Tag: finance

Authored by Brahma Chellaney via Project Syndicate,

The COVID-19 pandemic, much like a major war, is a defining moment for the world – one that demands major reforms of international institutions. The World Health Organization, whose credibility has taken a severe beating of late, is a good place to start.

The WHO is the only institution that can provide global health leadership. But, at a time when such leadership is urgently needed, the body has failed miserably. Before belatedly declaring the COVID-19 outbreak a pandemic on March 11, the WHO provided conflicting and confusing guidance. More damaging, it helped China, where the crisis originated, to cover its tracks.

It is now widely recognized that China’s political culture of secrecy helped to turn a local viral outbreak into the greatest global disaster of our time. Far from sounding the alarm when the new coronavirus was detected in Wuhan, the Communist Party of China (CPC) concealed the outbreak, allowing it to spread far and wide. Months later, China continues to sow doubt about the pandemic’s origins and withhold potentially life-saving data.

The WHO has been complicit in this deception.

Instead of attempting independently to verify Chinese claims, the WHO took them at face value – and disseminated them to the world.

In mid-January, the body tweeted that investigations by Chinese authorities had found no clear evidence of human-to-human transmission of the virus. Taiwan’s December 31 warning that such transmission was likely happening in Wuhan was ignored by the WHO, even though the information had been enough to convince the Taiwanese authorities – which may have better intelligence on China than anyone else – to institute preventive measures at home before any other country, including China.

The WHO’s persistent publicizing of China’s narrative lulled other countries into a dangerous complacency, delaying their responses by weeks. In fact, the WHO actively discouraged action. On January 10, with Wuhan gripped by the outbreak, the WHO said that it did “not recommend any specific health measures for travelers to and from Wuhan,” adding that “entry screening offers little benefit.” It also advised “against the application of any travel or trade restrictions on China.”

Even after China’s most famous pulmonologist, Zhong Nanshan, confirmed human-to-human transmission on January 20, the WHO continued to undermine effective responses by downplaying the risks of asymptomatic transmission and discouraging widespread testing. Meanwhile, China was hoarding personal protective equipment – scaling back exports of Chinese-made PPE and other medical gear and importing the rest of the world’s supply. In the final week of January, the country imported 56 million respirators and masks, according to official data.

By the time the WHO finally labeled the epidemic a public-health emergency on January 30, travelers from China had carried COVID-19 to far-flung corners of the world, including Australia, Brazil, France, and Germany. Yet, when Australia, India, Indonesia, Italy, and the US imposed restrictions on travel from China, WHO Director-General Tedros Adhanom Ghebreyesus roundly criticized the actions, arguing that they would increase “fear and stigma, with little public-health benefit.”

At the same time, Tedros extolled Chinese President Xi Jinping’s “very rare leadership” and China’s “transparency.” The bias has been so pronounced that Japanese Deputy Prime Minister Taro Aso recently noted that, for many, the WHO is looking more like the “CHO” – the Chinese Health Organization.

Yet, despite the WHO’s repeated deference to China, the authorities there did not allow a WHO team to visit until mid-February. Three of the team’s 12 members were allowed to visit Wuhan, but no one was granted access to the Wuhan Institute of Virology, the high-containment laboratory from which a natural coronavirus derived from bats is rumored to have escaped. In fact, a study conducted at the South China University of Technology in Guangzhou with support from the National Natural Science Foundation of China concluded in February that “the killer coronavirus probably originated from a laboratory in Wuhan” working on bat coronaviruses.

China did not always enjoy deferential treatment from the WHO.

When the first twenty-first-century pandemic – severe acute respiratory syndrome (SARS) – emerged from China in 2002, the agency publicly rebuked the Chinese authorities for concealing vital information in what proved to be a costly cover-up.

Why has the WHO changed its tune?

The answer is not money: China remains a relatively small contributor to the WHO’s $6 billion budget. The issue is the WHO’s leadership.

Tedros, who became the agency’s first non-physician chief in 2017 with China’s support, was accused of covering up three cholera outbreaks while serving as Ethiopia’s health minister. Nonetheless, few would have imagined that, as WHO chief, the microbiologist and malaria researcher would be complicit in China’s deadly deception.

The WHO’s faltering response to the 2014 Ebola outbreak underscored the imperative for reforms before Tedros was at the helm of the agency. But, rather than overseeing the needed changes, Tedros has allowed political considerations to trump public health.

As the costs of the mismanagement continue to mount, a reckoning is becoming all but inevitable. An online petition calling for Tedros to resign has garnered almost a million signatures. More consequential, President Donald Trump’s administration has suspended the WHO’s US funding, which accounts for 9.2% of its budget.

The world needs the WHO. But if the agency is to spearhead international health policy and respond to disease outbreaks effectively, it must pursue deep reforms aimed at broadening its jurisdiction and authority. That won’t happen unless and until the WHO rebuilds its credibility beginning with new leadership.

Three weeks and hundreds of billions in misappropriated loans later, the Treasury Department has issued guidance intended to stop banks from issuing Paycheck Protection Program loans to large companies.

According to CNBC, the Treasury says it’s unlikely that any public company with substantial market value and access to capital markets will be able to credibly prove in good faith that they have a legitimate need for a PPP loan.

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ”[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. –CNBC

The guidance comes after national outrage over banks such as JPMorgan prioritizing loans to large, public companies over small businesses struggling during the COVID-19 pandemic, which the funds were intended for in the first place. After they got caught, JPMorgan announced that they were working with the Treasury department to adjust the distribution qualifications for the next round of funding. That’s nice, but it doesn’t help small business owners who continue to struggle amid the pandemic – which resulted in a lawsuit filed last week in a Los Angeles federal court over the debacle.

In a Thursday Op-Ed in the Wall Street Journal, Sen. Ron Johnson (R-WI) writes:

With the rapid deployment of support through the Paycheck Protection Program, it has become clear that access to the forgivable loans hasn’t been limited to those who truly need them. The PPP was intended to support small employers that otherwise would have had to lay off employees because of coronavirus-related revenue loss. Keeping employees connected to employers provides wage and benefit continuity, and we hope it will help ensure a faster recovery.

But the minimal requirements for loan qualification, designed to speed relief, have allowed employers to obtain PPP loans even if they aren’t in financial distress and have no need or intention to lay workers off. Loan applications granted on a first-come, first-serve basis quickly depleted the $349 billion fund, and many deserving small businesses were crowded out, unable to obtain financial relief. On Tuesday the Senate passed a bill that provides another $310 billion for PPP. It places no further limitations on loan forgiveness, and the self-certification of economic harm required by applicants remains a nebulous statement that “current economic uncertainty makes [the] loan request necessary to support the ongoing operations” of the business.

Johnson proposes adding forgiveness limitations to PPP funds based on ability to repay, which would apply to all loans – including those granted under the Cares Act. It would allow no forgiveness for companies whose 2020 taxable income exceeds that of 2019, while full forgiveness would be limited to companies whose 2020 gross receipts are less than 60% of the preceding year’s.

Those in between would be eligible for forgiveness on a sliding scale: 10% of the loan if 2020 gross receipts are 90% or higher of 2019’s; 30% forgiveness for 80% to 90% of 2019 gross receipts; 50% forgiveness for 70% to 80% of 2019 gross receipts; and 75% forgiveness for 60% to 70% of 2019 gross receipts. In no case would forgiveness exceed the loan amount less after-tax income.

Sen. Elizabeth Warren’s older brother, Donald Reed Herring, died on Tuesday night in Norman, Oklahoma according to the former presidential candidate.

The 86-year-old Herring was a 20-year veteran of the Air Force and a Vietnam veteran.

My oldest brother, Don Reed, died from coronavirus on Tuesday evening. He joined the Air Force at 19 and spent his career in the military, including five and a half years off and on in combat in Vietnam. He was charming and funny, a natural leader. https://t.co/b8m0xKzAmM

— Elizabeth Warren (@ewarren) April 23, 2020

I’m grateful to the nurses and frontline staff who took care of him, but it’s hard to know that there was no family to hold his hand or to say “I love you” one more time—and no funeral for those of us who loved him to hold each other close. I’ll miss you dearly my brother. pic.twitter.com/oOG6HArEL6

— Elizabeth Warren (@ewarren) April 23, 2020

Herring spent his last months on earth watching his little sister’s lies over her heritage unravel, before she crashed and burned on the national stage as a presidential candidate – refusing to pull out of the race until Joe Biden had a clear lead over Bernie Sanders.

Just another example of how this vile disease disproportionately impacts people of color

— Viral Load (@noahgendas) April 23, 2020

Authored by Michael Lebowitz and Jack Scott via RealInvestmentAdvice.com,

U.S. Treasury bonds of all maturities have recently flirted with zero percent yields and, in the case of some Treasury Bills, have at times traded at negative yields. As a result, these bonds are closing in on the same “greater fool” status, which plagues sovereign and corporate bond investors throughout Europe and Japan.

We use the term greater fool to describe a market circumstance in which overvalued conditions are so extreme that foolish participants must rely on an even greater fool to whom they may sell their holdings to profit.

In the case of the U.S. Treasury market, the fool is the buyer of bonds at meager yields. The greater fool is an “investor” that he or she thinks will buy it at an even lower yield in the future.

Since the yield is minimal and the risk extensive, the fools either believe that yields will fall further, which in this case implies negative yields or that the future rate of deflation will be even lower than the bond yield.

Fixed-income assets play a vital role in every well-thought-out, prudent wealth management strategy.  Investors use treasuries, corporates, mortgages, other bond classes, and related securities for a wide range of purposes, including, but not limited to cash flow administration, risk management, diversification, and safety.

The world of traditional money management, as we know it, has been turned on its head with zero interest rates and financial repression. Willingly or naively blind to the objectives of central bankers, most investors did not consider the consequences of those measures employed following the 2008 financial crisis and being perpetrated once again today. Ironically, the current fragility of the economy is due in part to past policies and crisis management operations, which, over the longer run, detract from economic growth by discouraging prudent capital allocation and savings.

Fixed Allocation Strategies

Many institutional and retail investment advisors employ strategies that allocate a fixed percentage between stocks and bonds. A 60/40 plan, for example, is when an investor allocates 60% of a portfolio to equities and the remaining 40% to bonds and cash. Generically it is referred to as a “Balanced Portfolio.” Over the past few decades, investors and funds using this type of strategy have been rewarded for their allocation to bonds. There are several reasons for this. First, yields have steadily declined, which has resulted in price gains for those who chose to be opportunistic and take profits. Second, although declining as yields fell, coupon income has also supported returns and helped meet cash flow needs. Lastly, and very important at times, such as today, bonds have historically done well when equities are in a bear market, thus serving as a ballast in the portfolio and hedging equity risk.

With interest rates approaching zero and the stock market now in a bear market, common sense argues that bonds can no longer offer the same risk-reward profile as in the past. To clarify this point, consider the equity hedging benefits of holding bonds during the prior two recessions.

Going back to what we described above as a balanced portfolio, investors benefited greatly during bear markets from the allocation to bonds in a simple 60/40 strategy (S&P/UST). For purposes of simplicity, we assume the full 40% allocation of bonds was in 10-year U.S. Treasuries. In most cases, investors would use other high quality fixed income categories such as mortgages and investment-grade corporates as well as a range of various maturities such as 2-year, 5-year, and 10-years.

The following analysis shows how allocations to bonds helped limit downside in the last two equity bear markets.

• From September 2007 through March 2009, a simple 60/40 (S&P 500/7-10 Yr. UST) portfolio returned -23.92%. An all-stock portfolio returned -45.76%. The 40% allocation to bonds reduced losses by 21.84%.

• From January 2000 through September 2002, a simple 60/40 (S&P 500/7-10 Yr. UST) portfolio returned –16.41%. An all-stock portfolio would have returned -42.46%. The 40% allocation to bonds reduced losses by 26.05%.

Heading into the two bear markets mentioned above, the 12-month average yield on ten-year U.S. Treasury bonds was 6.66% in 2000 and 4.52% in late 2007. At their lows, the yields fell to 3.87% and 2.43% for 2002 and 2008, respectively.

The graphs below show the decline in the yield for the 10-year Treasury note and the approximate cumulative total return (price and coupon) over the periods mentioned above.

Data Courtesy St. Louis Federal Reserve

Prior bear markets began with interest rates at much higher levels than what we see today. Therefore, well-constructed portfolios containing a healthy share of high-quality fixed-income securities provided sound protection against significant and sometimes permanent losses in a portfolio.

The equity bear market of 2020 is starting with yields well below those seen during the careers of all active portfolio managers.  As described above, in the past, holding a ten-year Treasury note yielding 4% or 5% partially hedged equity losses as yield dropped and beneficial price convexity kicked in. With 10-year yields trading below 1%, there is limited room for price appreciation owing to a decline in yields unless one is convinced that yields will move significantly into negative territory.

If we assume the 10-year yield, currently at 0.55%, falls to zero over the next year as the U.S. and world are mired in a post COVID-19 recession, an investor of the 10-year note should expect to receive approximately 0.55% in coupon for the year and an approximate price gain of 5.00%.

5.55% pales in comparison to the 20%+ gains of the prior two recessions.

To hit home on this point, if bonds were to provide 25% protection, as they did in the past, ten-year Treasury yields would need to fall to approximately -2.20%. Given the experiences of Europe and Japan, we cannot rule that out. However, make no mistake; it will require a significant change in the Fed’s perspective on the damage negative yields do to the banking system. Further, we would also need to find a lot of fools willing to pay a remarkably high price.

To the distress of many, the math and probabilities also apply to pension funds, endowments, sovereign wealth funds, and a host of other large investors worldwide. As 10,000 baby boomers retire in the United States every day, all of whom seek secure fixed-income returns, the size of this problem cannot be overstated.

Portfolio Management in an Era of Fools

From an equity perspective, investors will have to be more agile with their allocations. If we are correct in that the bond market does not offer the same loss-mitigating firepower as in past cycles, then investors will be forced to do a better job of understanding valuations and risk.

As we are fond of reminding readers, wealth is best compounded by avoiding large losses. Significant losses are best avoided by not paying too much, or in other words, not being the greater fool. Smart investors and advisors will need to be much more active in choosing the right mix of stocks at the right price and shifting their overall allocations to and from stocks when prudent.

Further, they must also think about the types of companies they own. For instance, in a bear market, value-based strategies are likely to hold up much better than growth strategies.  For example, as the tech bubble deflated in the months following March 2000, out-of-favor “old economy” stocks that had gotten so beaten down during the tech euphoria, rallied. Investors may also become more dependent on dividend stocks and preferred stocks to help generate needed cash flows that bonds will not be able to deliver.

The investment industry, like it or not, is about to shift away from the brain-dead investing non-processes of passive and algorithm (black box) trading back toward a thoughtful, value-oriented, common-sense approach to compounding wealth. For more on Process-Based strategies, see our article March Madness: Having a Process for a Winning Outcome.

There are other options than holding equities, which may grow in importance at times. For instance, commodities are currently the cheapest asset class available. In the post-pandemic future, people may permanently modify what they buy and how they buy it. They might also decide to buy less and save more as resources become tangibly more precious. Investors will need to apply their intellect and rigor toward exploring the cause and effect of such changes and what that means for investment opportunities.

While the virus and the possible recession are not immediately good for the economy or commodity prices, we need to be forward-looking. Might rapidly changing supply lines and production cuts lead us to a period when commodities erase long periods of underperformance versus equities like the cheap “old economy” value stocks did in 2000-2002? Given the lack of demand for commodities today, it is hard to envision such performance, but as investors we must look beyond today.

Summary

As bonds flirt with zero or negative interest rates, it will likely be increasingly difficult to find a greater fool in the bond market. Consider also that while you wait to find a fool, you may be paying someone to borrow money from you. Now is the time to think about portfolio management using sound logic and common sense as opposed to blindly chasing tiny interest rates and taking enormous risks.

Balanced strategies and passive management worked well in the past years of financial repression. Still, if rates stay at, near, or even below zero, your portfolio may begin to demonstrate some symptoms of a wealth-devouring virus.

Today is the time contemplate what tomorrow may bring.

Now that the latest initial claims reports is in the history books, revealing that a record 26.5 million people have been let go in the past five years, which is over 10 times the prior worst five-week period in the last 50-plus years…

Source: Bloomberg

… the most important event today is the long-awaited European Council summit which is taking place via videoconference this afternoon, where as Jim Reid writes, the big question will be over how the idea of a European Recovery Fund is financed. Yesterday, Bloomberg News reported that the Commission would propose a €2 trillion plan that would in part use the bloc’s 7-year multi-annual budget with a €300bn recovery fund included, but also establish a new temporary financing mechanism that would raise up to €320bn. However, this could prove controversial given the issuance of joint debt, to which northern member states – most notably the Netherlands and Germany – are strongly reluctant.

Commenting on today’s “make or break” event, Rabobank’s Michael Every recaps the above, saying that “a temporary €300bn recovery fund is being discussed along with a €200bn recovery and resilience facility, €R50bn in repurposed cohesion funds, and two €200bn funds “to protect the EU’s internal markets”. And that appears to be it, even though somehow this is €2trn in some headlines.”

Alas, as with everything European, there is nothing but chaos as the world looks to Europe for some comfort. As Every continues, Italy which yesterday announced that its fiscal deficit will be 10% of GDP in 2020 even though there is precious little stimulus taking place, and which will almost certainly be downgraded to junk as soon as Friday, is now willing to avoid the debt mutualiation issue and instead favour ultra-long maturity or perpetual bond issuance, and “one wonders how the Usual Suspects in northern Europe will feel about that compromise.”

But the real kicker is the following: the total confusion over what Europe hopes to actually achieve:

I won’t allow myself to get sucked into the classic Euro game of mind-stultifying fudge, acronyms, and deck-chair rearranging. Instead, I will quote Bloomberg directly: “

The ‘roadmap’ EU Council President Charles Michel distributed to national delegations ahead of the video conference contained no details on the amount, the specific objectives, the time frame or the nature of the investment needed to get the bloc back on track. Leaders aren’t expected to reach a decision this week and a final package may not be ready for at least six months, according to a French official.”

SIX MONTHS?! And then action on a scale that looks completely out of kilter with the economic damage being wrought. Euro-committees are all very fine and good, and I am always told they work best when in a genuine crisis (or only in a crisis) – but where is The King when you need him? He appears to have left the building.

Meanwhile, as DB’s Jim Reid continues, “if we saw a full agreement today that would be a surprise but progress and something that Italy can sign up to will be the key.” At the same time, DB economists do expect an eventual agreement on a recovery fund, noting that “it would be a positive surprise if the important details were agreed today, since the question of burden sharing is politically complex and the ECB’s purchases are absorbing market pressure for now.”

According to them, the things to watch out for are: the size, speed and structure of the fund, even though joint bonds are unlikely for obvious reasons due to the Northern states current lack of desire to go down that route.

We’ve also seen increasing speculation around grants recently, which could be the principle means of buying solidarity, but that would also lead to tough debates around the ratio of grants to loans within the Recovery Fund and eligibility for the

Finally, here is a summary primer courtesy of RanSquawk on what to expect today, even if the most accurate expectations out of the EU summit is the usual one: disappointment.

The EU27 are poised to sign off on the plans concocted by EZ finance ministers, and brainstorm on a long-term recovery plan. Leaders have signalled a general will for a larger coordinated fiscal response, albeit views seem to differ. Officials noted that the North fears that their financial positions will be contaminated by debt mutualisation in the future due to decisions taken by the South. The European Council is expected to discuss the size of a European Recovery Fund alongside other financing tools. The virtual meeting will be chaired by EU Council President Michel at 1400BST, although the lack of detailed proposals could see another impasse or delay in talks.

EU RECOVERY FUND: The Council President said the Fund should be established as soon as possible to kick-start economy once lockdown measures are eased, but officials note of a large divide between member states on the size and whether it should consist of only grants or solely loans. Consensus on a Recovery Fund this week has been heavily downplayed, with officials pointing to more clarity in June or July. In terms of the nuances, Spain is to propose a EUR 1.5tln recovery fund backed by perpetual bonds to finance the recovery of the worst-hit countries in grants and not loans, to avoid rising debt. France has backed the principals in Spain’s proposal but noted a physical meeting will be needed for a formal decision, potentially before Summer – President Macron previously said there is no choice but to set up a joint EUR 400bln recovery fund. Sources said the European Commission is reportedly seeking EUR 320bln in the market to finance the regional recovery, whilst later reports noted that the Commission is floating a EUR 2.2tln plan for economic recovery.

EUROGROUP FALLOUT: At the Eurogroup meeting, Finance Ministers agreed on a EUR 540bln rescue package which consists of:

• ESM CREDIT LINE (up to 2% of Euro Area GDP): This will be immediately available for member states with “light” conditionality. The size could be up to USD 240bln should all countries tap the maximum available. This also opens the door to Outright Monetary Transactions (OMT) by the ECB, which allows the Central Bank to purchase unlimited debt from the worst-hit regions, albeit some analysts have suggested that the OMT programme has already been made redundant by the ECB’s new PEPP.
• FIRMING EIB ACTIVITIES (up to 1.6% of Euro Area GDP): The European Investment Bank could support EUR 200bln of company financings, with emphasis on SMEs.
• SHORT-TIME WORK SCHEME (0.8% of Euro Area GDP): The EUR 100bln scheme was drafted to aid protect jobs and workers hit by the pandemic in the form of loans on “favourable” terms.

CORONABOND: The common debt issuances pursued namely by Spain and Italy was not included in the Eurogroup’s draft document after experiencing pushback by several larger members, vehemently from Austria, Germany and Netherlands. However, Italy seems to be erring towards a compromise on the issue. Italian PM Conte, at a Senate hearing on Tuesday, signalled open-mindedness towards the ESM credit line and an alternative fund as a substitute to Eurobonds. Desks note that this should reduce tail risks for a roadblock.

ITALY’S DILEMMA: PM Conte set a high bar for success in negotiations for a post-virus response as domestic pressure builds at the epicentre of the European outbreak. Desks note that the PM will need a win to confine the rising Eurosceptics whilst fending off opposition parties waiting to muster support from any failures. Despite Conte’s more recent sanguine tone regarding a Coronabond compromise, participants believe the PM could be tempted to walk away from the table, having had battled for weeks on a Euro-wide debt instrument. Meanwhile, domestic pushback could arise from a compromise of just ESM lines – potentially paving a way for a change in government. It’s also worth noting that S&P will be reviewing Italy’s sovereign debt on Friday; the agency will be eyeing the outcome of negotiations. Credit Suisse believes that the survival of the Euro could be at risk if EU leaders fail to understand the difficultly in Italy’s economical and political landscapes.

Authored by James Rickards via The Daily Reckoning,

Over the course of 13 years as a media commentator and nine years as a bestselling author, I’ve had frequent occasion to state the following:

“In 1998, Wall Street came together to bail out a hedge fund. In 2008, the Federal Reserve stepped forward to bail out Wall Street. Each crisis was worse than the one before. In the next crisis, who will bail out the Fed?”

This was more than just rhetoric. It was a clinical description of a pattern of worsening crises on an approximately 10-year tempo, along with escalating bailouts.

Now the worst economic crisis in U.S. history is here and the Fed itself is in need of a bailout.

But what is the source of that bailout?

We now know part of the answer. A few weeks ago, the U.S. Congress passed a $2.2 trillion bailout bill called the CARES Act. This is the law that provided $349 billion in small-business loans, which are forgivable if the employer does not lay off its employees.

That fund has dried up already with most businesses getting either no money or not enough to survive more than a few weeks.

Also buried in that law was a $425 billion bailout fund for the Treasury to recapitalize the Fed. Since the Fed operates like a bank, they will leverage that $425 billion of new capital into $4.25 trillion of new money printing to buy corporate debt, municipal bonds, mortgages and other assets in order to keep liquidity in the system.

Still, that’s also a temporary solution when many more trillions of dollars of new money will be needed.

U.S. GDP is expected to lose an annualized $6 trillion or more in output in the second quarter. I estimate that 50% of retail and 90% of office rents aren’t being paid right now. Many small businesses will fail and probably never reopen.

I had always suggested that the IMF has the only clean balance sheet and would be the only source of liquidity in the world once the Fed was tapped out.

That’s exactly what we’re seeing now. The world is turning to the IMF for help. And that means printing the world money called special drawing rights (SDRs) to bail out the global financial system in the current economic and financial crisis.

SDRs were used in a small way during the 2008 financial crisis. They did not have much impact because the quantity was relatively small (about $250 billion equivalent) and it took a long time to get done. The SDRs were issued in August 2009, almost a year after the acute phase of the crisis and after a recovery had already begun.

Still, the 2009 issuance was a good dry run in preparation for the next crisis. Now the next crisis is here.

The world has never been so deeply in debt.

Societies with low debt burdens are robust to disaster. They can mobilize capital, raise taxes, increase spending and rebuild when the crisis is over.

But heavily indebted societies are much more brittle. They just don’t have that flexibility. Meanwhile, panicked creditors demand repayment that causes distressed sales of assets, falling markets and default.

That’s the situation we’re facing today.

Still, nothing this momentous happens without a heavy injection of politics, especially while Donald Trump and his “America First” agenda are in place.

A normal SDR printing exercise requires that the total SDRs be issued to all IMF members in proportion to their voting rights in the IMF. This means that U.S. adversaries such as Iran and China would get part of the bailout money along with more needy countries in Africa and Latin America.

The U.S. is now holding up the new issuance of new SDRs for exactly this reason.

We’ll see how this impasse gets resolved. Perhaps new SDRs will be issued right away. But as the depression lingers and the Fed’s impotence is exposed, the issue of printing a trillion SDRs will be back on the table.

China may have their own conditions such as a diminution in the role of the dollar as a global reserve currency. The U.S. may be more desperate when the time comes. Either way, this issue will not go away.

SDRs were originally intended as a kind of “paper gold.” Once the IMF starts the printing presses, investors will probably favor real gold as the proper antidote.

Bill Gates has inserted himself into the national dialogue as a self-proclaimed coronavirus sage who will lead the world out of dark times through a digitally-assisted brave new world of testing, contact tracing, and of course – a vaccine.

Of course, some of this might not be such a bad idea if it wasn’t coming from Gates, who’s written an op-ed in the Washington Post to elaborate on his thoughts – which makes the whole thing seem even more nefarious.

‘Sure, my Dad was on the board of planed parenthood – an organization founded by a eugenecist, and yes, I’ve talked about the need for population reduction for years. And sure, I want you to take my vaccines and get chipped. And ok, maybe India kicked us out after our immunization campaign was blamed for paralyzing 490,000 kids. And yeah, there was that whole ‘coronavirus pandemic‘ simulation my foundation spearheaded late last year which modeled 65 million dead. BUT, hear me out…‘

All jokes aside, here’s what Gates proposes in his WaPo Op-Ed in order to ‘reopen the economy.’

Widespread, at-home testing – “We can’t defeat an enemy if we don’t know where it is,” says Gates, who advocates home testing kits which “produces results that are just as accurate” as nasal swabs performed by healthcare professionals. Ok, not evil. Probably a good idea.

Choosing who to test – Essential workers and symptomatic people, or those who have been in contact with someone who tested positive, should be prioritized, otherwise “we’re wasting a precious resources and potentially missing big reserves of the virus.” Asymptomatic people who aren’t in the above categories should not be tested until there are enough tests, according to Gates. Again, not a terrible idea.

Using technology to enable a surveillance state – ah, here we go. Gates says the United States needs to follow Germany’s example; “interview everyone who has tested positive and use a database to ensure someone follows up with all their contacts.” And how to ensure accuracy? Digital big brother tools!

An even better solution would be the broad, voluntary adoption of digital tools. For example, there are apps that will help you remember where you have been; if you ever test positive, you can review the history or choose to share it with whoever comes to interview you about your contacts. And some people have proposed allowing phones to detect other phones that are near them by using Bluetooth and emitting sounds that humans can’t hear. If someone tested positive, their phone would send a message to the other phones, and their owners could get tested. If most people chose to install this kind of application, it would probably help some. -Bill Gates

Gates suggests this would be voluntary, unlike South Korea – which forces COVID-19 positive patients to self-isolate and install a tracking app on their smartphones which will alert authorities when an infected person has left their home, while warning them to return immediately. Admittedly, South Korea – which also employed widespread testing and the use of face masks, has had just under 11,000 confirmed cases and 240 deaths.

Treatment options – Gates notes that while Hydroxychloroquine has ‘received a lot of attention,’ his foundation is funding a clinical trial which will determine if it works on COVID-19 by the end of May, and that “it appears the benefits will be modest at best,” despite overwhelming anecdotal evidence of its efficacy by doctors using it in the field.

We’re guessing Gates’ trial doesn’t include the use of zinc, much like most of the other studies which are ‘proving’ that the anti-malaria drug doesn’t work. This is disingenuous science, as HCQ acts as an ‘iononpore‘ which allows zinc into infected cells, disrupting virus replication. On its own, HCQ only allows low levels of zinc to enter cells, vs. the high-dose cocktail employed by doctors such as Vladimir Zelenko, who claims he’s cured over 700 patients with the combination.

Gates, meanwhile, is promoting the use of plasma therapy, which involves “drawing blood from patients who have recovered from covid-19, making sure it is free of the coronavirus and other infections, and giving the plasma (and the antibodies it contains) to sick people. Several major companies are working together to see whether this succeeds.”

Another treatment he’s proposing is synthesizing antibodies that are “most effective against the novel coronavirus,” which may face manufacturing constraints.

If you want to get back to large gatherings, we need a vaccine! Perhaps, but immeasurably more creepy coming from Gates considering his history.

Every additional month that it takes to produce a vaccine is a month in which the economy cannot completely return to normal.

The new approach I’m most excited about is known as an RNA vaccine. (The first covid-19 vaccine to start human trials is an RNA vaccine.) Unlike a flu shot, which contains fragments of the influenza virus so your immune system can learn to attack them, an RNA vaccine gives your body the genetic code needed to produce viral fragments on its own. When the immune system sees these fragments, it learns how to attack them. An RNA vaccine essentially turns your body into its own vaccine manufacturing unit. -Bill Gates

Gates then says that distributing vaccines will be the next hurdle – and that governments which fund vaccine development, countries which test the vaccines, and hardest-hit regions “will all have a good case that they should receive priority,” and that “Ideally, there would be a global agreement about who should get the vaccine first.” 

In short – get tracked, don’t trust hydroxychloroquine, and take the shot.

After the plunge in homebuilder sentiment as they are forced to face reality and the big drop in existing home sales, new home sales were expected to tumble in March (after already dropping in February – bucking the uptrend in existing- and pending-sales).

New Home Sales crashed by 15.4% MoM – the biggest drop since July 2013 – smashing the year-over-year comparison down 9.5%…

Source: Bloomberg

This is the biggest decline for March… ever…

Source: Bloomberg

From the best levels in 13 years, sales are crashing fast (and the last two months were also revised downward)…

Source: Bloomberg

The median sales price rose from the prior year to $321,400.

As Bloomberg notes, March was the first month when U.S. state closures of restaurants, retailers and other non-essential business became more widespread. The data underscore how the pandemic and broader uncertainty about the economy is thwarting potential homebuyers.

One day after the ECB announced that it – just like the Fed – would purchases fallen angle junk bonds, the BOJ, afraid it would be left behind in the global race to crush one’s currency, is reportedly preparing to abandon its 80 trillion yen a year purchase limit for JGBs and will replace it with unlimited QE – also just like what the Fed unveiled exactly one month ago – when it meets for its next policy meeting on Monday, the Nikkei reports.

Additionally, the BOJ is also set to double purchase targets for CP and corporate bonds, while keeping its Yield Curve Control in place, targeting the 10-year JGB at around 0% and maintaining  negative rate at -0.1%.

While we wish Kuroda the best of luck in overtaking the Fed and ECB in nationalizing the market, we will remind the central banker that it is not an issue of monetization demand, but rather supply, that has kept Japan’s QE in check, with the annual amount of bonds purchased by the central bank declining consistently every year as there are simply not enough bonds available in the open market for the central bank to buy, and is also one of the reasons why Japan has been urged by various entities to boost its fiscal stimulus to provide the BOJ with the “helicopter money” ammo it so desperately needs to keep the Japanese economy running.

Following the news, the USD/JPY spiked around 40 pips to 107.85 now that the BOJ is clearly doing what it can to crush the yen…

… while US Treasury 10-year yields tumbled back below 0.61%, 1bp richer on the day, as traders are starting to contemplate that the next BOJ move may be to buy US debt.

Submitted by Michael Every of Rabobank

Suspicious Minds

It is perhaps the oldest Middle East oil trick in the book: you want higher oil prices, threaten to start breaking things. Yesterday US President Trump gave an order authorizing the navy to use “overwhelming lethal force” against any Iranian gunboats which harass American ships – and up popped oil. Of course, it probably won’t last long given supply-demand imbalances and the fact that Iran will now just switch to another way to harass and annoy the US in the region (of which it has many); and surely even the most suspicious of minds must concede that starting a war with Iran is pretty low on Trump’s to-do list going into the 2020 election? As such, the ripple effects from lower oil prices are going to continue to be felt in both some obvious and some unusual places. For example, one would think China is a big winner from this oil-price war – yet Caixin is reporting that the Bank of China sold the May oil contract to wealthy retail investors using fund names like “crude oil treasure”, who subsequently got absolutely crushed.

Jailhouse Rock

The UK government still can’t find masks. It still can’t tell us to wear masks. It still can’t do mass testing. But what it can do is tell the public what should have been obvious from the start: that social distancing measures will have to stay in place for the rest of the year in order to control COVID-19. We have made clear previously what the implications of this are: you stop a lockdown and yet you don’t go back to normal.

Please explain the functional business model of a restaurant already running on tight margins when customer turnover needs to be reduced by 50% to allow safe 2-meter gaps between tables, and where everyone is sitting there enjoying the food and drink and ambience in a mask. Imagine what the meal will have to cost to make a profit for the poor restaurateur; and imagine if subsequently the air-conditioning has to be turned off too given there is evidence that this also spreads the virus.

Need another simple example? RyanAir has announced that it won’t be flying again with “idiotic” social distancing rules, according to its CEO, which he proposes as middle seats being left empty when surely the 2-metre logic should be only 3-4 people per row, and two rows empty between each occupied one? On the more prudent basis an economy class ticket will surely be closer to business class fares – in which case the potential number of people willing and able to fly is going to be even lower than projected (an exponential/fat tail effect where less means less, just as more can mean more).

Likewise, Australia is now going to keep its international borders closed for another three to four months at least, even as local lockdowns are partially eased – so no international tourism until August at the very earliest. If anyone can afford to fly there when the skies do open again.

Of course, the US is also closing down to immigration for 60 days (except it isn’t: there are visa loopholes as big as the gaps in Trump’s Wall) even as it is seeing some states boldly reopen…and Trump is suddenly hedging his bets by allowing governors to reopen while being publicly opposed in the case of Georgia. Heads he wins, tails he doesn’t lose. We shall see within weeks if this action means the economy picks up or virus infections do..

Heartbreak Hotel

Consequently, even as Australia saw its services PMI at just 19.6(!) and as Japan recorded the worst manufacturing PMI since 2009 at 43.7 and the worst services PMI ever at 22.8, consider that for the services sector on which so much of the modern global economy is built, normal service is not anywhere close to being resumed. Other global PMIs follow today and are expected to see Eurozone manufacturing at 38.0, down from 44.5, and services also at 22.8, down from 26.4, while the UK consensus is for 42.0 and 27.8, respectively, and for the US 35.0 and 30.0 – making the US a relative outperformer.

Meanwhile, today we will all be looking at the US initial claims data to see if another 4.5 million people lose their jobs, taking the total to 26.5 million in five weeks, or if it’s slightly better or worse than that.

A Little Less Conversation

Today also has a “make or break” European meeting on what to do to save the economy and, according to the French and Portuguese leaders, the EU and Euro too. Yesterday saw the ECB set some limits when it prudently underlined that it is not allowed to buy government securities directly, as this is illegal, and that ‘helicopter money’ would also be problematic for it; this is the same ECB that is literally begging governments to spend vastly more so it has bonds to buy in the secondary market (which is not just legal, but standard policy) and which is now about to buy corporate junk-bonds too. (Rather ironically, yesterday saw data show that Eurozone debt-to-GDP in 2019 dropped from 85.8% to 84.1%)

But back to the politicians. By videoconference (underlining the lost service-sector revenue to a hotel and caterer somewhere) a temporary EUR300bn recovery fund is being discussed along with a EUR200bn recovery and resilience facility, EUR50bn in repurposed cohesion funds, and two EUR200bn funds “to protect the EU’s internal markets”. And that appears to be it, even though somehow this is EUR 2trn in some headlines. Italy, which yesterday announced that its fiscal deficit will be 10% of GDP in 2020 even though there is precious little stimulus taking place is, according to a report in the FT, now willing to avoid the debt mutualisation issue and instead favour ultra-long maturity or perpetual bond issuance. One wonders how the Usual Suspects in northern Europe will feel about that compromise. Is the numeric response still 999?

I won’t allow myself to get sucked into the classic Euro game of mind-stultifying fudge, acronyms, and deck-chair rearranging. Instead, I will quote Bloomberg directly: “The ‘roadmap’ EU Council President Charles Michel distributed to national delegations ahead of the video conference contained no details on the amount, the specific objectives, the time frame or the nature of the investment needed to get the bloc back on track. Leaders aren’t expected to reach a decision this week and a final package may not be ready for at least six months, according to a French official.”

SIX MONTHS?! And then action on a scale that looks completely out of kilter with the economic damage being wrought. Euro-committees are all very fine and good, and I am always told they work best when in a genuine crisis (or only in a crisis) – but where is The King when you need him? He appears to have left the building.