Tag: finance

Authored by Alan Macleod via MintPressNews.com,

A new report from the Institute for Policy Studies found that, while tens of millions of Americans have lost their jobs during the coronavirus pandemic, America’s ultra-wealthy elite have seen their net worth surge by $282 billion in just 23 days. This is despite the fact that the economy is expected to contract by 40 percent this quarter.

The report also noted that between 1980 and 2020 the tax obligations of America’s billionaires, measured as a percentage of their wealth, decreased by 79 percent. In the last 30 years, U.S. billionaire wealth soared by over 1100 percent while median household wealth increased by barely five percent. In 1990, the total wealth held by America’s billionaire class was $240 billion; today that number stands at $2.95 trillion.

Thus, America’s billionaires accrued more wealth in just the past three weeks than they made in total prior to 1980. As a result, just three people ­– Amazon CEO Jeff Bezos, Microsoft co-founder Bill Gates and Berkshire Hathaway’s Warren Buffet – own as much wealth as the bottom half of all U.S. households combined.

The Institute for Policy Studies’ report paints a picture of a modern day oligarchy, where the super-rich have captured legislative and executive power, controlling what laws are passed. The report discusses what it labels a new “wealth defense industry” – where “billionaires are paying millions to dodge billions in taxes,” with teams of accountants, lawyers, lobbyists and asset managers helping them conceal their vast fortunes in tax havens and so-called charitable trusts. The result has been crippled social programs and a decrease in living standards and even a sustained drop in life expectancy – something rarely seen in history outside of major wars or famines. Few Americans believe their children will be better off than they were. Statistics suggest they are right.

Billionaires very theatrically donate a fraction of what they used to give back in taxes, making sure to generate maximum publicity for their actions. And they secure positive coverage of themselves by stepping in to keep influential news organizations afloat. A December investigation by MintPress found that Gates had donated over $9 million to The Guardian, over $3 million to NBC Universal, over $4.5 million to NPR, $1 million to Al-Jazeera, and a staggering $49 million to the BBC’s Media Action program. Some, like Bezos, prefer to simply outright purchase news organizations themselves, changing the editorial stance to unquestioning loyalty to their new owners.

The spike in billionaire wealth comes amid an unprecedented economic crash; 26.5 million Americans have filed for unemployment over the last five weeks, and that number is expected to continue to rise dramatically. While the super-rich are holed up in their mansions and yachts, the 49-62 million Americans designated as “essential workers” must continue to risk their lives to keep society functioning, even as many of them do not even earn as much as the $600 weekly increase in unemployment benefits the CARES act stipulates. Many low paid workers, such as grocery store employees, have already fallen sick and died. The mother of one 27-year-old Maryland worker who contracted COVID-19 and died received her daughter’s last paycheck. It amounted to $20.64.

Amazon staff, directly employed by Bezos, also risk their lives for measly pay. One third of all Amazon workers in Arizona, for example, are enrolled in the food stamps program, their wages so low that they cannot afford to pay for food. The vast contrast in the effect that COVID-19 has had on the super wealthy versus the rest of us has many concluding that billionaires’ wealth and the poverty of the rest of the world are two sides of the same coin: that the reason people working full-time still cannot afford a house or even to eat is the same reason people like Bezos control more wealth than many countries. Bezos’ solution to his employees’ hunger has been to set up a charity and ask for public donations to help his desperate workers.

The majority of millennials, most of them shut out from attaining the American dream, already prefer socialism to capitalism, taking a dim view of the latter. The latest news that the billionaire class is laughing all the way to the bank during a period of intense economic suffering is unlikely to improve their disposition.

It all started in late 2017, when we reported that JPM was quietly trying to sell the world’s oldest gold trader after a massive money laundering scandal terminally crippled the reputation of one of the most iconic names in the business, resulting in  Canada’s Bank of Nova Scotia exploring options for its gold business ScotiaMocatta. As reported at the time, Scotiabank made the decision to sell ScotiaMocatta following a massive money laundering scandal centered on a US refinery that involved smuggled gold from South America, a fascinating story which we profiled here several years back.

For those unfamiliar, the ScotiaMocatta business better known as the world’s oldest gold trader and a mainstay in PM trading since its founding in 1684 as Mocatta Bullion, was a precious metal and base metal trading company that operated as the metals trading division of the Bank of Nova Scotia.

A few months later in February 2018, we reported that JPMorgan’s attempt to sell the business failed, and one year later, in January 2019 Bank of Nova Scotia quietly dropped the “Mocatta” name from its metals-trading business, shedding the last vestiges of a firm dating back nearly 350 years as the Canadian owner tried to absorb the platform into its capital-markets division.

The restructuring attempt lasted a little over a year, until its failure this week when the Scotiabank told staff on Tuesday it would close its metals business, drawing the curtain on one of the most venerable names in precious metals trading, Reuters reported citing two sources.

Scotia was for years the world’s biggest lender to the physical precious metals industry, with a history stretching to the founding in 1684 of London gold dealer Mocatta Bullion, which it bought in 1997.  Once a global player with more than 100 staff in offices from New York and London to India and Hong Kong, the bank effectively exited the business in 2018 following the abovementioned strategic review and unsuccessful attempt to find a buyer.

“Scotia had a global call with all its metals staff and said it was shutting down its metals business,” said a Reuters source. “The plan is to unwind the metals business.”

Scotiabank’s exit of the metals business ends an end of an era that began in 1671 when Moses Mocatta opened an account with one of London’s most famous goldsmith bankers, Edward Backwell. Mocatta and his descendants would go on to build what became one of the world’s largest metals-trading businesses and the oldest member of London’s bullion market. The firm has long participated in the London gold auction, where an industry benchmark price is set twice a day.

Scotiabank came onto the scene in 1997 when it bought the Mocatta Bullion and Base Metals unit from Standard Chartered and renamed it ScotiaMocatta. The Toronto-based bank gained a business with 180 employees and 10 offices worldwide, including in New York, London, New Delhi, Hong Kong, Shanghai and Singapore.

It all came crashing down in 2018 however following a historic money-laundering, metals rehypothecation scandal that wiped out nearly 350 years of good reputation overnight.

Sources told Reuters Scotia would not take on new business and would wind down existing activities by around the beginning of 2021. Some staff would be kept on over that period while others would be made redundant. Around 15 people worked in Scotia’s metals business, Reuters reported,around three-quarters of them in precious metals and the remainder in industrial metals. That compares to around 140 five years ago.

Even after exiting the metals business, Scotiabank will remain one of the five banks that settle gold trades and one of 12 market makers that provide liquidity in the London market. The bank is also a participant in daily auctions that set a globally used gold benchmark price.

That said, without a dedicated metals business, Scotia’s presence in the London gold market will be only symbolic, as the bank hands over the bulk of the business to HSBC and JPMorgan, the two titans who currently dominate the London PM business, and for a good reason: gold trading in London is estimated to be worth more than $5 trillion a year, resulting in some fat commissions for all involved.

Oil prices extended their hope-filled gains on the heels of a smaller than expected crude build reported by API last night and ongoings headlines dropped with interesting timing about further output cuts to counter the unprecedented global glut.

“You have a correlation to equities, which are ripping,” Bob Yawger, director of the futures division at Mizuho Securities USA, said. “You have a best possible scenario API report.”

Additionally, there have been tentative signs of a recovery in European physical oil markets. Key pricing contracts in the North Sea and Russia have rallied in recent days, though there are still concerns that the world is on the brink of filling its storage capacity. Major producers were due to start output cuts on May 1, but some, including Saudi Arabia, are now curbing output early.

But once more, all eyes will be on crude inventory increases particularly after the API reported a smaller-than-expected build last week (smallest in 5 weeks).

API

• Crude +9.978mm (+11mm exp)

• Cushing +2.486mm

• Gasoline -1.108mm (+2.7mm exp)

• Distillates +5.462mm (+3.7mm exp)

DOE

• Crude +8.991mm (+11mm exp)

• Cushing +3.637mm

• Gasoline -3.669mm (+2.7mm exp)

• Distillates +5.092mm (+3.7mm exp)

This is the 14th weekly crude build in a row but the lowest in 5 weeks and a surprise gasoline draw to boot…

Source: Bloomberg

According to Bloomberg Intelligence Energy Analyst Fernando Valle, the buildup in diesel stockpiles is quickly becoming a concern as economic activity slows.

That will further diminish refiners’ margins, driving plants to be temporarily shut over the coming weeks and bringing U.S. utilization down to the mid-60%s. Gasoline inventories are at historic highs, and with lockdowns in Latin America becoming more severe, exports could drop and exacerbate the glut.

US Crude output tumbled (as the rig count collapses by the most on record)…

Source: Bloomberg

Producers in North Dakota have shut about 6,200 oil wells, which account for about 405,000 barrels a day of supply.

Storage capacity is being tested as a worldwide glut of fuels and crude expands due to coronavirus-led demand destruction with Cushing approaching its limits…

Source: Bloomberg

Front-month (June) WTI futures are up 25-30% (yeah that volatile) ahead of the DOE data, hovering around $15.50… and held those gains

Bloomberg Intelligence Senior Energy Analyst Vince Piazza says production shut ins will take time to work through system, while April demand degradation is likely is the worst of 2Q… Even if states reopen in May, the slow slog will lead to a lethargic recovery for transport-fuel demand.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Since superfluous demand was the core driver of most consumer spending, and that demand is in free-fall, what’s the upside of re-opening?

The mainstream view assumes everyone will be gripped by an absolutely rabid desire to return to their pre-pandemic frenzy of borrowing and spending and consuming, the more the better. While the urge to believe the Titanic scraping the iceberg will have no consequence and the collision was nothing but a spot of bother is compelling (so party on!), many people will reassess their pre-pandemic lives and ask: do I really want to go back to circling the pavement in a dead end?

Being away from the crazy-busy churn invites reassessment, especially for small business owners who are facing the near-certainty of uncertain sales and still-high fixed costs.

When we’re embedded in the crazy-busy churn, we’re only trying to get through the day. Once we’re removed from the pressure-cooker of running the business, we start wondering: is this craziness what I want to spend the rest of my life pursuing? For what gain? Do I really love my business and my customers/clients, or am I just telling myself that I love my business and my customers/clients as duct tape to keep the whole contraption from flying apart?

Then there’s the question of Superfluous Demand, a topic Max Keiser and Stacy Herbert and I discussed in their recent Double Down podcast. Superfluous demand is demand that’s a manifestation not of what we might call authentic or organic demand for essentials but demand driven by cheap credit and the consumerist mania to fill the insatiable black hole of insecurity inside every debt-serf to raise their publicly posted social status with an endless stream of aspirational goods and services that shout “Look at me! I have the same things and experiences the top 5% have!”

But sadly, no amount of aspirational goods and services will fill the insecurity or create an authentic positive social role, or express an authentic selfhood that exists outside of the consumerist definition of “self” as nothing more than a consuming machine.

Every business owner and manager has to anticipate a decline in superfluous demand as incomes decline and credit tightens, and households and enterprises recalibrate their exposure to risks of further downside and forego spending in favor of rebuilding a cash reserve. How severe the drop in demand will be correlates with how much of their pre-pandemic sales were manifestations of superfluous demand.

Entertainment, travel and a vast array of consumables were virtually all superfluous, so the decline in superfluous demand will be consequential to virtually every business.

But humans are not just consuming machines generating superfluous demand with credit. Humans have to create the goods and services, and that is an intrinsically risky process. Decisions have consequences, and those consequences weigh heavily on those who are accountable: managers, executives and especially owners, who must cover expenses with their own personal cash if the enterprise’s expenses exceed its net income.

Only owners and previous owners of small businesses know what this potential for personal loss and bankruptcy feel like. Very few of the punditry and corporate media commentators have personal experience in running a business, and especially one on the knife edge between covering expenses and losing money. To all these media commentators, “small business” is an abstraction.

Employees also have no idea what it’s like to be responsible for losses and accountable for decisions that may make or break the enterprise.

Which brings us to the asymmetrical impacts of owners, managers and essential workers in the economy, which is effectively a complex network of critical nodes that all the millions of network participants depend on. Examples include oil refineries, nuclear power plants and slaughterhouses.

The fewer the number of these essential nodes, the more consequential the impact when one or more go offline. Put simply: not all nodes are equal in their impact.

This dynamic is also present in human capital: if a small business has 10 employees, the business will survive the loss of an employee, but it won’t survive the loss of the owner. A region can survive 500 white collar workers not showing up for work, but if 500 slaughterhouse workers don’t show up for work, meat production in the region falls to near-zero.

Blinded by their absence of real-world experience, the financial punditry devote their attention to the trillion-dollar Big Tech behemoths, as if they dominate the economy because they’re so incredibly overvalued by Wall Street.

But in the real world, Big Tech’s share of the work force is essentially signal noise. A tiny sliver of the 150 million people with earned income in the U.S. toil for a Big Tech company.

Who really matters in terms of employment and earned income are small business owners, not the Big Tech monopolies.

Which brings us back to the owner who’s wondering if they want to return to the heavy burdens and crazy-busy churn of a business that may well lose money or flounder for years. What’s the pay-off for working extra hours because you can’t afford to hire back all your previous staff? What’s the payoff as rents, healthcare, fees, taxes and the cost of goods all increase while customers balk at any increase in your own prices? Is struggling to survive really what I want to spend the rest of my life doing? And for what? To slowly go bankrupt?

Small business is not a financial abstraction. It is real people who were often burned out even before the pandemic and who are now wondering if it’s wiser to bail out now and close the doors rather than endure a slow side into bankruptcy and exhaustion.

Since superfluous demand was the core driver of most consumer spending, and that demand is in free-fall, what’s the upside of re-opening? Isn’t it more prudent to close up now and preserve whatever capital and health one still has, and pick a way of life that doesn’t require meeting payroll, paying outrageous rents and being liable for calamities that are outside of your control?

Can we be honest, and note that for many owners and managers, their pre-pandemic life was nothing more than a crazy-busy dead end? Why continue the struggle now with even heavier burdens and greater risks, and for what gain?

I’ll tell you what: if “small business” is so great and profitable, then how about you go plunk down thousands of dollars for rent, healthcare, payroll for employees, tax payments, insurance, fees, and on and on, and then take your chances that superfluous demand hasn’t dried up and blown away.

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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)
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Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

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After new home sales suffered their biggest March drop ever, pending home sales were expected to decline by a record amount MoM (-13.7%) in March. However, pending home sales was far worse than expected – plummeting 20.8% MoM and 14.5% YoY

Source: Bloomberg

Contract signings plummeted in all four major U.S. regions, including a 19.5% drop in the South and a 26.8% retreat in the West.

“The housing market is temporarily grappling with the coronavirus-induced shutdown,” which reduced listings and purchases, Lawrence Yun, NAR’s chief economist, said in a statement.

This is the weakest level since May 2011… after hitting its highest levels since Feb 2017 in February.

Source: Bloomberg

March historically begins the annual peak U.S. selling season as warming weather spurs home searches and families with children prepare for moves during the school summer break. That’s been drastically curtailed in 2020 as the virus triggers the biggest economic contraction in decades, closing workplaces, schools and other activities with the biggest March decline on record.

As Bloomberg notes, pending home sales are leading indicators of housing activity, based on signed contracts to buy single-family homes, condos and co-ops, typically occurring one or two months before closings.

Submitted by Michael Every of Rabobank

Where’s the Beef?

As we approach a long weekend (China shuts for the May Day holiday on Friday, and most of the rest of the world celebrates the following Monday), the prevailing sentiment is still moderately risk on – or at least that is what one would assume when looking at USD, which has been on the back foot the last few days. This is presumably because of the ‘victories’ being seen in various places against the virus. Unfortunately, in market terms we once again have to reiterate that this is a case of finding the potatoes but missing all the beef – because the economic damage is only just beginning. And it is terrifying.

Let’s start with the beef. Literally. Long before Covid emerged I was muttering darkly to colleagues that in a future more mercantilist, more militarised world disorder I could imagine food security meaning something far less ‘benign’ than it does today: not so much the ‘can I get food?’ demand side, but the ‘we have the food but aren’t sure we want you to have it’ supply side. Recent developments on wheat in Russia and rice in Vietnam may not have a deliberately Machiavellian bent to them, but they still take us closer to that kind of backdrop.

Meanwhile, with virus lockdowns hitting the supply side we have had reports of Indonesian provinces facing food shortages in staples such as rice, sugar, corn, chili, eggs and shallots. (I can personally report there are no eggs and almost no butter where I reside for now, and have not been for weeks.) Now we see headlines about potential meat shortages, even in the US, due to shutdowns of virus-struck meat processing plants in the States, Brazil, and Canada, who together account for around 65% of world production. There have even been claims that “The food supply chain is breaking.” In response US President Trump invoked the Defence Production Act to force meat-processing plants to stay open – but can you force worried, or sick, workers to turn up to their shift? Unions are also opposed to the decision.

(As a related side-bar, with global animal protein supplies perhaps under threat Australia is calling China’s bluff over its recent “economic coercion” of a potential boycott Aussie beef, among other things, should a public inquiry into the Coronavirus pandemic take place. The Chinese ambassador to Australia has since tried to imply that when he said there could be a consumer boycott if that happens he was not saying the government would make one happen, merely that it might spontaneously occur. China is of course a famously spontaneous kind of place like that.)

From a financial, not agri-commodity, markets perspective this kind of unexpected virus ripple is arguably not compatible with a sustained USD sell-off based on assumptions the war against the virus is close to being over. Rather, it underlines that only the first stage of the first battle is over – at best. Here are a few more very depressing snapshots to make the same point:

• In the UK, British Airways is about to lay off 12,000 staff, or one in four of its total;
• A report from the US Economic Policy Institute argues ‘real’ initial claims in the last six weeks could be north of a cumulative 50m rather than the 30m we will probably see on tomorrow;
• We already saw a published-and-retracted estimate that China has a 20% unemployment rate;
• More than a million Canadians lost their jobs in March according to Statistics Canada;
• South Africa is expected to see a million lose their jobs ahead too according to modelling by a business group; and
• In India, the founder of an on-line jobs portal states that job losses and pay cuts ahead are likely to make 2008 look like a “minor hiccup”.

There is the beef! And there is only gristle for those suggesting inflation is about to get out of control even if we get food supply shocks – at least according to 10-year Treasuries, which are little changed around 0.61% (and that despite a bounce in oil from ridiculously to just incredibly low).

Always the Wombat exception to every rule is Australia, where today’s Q1 CPI rose 0.3% q/q vs. the 0.2% expected and 2.2% y/y vs. 1.9%, so above the RBA’s inflation target band just as the economy collapses in the same way it was well below when GDP wasn’t collapsing. It was also 0.5% q/q on a trimmed mean basis vs. 0.3% expected, and 1.8% y/y vs. 1.6% consensus. That has put AUD comfortably back over 0.65 for now and means we are 10 big figures off the panic low we saw a few weeks back. 10-year Aussie yields are also up 3bp at 0.93%. For all the Aussie bulls, and boy the country seems to produces a lot of them, just recall that the plumpest cattle are being fattened up for a reason.

Elsewhere, Italians will be waking up today wondering who has a beef with them given Fitch just downgraded the country out of cycle to BBB-, one grade above junk, but with a stable outlook rather than the previous negative. Many in markets will be questioning the timing of the move if not the direction, as well as the presumption that everything is stable – because stability is not something we are seeing much of anywhere. Indeed, the stable outlook rests on the assumption that the Italian government will implement a credible economic plan to ensure debt-to-GDP is lowered ahead. Of course, following the downgrade Italian Finance Minister Gualtieri stated pro-forma that Italy will initiate an agenda of reforms and investments to raise the nation’s growth potential while making sure debt declines. One wonders what the meat on those particular bones will look like.

Hot on the heels of positive-sounding news on Gilead’s anti-viral therapy drug Remdesivir, Salveen Richter, GS lead analyst for the US Biotechnology sector, answers key questions on where we are on US testing, treatments and vaccines for COVID-19.

Q: What are the different ways that healthcare companies are tackling COVID-19?

A: As the impact of the COVID-19 pandemic on the global economy and modern-day society continues to unfold, diagnostics (testing for infection), treatments (to treat symptoms of COVID-19) and prophylactic vaccines (to prevent infection of SARS-CoV2—the virus that causes COVID-19) are being developed. There are primarily two types of diagnostic tests: molecular and serological. While molecular tests quantify the presence of viral infection (implies infection), serological tests detect the presence of antibodies to coronavirus in the blood (implies immunity). Of the ~49 diagnostic tests approved by the FDA under its emergency use authorization (EUA), over 80% are molecular. However, as state and federal policy makers begin to think about restarting the economy, serology tests with high specificity are becoming a focus.

On the therapy side, there are two broad groups for COVID-19—prophylactic vaccines and treatment. Prophylactic vaccines are intended to provide protection from infection and confer immunity in people who have not been exposed to COVID-19, while treatments address the different symptoms associated with COVID-19, such as acute respiratory distress syndrome (ARDS). According to the Milken Institute COVID-19 tracker, there were over 250 therapies in the pipeline as of April 27, with 96 of these being vaccines and 55 antibodies. We note that according to the WHO, there are 89 vaccines currently in the pipeline, seven of which are in clinical development.

Q: What progress have we made in ramping up diagnostic testing capacity in the US and globally, and where are we still falling short?

A: The global capacity for molecular diagnostic testing of COVID-19 is now at ~30 million tests per month. While the current testing capacity is not sufficient to meet the entire demand on a population basis, we note an improvement in testing in the US over the past few weeks according to the COVID Tracking Project, from a total of 866 tests as of March 4 to 4.7 million tests as of April 23—largely driven by the FDA’s flexibility towards labs and manufacturers in this time of crisis. We expect the FDA’s decision to implement its EUA (emergency use authorization) on in vitro diagnostics for the detection and/or diagnosis of COVID19 will continue to accelerate testing efforts. The FDA emergency use guidelines relax the standards that allow tests to be available, in part by expediting review timelines to as little as one day and allowing labs to begin testing prior to FDA review of the validation data. But while the increase in available tests represents meaningful progress compared to the past couple of weeks, the availability of resources, including swab samples and trained professionals to collect these samples, and testing turnaround times continue to hinder the widespread scale up and availability of testing. Errors in the tests themselves, such as false negatives, present an additional hurdle for diagnosing COVID-19. As capacity for testing increases, it will be key to delineate between testing for the presence/absence of the actual infection, where there was meaningful progress in March, and testing for immunity generation, which will be relevant going forward.

Q: What is the status of antibody testing, and when can we expect to see a ramp up of such testing in the US?

A: Serological testing (i.e. presence of antibodies) can provide insight into herd immunity (the resistance to the spread of disease
within a population resulting from a sufficiently high proportion of individuals immune to the disease), which is important because
once approximately >60% of the population is immune to the virus, a “next wave” of infections stemming from the same version
of the virus is unlikely. Several companies are developing antibody tests to measure the markers of an immune response to
COVID-19, namely immunoglobulin M (IgM) and immunoglobulin G (IgG) antibodies. IgM antibodies are the first to appear in
response to the initial exposure of a viral infection, and they begin to fade after the infection ends. As the body clears the
infection, there is an increase in IgG antibodies, which provide long-term immunity. Thus, COVID-19 IgM antibodies may indicate
more recent exposure to the virus, and the detection of COVID-19 IgG antibodies may indicate a later stage of infection. In order
to determine the stage of infection, it is therefore critically important to have a highly specific test that identifies the specific
antibody present rather than a highly sensitive test that quantifies levels of the antibody. To that end, we highlight two serological
tests: Abbott’s, which has a specificity and sensitivity of 99.6% and 86.4%, respectively, and Roche’s, which has a specificity and
sensitivity of >99% and >95%, respectively.

Based on the different proposed plans for the path forward in the US, we estimate the country would need an estimated 50 to 100 million antibody tests per month. In the US, Abbott committed to shipping 4 million tests in April, ramping to 20 million tests in June, and notes that its testing instruments can run up to 100 to 200 tests per hour. Roche is currently working with the FDA for an EUA on its tests, and plans to reach a capacity of 100 million tests per month by June, with a goal to ramp up further towards year-end. According to Roche, its instruments can run up to 300 tests per hour, depending on the analyzer used.

Q: What are the most promising types of treatments for active cases being developed right now, and what is a realistic timeframe for having an effective treatment widely available?

A: In broad terms, treatments for COVID-19 include approved drugs that can be repurposed, antiviral therapies that counteract the virus, antibody therapies that introduce neutralizing antibodies against the virus and convalescent plasma therapies, in which plasma from convalescent patients is administered to those infected. On the therapeutic side, Gilead’s remdesivir and Regeneron’s antibody cocktail are most in focus. Gilead’s remdesivir is an Nuc inhibitor that terminates viral replication by preventing the function of RNA-dependent RNA polymerases (an enzyme that catalyzes the replication of RNA), resulting in a decrease in viral RNA production. Thus far, there has been emerging data for remdesivir in COVID-19 but we await full Phase 3 results in late April (for severe patients), late May (for moderate patients) and data from the NIAID sponsored study in mid-to-late May to elucidate the profile of the drug. Regeneron is developing a novel multi-antibody cocktail that can be used as a treatment for COVID-19 in infected individuals. This treatment will use two undisclosed antibodies that target different parts of the virus to protect against multiple viral variants. Regeneron’s antibody cocktail will be ready to enter the clinic by early summer, with a goal of producing hundreds of thousands of doses per month by the end of summer.

As it relates to symptomatic relief of COVID-19, anti-IL6 inhibitors are in development, with Roche’s Actemra in a Phase 3 trial (data in 2H20, potentially in the summer) and Regeneron/Sanofi’s Kevzara currently in Phase 2/3 testing. On the latter, going forward, the Phase 3 trial will only include “critical” patients with results (US) expected in June and the rest of the global studies in 3Q20. We also highlight Grifols, Takeda and CSL Behring, all of which are independently developing a novel convalescent plasma therapy against COVID-19. One potential limitation of this approach is the requirement of donor plasma, which could limit its scale.

Q: What are the most promising vaccines currently in development, and what is the earliest timeline we can expect to see for getting a vaccine to the public?

A: With several vaccines in development, we believe Moderna’s mRNA-based vaccine (mRNA-127) and Johnson & Johnson’s vaccine candidate, which uses established and validated AdVac technology, are the leading contenders to address the public health needs of the global community. Moderna has previously issued guidance on the potential for emergency vaccine use in primary populations (including physicians) as early as fall 2020, following the release of Phase 1 safety data in the spring and immunogenicity data in the summer and Phase 2 initiation in 2Q20. We expect Johnson & Johnson to initiate Phase 1 trials in September, with topline safety and immunogenicity data expected by the end of 2020, and note the vaccine could be available under EUA in early 2021.

Q: Will any vaccine need to be administered every year, like a flu vaccine, or will it be effective over a multi-year period?

A: On the duration of efficacy, it is unclear if the COVID-19 vaccine will be similar to the yearly flu vaccine or whether it will be able to confer multi-year efficacy. While some experts believe multi-year protection is likely, more research is needed to determine if this is the case based on what we know about similar viruses. Using the 2002 SARS and 2012 MERS epidemics as analogs is not helpful in this case because there is not much known about their reinfection rates given the limited epidemiological details of both – there were >8,000 cases of SARS over 3 months, and only 2,500 observed cases of MERS over 8 years.

 

“History doesn’t repeat itself, but it often rhymes,” as Mark Twain is often reputed to have said. Before the 2007-2008 GFC, people built real estate portfolios based around renters. We all know what happened there; once consumers got pinched in the GFC, rent payments couldn’t be made, and it rippled down the chain and resulted in landlords foreclosing on properties. Now a similar event is underway, that is, overleveraged Airbnb Superhosts, who own portfolios of rental properties built on debt, are now starting to blow up after the pandemic has left them incomeless for months and unable to service mortgage debt. 

We have described the financial troubles that were ahead for Superhosts in late March after noticing nationwide lockdowns led to a crash not just in the tourism and hospitality industries, but also a plunge in Airbnb bookings. It was to our surprise that Airbnb’s management understood many of their Superhosts were overleveraged and insolvent, which forced the company to quickly erect a bailout fund for Superhosts that would cover part of their mortgage payments in April. 

The Wall Street Journal has done the groundwork by interviewing Superhosts that are seeing their mini-empires of short-term rental properties built on debt implode as the “magic money” dries up. 

Cheryl Dopp,54, has a small portfolio of Airbnb properties with monthly mortgage payments totaling around $22,000. She said the increasing rental income of adding properties to the portfolio would offset the growing debt. When the pandemic struck, she said $10,000 in rental income evaporated overnight. 

“I made a bargain with the devil,” she said while referring to her financial misery of being overleveraged and incomeless. 

Dopp said when the pandemic lockdowns began, “I thought, ‘Holy God. We’re about to lose everything.'”

Market-research firm AirDNA LLC said $1.5 billion in bookings have vanished since mid-March. Airbnb gave all hosts a refund, along with Superhosts, a bailout (in Airbnb terms they called it a “grant”). 

“Hosts should’ve always been prepared for this income to go away,” said Gina Marotta, a principal at Argentia Group Inc., which does credit analysis on real estate loans. “Instead, they built an expensive lifestyle feeding off of it.”

We noted that last month, “Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.”  

Airbnb spokesman Nick Papas said the decline in bookings and slump in the tourism and travel industry is “temporary: Travel will bounce back and Airbnb hosts—the vast majority of whom have just one listing—will continue to welcome guests and generate income.”

Papas’ optimism about a V-shaped recovery has certainly not been echoed in the petroleum and aviation industry. Boeing CEO Dave Calhoun warned on Tuesday that air travel growth might not return to pre-corona levels for years. Fewer people traveling is more bad news for Airbnb hosts that a slump could persist for years, leading to the eventual deleveraging of properties. 

AirDNA has determined that a third of Airbnb’s US hosts have one property. Another third have two and 24 properties and get ready for this: a third have more than 24.  

Startups such as Sonder Corp. and Lyric Hospitality Inc. manage properties for hosts that have 25+ properties. Many of these companies have furloughed or laid off staff in April. 

Jennifer Kelleher-Hazlett of Clawson, Michigan, spent $380,000 on two properties in 2018. She and her husband borrowed $100,000 to furnish each. Rental income would net up to $7,000 per month from Airbnb after mortgage payments, which would supplement her income as a part-time pharmacist and husband’s work in academia. 

Before the virus struck, both were expecting to buy more homes – now they can’t make the payments on their Airbnb properties because rental income has collapsed. “We’re either borrowing more or defaulting,” she said.

Here’s another Airbnb horror story via The Journal:  

“That sum would provide little relief to hosts such as Jennifer and David Landrum of Atlanta. In 2016, they started a company named Local, renting the 18 apartments they leased and 21 apartments they managed to corporate travelers and film-industry workers. They spent more than $14,000 per apartment to outfit them with rugs, throw pillows, art and chandeliers. They grossed about $1.5 million annually, mostly through Airbnb, Ms. Landrum said.

They spend about $50,000 annually with cleaning services, about $25,000 on an inspector and $30,000 a year on maintenance staff and landscapers, Ms. Landrum said, not to mention spending on furnishings.

When Airbnb began refunding guests March 14, the Landrums had nearly $40,000 in cancellations, she said. The couple has been able to pay only a portion of April rent on the 18 apartments they lease and can’t fulfill their obligations to pay three months’ rent unless bookings resume. They have reduced pay to cleaning staff and others. Adding to the stress, Georgia banned short-term rentals through April.

“It’s scary,” said Ms. Landrum, who said she has discounted some units three times since mid-March. The Landrums have negotiated to get some leniency from apartment owners on their leases. If not, Ms. Landrum said, they would have to sell their house.”

To make matters worse, and this is exactly what we warned about last month, Airbnb Superhosts are now panic selling properties: 

Greg Hague, who runs a Phoenix real-estate firm, said Airbnb hosts are “desperate to sell properties” in April. 

“There’s been a flood of people. You have people coming to us saying, ‘I’m a month or two away from foreclosure. What’s it going to take to get it sold now?'” Hague said.

And here’s what we said in March: “We might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.” 

Authored by Richard Breslow via Bloomberg,

And Now We Wait For The Big Show To Begin…

I realize that Japan was off on holiday today. But when the first thing you read after sitting down is that Treasury futures traded at 20% of normal volume in Asia, it’s probably wise to take a wait-and-see approach to the day.

[ZH: of course the GILD headlines have sparked another ramp ahead of the open]

And that is how it has certainly felt. Having opinions on where things are going is essential in order to formulate a strategy. Keeping an open-mind is a pretty valuable survival trait, as well. Watching the early price action, the challenge has been deciding if this is going to be a big-picture or little-picture day. The charts have not helped. Their short-term ambiguity is startling in their starkness.

Yesterday, a big part of the story was that equities fell in large part because of a drop in the April Consumer Confidence number. We did expect it. Forecasters were not far off. But the expectations number was pleasantly good. It didn’t seem surprising, therefore, to reevaluate the number and attribute some of that, in addition to earnings of course, to why S&P 500 futures regained some of their luster this morning. That is a pretty good proxy for how a lot of people are navigating our current situation. Things stink now, but we have to believe they are indeed going to get better. The glass analogy was never more appropriate.

But there is a caveat. We need to continue to see progress. Traders will experience bouts of intermittent impatience the longer it takes for conditions to loosen up. And periodically take it out on the market. Even if the big-picture base case remains constructive. Deciding where we are on that spectrum will be the key to successfully balancing being flexible and resolute. This isn’t a time to declare you have a story and are sticking with it, unless you are also willing to go with the flow. Especially when they are big. Because the moves aren’t always something you can afford to sit through and ignore.

As we prepare for learning what the FOMC and ECB will be up to, it’s worth considering what their challenges might be as they evaluate the sometimes different demands of the economy versus the market. And it remains very much to be seen if they are able, and willing, to make a clear distinction.

The Fed should take a deep breath, applaud recent and future fiscal policy relief efforts and be willing to live with a short-term asset price hiccup, should it happen. It will be good for their credibility. Their strength will be keeping some policy choices in their pockets. This isn’t an opportunity for hand-wringing. And their forward guidance is already pretty obvious. Chairman Jerome Powell should spend his time talking about accomplishments in keeping financial plumbing and funding functional. He can acknowledge the weak economy and still be a touch optimistic. They have already done a lot. A move to negative rates would be a very bad mistake. And crush the currency. I’m amazed that it has its advocates.

The ECB has a more immediate, and pressing, challenge. They need to compensate for the EU’s inability to adequately address burden-sharing. And a very weak and uneven economy. What they might buy now, PEPP expansion, how flexible they will make all of their rules, and changes to the Capital Key will all lead to a complicated set of decisions and a mess of a communication challenge. The mixed signals being given off by the currency suggest there is a fair degree of uncertainty about just what policy mix is coming. But be sure, they won’t be timid. Nor will the hawks be difficult. At least on the subject of ECB spending
If I had to hazard a guess, this morning’s price action will be about traders having a hard time holding onto their positions and later we could get a real sense what the next medium-term move is likely to be.

With news that the Gilead Remdesivir trial had reportedly met its primary endpoint hitting “coincidentally” just seconds before the Q1 GDP print, and with newswires initially reporting the GDP erroneously as a positive 4.8% print, it was clear that the real number would be a disaster, and sure enough moments later newswires reversed and reported that Q1 GDP was in fact, a worse than expected negative 4.8%, the biggest drop since March of 2009, and officially marking the start of the US recession. Current-dollar GDP decreased 3.5%, or $191.2 billion, in the first quarter to a level of $21.54 trillion, after increasing 3.5% in the fourth quarter.

The decrease in real GDP in the first quarter reflected negative contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and private inventory investment that were partly offset by positive contributions from residential fixed investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The decrease in PCE reflected decreases in services, led by health care, and goods, led by motor vehicles and parts. The decrease in nonresidential fixed investment primarily reflected a decrease in equipment, led by transportation equipment. The decrease in exports primarily reflected a decrease in services, led by travel.

The increase in housing investment primarily reflected an increase in new single-family housing, while the increase in government spending reflected an increase in federal government.

Perhaps in response to demands from the White House, the BEA was quick to note that “the decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.”

The BEA nonetheless quantified the hit and found the following:

• Personal Consumption contributed -5.26% to the bottom line -4.8% drop, the biggest drop since 1980
• Fixed Investment shrank -0.43%, a drop from the -0.09% decline in Q4
• The Change in Private Inventories detracted another -0.53% from GDP, a modest improvement from -0.98% in Q4
• Exports shrank -1.02%, a deterioration from the 0.24% increase in Q4
• Imports were the sole bright spot, jumping 2.32%, double the 1.27% in the last quarter
• Government consumption also added a modest 0.13% to the bottom line, a decline from the 0.44% in the prior quarter.

Of note, the collapse in consumption was the biggest since 1980 which was to be expected with the economy on lockdown.

Separately, real disposable personal income increased 0.5 percent in the first quarter after increasing 1.6 percent in the fourth quarter. Personal saving as a percent of disposable personal income was 9.6 percent in the first quarter, compared with 7.6 percent in the fourth quarter.

Prices of goods and services purchased by U.S. residents increased 1.6 percent in the first quarter of 2020, after increasing 1.4 percent in the fourth quarter of 2019. Meanwhile, food prices increased 3.1 percent, while energy prices decreased 11.0 percent in the first quarter. Excluding food and energy, prices increased 1.9 percent in the first quarter of 2020, compared with an increase of 1.3 percent in the fourth quarter.

Finally, recall that the sharp slowdown only reflects two weeks of March going offline. As such the real question is what happens to Q2 GDP, and whether the expected ~30% drop in GDP will be the trough and whether a V-shaped recovery will follow.