zombie insolvent companies on the verge of default is huge and a market shock combined with bank’s holding back lending due to the NPL threat, could trigger a credit-event shock. As always, a correction will throw up some great opportunities – I’ll be looking for cheap bank paper! I was very happy to pick up Tech in March and April. The question is when to sell? 

What might trigger a correction?

Something small and unnoticed – which maybe sets off a sell signal within a High Frequency Algorithm, triggering a cascade of HFT selling which traders and investors struggle to catchup with. The RobinHood platforms crash under the massive volumes and the noise across every market will be deafening as everyone tries to exit. 

Ouch. 

But… reading the papers this morning a couple of the investment banks say it’s all right – stocks are going higher… What would I know…? 

Senate Republicans are assembling a $500 billion ‘narrow’ COVID-19 relief package which will be ready as early as next week, as negotiations on a larger overall package remain at an impasse.

White House Chief of Staff Mark Meadows told CNBC on Tuesday that the biggest stumbling block between Congressional lawmakers is the amount of money allocated for state and local governments – with Democrats insisting on $915 billion out of their overall $2.2 trillion proposal (down from more than $3 trillion), while the GOP is standing firm at $150 billion in new funds on top of $150 billion previously allocated for state and local needs.

“Probably the biggest stumbling block that remains is the amount of money that would go to state and local help,” said Meadows.

“The speaker is still at $915 billion dollars, which is just not a number that’s based on reality, and certainly not a number that represents the lost revenues for state and local governments.”

“We actually have talked about giving great flexibility for the $150 billion that was allocated in the previous CARES Act, in addition to another $150 billion that would go there which would overall give $300 billion in terms of flexibility and additional funds to state and local – which should represent the actual loss that we see,” Meadows continued. 

“If you take the GDP reduction that we’ve experienced over the last quarter, and based on projections now – that should indicate about a $275 billion loss in revenues.“

Meadows added that he expects Senate Republicans to put forth a bill sometime next week that should pass the 60-vote threshold required to pass, which would be “more targeted” than the House Democrats’ proposal, and would include around $500 billion in additional financial aid according to Reuters (though not heard in the clip below).

Watch:

Meanwhile, in a poll conducted by Franklin Templeton and Gallup, 70% of Americans say they would support the government sending an additional economic impact payment (EIP) to all qualified adults.

Despite deep polarization on a number of policies related to COVID-19, an additional EIP receives strong support among both Democrats and Republicans. Democrats (82%) are most likely to favor the federal government sending another direct payment to all qualified U.S. adults (based on their income level), with about two-thirds of Republicans (64%) and independents (66%) saying the same.

As for the size of the stimulus checks, support for setting maximum payments at $900 or more per month is high on both sides of the aisle. “Two-thirds of Democrats who support an additional EIP (68%) think each qualified adult should receive $900 or more. A majority of Republicans (60%) and independents (65%) who support this policy also believe that the payments should be $900 or more.”

More via CNBC:

Talks between the White House and Democratic congressional leaders broke down last month after the two sides failed to agree on the terms of a fifth package designed to contain the economic fallout caused by the Covid-19 pandemic.

Meadows and Treasury Secretary Steven Mnuchin have represented President Donald Trump in the negotiations with Democrats, who are being led by House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Chuck Schumer, D-N.Y. 

While some aspects of a potential rescue bill, such as direct payments to Americans and more money for small businesses, have bipartisan support, the White House is opposed to spending as much as the Democrats have asked for on items such as unemployment assistance and funding for state and local governments. 

Amid the impasse, the GOP has floated the idea of a stopgap “skinny” bill which would carve out only areas on which both sides agree, however Democrats have rejected the idea. 

According to Pelosi spokesman Drew Hammill in statements last week, “Democrats have compromised in these negotiations,” adding “We offered to come down $1 trillion if the White House would come up $1 trillion. We welcome the White House back to the negotiating table but they must meet us halfway.”

August is traditionally a slumbering, vacation-heavy month, with low market volumes and little price action. Of course, the month that just passed was anything but with the S&P recording its best performance since 1986 on the back of an unprecedented meltup in a handful of tech stocks.

Indeed, unlike 2011 and 2015 when August was a “troublesome month for risk assets,” this year saw a continued recovery from the lows reached back in March, with 25 of the 38 non-currency assets in the Deustche Bank asset sample having a positive return over the month. Furthermore, the month marks another milestone, since for the first time this year, more than half the sample is now positive on a YTD basis as well, with 21/38 non-currency assets having moved higher.

As Deutsche Bank’s Henry Allen writes, in terms of the highlights it wasn’t tech but silver that was the top performing asset in August for the 2nd month in a row, thanks to a +15.4% increase. That move cements its existing YTD lead, having now risen by +57.6% since the start of the year, in a move that outpaces even the NASDAQ. Matters weren’t so positive for gold though, as in spite of rising above $2,000/oz at the start of the month for the first time ever, the precious metal ended up losing ground to close -0.4% lower. Nevertheless, commodities generally performed strongly, with WTI (+5.8%), Brent crude (+4.6%) and copper  (+6.0%) all seeing solid advances, even though oil remains one of the worst performers on a YTD basis, with Brent (-31.4%) and WTI (-30.2%) still well below their pre-Covid levels.

Equities, of course, were another asset class that had a strong month, particularly in the US. The S&P 500 was up another +7.2% in total return terms, as the index climbed above the record high reached back in February. Meanwhile the price index, which now stands above the 3,500 mark, saw its best August performance (+7.0%) since 1986. The NASDAQ saw an even larger +9.7% advance over the month in total return terms, while in Europe the DAX also climbed +5.1%. The exception was the Brazilian Bovespa, which was the only equity index in our main sample to lose ground in August, with a -3.4% fall.

Meanwhile, after a stellar Q2 and early Q3, fixed income struggled in August as investors moved into riskier assets. In fact, gilts (-3.2%) were the second-worst monthly performer the entire sample in local currency terms, while Treasuries (-1.2%) and bunds (-1.2%) both lost ground as well. In line with this broader move into risk however, Italian BTPs (-0.3%) and Spanish bonds (-0.6%) outperformed relative to these core countries, and in credit HY outperformed IG in both Europe and the US.

Finally in FX, the dollar fell to a 2-year low in August (-1.3%) as it declined for the 5th consecutive month. The dollar’s weakness meant that the euro strengthened above $1.19 for the first time in over 2 years, while sterling rose +2.2% against the dollar. For the euro, that extends its YTD advance against the US dollar to +6.4%, but the renewed rise in the number of virus cases on the continent will come as a source of concern to investors looking forward into the final third of the year.

Visually, here are the best and worst performing assets in August…

… and YTD.

By Mohamed El-Erian

Derivatives reflect risk of heavy selling that could overwhelm smaller players

Retail investors have been flocking to equity markets as an unrelenting five-month surge in valuations suggests stocks are immune to the damage being inflicted on the economy by the Covid-19 pandemic.

The seemingly endless rally in US stocks gives the impression that prices are endorsed and supported by the entire professional investment community. After all, despite the vocal concerns over valuations having split away from underlying corporate and economic fundamentals, few fund managers have been willing to challenge the market by placing outright shorts.

But the outlook is much more nuanced in the derivatives market that sophisticated investors use to express more refined views.

Retail investors should take note.

It is hard to overstate the extent of today’s risk-taking in US financial markets.

Dramatic single-name surges (think Apple and Tesla) have amplified stocks’ continuous march higher, producing a series of records for the tech-heavy Nasdaq and the S&P 500 index, in particular.

Agile millennial-friendly investment apps such as Robinhood and fractional equity-ownership programmes have also taken hold, part of a bigger phenomenon of lowering barriers to entry for small investors. Meanwhile, special purpose acquisition companies are springing up at a rapid pace, with operating spaces and expertise that are often defined poorly, if at all. Nearly $24bn has been raised so far by these blank-cheque vehicles, exceeding the 2019 record by 70 per cent.

This multi-faceted demand for risky investments has coincided with a dilution of the management of risk in conventionally diversified portfolios. Increasingly, the mitigation role traditionally played by government bonds is being replaced by a significantly higher use of corporate debt. This all comes during a period of record-setting corporate bond issuance at exceptionally low yields, affording thin compensation to investors taking on more exposure to potential defaults in a bankruptcy-prone environment.

Much of this could be seen as market deepening were it not for one troubling fact: corporate and economic fundamentals have yet to reflect a sustained and convincing recovery from Covid-related damage.

• The bounce in consumption is moderating.
• Initial US jobless claims are back at the one million level for a second straight week.
• The recovery in mobility, retail traffic and other high-frequency indicators has eased.
• Bankruptcies are rising.
• And with Congress yet to agree on a new relief package, the risks are rising that short-term disruptions will become deep, long-term scars.

Rather than a well-thought-out bet on the future, stocks reflect many investors’ resolute faith in a consistently favourable and predictable liquidity environment. It is a backdrop anchored by reliable stimulus from central banks – a condition that was further reinforced by last week’s speech from Jay Powell, the Federal Reserve chair. Many analysts interpreted it as a hard-wiring of what was until now seen as data-dependent dovishness by the central bank.

On the face of it, the derivatives market tells a similar tale. Those who would normally short the market on concerns of excessive valuations appear to have no desire to be steamrollered once again by favourable liquidity and the strong “buy-the-dip” conditioning that comes with that. However, that comes with important qualifications.

Over the past few weeks, the fear of missing out on an unceasing equity rally has increasingly been expressed through call options — contracts that give the right to buy at a fixed point in future — rather than straight equity longs.

That limits the amount at risk and gives users the ability to capture rallies.

It has been supplemented by more downside “tail protection” aimed at safeguarding portfolios from sharp drops. With that, the Vix volatility index has decoupled from equity indices, adding to signals that a large market correction, should one materialise, would encourage more professional selling that could overwhelm the buy-the-dip retail investor.

This is a potentially troubling situation for central bankers, regulators and economists.

Yes, it would take a big shock for markets to move significantly lower — such as a renewed sharp economic downturn, a considerable monetary or fiscal policy mistake, or market defaults and liquidity accidents. But should such a move occur, the likelihood of further market turmoil would be high, especially given the current lack of a short base to buffer the downturn.

This exposes small retail investors to big potential losses. It risks broader economic damage and could end up pulling central banks even deeper into distorting price signals and undermining the markets’ role in efficiently allocating resources throughout the economy.