Tag: finance

Two of Europe’s largest banks tumbled on Wednesday, dragging down the broader Eurostoxx Bank Index, after they joined the rest of their peers in suspending shareholder payouts.

HSBC plunged in Hong Kong trading after scrapping its dividend and warning revenue and loan losses will be impacted in the first quarter from the coronavirus outbreak. The bank’s shares dropped over 7% bringing this year’s decline to 33%. Meanwhile, Standard Chartered tumbled 5.2% after it too announced a suspension of dividends and a buyback plan.

In a statement on Tuesday, HSBC said that “we expect reported revenues to be impacted in insurance manufacturing, and credit and funding valuation adjustments in global banking & markets, alongside higher expected credit losses.” The bank had earlier said in the most extreme scenario, in which the virus continues into the second half of 2020, it could see US$600 million in additional loan losses.

In order to preserve liquidity amid a global depression, European (and US) banks have been scrapping shareholder payouts to protect their capital cushions. Along with other UK banks, HSBC decided to scrap dividend payments after urging from UK regulators. The lender said it would cancel an interim dividend slated to be paid this month and also make no payouts or do any buybacks until at least the end of the year.

In total, the UK’s five biggest banks had planned to pay out £7.5 billion in dividends over the next two months, with Barclays due to pay more than £1 billion on Friday. That money will now go where it should have been from the start: a rainy day fund, i.e., money that will be spent first before banks ask for – and receive – a bailout.

* * *

But if shareholders are impacted, why not also the biggest source of bank cash: banker bonuses.

Well, it seems that’s next on the docket, because as Bloomberg reports, European banks are coming under increased pressure to reconsider bonus payments and conserve money that can be used to support the economy. In its strongest warning to date, the European Banking Authority said banks should set pay and especially bonuses at a “conservative level” during the crisis. Firms should also consider deferring awards for a longer period and paying staff in shares.

Lenders should review pay plans to “ensure that they are consistent with and promote sound and effective risk management also reflecting the current economic situation,” the EBA, which coordinates standards across the region, said in a statement on Tuesday. The guidance followed a warning from the European Central Bank’s top supervisor, Andrea Enria, who said in a Bloomberg TV interview that lenders should be cautious about awarding bonuses.

“Banks, shareholders, managers and key risk takers should also take part in the rethink of where we are right now and try to preserve as much capital as possible,” Enria said. “Our recommendation to banks is to be very moderate on” bonuses, he added.

Later on Tuesday, the European Banking Authority issued a statement calling on banks to set bonuses at “a very conservative level” and consider paying them in stock rather than cash.

Perhaps realizing that this is a war not worth fighting, many European banks have already taken proactive steps in limiting bonuses, with Spanish lenders among the first to kick off the Europe-wide trend as Banco Bilbao Vizcaya Argentaria on Monday said that 300 of its top executives waived their 2020 bonuses, while Italy’s UniCredit SpA followed suit late Tuesday, and Intesa Sanpaolo SpA’s top management decided to donate some of their bonuses.

Credit Suisse AG Chief Executive Thomas Gottstein signaled to Swiss broadcaster SRF that the lender may also curb variable pay for 2020 to show “solidarity” amid the crisis. Eearlier this year the Swiss bank decided to pay out 3.17 billion Swiss francs ($3.28 billion) in bonuses for last year. Even insolvent Deutsche Bank distributed 1.5 billion euros.

“It’s a bit early to talk about the bonuses for 2020, but we are definitely thinking along the lines of showing solidarity,” Credit Suisse’s Gottstein said in the interview.

Of course, there were also those who were against the bonus cut: Stephan Szukalski, a representative for the German labor union DBV, said that broad-brushed bonus cuts could hit vulnerable staff:

“We oppose a general bonus cut because the bonus pool doesn’t only include staff with very high salaries,” said Szukalski, who also sits on Deutsche Bank AG’s supervisory board. “Many medium- to low-income earners — of which there are many in Deutsche Bank — have made a contribution over the past years through the previous cuts.”

Well, Stephan, maybe vulnerable staff should demand a higher base pay and eliminate the bonus, which in theory should only be paid to non-vulnerable producers who generate outsized gains for the company.

The worst news, however, is for Deutsche Bank staffers, who after years of getting virtually nothing following several consecutive near-death experiences for the biggest German bank, can now write off 2020 as well:

As Bloomberg reports, Deutsche Bank is considering scrapping bonuses for top management this year as regulators urge banks to preserve capital and keep lending through the coronavirus pandemic. Cutting bonuses is just one possibility and the bank is also looking at alternative measures that wouldn’t involve variable compensation, according to a person familiar with the matter. A decision could be announced as early as this week.

Update (1200ET): Vice President Mike Pence just said during an appearance on CNN that it “would have been better” if China was more forthcoming with the US during the early days of the outbreak, and basically blamed the Chinese for the White House’s slow response.

And there you have it, the purpose for this particular leak, is to begin laying out the administration’s defense when accosted by critics who accuse Trump of not doing enough early on to combat the virus.

*   *   *

A day after China reported more than 1,500 additional “asymptomatic” cases that authorities said had been left out of the country’s data, while promising to start reporting these cases (they’ve already reported 50 more on Wednesday, blaming most of them on travel) going forward, an intelligence report has been submitted to the White House accusing Beijing of deliberately underreporting cases.

The report, which was leaked to the US press by senior-level officials, revealed that the US believes China deliberately tried to conceal the extent of the outbreak, suggesting that Beijing’s decision to lift its lockdown is probably premature, which is why they’re pivoting toward blaming foreigners for these new “asymptomatic” cases that have supposedly been known to the government all along, they just simply ‘forgot’ to count them.

This shouldn’t be a surprise to anyone, as it was widely speculated during the early phases of the outbreak. But this is the first concrete indication that US intelligence has been taking Beijing’s deceptions seriously, and doesn’t intend to just sit back and take it lying down. Secretary of State Mike Pompeo earlier this month blasted the Chinese for withholding data about the virus.

Here’s the Bloomberg report:

China has concealed the extent of the coronavirus outbreak in its country, under-reporting both total cases and deaths it’s suffered from the disease, the U.S. intelligence community concluded in a classified report to the White House, according to three U.S. officials.

The officials asked not to be identified because the report is secret and declined to detail its contents. But the thrust, they said, is that China’s public reporting on cases and deaths is intentionally incomplete. Two of the officials said the report concludes that China’s numbers are fake.

The report was received by the White House last week, one of the officials said.

The outbreak began in China’s Hubei province in late 2019, but the country has publicly reported only about 82,000 cases and 3,300 deaths, according to data compiled by Johns Hopkins University. That compares to more than 189,000 cases and more than 4,000 deaths in the U.S., which has the largest publicly reported outbreak in the world.

Beijing has sought to convince the Chinese people that the virus was created and spread by the US military, a “conspiracy theory” that’s been dreamed up by the government and spread via state-controlled media outlets, a type of advanced-level information warfare designed to distract from the possibility that the virus may have leaked out of a Chinese bioweapons lab.

China’s lies have been exposed in surprising ways, like the deliveries of urns in Wuhan. Some leaked documents have suggested that China’s real numbers were 52 times higher than what Beijing allowed to be reported.

President Trump’s decision to refer to the virus as the “Chinese virus” was so aggravating for Beijing because it impeded the government’s effort to convince its people that the virus was made in America – though of course they didn’t say that, exactly, they couched their objections in accusations of racism and faux-outrage.

Authored by Noah Bonn via The Mises Institute,

Austrians and Libertarians are well-established critics of central banking in general, and emergency monetary stimulus in particular.

There is near universal agreement that Alan Greenspan should not have cut rates following the Dot-Com Bubble, and that Ben Bernanke and Janet Yellen should not have quadrupled the monetary base following the Housing Bubble.

Yet if you mention this to someone who is not persuaded of our position, you will likely get a response along the lines of:

“well, what should they have done instead?”

“Nothing,” you reply.

“Well then wouldn’t things have been even worse?”

It’s this last question that I don’t believe we have answered to great effect. What would the effects have been if Greenspan, Bernanke, and Yellen had simply frozen the monetary base during their respective crises? More importantly, what would be the effect today if Powell did so?

We are currently in a situation in which many business’ revenues have dried up. Airlines, retail stores, restaurants and bars, cruise lines, oil companies, and others have seen their cash flow deteriorate over the first quarter of this year. Nonetheless, many of their obligations remain: rent still has to be payed; loan payments still need to be made; salaries still need to be paid, etc. As a result, the demand for loanable funds has gone through the roof. The Fed has responded to this situation by injecting hundreds of billions of dollars (if not yet trillions) into various lending markets such as the markets for repurchase agreements, treasury bills, municipal bonds, and mortgage-backed securities.

Don’t be intimidated by the technical specifications of these particular instruments. All of these various open market operations amount to different versions of the same thing: the Fed is responding to the demand for loanable funds by printing new money and lending it.

Given our opposition to these actions, it is worth playing through the exercise of describing what would happen if the Fed simply sat this one out. What prices would change? What levers would move? How would normalcy once again be restored?

As businesses begin to demand short term loans in order to meet their obligations, the first thing we would begin to see is that interest rates would rise. Likely they would rise a lot. For the sake of argument, let’s say the short term interest rate shot up to 15 or 20% on an annualized basis. The effect of this rate change would be two-fold:

• First, it would push the marginal borrower out of the market. This would mean that borrowing for non-essential purposes would be curbed. Credit card rates, for example, would be much higher than normal, and people would be strongly incentivized to pay in cash whenever possible. This would free up funds that could flow to businesses facing financial distress.

• Second, those who do keep cash balances would be strongly incentivized to enter the lending market. Those who had sidelined cash, and had been missing out on the excellent returns of the stock market would suddenly have the opportunity to return 10% in six months on a Certificate of Deposit (CD) account while the stock market is in a state of precipitous decline. This would add even more funds to the lending market, and provide a further lifeline to businesses in need.

All of this, however, starts with the premise that interest rates are allowed to rise. When the Fed suppresses short term rates, this mechanism is broken: there is no incentive to curb short-term borrowing for non-essential purposes, and there is no incentive for those with cash balances to supply short term loans. As of this writing, the yield on CDs at Bank of America is between 0.03 and 0.15% for balances under $10,000, andlittle better for balances above that threshold. As a result, a difficult situation is becoming a genuine liquidity shortage, and financial distress for under-capitalized firms has become a financial emergency for the entire system.

A concept that can help keep these conversations grounded is the acknowledgment that there is no free lunch. When the Fed buys treasury bills, and the federal government uses those funds for bail-outs, even though the money is being printed fresh, the purchasing power has to come from somewhere. In this case, it’s coming from the diluted value of cash balances. So as we can now see, regardless of whether central banks intervene, the lifeline to the economy must come from the cash balances of savers. There is nowhere else for it to come from. The question is simply who gets to profit from this state of affairs. In the absence of Fed intervention, it is the savers who profit. They are rewarded with handsome returns for rescuing those firms who did not prepare for the worst. When the Fed does intervene, the reward goes to under-capitalized banks, and over-extended businesses, who get loans at a price that does not at all reflect the cost they are imposing on society.

Needless to say, these incentives are perverse. Not only are we engaging in the ethically dubious practice of rewarding the profligate and punishing the prudent, but with each next iteration, we are incentivizing poor management decisions, and discouraging the very saving that has just been tapped as a lifeline. With each next business cycle; with each next monetary stimulus; with each next round of bail-outs, our society will find itself with fewer and fewer savers who can be squeezed to rescue the economy. Indeed we are approaching this point already, as a Bankrate survey in 2019 revealed that only 41% of Americans would write a check to cover a $1,000 unexpected cost. The longer these incentives remain in place, the smaller that pool of savings will be, and the dimmer our prospects will become of bouncing back from an unexpected supply shock like that brought on by the COVID-19 panic.

So in conclusion, I’ll contrast this dire picture one last time with the question: what would happen if the Fed did nothing?

• Savers would profit very well over the coming year.

• Viable businesses would eat the cost of borrowing at higher short-term rates, but would ultimately be able to weather the storm.

• Some businesses would inevitably fail, and their resources would become available to more productive uses.

• But most importantly, the signal would emanate through society that it pays to save.

It pays to be prepared for a rainy day. And next time, more would be.

On Tuesday it was revealed that Denis Protsenko, the head doctor at the infectious diseases hospital treating coronavirus patients in Moscow, tested positive for COVID-19.

Just a week ago Dr. Protsenko was photographed shaking hands with President Vladimir Putin, during the Russian leader’s visit to the hospital, where he donned a full protective Hazmat suit to visit patients. But during most of his interaction with Protenko, Putin wasn’t wearing the protective gear. 

Putin’s office now reports he’ll conduct his duties remotely, in self-isolation after the exposure. “The president prefers these days to work remotely,” Kremlin spokesman Dmitry Peskov told the press just before Putin was due to hold a cabinet meeting by videoconference Wednesday.

“We are taking all precautionary measures,” Peskov said further. Joining a list of other leaders who have had to enter self-quarantine after potential exposure, most notably Justin Trudeau, and also Boris Johnson – who was actually confirmed for the virus – Putin will now work exclusively from his presidential residence in Novo-Ogaryovo outside Moscow.

The Russian presidency’s office also now says he’ll no longer shake hands. “Of course everyone is now social distancing,” Peskov said.

“All of those who were with the president at Kommunarka are being tested daily for the coronavirus,” Peskov added, while attempting to assure the public that “everything is fine” with Putin.

Denis Protsenko was the very doctor who gave Putin a tour of the COVID-19 treatment center in the Kommunarka area of Moscow last Tuesday in what we described at the time as clearly a “high risk” photo op.

Currently some two-thirds of Russia’s entire population of just under 150 million is under strict ‘stay at home’ orders after last week Putin announced a paid ‘work holiday’ for at least a week.

This includes some 53 regions of the country under lockdown, which includes the following mandates, according to TASS:

All residents of these regions are ordered to stay home and can go out only to call at a nearby drug store or supermarket, walk the pet, as well as dispose garbage and travel to work if they cannot work from home on official days off declared nationwide between March 28 and April 5.

As of Tuesday Russia has 2,777 official confirmed COVID-19 cases, including 24 deaths, with most infections concentrated in Moscow.

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

“You better tuck that in. You’re gonna’ get that caught on a tripwire.”

 – Lieutenant Dan, Forrest Gump

There is a popular game called Jenga in which a tower of rectangular blocks is arranged to form a sturdy tower. The objective of the game is to take turns removing blocks without causing the tower to fall. At first, the task is as easy as the structure is stable. However, as more blocks are removed, the structure weakens. At some point, a key block is pulled, and the tower collapses.

Yes, the collapse is a direct cause of the last block being removed, but piece by piece the structure became increasingly unstable. The last block was the catalyst, but the turns played leading up to that point had just as much to do with the collapse. It was bound to happen; the only question was, which block would cause the tower to give way?

A Coronavirus

Pneumonia of unknown cause first detected in Wuhan, China, was reported to the World Health Organization (WHO) on December 31, 2019. The risks of it becoming a global pandemic (formally labeled COVID-19) was apparent by late January. Unfortunately, it went mostly unnoticed in the United States as China was slow to disclose the matter and many Americans were distracted by impeachment proceedings, bullish equity markets, and other geopolitical disruptions.

The S&P 500 peaked on February 19, 2020, at 3393, up over 5% in the first two months of the year. Over the following four weeks, the stock market dropped 30% in one of the most vicious corrections of broad asset prices ever seen. The collapse erased all of the gains achieved during the prior 3+ years of the Trump administration. The economy likely entered a recession in March.

There will be much discussion and debate in the coming months and years about the dynamics of this stunning period. There is one point that must be made clear so that history can properly record it; the COVID-19 virus did not cause the stock and bond market carnage we have seen so far and are likely to see in the coming months. The virus was the passive triggering mechanism, the tripwire, for an economy full of a decade of monetary policy-induced misallocations and excesses leaving assets priced well beyond perfection.

Never-Ending Gains

It is safe to say that the record-long economic expansion, to which no one saw an end, ended in February 2020 at 128 months. To suggest otherwise is preposterous given what we know about national economic shutdowns and the early look at record Initial Jobless Claims that surpassed three million. Between the trough in the S&P 500 from the financial crisis in March 2009 and the recent February peak, 3,999 days passed. The 10-year rally scored a total holding-period return of 528% and annualized returns of 18.3%. Although the longest expansion on record, those may be the most remarkable risk-adjusted performance numbers considering it was also the weakest U.S. economic expansion on record, as shown below.

They say “being early is wrong,” but the 30-day destruction of valuations erasing over three years of gains, argues that you could have been conservative for the past three years, kept a large allocation in cash, and are now sitting on small losses and a pile of opportunity with the market down 30%.

As we have documented time and again, the market for financial assets was a walking dead man, especially heading into 2020. Total corporate profits were stagnant for the last six years, and the optics of magnified earnings-per-share growth, thanks to trillions in share buybacks, provided the lipstick on the pig.

Passive investors indiscriminately and in most cases, unknowingly, bought $1.5 trillion in over-valued stocks and bonds, helping further push the market to irrational levels. Even Goldman Sachs’ assessment of equity market valuations at the end of 2019, showed all of their valuation measures resting in the 90-99th percentile of historical levels.

Blind Bond Markets

The fixed income markets were also swarming with indiscriminate buyers. The corporate bond market was remarkably overvalued with tight spreads and low yields that in no way offered an appropriate return for the risk being incurred. Investment-grade bonds held the highest concentration of BBB credit in history, most of which did not qualify for that rating by the rating agencies’ own guidelines. The junk bond sector was full of companies that did not produce profits, many of whom were zombies by definition, meaning the company did not generate enough operating income to cover their debt servicing costs. The same held for leveraged loans and collateralized loan obligations with low to no covenants imposed. And yet, investors showed up to feed at the trough. After all, one must reach for extra yield even if it means forgoing all discipline and prudence.

To say that no lessons were learned from 2008 is an understatement.

Black Swan

Meanwhile, as the markets priced to ridiculous valuations, corporate executives and financial advisors got paid handsomely, encouraging shareholders and clients to throw caution to the wind and chase the market ever higher. Thanks also to imprudent monetary policies aimed explicitly at propping up indefensible valuations, the market was at risk due to any disruption.

What happened, however, was not a slow leaking of the market as occurred leading into the 2008 crisis, but a doozy of a gut punch in the form of a pandemic. Markets do not correct by 30% in 30 days unless they are extremely overvalued, no matter the cause. We admire the optimism of formerly super-intelligent bulls who bought every dip on the way down. Ask your advisor not just to tell you how he is personally invested at this time, ask him to show you. You may find them to be far more conservative in their investment posture than what they recommend for clients. Why? Because they get paid on your imprudently aggressive posture, and they do not typically “eat their own cooking”. The advisor gets paid more to have you chasing returns as opposed to avoiding large losses.

Summary

We are facing a new world order of DE-globalization. Supply chains will be fractured and re-oriented. Products will cost more as a result. Inflation will rise. Interest rates, therefore, also will increase contingent upon Fed intervention. We have become accustomed to accessing many cheap foreign-made goods, the price for which will now be altered higher or altogether beyond our reach. For most people, these events and outcomes remain inconceivable. The widespread expectation is that at some point in the not too distant future, we will return to the relative stability and tranquility of 2019. That assuredly will not be the case.

Society as a whole does not yet grasp what this will mean, but as we are fond of saying, “you cannot predict, but you can prepare.” That said, we need to be good neighbors and good stewards and alert one another to the rapid changes taking place in our communities, states, and nation. Neither investors nor Americans, in general, can afford to be intellectually lazy.

The COVID-19 virus triggered these changes, and they will have an enormous and lasting impact on our lives much as 9-11 did. Over time, as we experience these changes, our brains will think differently, and our decision-making will change. Given a world where resources are scarce and our proclivity to – since it is made in China and “cheap” – be wasteful, this will probably be a good change. Instead of scoffing at the frugality of our grandparents, we just might begin to see their wisdom. As a nation, we may start to understand what it means to “save for a rainy day.”

Save, remember that forgotten word.

As those things transpire – maybe slowly, maybe rapidly – people will also begin to see the folly in the expedience of monetary and fiscal policy of the past 40 years. Expedience such as the Greenspan Put, quantitative easing, and expanding deficits with an economy at full employment. Doing “what works” in the short term often times conflicts with doing what is best for the most people over the long term.

After its worst quarter ever, as COVID-19 lockdowns crushed demand, raising fears about overflowing storage tanks amid a price war that has flooded the market with extra supply, all eyes are glued to today’s official inventory data (after API reported a major surprise build in crude and gasoline stocks) as Standard Chartered analysts, including Emily Ashford warned in a report, oil tanks around the world could fill in six weeks, a move that will likely force significant production shut-downs,

“Huge inventory builds, potentially exhausting spare storage capacity, will mean that market balance requires an unprecedented output shutdown by producers,” they wrote.

So, eyes down…

“There is the very real possibility that this week’s storage reports could be the energy patch version of last Thursday’s Weekly Jobless Claims,” Robert Yawger, Mizuho Securities USA’s director of energy said in a note.

“I would expect the numbers to be supersized and challenge multi-year highs/lows on multiple data points. Of course, I have been expecting big numbers for the past couple week, but the fireworks have not happened. That leads me to believe that the data explosion will likely happen this week … Exports will likely be down big, and refinery utilization will likely pull back dramatically. That will leave a lot of crude oil on the sidelines … EIA crude oil storage has been higher for nine weeks in a row. Storage will likely double up and increase at the rate of around 10 million for another nine weeks…at least.”

API

• Crude +10.485mm (+4.6mm exp) – biggest build since Feb 2017

• Cushing +2.926mm – biggest build since Feb 2019

• Gasoline +6.058mm (+3.6mm exp) – biggest build since Jan 2020

• Distillates -4.458mm (-600k exp)

DOE

• Crude +13.833mm (+4.6mm exp) – biggest since Oct 2016

• Cushing +3.521mm – biggest build since Mar 2018

• Gasoline +7.524mm (+3.6mm exp) – biggest build since Jan 2020

• Distillates -2.194mm (-600k exp)

API reported a massive crude build (and gasoline build) overnight but the official data showed an even bigger 13.8mm barrel crude build – the biggest since Oct 2016 and a huge increase in stocks at Cushing…

Source: Bloomberg

Total US crude inventories are now at their highest since June 2019…

Source: Bloomberg

U.S. oil production has remained at a strong 13-13.1 million barrels a day in recent weeks, despite a big drop in the rig count last week (which could presage a shift)…

Source: Bloomberg

Bloomberg notes that it’s important to remember that while prices are low, we haven’t seen the sort of uniform production cut that many are expecting. There are a few reasons.

For one, many of these firms are hedged, so even with WTI trending at $20, that’s not necessarily the price a shale firm receives (there’s nuance here, but that’s another issue). Also, many of these firms may be just completing their wells instead of drilling new ones, which means production continues to rise. The trickle down effect of the rout isn’t quite here yet, but hold on – it might be here soon, particularly if oil remains at these levels.

WTI hovered around $20.20 ahead of the official inventory print and tumbled to a $19 handle after the big build…

How low can prices go? Well, as we detailed last night, the first crude stream to price below zero was Wyoming Asphalt Sour, a dense oil used mostly to produce paving bitumen. Energy trading giant Mercuria bid negative 19 cents per barrel in mid-March for the crude, effectively asking producers to pay for the luxury of getting rid of their output.

Echoing Goldman, Elisabeth Murphy, an analyst at consultant ESAI Energy said that “these are landlocked crude with just no buyers. In areas where storage is filling up quickly, prices could go negative. Shut-ins are likely to happen by then.”

Finally, we note that Brent futures are signaling a historic glut is emerging.

The May contract traded at a discount of $13.66 a barrel to November, a more bearish super-contango than the market saw even in the depths of the 2008-09 global financial crisis.

When the Fed broke the last frontier of moral hazard – at least until it starts openly purchasing ETFs and single stocks after the next market crash, thereby fully nationalizing the market – and announced it, or rather Blackrock, would not only expand its QE to “unlimited” but also buy investment grade bonds and the IG ETF, LQD, it effectively tore the bond market into two categories: that backstopped by the Fed, and that which isn’t (something we described in “Bond Market Tears In Two: Distressed Debt Is Cratering, As Fed Buying Of Investment Grade Sends LQD NAV Soaring“).

It also unleashed the biggest debt bubble of all time.

Why? Because by explicitly guaranteeing investment grade debt, the Fed – by making BBB and higher rated debt effectively risk-free – not only precipitated the biggest one-day surge and inflow into LQD, but unleashed an unprecedented free for all as every single investment grade company – especially those soon to be fallen angels who will be downgraded to junk – have rushed into the bond market to issue debt and raise cash while they can at artificially low yields.

And the data confirms it: according to BofA, after the IG market was largely shut down in the two weeks ahead of the Fed’s March 23 bond buying announcement, US new issuance reached a new monthly record of $260.7 billion in March 2020, bringing YtD to $509.7 billion – the fastest ever start to a year and 47% ahead of 2019’s pace.

Looking at the use of proceeds, BofA observes that refinancings continued at a strong $79.8bn, but as the commercial paper market froze $51.8bn was specifically earmarked for terming that out. In addition, there was roughly $69bn of COVID-19 liquidity-related issuance from banks and companies that drew credit lines or mentioned liquidity in the use of proceeds language. What is more remarkable is that is that another $57bn was for frontloaded issuance for capex, M&A as well as – drumroll – share buybacks and dividends.

Yes, even at this moment, having seen the Boeing blowback which repurchased over $50BN in stock pushing its debt load to record highs and now demands a $60BN bailout, companies have the gall to issue debt and buyback stock! Something tells us there will be a lot of angry articles in the NYT singling out each and every one of those companies, especially if they have or plan to fire even one single worker.

And it’s just starting. Looking ahead, BofA notes that April is seasonally a lighter month than March in primary, accounting for 7.7% of annual issuance on average with a five-year run-rate of $102bn.

However, with the economic shutdown IG companies will continue to issue bonds for liquidity needs while others frontload as the market is wide open. M&A issuance totaled just $2.2bn in March and that may continue in April as global markets remain fragile, and T-Mobile/Sprint using a $23bn bridge loan for the April 1st closing with the IG bond refinancing delayed till when market conditions improve.

On the other hand, 1Q20 earnings-related blackouts will begin in the coming weeks, somewhat limiting the industrial pipeline as far as seasonality goes. As a result, BofA now looks for a wide range of $150-200bn of gross issuance in April. With $36.7bn of maturities in April and another $4.6bn of additional redemptions announced so far for a total of $41.3bn, the implied net issuance in April is $133.7bn.

If correct, total issuance in just the first 4 months of the year could reach a mindblowing $700BN, an unheard of number and one which means the Fed will very soon end up owning equity stakes in hundreds of bankrupt companies once its bonds are equitized as dozens of formerly IG companies are downgraded to junk, and then file for bankruptcy, convering the pre-petition debt into equity.

We, for one, can’t wait to see what the Fed will do when it ends up owning controlling post-petition equity stakes across countless US corporations.

Authored by Richard Breslow via Bloomberg,

Most of us have lower pain thresholds than we would like to admit. And have developed various coping mechanisms to deal with it. We opt to hear what we want to. This tendency is often accommodated by enablers who long ago realized that catering to this preference can win friends and influence people. It contradicts the dictum of under-promising and over-delivering. But is a sleight of hand that often buys time. It can also occasionally lead to heads-I-win, tails-you-lose outcomes, moments of severe disappointment and hurt people.

Today is one of those days. Maybe we can’t handle the whole, unvarnished truth, but would be better served getting more of it and earlier. I don’t want to suggest things are more nefarious than they might really be. But, consider today’s market price action as an example of this in microcosm. It’s also worth pointing out that, at least some of what is going on, is an unwind of the front-running and rote positioning that came with what was a well-advertised and potentially difficult month-end portfolio rebalancing exercise that we just completed. Possibly more than it seems. It won’t take long to find out.

Risk assets are not having a happy start to the quarter. Not horrendous, but certainly discouraging nevertheless. And there are a number of factors that have conspired to drag us down. We were told, yesterday evening, that we are still in the very dangerous stages of surviving the pandemic. “It will be a very difficult two weeks.” Should that have come as a surprise to anyone watching the news? Apparently so. There’s still light at the end of the tunnel, just not as soon as we were told to hope. And with potentially greater human toll. Sometimes, it is just so much better to get out ahead of things. That’s exactly what NIAID Director Anthony Fauci was trying to do. And then he suggested a believable path toward achieving a better result than the models they use suggest.

Global economic numbers are going to be disappointing. Today’s certainly were uninspiring. We know we are in recession. Bad data comes with that. The lesson to learn is to follow the trajectory, one way or the other, and not get solely hung up on the absolute levels. We are in danger of slipping from looking beyond the numbers to merely being unnerved by them. Accept that precise estimates are hard to come by and aren’t really the point. Just look at the dispersion of forecasts for Friday’s nonfarm payrolls.

What may have tipped the balance, given our current mood, is the new realization that the V-shaped recovery is unlikely to happen exactly on schedule as we were promised. New realization? It was an unrealistic expectation that shouldn’t have been stated as the base case. Have we not already been discussing a fourth stimulus plan?

European banks are having to cut out dividends and share buybacks. We’ve been discussing the weakness of this sector and other uses for these funds ad nauseam. This can’t have come as a total bolt from the blue. The market’s reaction should be taken as an object lesson in understanding the concept of asking, “whose ox is being gored” more than anything else.

Some fund managers are bearish. Earnings season will be disappointing and revenue expectations too high. Enough said. Although, I did read that cigarette companies seem to be doing just fine.

The point is, we know these are bad times. And sometimes the bad news gangs up on us. That surely can’t come as a surprise, nor should we pretend it does. If that is the case, we aren’t doing enough to overcome the challenges we face.

After a bloodbath in European PMIs (and a ‘surprise’ surge back to growth in China), and following some serious collapses in regional Fed surveys (and this morning’s tumble in Canadian PMIs), today’s US manufacturing survey data was expected to slide further into contraction (though not as much as the Services surveys collapsed).

• Markit’s US Manufacturing PMI fell modestly from 49.2 to 48.5 in March (modestly better than the 48.0 flash print) – a considerably smaller drop than many expected.

• ISM’s US Manufacturing survey fell modestly from 50.1 to 49.1 in March (far better than the 44.5 print expected)

Source: Bloomberg

This move follows the carnage seen in US Services PMI and shows very little relative declines (perhaps the survey was premature)…

Source: Bloomberg

Once again, the driver of this relatively positive print is the same as has caused problems with surveys since the crisis began – supplier delivery times rising at the fastest pace since 2005 – typically seen as a sign of expansion. However, in this case it is caused by collapsing global supply chains, and along with prices paid rising rapidly means a stagflationary collapse in global trade… not exactly the positive signal the index is trying to send.

Chris Williamson, Chief Business Economist at IHS Markit said:

“The final PMI data for March are even worse than the initial flash estimate, with manufacturing output slumping to the greatest extent since the height of the global financial crisis in 2009.

“Growing numbers of company closures and lockdowns as the nation fights the COVID-19 outbreak mean business levels have collapsed. While some producers reported being busier as a result of stockpiling and anti-virus activities, notably in the food and healthcare sectors, these are very much the minority, and most sectors reported a rapid deterioration in demand and production.

“Orders for capital equipment have deteriorated at a rate not seen since data were first available in 2009 as firms stopped investing in machinery. Companies have meanwhile reined-in spending on inputs and households have pulled back sharply on many forms of spending, especially for non-essential and big ticket items. With export sales also sliding, factories are facing a broad-based slide in demand which is already resulting in the largest job losses recorded since the global financial crisis.”

Finally, manufacturers cut their workforce numbers at the sharpest rate since October 2009, reporting an increase in redundancies and the need for lower operating capacity. Specifically, looking at ISM’s Employment sub-index – at 2009’s lows – suggests Friday’s payrolls data will be extremely ugly (despite ADP’s miraculously timed survey)…

Source: Bloomberg

We give the last word to Williamson: “Worse is likely to come as consumer spending falls further in coming months as lockdowns intensify and unemployment spikes higher.”

Submitted by Michael Every of Rabobank

Another day, another trillion dollars.

After noting for the nth time yesterday that not all currencies are equal, and that the Eurodollar system–that is to say, offshore USD liquidity–remains a structural issue regardless of the recent introduction of (too small) Fed swap lines with (too few) central banks, it’s not surprising that we saw movement on that Front. Indeed, the Fed introduced a new repo facility for any central banks that with an account with the Federal Reserve Bank of New York, who can now swap their holdings of US Treasuries held on account for good ol’ USD cash. The key takeaways from this move are as follow:

1. The stress on USD liquidity is real and isn’t going away despite the alphabetti spaghetti of Fed channels to try to get USD from A (them) to B (everyone);
2. It means country C (and let’s just say ‘C’ is particularly apt in this instance) doesn’t have to sell US Treasuries to gain access to USD, alleviating the risks of a move higher in Treasury yields should this need to happen on scale in what are currently far from normal market conditions;  
3. However, it is not actually going to solve any real problems if country C (or D or E) are short of USD, as those USD are still gone once they have been used to pay for imports or settle USD debts; yet
4. The fact that the universe of foreign central banks being offered this facility is now anyone, not G-10, speaks volumes about the structural issues relating to the global role of the USD; and hence
5. This is net structurally positive for USD even while it looks negative.

In short, the Fed might, in its navel-gazing kind of way, only care about smooth functioning of the US Treasury market; yet this is still a step towards one of the only logical end-points of having USD as de facto global currency – the Fed as not just US but de facto global central bank. Don’t like that? Well, the other end-points are that the system collapses due to a lack of USD and/or USD being far too high for all involved, which will make what happened in Q1 look like a picnic; or that the system lasts in some places lucky enough for the Fed to look up from its navel at, which will be similar globally if not as bad.

One might not want to recognise any of this from a small, technical change in Fed policy, but it’s not hard to join the dots and project them forward. The only question is how far those dot-plots extend into the future. (As I have said before, if unsustainable systems didn’t ultimately change, we would probably all be Romans.)

On which front, in the US we yesterday had the President once again flipping between his two different characters – Dr.. Donald and Mr. Trump, the former this time urging people and businesses to take the virus seriously and promising a very difficult few weeks ahead as the range of virus deaths has been shunted up to 100,000-240,000.

Yet we also had Mr. Trump tweeting: “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4”

Yes, it’s election season; and yes, it’s odd that the US last elected a real estate developer who in office has refused to develop any real estate; and it would need to pass Congress. However, when we already had a USD1 trillion deficit; then added USD2.2 trillion in a virus-fighting package; and are planning a UD600bn top up; why not go the whole hog and actually do something stimulatory and much needed like USD2 trillion on infrastructure rather than just trying to lean against the huge negative impact of the virus?

What fiscal deficits! USD5.8 trillion is being bandied around in the way USD580bn was two years ago. And yet, as Trump implies, what fiscal deficits? Rates are zero and are unlikely to be anything other than zero for a looooong time. The Fed will see to that. There is enormous domestic demand for some decent US infrastructure. And there is enormous global USD demand. In short, this is potentially about as clear an argument as one is going to see put forward by a politician for MMT – or here MMT-rump. As another aside, I had many conversations with colleagues when Trump was first elected, and the conclusion was always that if there was ever a US president prepared to use a crisis to go MMT, it was T: nobody even once went ‘Mmm’ about that prospect. Would you want to be a Democratic candidate running against spending USD2 trillion on infrastructure in a weak economy? Good luck with that!

Yes, once again we are dot-plotting here. But when a structural break of this size is presented, one should be paying attention. Particularly as while the rest of the world might be hearing USD2 trillion and licking its lips, I am sure that MMT will be M(MAGA)MT in the US case: buy American, use American, hire American. In which case, the bulk of that liquidity is going to be for domestic not global reflation – or at least that will be the aim.

Of course, if the US does this, expect other countries to go the same route. Today’s Tankan survey was bad but not as bad as had been feared for large firms: perhaps it was covering the period before the Olympics got cancelled – or perhaps PM Abe announcing USD554bn, 10% of GDP, in fiscal stimulus is helping? Of course, for those wanting to follow the US and Japan this will mean either having to run current account surpluses to protect their currencies while doing so, which means more protectionism, or watch their currencies collapse, which likely means more US protectionism and less USD flow: the Fed is going to be oh-so busy in coming years, even if rates are not going to be doing anything at all.

Elsewhere, in China we saw a further attempt to say all is well post-virus with the Caixin PMI suggesting we are now above 50 – when actually the report merely said things had stabilized. In Australia we saw the virus in action today: the mind virus of the housing bubble and its associated “The Block” mentality. Building approvals soared 19.9% m/m in February and CoreLogic house prices went up 0.7% m/m in March, even as everyone is locked down in their homes. Indicative of just how obsessed – and I mean obsessed – Australia is with housing, CoreLogic actually has a day-to-day house price index, so once can track how much “wealthier” one has become each morning. As MMT pointed out decades ago, if businesses won’t invest in capital stock, or the state in new infrastructure, and you still pump in liquidity, you just elevate asset prices. Look how well that has worked out. Fortunately, the latest RBA minutes show that they have finally woken up: a recession is expected; and policy is now to anchor both rates and 3-year yields for as long as needed while waiting for the government to do more on the fiscal front. Might that even include infrastructure at some point?