Tag: finance

Authored by Jake Johnson & Eoin Higgins via CommonDreams.org,

Hours after David Dayen reported Thursday at The American Prospect that USAA was seizing coronavirus stimulus money from veterans with accounts at the financial institution, the bank reversed course, telling Dayen in a statement that the money seized would returned.

“For members with negative deposit account balances, USAA will pause the collection of a negative account balance existing at the time their stimulus payment was deposited for 90 days,” USAA spokesman Matthew Hartwig told Dayen. “This will allow members access to their full stimulus payment to help cover the costs of rent, food and other important necessities.”

As Dayen reported Thursday, while USAA’s decision is welcomed, it’s ultimately just one bank of many with the technical ability to seize the funds.

“Only a global solution by Treasury can ensure that the payments get into the hands of individuals struggling to make ends meet and afford basic necessities,” Dayen wrote. “A bank-by-bank or state-by-state solution will ultimately not protect everyone in time.”

The Treasury Department last week gave U.S. financial institutions the go-ahead to seize coronavirus stimulus payments to pay off individuals’ outstanding debts, and one of the nation’s largest banks is reportedly already taking advantage of the green light.

“USAA, the veteran-serving financial institution, took $3,400 in CARES Act payments from the family of a disabled veteran to offset an existing debt, denying the family emergency funds during a time of personal economic stress,” David Dayen, executive editor of The American Prospect, reported Thursday.

Headquartered in San Antonio, USAA has a membership of around 13 million that is comprised largely of current and former members of the military and their families.

“Text messages from USAA customers show that this is not an isolated incident,” Dayen noted. “In fact, USAA is using a boilerplate statement to respond to customer complaints about taking their payments.”

The New York Times on Thursday also reported that USAA and other institutions are garnishing stimulus payments.

.@USAA is confiscating the emergency $1200 Coronavirus checks from veterans & military families who have debt, leaving us struggling to survive during this crisis.

This is absolutely unacceptable. @USAA must immediately reverse this practice, & Congress should make it illegal. https://t.co/0ti3Qjeu8U

— Common Defense (@commondefense) April 16, 2020

Consumer advocates warned about this possibility after Dayen revealed Tuesday that Ronda Kent, chief disbursing officer at the Treasury Department’s Bureau of the Fiscal Service, told bankers in a webinar last week that “there’s nothing in the law that precludes” financial institutions from seizing stimulus payments to pay off a person’s existing debts.

The law Kent referenced was the CARES Act, a multi-trillion-dollar stimulus package President Donald Trump signed last month. The CARES Act authorized one-time $1,200 payments to adults who earn less than $75,000 a year. The law also approved an additional $500 for each child under the age of 17.

Carrie, a 22-year-old mother of two from Minnesota whose husband was injured while serving in the military, told the Prospect that she doesn’t “know where rent is going to come from” now that USAA has seized her family’s $3,400 payment.

“It was going to help my 18-month-old get her meds,” Carrie said. “I’m at a loss for words, they don’t care.”

Common Defense, an advocacy group that represents veterans, called USAA’s seizure of stimulus payments “absolutely unacceptable” and urged Congress to “make it illegal.”

The CARES Act explicitly gives Treasury Secretary Steve Mnuchin the authority to exempt the coronavirus relief payments from debt collection by banks, but Mnuchin — a former Goldman Sachs executive — has yet to exercise that authority despite pressure from Democrats in Congress and state attorneys general.

Carrie provided the Prospect with a text exchange she had with a representative of USAA, who explained that Carrie’s coronavirus payment “will be used to offset the amount owed” on a USAA account she abandoned last year. Because the IRS still had Carrie’s USAA account on file, the agency sent the direct deposit there rather than to her new bank account at a different institution.

Dayen reported that Carrie said “her family did run up some debt and get overdrawn after her husband was injured. But they also experienced fraudulent use of the USAA account. The bank concluded that the family did not have sufficient proof of fraud claims, and would be liable for $8,000 in charges.”

The USAA example went viral, resulting in immense public pressure and a brewing revolt among veterans who make up the bulk of clients:

Reverse this now, @USAA, or I’ll pull my membership and accounts and encourage my friends to do the same thing https://t.co/MQFXppYL4J

— Adam Weinstein (@AdamWeinstein) April 16, 2020

Adam Weinstein, a Navy veteran and national security editor at The New Republic, tweeted that he will cancel his USAA membership and urge his friends to do the same if the bank doesn’t reverse its seizure of coronavirus payments. USAA, which is headquartered in San Antonio, has over 13 million members.

As the Times reported:

The phenomenon is swiftly becoming a political issue, with Treasury Secretary Steven Mnuchin fielding calls from senators urging him to ensure that relief money isn’t garnished. Banks are legally allowed to withhold funds that go into accounts that have negative balances, and no specific provision in the CARES Act, the $2 trillion relief package that authorized the stimulus payments, prevents banks from taking customers’ stimulus money to cover debts.

In a statement to the Prospect, Rep. Ilhan Omar (D-Minn.) called USAA’s behavior “shameful” and urged the Treasury Department to act.

“This money was supposed to go to Minnesotans who are struggling and instead the administration is using it to help big banks who don’t need the cash,” said Omar. “I, along with my colleagues in Congress, are doing everything we can to put an end to this. The Treasury Department and the IRS have the authority to prohibit this cruelty, and they should.”

In early February  we detailed that a little known specialized bond created in 2017 by the World Bank may have held the answer as to why global health authorities had, until then, declined to label the global spread of the novel coronavirus a “pandemic.”

As Whitney Webb explained at the time, those bonds, now often referred to as “pandemic bonds,” were ostensibly intended to transfer the risk of potential pandemics in low-income nations to financial markets.

They were essentially sold under the premise that those who invested in the bonds would lose their money if any of six deadly pandemics hit, including coronavirus. Yet, if a pandemic did not occur before the bonds mature on July 15, 2020, investors would receive what they had originally paid for the bonds back in addition to interest and premium payments on those bonds that they recieve between the date of purchase and the bond’s maturation date.

The PEF, which these pandemic bonds fund, was created by the World Bank “to channel surge funding to developing countries facing the risk of a pandemic” and the creation of these so-called “pandemic bonds” was intended to transfer pandemic risk in low-income countries to global financial markets. According to a World Bank press release on the launch of the bonds, WHO backed the World Bank’s initiative.

However, there is much more to these “pandemic bonds” than meets the eye. For example, PEF has a “unique financing structure [that] combines funding from the bonds issued today with over-the-counter derivatives that transfer pandemic outbreak risk to derivative counterparties.”

Specifically, the news site Quartz described the mechanism of “pandemic bonds” as follows:

Investors buy the bonds and receive regular coupons payments in return.

 If there is an outbreak of disease, the investors don’t get their initial money back. 

There are two varieties of debt, both scheduled to mature in July 2020.

The first bond raised $225 million and features an interest rate of around 7%. Payout on the bond is suspended if there is an outbreak of new influenza viruses or coronaviridae (SARS, MERS).

The second, riskier bond raised $95 million at an interest rate of more than 11%. This bond keeps investors’ money if there is an outbreak of Filovirus, Coronavirus, Lassa Fever, Rift Valley Fever, and/or Crimean Congo Hemorrhagic Fever.

The World Bank also issued $105 million in swap derivatives that work in a similar way. (emphasis added)”

Investors have been receiving coupons of 6.5% over six-month Libor on the safe tranche and 11.1% above Libor on the risky notes ever since the bonds were issued in July 2017. German media outlet Deutsche-Welle noted that:

• The trigger for the first class of pandemic bonds, valued at $225 million, would normally have already been met due to the criterion of more than 2,500 deaths in a “developing country.”

• For the second and riskier category of pandemic bonds, those bonds are triggered when the disease in question crosses an international border and causes more than 20 deaths in the second country.

And now, the global pandemic is considered severe enough to trigger these events as Artemis.be reports that the all-important growth rate factor turned positive as of March 31st, which was the final piece of the trigger that need to fall into place for a pay out to come due.

As a result there will be a loss of catastrophe bond investor principal with the cash in the reinsurance trust backing the pandemic cat bonds set to be called upon to support some of the most in-need countries with their response to the coronavirus. Also set to payout are the pandemic risk-linked swaps that were issued at the same time and we understand are backed by reinsurance capital from both the traditional and alternative marketplaces.

The payout will be just under $196 million across the pandemic catastrophe bonds and also the pandemic swaps (or OTC derivatives) that were issued at the same time and are backed by reinsurance capital.

It will consist of 16.67% of the $225 million from the Class A pandemic cat bond notes and $50 million from the Class A swaps ($37.5 million and $8.34 million), which could only payout a maximum of 16.67% of their principal for a coronavirus outbreak.

In addition, 100% of the Class B layer, made up of $95 million of Class B pandemic cat bonds and $55 million of Class B swaps, will also now payout, a total loss for that tranche.

So in total the payout coming due will be $195.84 million, which will be disbursed to the World Bank housed Pandemic Emergency Financing Facility (PEF) and will be used to help some of the poorer nations of the world in their response to the worsening global coronavirus outbreak.

Finally, we note that this decision ends months of speculation on whether bondholders would finally take a hit to free up cash for struggling health systems.

Authored by Alex Kimani via OilPrice.com,

After months of high drama and unceasing tedium, the OPEC+ group of countries, led by Saudi Arabia and Russia, finally granted President Trump his wish and agreed to pull some by 9.7 million barrels/day from the market in response to the epic collapse in demand. Trump’s second act is here already: Exhorting America’s allies to buy ‘America First’ as U.S. storage bursts at the seams.

Yet, Trump might do well to first look at an antiquated law that places limits on shipping oil and gas to customers in the U.S.: The Merchant Marine Act of 1920.

The century-old law, colloquially known as the Jones Act or simply J.A., regulates maritime commerce in the United States in a way that could curtail the nation’s efforts at energy independence.

Jones Act: The Drawbacks

JA demands that vessels undertaking shipments between two U.S. ports be U.S.-built, U.S.- owned and U.S.-manned. Even foreign steel used in repair work on a J.A. vessel should not exceed 10% of the vessel’s original weight. However, that same requirement does not apply to shipments going from a U.S. port to a foreign port or vice versa, meaning any ship can make that trip. 

Originally meant to protect U.S. fleets after suffering heavy losses in World War I, JA is now coming under scrutiny because it limits shipping oil and gas to customers in U.S. ports, encouraging American producers to send their low-cost oil and gas to consumers abroad. 

In many cases, it’s much cheaper to ship U.S. products to foreign buyers in foreign ports considering that J.A. ships cost up to five times as much as their foreign-built counterparts. Further, a 2010 study by the U.S. Maritime Administration (MARAD) revealed that the average operating cost of a US-flag ship was 2.7x greater than that of a foreign-flagged vessel. This can lead to significantly higher prices for goods transported domestically, making them less competitive against imported products.

J.A. has been detrimental for the U.S. energy industry because it limits inter-state trade in oil products and LNG with the high costs for US-built vessels forcing producers to turn to less efficient forms of transportation oil products.

The average cost of oil transport by huge oil tankers amounts to only US$5 to $8 per cubic meter ($0.02 to $0.03 per U.S. gallon), the second cheapest after pipeline transport. 

Noncontiguous states and territories, like Puerto Rico, Alaska, or Hawaii, are even more disadvantaged since no pipeline, rail, or truck transport of U.S. energy products can reach them, forcing them to rely on imports.

This problem hits Puerto Rico, in particular, quite hard, with economists estimating that the Jones Act cost Puerto Rico’s economy $29 billion between 1970-2012. 

Reforming JA could potentially save consumers in Puerto Rico, Alaska, and Hawaii as much as $15 billion per year, and possibly prevent Puerto Rico from going bankrupt again.

Shale Producers Disadvantaged

Refineries searching for light oil make up the principal demand for fracked oil. Unfortunately, the refineries at the epicenter of the shale boom are located in the Midwest and the Gulf Coast, where many have upgraded to handle heavy oil from Canada, Venezuela, and Mexico. This leaves refineries on the U.S. east coast as the most obvious destination for light fracked oil. 

Unfortunately, it costs ~3x to ship oil from Texas to refineries on the U.S. East Coast compared to shipping it further to refineries in Canada, thanks to the Jones Act. There are simply not enough JA-compliant ships to transport oil from Texas to the U.S. East Coast, meaning it must be shipped abroad. Similarly, it costs more than 3x for northeastern U.S. refineries to ship oil from Texas compared to shipping from West Africa or Saudi Arabia. 

As a result, the northeastern U.S. is forced to rely heavily on foreign crude.

U.S. LNG markets face a similar problem. Massachusetts import facilities take in gas from Trinidad & Tobago while new LNG facilities along the Gulf Coast are exporting cargoes across the Pacific Ocean to Japan because there are no U.S. flagged LNG tankers that can carry LNG between U.S. ports.

Repealing Jones Act

Modern-day JA proponents argue that it helps to promote economic growth, national security, and domestic employment by allowing the U.S. to better monitor labor, environmental, and safety standards. But given the heavy burden that J.A. imposes on domestic energy producers and consumers, it is not surprising that it’s now meeting with heavy opposition. 

Will they succeed? Unfortunately, history does not seem to be on the anti-JA’s side.

J.A.’s basic structure has remained unchanged for decades, with the last major challenge to the law coming two decades ago when free-market advocates sought to weaken or repeal the act. 

Unfortunately, they were soundly defeated by a maritime industry coalition consisting of US-flag domestic carriers as well as shipyards and their suppliers. They did score a minor victory though in 2017 after forcing the U.S. Customs and Border Protection (CBP) to withdraw a proposal that would have tightened US-flag shipping requirements by redefining components such as pipes and valves used in domestic offshore oil and gas construction as “merchandise” subject to J.A. 

But given Trump’s ‘America First’ ethos, the pursuit of energy independence, and the fact that the U.S. shipping industry is currently not reaping many benefits from the high demand for crude oil and storage from an oversupplied market, J.A. opposers just might have a fair shot this time around.

From an initial $75 billion per day when the Fed announced the launch of Unlimited QE, the us central bank reduced its daily buying to $60 billion per day, then  two weeks ago announced another ‘taper’ in its bond-buying program to $50 billion per day, which was followed by last week’s reduction to 30 billion per day. Now, the Fed has slashed its buying by another 50%, to “only” $15BN per day.

Having implicitly confirmed there is now a shortage of bonds – at least coupon bonds considering the $1.382 trillion flood in T-Bills and Cash Management Bills in the past two weeks to fund the stimulus package…

… as demonstrated by the recent repo ops that saw zero submissions as instead of using repo to park bonds with the Fed Dealers merely sell them back to the Fed, the NYFed has announced it will continue cutting back, or tapering, its “unlimited QE” bond-buying next week.

Here is the full schedule for the week ahead.

Additionally, the Fed will also taper its MBS buying from $15 billion to $10 billion in MBS per day next week:

• Mon: $10.709
• Tue: $8.938
• Wed: $10.709
• Thur: $8.938
• Fri: $10.7019

The chart below summarizes all the Fed Treasury and MBS buying completed and scheduled since the relaunch of QE on March 13:

So, in aggregate, The Fed will buy a total of $125 billion of MBS/TSYs next week, still vastly more on a weekly basis than the largest QE programs monthly totals before this crisis, if well below the $625 billion in purchases conducted in the week starting March 23, when the financial system was once again on the verge of collapse and only the Fed could bail it out… just don’t call it a bail out because nobody could have possibly anticipated an economic shock especially after banks repurchased trillions in their own stock in the past decade.

Meanwhile, after the Fed mysteriously delayed the publication of its closely followed H.4.1 statement laying out the size of its balance sheet on Thursday, the central bank updated the numbers this morning, which showed that as close of Aptil 15, the Fed’s balance sheet was a record $6.368 trillion, up $285 billion on the week and up $2.4 trillion from a year ago. Just staggering numbers and unprecedented dollar debasement.

For those curious what the “helicopter money” big picture looks like, now that the Fed and Treasury are effectively merged with the Fed stuck monetizing Treasury issuance indefinitely, here it is: as we reported last night when the Fed did QE in the years following the 2008 financial crisis monthly Treasury purchases never exceeded US Treasury net issuance, but the Fed is now on track to buy double the amount of net issuance.

Finally, and perhaps most ominous, is that treasury yields were clearly unhappy with the latest POPO taper (unlike last week’s cut to $30BN which the bond market largely ignored) with 10Y yi8elds spiking by 5bps, which suggests that $15BN is where the Fed will be stuck with QE going forward as any further cuts to the daily monetization amount will lead to a major repricing in the long-end, in a clear shock to fans of the Magic Money Tree paradigm who believe that the US can float quadrillion dollar deficits without penalty.

This also means that if the Fed does taper again next week, watch out as Treasury volatility returns with a vengeance and the spread to all other asset classes, again.

Authored by James Howard Kunstler via Kunstler.com,

Flight Path

This age of battling narratives tends to conceal the broken consensus behind it. What’s gone is a broad social agreement that there are certain fundamental realities, and then codes of conduct that follow from them.

When anything goes, don’t expect people to do the right thing, or even know what it is.

The Covid-19 debacle presents just such a set of quandaries and puzzles. For many people stewing in quarantine, the virus is a just another evil phantom lurking in the permanent twilight zone of television, and even there, among the familiar jabbering figments, there’s little agreement about it. The statistical projections mutate weekly. It’s no worse than any annual flu… It’s a savage illness that attacks every organ in the body, leaves survivors maimed, and you can even catch it again… The lockdowns are imperative… the lockdowns amount to economic suicide…  There’s no sorting it all out, and the uncertainty itself is intolerable.

The only certainty is that most of the people in lockdown are going broke fast. By any ordinary rules, they are wiped out. They can’t even pretend anymore to keep juggling all those monthly payments for rent or mortgages, food, the cars, the medical insurance, the electricity, the cable, and on and on. The $1200 mad money checks promised by Uncle Sam are little consolation for that, and the small business “loans” ­– if you can even jump through the infuriating hoops to get them – just pile on an additional layer of obligation in a lifetime of debt serfdom. You don’t have to leap too many steps ahead mentally to imagine utter personal ruin on that glide path. And so what if millions of others are feeling squashed by the same phantom forces of disease and finance?

One firm reality is this: the global debt system that supported the turbo-charged global economy, was disintegrating badly in the early fall of 2019, threatening every financial asset and the markets that affected to manage them ­­– and all the operations of modern daily life that they represented. Nowhere on earth was the debt load more out-of-control than in China, where there were no constraints whatsoever on the banks’ accounting fraud, since they answered solely to the ruling party, which had but one overarching policy: to keep ruling.

And the biggest economic fiction of all was that China could maintain its supernatural growth rates in a world that had actually reached the limits of growth. Mr. Trump’s trade wars sent tremors through the system. A whole lot of bad loans were about to be flushed down the drain. Banks everywhere else felt the vibrations, too, you may be sure. The Wuhan virus was, at least, a very convenient distraction from all that. And then, the darn thing got loose on countless airplane flights around the world.

The Covid-19 corona virus didn’t initiate the financial disorders of the moment in the US and Europe, but it ensured that there would not be another appearance of any “recovery” a la the central bank interventions of 2009-19. What it portends is a fast-track journey to a whole new disposition of things: first, for a while, a harsher, hungrier, angrier society of broken promises and dashed expectations; and then adaptation when a consensus emerges that the set of facts at hand amount to a new reality. In the meantime, we’re living in the meantime, which is not a comfortable place.

Money is not an economy. Money is a medium of exchange within an economy where people grow things, make things, move things, and serve each other in countless ways. We’re not going to replace all those growings, makings, movings, and services by just giving people money. Money may produce more money by the magic of compound interest, but money is not necessarily wealth, it just represents our ideas about wealth, and interest stops compounding anyway when the trend is clearly for reduced growings, makings, movings, and servicings. That’s exactly how and why capital vanishes. The hocus-pocus of Modern Monetary Theory can only pretend to work around that reality.

The world never reached such a pitch of activity up to the blow-ups of 2008, and it went through the motions for a decade after that. Now that it’s stopped, all that’s left is the law of gravity, and it doesn’t get more basic. The “wealth” acquired in the decade since by the so-called “one-percent” was loaded onto a defective aircraft, like a Boeing 737-MAX, and an awful lot of it will fall to earth now on broken wings. Their agents and praetorians on Wall Street are working feverishly to stave off that crash-landing, like a band of magicians casting spells on the ground while that big hunk of juddering metal augers earthward.

Wait for it as spring brings new life across the land and things unseen before steal onto the scene.

In an extremely worrisome development signaling the coronavirus peak in the United States could last longer than expected, the US Navy has found that most COVID-19 cases aboard the virus-stricken aircraft carrier Theodore Roosevelt are among sailors who are asymptomatic. 

“Sweeping testing of the entire crew of the coronavirus-stricken U.S. aircraft carrier Theodore Roosevelt may have revealed a clue about the pandemic: The majority of the positive cases so far are among sailors who are asymptomatic, officials say,” Reuters reports. 

This suggests the virus could be spreading more frequently by stealth mode in the broader population, with many more people than is known walking around walking around with the disease unawares. 

At least 655 Roosevelt sailors have now tested positive, including one death and multiple hospitalizations, out of a total crew of a about 4,800. It’s startling that the Navy has found that out of over 600 COVID-19 infected sailors, the majority have displayed no symptoms. Testing is about 95% complete on the entire crew since the ship was diverted to Guam last month amid a spiraling crisis on board. 

“With regard to COVID-19, we’re learning that stealth in the form of asymptomatic transmission is this adversary’s secret power,” Rear Admiral Bruce Gillingham, surgeon general of the Navy, told reporters.

The Navy specified that 60% of the Roosevelt’s positive cases “so far have not shown symptoms”. Crucially, Reuters points out that the “figure is higher than the 25% to 50% range offered on April 5 by Dr. Anthony Fauci”.

This is likely due the fact that enlisted military ranks tend to be already very healthy individuals in their 20’s and early 30’s. The carrier crew also provides a key active case study given the isolation of nearly 5,000 people apart from broader society, and the young, fit demographic. 

Defense Secretary Mark Esper told NBC’s Today on Thursday that the conclusions regarding asymptomatic spread aboard the ship conclusions are “disconcerting”. Esper said, “It has revealed a new dynamic of this virus: that it can be carried by normal, healthy people who have no idea whatsoever that they are carrying it,” Esper said.

While this is not a new revelation, the case of the Roosevelt carrier and its crew provides shocking and clear confirmation that this reality is likely playing out on a much broader scale than previously thought. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Don’t fight the Fed.” – Every amateur investor who has never seen a bear market.

Over the last decade, investors have been trained to “buy” the markets every time the Federal Reserve was engaging in providing liquidity to the financial markets. As I noted in “Pavlov’s Dogs:”

“Classical conditioning (also known as Pavlovian or respondent conditioning) refers to a learning procedure in which a potent stimulus (e.g. food) is paired with a previously neutral stimulus (e.g. a bell). What Pavlov discovered is that when the neutral stimulus was introduced, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not currently present. This learning process results from the psychological ‘pairing’ of the stimuli. Importantly, for conditioning to work, the ‘neutral stimulus,’ when introduced, must be followed by the ‘potent stimulus,’ for the ‘pairing’ to be completed.”

For investors, as each round of “Quantitative Easing” was the “neutral stimulus,” which was followed by the “potent stimulus” of higher stock prices, Not surprisingly, after a decade of “ringing the bell,” investors have been conditioned to respond accordingly.

It is worth a trip back through history to evaluate the relationship between the Fed’s monetary interventions, and the impact on asset prices.

2002-2007:  Credit spreads and financial conditions had normalized following the “Dot.com” crash. The Fed’s balance sheet was growing in line with the rate of GDP growth, ensuring banks had adequate liquidity to operate (This is the baseline of “normalcy.”)

2008: March – Bear Stearns fails, mortgage defaults start to rise, credit conditions worsen, and yield spreads rise. September – Lehman fails and freezes credit markets. Asset prices decline sharply, triggering margin calls, and the Fed floods the system with liquidity. As discussed last week:

The reality of the economic devastation begins to set in as unemployment skyrockets, consumption and investment contract, and earnings fall nearly 100% from their previous peak, as the market declines 26% into late November. It was then the Federal Reserve launched the first round of Quantitative Easing. 

Stocks staged an impressive rally of almost 25% from the lows. Yes, the bull market was back! Except that it wasn’t. Over the next few months, the Fed’s liquidity was absorbed by the “gaping economic wound,” and the market fell another 28.5% to its ultimate low.”

Note: At this juncture, credit conditions were improving, spreads were normalizing, and the bulk of the economic devastation had been seen. 

2010: QE1 ends, credit conditions tighten slightly as the new economy recovery showed strains. The Fed quickly acts to inject more liquidity with QE2. Given credit spreads and conditions were close to normal levels, the excess liquidity only had one place to go – the stock market. 

2011: QE2 ends as the world is hit with a double-threat. Japan is impacted by a massive tsunami and the U.S. Government is enthralled in the midst of a “debt-ceiling debate.” Again, despite credit spreads and conditions being near normal levels, the Fed jumps in with “Operation Twist.” The economy quickly found its footing in Q3 of 2010, and with no crisis to absorb the liquidity, it flowed into the stock market.

2012: One of the byproducts of the “debt ceiling debate” was a bipartisan commission tasked with finding $1 trillion in spending cuts to reduce the deficit. This was known as the “fiscal cliff.” In late 2012, Ben Bernanke panicked and launched QE3 to preempt a “fiscal cliff” crisis. However, no crisis occurred, leaving the trillion-plus in liquidity with nowhere to go but the stock market.

2016: With the market down 20% from the peak over fears of a disorderly “Brexit,” Janet Yellen calls on the BOE and ECB to launch a Euro-QE program. Once again, the “Brexit” crisis never happened, and the only place for all of the excess liquidity to go was into the equity markets.

2019: In mid-summer, the Fed is faced with an “overnight liquidity shortage” for hedge funds. This was the first sign of trouble, but credit markets were not showing any real signs of strain. With credit markets operating normally, the liquidity flowed into asset prices, pushing markets to all-time highs.

NOTE; With 2008 a distant memory, and a decade of “emergency measures” providing “excess liquidity” to financial institutions for “emergencies” that never occurred, investors were fully trained to “buy the dip.” 

2020: COVID-19 Strikes: The shutdown of the economy was unprecedented. Importantly, for the first time in a decade, credit conditions tightened, and yield spreads blew out. Bank’s loan loss reserves are exploding, and the economic data is worse than at any other point in history outside of the “Great Depression.” 

While the Federal Reserve is busy providing liquidity to keep the credit markets functioning, investors who have forgotten to study 2008 still assume stocks can only rise. However, this time, for the first time since the “Financial Crisis,” there is “credit event” absorbing the Fed’s liquidity.

Importantly, like 2008, the “economic disruption” is likely to be far worse and more damaging to corporate earnings, than currently estimated as these “bailouts” fail to increase economic prosperity, wages, or savings.

How do we know that?

The chart below is our economic composite indicator. Given the primary indicators of economic strength are wage growth, inflation, the dollar, and interest rates, it is no surprise the indicator has a close correlation to GDP.

Since the financial crisis, there has been very little organic economic growth. Importantly, the rate of growth remained below pre-recessionary highs. The Fed’s zero-interest-rate policies, and expansion of the balance sheet, did little to improve that weakness. In fact, we argue that their incredibly loose monetary policy which fed speculative investments, deterred from economic growth.

In other words, while the Federal Reserve’s policies have been shown to absolutely boost asset prices, and inflate debt levels, they are responsible for detracting from economic growth, and widening the “wealth gap” between economic participants,

No “V-Shaped” Recovery

Consumption, what you and I spend supporting our families, working, and playing, comprises roughly 70% of economic growth. Of that 70%, retail sales make up about 40%. This past week, the first “retail sales” report was released showing the impact of the “economic shutdown” on domestic consumption.

“Pretty Catastrophic’ Month for Retailers, and Now a Race to Survive. March brought a record sales plunge as the coronavirus outbreak closed stores. A long shutdown could leave lasting changes in the shopping landscape.” – NYT

This decline in retail is not the end, but the beginning, as job losses mount. Retail demand is going to continue to suffer long after the “economy” is re-opened.

From this analysis, we can extrapolate the decline in retail sales into expectations for PCE growth. Again, since PCE comprises almost 70% of the economy, this is why expectations are for a drop of 10%, or more, in GDP in the second quarter.

Unfortunately, despite many hopes to the contrary, this is unlikely to be a “V-shaped” recovery for several reasons.

While the Government is talking about re-opening the economy, they are discussing doing so in phases over several months. Essential workers like plumbers, electricians, and other providers will reopen first, and only in areas with low infection rates. Then over time the rest of the economy will be opened as the “risk of spread” diminishes.

The problem is that during that time, the majority of small business owners, which as stated previously, comprise about 70% of employment, and roughly 45% of GDP, will run out of money. To wit: 

“Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher, and a longer-duration of, unemployment.”

However, the bigger problem was noted on Wednesday by UBS:

“Not every company that qualifies for the Federal Reserve’s loan support will survive the coronavirus-led downturn. Despite the Fed’s rescue efforts, these companies may struggle to remain in business and could be downgraded deeper into junk territory by the raters. 

‘For now, we assume direct Fed loan support helps 50% of those eligible; i.e., distressed firms become non-distressed. However, without specific single name analysis, this estimate is effectively the coin toss because the actual figure is below 100% and above 0%. That implies half of eligible issuers avoid distress with Fed loans (9% leveraged loans, 10% middle-market, 19% high-yield).’

In reality, not every company that qualifies on paper will be able to pull this off. Some may suffer from long-term effects of the pandemic such as reduced travel and office-space rentals. Others may require assistance beyond September 30, which is the current termination date of the Fed’s facilities.”

Even if these companies get loans and assistance, they require “revenue” to stay in business. However, the nasty “feedback loop” is that by reducing employment, consumption is also curtailed. As revenue falls at the top line, the propensity to make capital investments into the economy plummets.

Of course, that demand drop also reduces the biggest support for asset prices over the past decade – share buybacks.

“Between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market.”

The problem with surging unemployment is what happens to confidence.

Consumption Is Function Of A Paycheck

Without a job, or even the threat of losing one’s job or a pay cut, “confidence” is falling quickly which curtails consumption.

(The chart below shows our composite confidence index, which combines both the University of Michigan and Conference Board measures.) If we overlay that confidence composite with personal consumption expenditures, it is not surprising there is a reasonably high correlation.

Not surprisingly, since retail sales make up 40% of personal consumption expenditures, it also has a high correlation with consumer confidence.

Do you know what else has a high correlation with consumer confidence?

Employment.

This should be a relatively obvious connection.

No job = No paycheck = No spending. 

Of course, in October 2019, we asked a simple question:

“[Who is a better measure of economic strength?] Is it the consumer cranking out work hours, raising a family, and trying to make ends meet? Or the CEO of a company who is watching sales, prices, managing inventory, dealing with collections, paying bills, and managing changes to the economic landscape on a daily basis? A quick look at history shows this level of disparity (between consumer and CEO confidence) is not unusual. It happens every time prior to the onset of a recession.

“Notice that CEO confidence leads consumer confidence by a wide margin. This lures bullish investors, and the media, into believing that CEO’s really don’t know what they are doing. Unfortunately, consumer confidence tends to crash as it catches up with what CEO’s were already telling them.

What were CEO’s telling consumers that crushed their confidence?

‘I’m sorry, we think you are really great, but I have to let you go.’” 

As I concluded in that note last year:

“It is hard for consumers to remain ‘confident,’ and continue spending, when they have lost their source of income. This is why consumer confidence doesn’t ‘go gently into the night,’ but rather ‘screaming into the abyss.’”

While the markets have indeed managed a strong “bear market rally” following the fastest decline in the entirety of financial history, there are reasons to be cautious.

We are just entering into what will likely be a longer, deeper, and more damaging recession than what we saw in 2008. Credit conditions and yields spreads are still a long-way from normalized, and defaults and bankruptcies are likely only in the very early stages. Liquidity from the Fed has suspended bankruptcies for the time being, but the longer this recession/depression drags on, the greater the risk is the Fed only delayed the inevitable.

While the Federal Reserve has certainly moved quickly to assist the credit markets in remaining operational, as discussed here, those “emergency measures” don’t translate into stronger economic prosperity, revenues, or corporate profits.

What this all means is there will be no “V-shaped” recovery.

It also suggests there is a possibility that “buying the dip,” doesn’t work this time.

Authored by Jennie Taer via SaraACarter.com,

MSNBC anchor Stephanie Ruhle suggested earlier this week that former Vice President and likely Democratic nominee in the 2020 race Joe Biden form “a shadow government” to counter President Donald Trump’s daily briefing on the White House’s response to the coronavirus pandemic.

“Do they (the Biden campaign) need to do it in a bigger way? What did you just call it ‘the President’s daily clown show’? That’s his press briefing? Should Joe Biden be counter programming that? Should he be creating his own shadow government, shadow cabinet, shadow SWAT team? And gearing up there at a podium every night saying here’s the crisis we’re in, here’s what we need to do to address this,” Rule said in her interview with former Obama White House Deputy Chief of Staff Jim Messina.

MSNBC’s @SRuhle suggests Biden create “shadow government” to counter Trump during pandemic crisis pic.twitter.com/pxT8RvBuTU

— Kyle Drennen (@kjdrennen) April 15, 2020

Messina, as Ruhle implied, did earlier in the interview call the President’s daily briefings a ‘clown show’ and suggested that “real upstanding leaders” like former President Barack Obama and Senator Elizabeth Warren endorsing Biden and his message “is a contrast that the Biden campaign is gonna bank on going forward.”

Given President Trump’s push for nationwide testing, DPA-threats on ventilator and PPE manufacture, state-by-state re-opening of the economy, massive money-flow to America, and taxpayer-funding for vaccine/treatments… we wonder just what it is that this new “shadow government” will do to “counter Trump’s response.”

Severe thunderstorms and tornadoes are expected for much of the South on Sunday, including areas that are still recovering from last weekend’s deadly storm.

“The highest probability will be on Sunday across many of the same areas that saw severe weather on Easter,” CNN meteorologist Dave Hennen said. “This storm will be similar, but not as strong.”

About 105 tornadoes were spotted across the South during Easter weekend.

The devastating storms resulted in at least 32 deaths, and dozens of homes and buildings ripped apart across the South. At one point, nearly 25 million people on the East Coast were under a tornado watch.

These tornadoes were BAD. This is from my sister’s live. I don’t own this. I’m not selling it. Please do not contact me about using it. I’m not giving out her name. I just want people to know what’s going on in the South. #Mississippi #tornado pic.twitter.com/ERgtiOoIIG

— Carole Baskin Hate Account (@theori) April 13, 2020

Intense tornado damage from Bassfield, Ms. #MsWx #Tornado #Damage #Drone pic.twitter.com/nWpGpyEOJb

— WXChasing (Brandon Clement) (@bclemms) April 13, 2020

“My boy’s house gone, man.”

Shocking footage shows significant damage done to homes in a neighborhood of Monroe, Louisiana after a suspected tornado tore through the area. https://t.co/TiQP7vbu28 pic.twitter.com/nSVJAqsNAx

— ABC News (@ABC) April 12, 2020

At the time of the storms, the National Weather Service (NWS) Eastern Region tweeted a map of the most heavily impacted areas.

Updated severe thunderstorm reports from Sunday-Sunday night, and Monday as of 6 pm. Wind reports are from thunderstorms only…not including gusts/damage reports from winds not associated with thunderstorms. NWS storm surveys are ongoing, and will continue for most of the week. pic.twitter.com/ZYAbvfc1sU

— NWS Eastern Region (@NWSEastern) April 13, 2020

Hennen says this weekend’s storm will develop in East Texas on Saturday night and early Sunday, with potential for large hail, damaging winds, and tornados.

The storm will trek east throughout the day. “Tornadoes will be possible, but this time the ingredients will favor strong winds as the most prevalent threat,” CNN meteorologist Taylor Ward says.

The most high-risk regions for severe weather on Sunday will be North Louisiana, Southern Mississippi, Alabama, and West Georgia.

There is an Enhanced Risk level (3/5) for Day 4 Sunday April 19th across portions of the Southeast. Damaging Wind gusts and tornadoes will be the main hazards. For more information and later updates please visit https://t.co/DFvb0t7WMD #TXwx #LAwx #MSwx #GAwx #SCwx pic.twitter.com/uCmmDuRPeS

— NWS SPC (@NWSSPC) April 16, 2020

Since the ground is mostly saturated from last weekend’s storm, there’s an elevated risk of flooding in the South on Sunday.

NOAA’s Weather Prediction Center shows rain totals for southern states could be exceptionally high in Alabama and Georgia through Monday. 

A MODERATE risk is in effect in our Day 3 Excessive Rainfall Outlook. More details: https://t.co/FQU5sb4jjg pic.twitter.com/q3jQt84l3d

— NWS WPC (@NWSWPC) April 17, 2020

By Monday afternoon, the system is expected to move off the Carolina coast. 

Submitted by Michael Every of Rabobank

It’s Hard Not to Be ‘Depressed’

Here come the depression-level data. US jobless claims soared a further 5.2 million in the past week, meaning that around 22 million jobs have now been shed in the past four weeks. That undoes all the jobs created since the end of the Global Financial Crisis, which is seen as unprecedented in the structural economic damage that it wrought. Yet we are still only four weeks in to this: does anyone think the sudden slump in demand from 22 million newly unemployed, let alone the broader impact of ongoing lockdowns, won’t see a further massive initial claims print next week, and the week after, and the one after that, and so on?

I have written about economics and markets for over 20 years and try (and often fail) to detach myself from some of the wilder, more unusual, or more illogical and/or unsustainable movements one sees. However, US equities rallying for a fourth successive week on the back of a fourth successive print showing millions of US citizens losing their jobs is a real splinter in the mind’s eye: maybe if everyone loses their job equities could double?

This all goes far beyond the pre-Covid metric of ‘bad news is good news’ because we already have zero rates and apparently infinite quasi-fiscal Fed liquidity on offer: what more is being priced in by further economic misery? To the increasingly depressed it smacks dangerously of depression alongside a Marie Antoinette-esque “Let them eat stocks” from Wall Street – as does Treasury Secretary Mnuchin stating in a TV interview that a check for $1,200 is bridge finance supposed to last the recipient for 10 weeks: I am sure he has vast experience of living on that kind of breadline.

Yes, US President Trump is now flagging that some parts of the US economy can open up again in four weeks – but that’s another month of massive job losses to then try to recover from, and to eke out on USD1,200. Moreover, as we keep repeating, one cannot assume that there is going to be a binary switch back to normal. Voluntary lockdowns, in terms of consumers not going out to many places, are going to linger for a long time – we have evidence of that from China, where things are still not back to normal at all, and from Sweden, where things aren’t locked down and yet where people won’t go to cinemas, etc. Add on top recent evidence that social distancing needs to be MUCH more than two meters OR that masks must be worn inside and outside at all times to ensure that two metres is enough, and normal economies are not on the horizon.

On that front, the headlines today are that China’s GDP collapsed -9.8% q/q and -6.8% y/y in Q1, the inverse of what one would normally expect to see in a series that is carefully pruned and polished before public outings. That was actually better than the -12.0% q/q consensus but oddly worse than the -6.0% y/y consensus – but this is all probably still the market-friendly version of the actual facts in many places.

We also saw industrial production for “back to normal” March at -1.1%, far better than the -6.2% expected, and fixed investment was -16.1% y/y YTD, although up from -24.5%. Yet retail sales, on which hopes for Chinese recovery are based given global demand is absent, were -15.8% y/y, worse than the -10.0% the market was looking for. Lastly, the unemployment rate was DOWN to 5.9% from 6.2%, which is why nobody pays any attention to it at all. Also worth noting was a survey on SME activity released yesterday by the PBC School of Finance at Tsinghua University. It shows daily revenue is running around half the level it was in 2019, and monthly revenue for March is -60% y/y. That is with an economy that has been opened up – and those are still depression level data.

Even some Fed members are hedging their bets. Bullard notes that while a V-shaped US recovery is possible, so is a “depression”. Yes, he mentioned the D word. Kaplan sees unemployment hitting the high teens (it’s already there, so that’s another great Fed look into the distant future) and is “open minded” about the Fed now including financial aid to non-profits. One could quip that by covering junk bonds the Fed is already bailing out non-profits: that as GOP Senator Crapo (no typo), who heads the powerful Banking Committee, is stressing that transparency over the eligibility for the coming flood of trillions of USD is required.

Meanwhile, Europe is having its own drama. French President Macron has given an interview with the FT in which he argues that fiscal transfers are needed if the EU is to “hold on” through this crisis, underlining that globalisation as we knew it is over, and that tomorrow belongs to populists and Euroskeptics if the EU won’t agree to burden sharing. With opinion so split on the issue of coronabonds, and the nuts and bolts of it so complex, large parts of the EU are going to face ‘depression’ in a least one sense no matter how this binary issue is finally resolved – though if that will be at next week’s virtual summit remains to be seen.

Finally, more international drama. Stand-in UK PM Dominic Raab has decided to go on a “Raab araaand” (apologies to the late Mike Reid) on the foreign policy front, stating “There is no doubt we can’t have business as usual” with China and that “After this crisis, we’ll have to ask the hard questions about how it came about and how it couldn’t have been stopped earlier.“ Anglo-US solidarity? One wonders if the Huawei greenlight still stands when Boris gets back to No. 10.

Likewise, Reuters reported yesterday that the US has blocked the IMF from issuing more SDR to free up lending capacity specifically over objections to USD funding being made without conditions to Iran….and China. Why does China need USD from the IMF? Why doesn’t the US want the IMF to lend them to it? And why is China on the same list as Iran at all? Perhaps this is nothing – but for those who want to see, it looks a lot like another facet of USD/Eurodollar power-play akin to the “He who controls the spice controls the universe!” going on inside the US in terms of who the Fed/Treasury channel cash to.

It really is all very depressing – and so I get why people don’t want to see it.