Tag: finance

Update (1020ET): Of course, just because the Fed can continue to pump “emergency liquidity” into credit markets until the cows come home, doesn’t mean the government should just sit on its hands. Powell urged Congress and President Trump to continue to take steps to provide support for individuals and businesses.

“This is what the great fiscal power of the United States is for to protect these people as best we can” when they’re faced with extreme challenges through no fault of their own.

*    *    *

Update (1015ET): As the Q&A with Brookings’ David Wessel (a former editor at WSJ) began, Powell was pressed about whether the Fed’s extreme actions in the crisis so far might have unintended consequences like “more inflation than we’d like” or something else. At this point, the Fed sees limit consequences, and right now the is focusing on the “extraordinary measures” it can take according to its statute.

So long as the Treasury Secretary agrees, “there’s really no limit on what we can do,” Powell said.

In other words: Investors need worry not, even if the the banks and the government totally whiff this bailout, the Fed can keep launching ‘credit facilities’ and printing money ad infinitum.

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With the “Paycheck Protection Program” in turmoil as banks drag their feet over concerns about culpability for fraud and abuse, the Fed once again stepped up as Jerome Powell ordered the Fed to provide another $2.3 trillion in emergency loans along with new credit facilities to get the money to  struggling small and medium-sized businesses and municipalities, two groups that are still struggling despite federal and state efforts.

Now, one day after the release of minutes revealing the depths of the “profound uncertainty” lying ahead, Jerome Powell will be speaking live and taking questions at the Brookings Institute after unveiling the new program:

Powell’s prepared remarks have just been released. Read them below:

Good morning. The challenge we face today is different in scope and character from those we have faced before. The coronavirus has spread quickly around the world, leaving a tragic and growing toll of illness and lost lives. This is first and foremost a public health crisis, and the most important response is coming from those on the front lines in hospitals, emergency services, and care facilities. We watch in collective awe and gratitude as these dedicated individuals put themselves at risk in service to others and to our nation.

Like other countries, we are taking forceful measures to control the spread of the virus. Businesses have shuttered, workers are staying home, and we have suspended many basic social interactions. People have been asked to put their lives and livelihoods on hold, at significant economic and personal cost. We are moving with alarming speed from 50-year lows in unemployment to what will likely be very high, although temporary, levels.

All of us are affected, but the burdens are falling most heavily on those least able to carry them. It is worth remembering that the measures we are taking to contain the virus represent an essential investment in our individual and collective health. As a society, we should do everything we can to provide relief to those who are suffering for the public good.

The recently passed Cares Act is an important step in honoring that commitment, providing $2.2 trillion in relief to those who have lost their jobs, to low- and middle-income households, to employers of all sizes, to hospitals and health-care providers, and to state and local governments. And there are reports of additional legislation in the works. The critical task of delivering financial support directly to those most affected falls to elected officials, who use their powers of taxation and spending to make decisions about where we, as a society, should direct our collective resources.

The Fed can also contribute in important ways: by providing a measure of relief and stability during this period of constrained economic activity, and by using our tools to ensure that the eventual recovery is as vigorous as possible.

To those ends, we have lowered interest rates to near zero in order to bring down borrowing costs. We have also committed to keeping rates at this low level until we are confident that the economy has weathered the storm and is on track to achieve our maximum-employment and price-stability goals.

Even more importantly, we have acted to safeguard financial markets in order to provide stability to the financial system and support the flow of credit in the economy. As a result of the economic dislocations caused by the virus, some essential financial markets had begun to sink into dysfunction, and many channels that households, businesses, and state and local governments rely on for credit had simply stopped working. We acted forcefully to get our markets working again, and, as a result, market conditions have generally improved.

Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances—such as those we find ourselves in today—and only with the consent of the Secretary of the Treasury. We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury. We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.

I would stress that these are lending powers, not spending powers. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solvent entities with the expectation that the loans will be fully repaid. In the situation we face today, many borrowers will benefit from these programs, as will the overall economy. But there will also be entities of various kinds that need direct fiscal support rather than a loan they would struggle to repay.

Our emergency measures are reserved for truly rare circumstances, such as those we face today. When the economy is well on its way back to recovery, and private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth, we will put these emergency tools away.

None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented. At the Fed, we are doing all we can to help shepherd the economy through this difficult time. When the spread of the virus is under control, businesses will reopen, and people will come back to work. There is every reason to believe that the economic rebound, when it comes, can be robust. We entered this turbulent period on a strong economic footing, and that should help support the recovery. In the meantime, we are using our tools to help build a bridge from the solid economic foundation on which we entered this crisis to a position of regained economic strength on the other side.

I want to close by thanking the millions on the front lines: those working in health care, sanitation, transportation, grocery stores, warehouses, deliveries, security—including our own team at the Federal Reserve—and countless others. Day after day, you have put yourselves in harm’s way for others: to care for us, to ensure we have access to the things we need, and to help us through this difficult time.

A number of years ago, we first introduced the topic of a ‘welfare cliff’ at which more work was punished – i.e. the ‘generosity’ of the package of welfare benefits creates a perverse incentive not to work any harder…

As we wrote at the time, one of the tragedies of America today is that so many adults of sound mind and body do not support themselves and their families. It’s a tragedy not because they suffer material want; indeed, relatively few suffer so, because government assistance satisfies many of their material needs.

It’s tragic because one of the keys to human happiness is earned self-respect, which requires, as Charles Murray has written, making one’s own way in the world. The vast majority of poor people don’t want welfare; they don’t want handouts; they want a good job with which they can support themselves and their families comfortably.

The tragedy of the American welfare system is that it traps so many people in dependency on government, by hindering them from getting on and climbing up the job ladder, and thereby earning self-respect and happiness.

*  *  *

Our fear now, confirmed by excellent research from  Kathy Morris & Chris Kolmar at Zippia.com, is that the ‘generosity’ of the CARES Act (and the fact that politicians are loathed to remove any policy that could possibly make their voters upset) has the potential to create an entire new generation of welfare serfs, subsisting on significant welfare benefits with no incentive to ‘get back to work’, even after the lockdowns are lifted.

So, detailed below from Morris and Kolmar, is the maximum, annualized salary you can expect under the new Coronavirus unemployment benefit in each state.

The past month has seen a record breaking surge in unemployment. Millions of American workers have unexpectedly lost their jobs in an uncertain job market where many businesses are shut down.

Understandably, the newly unemployed masses have turned to unemployment to help scrape by. Fortunately, the new coronavirus stimulus package has provisions to help the unemployed during this difficult time.

Under the CARES Act, Americans laid off due to the coronavirus receive an additional $600 a week for the next four months, ending July 31st or upon employment. In addition, the unemployment window has been increased in each state by 13 weeks.

No doubt, the passage of the stimulus has many laid off workers breathing a sigh of relief.

However, many still working may be frustrated to realize their weekly paycheck is less than they would receive in unemployment.

We hit the data to determine how much unemployed workers can expect to receive under the stimulus — and the amount in each state where you would make more money not working at all.

HOW WE DETERMINED UNEMPLOYMENT UNDER THE STIMULUS

Each state has its own complex, intricate (sometimes unnecessarily so) unemployment laws. Typically, they amount to around .09-1.1% a week of your annual salary, up to the weekly maximum.

Some states have special clauses for dependents we included in the calculator. Often this additional cash is pretty low. If you have one kid in Michigan, for example, you receive an extra $6 a week.

In addition to slogging through each state’s unemployment policies to determine each state’s unemployment pay outs, we added the $600 a week included in the new stimulus package.

Depending on the distribution of your quarterly pay, the results may vary from your actual unemployment. However, this number is a good indicator of what you can expect.

To determine the salary threshold in each state where workers would make more on unemployment we simply took the state’s weekly max and added the new $600 stipend to find the annual salary that exceeds the unemployment pay out.

THE SALARY IN EACH STATE WHERE YOU’D MAKE MORE ON UNEMPLOYMENT

While many have speculated on the number of minimum wage workers who would be better off financially working for minimum wage, the number of skilled workers has been underestimated. For example, Massachusetts generous unemployment policies combined with the stimulus means all workers making under $73,996 would receive more a week unemployed than they do from working.

Many of these salaries outstrip the state’s median income, meaning the majority of workers would receive more from an unemployment check than a paycheck.

Of course, no one will be receiving unemployment benefits for a year (no state’s unemployment duration goes past 39 weeks) and many displaced workers are no doubt eager to secure a new job. It is also important to point out that the extra $600 a month only lasts until July 31st. After these four months, the unemployed will be back to receiving only what the state provides — about 50% of their previous pay- and be faced with trying to find employment in a rough job market.

These numbers do also not take into account benefits, including health insurance which is usually procured through your employer at a much cheaper rate than employees can get on the market. I think we can all agree a pandemic is a pretty bad time to be uninsured.

UNEMPLOYMENT DURATION CHANGES

Another side effect of the coronavirus stimulus bill is the increase in the period of time people are able to draw unemployment benefits.

Similar to unemployment benefits, each state sets their own cap on how long the unemployed can draw checks. Prior to the stimulus bill, generous states had a cap of 26 weeks, or 6.5 months. Less generous states such as Florida or North Carolina only allotted 12 weeks.

The stimulus bill increased the unemployment period by adding 13 weeks to each state’s unemployment period. Florida and North Carolina more than doubled their period of time people could draw unemployment.

Even states with the more generous 26 weeks saw an increase to 39 weeks.

SUMMARY ON UNEMPLOYMENT BENEFITS AFTER THE STIMULUS

The stimulus package made significant changes to state unemployment. For the next four months, the unemployed will receive an additional $2,400 a month. Similarly, the added 13 weeks provides people longer to find a job in a new hostile job market.

The new package does mean a good chunk of the workforce are now receiving paychecks smaller than they would on unemployment. This includes workers in essential businesses, including hospitals and super markets, who are putting themselves in harm’s way to keep society running.

For minimum wage and low wage workers the difference between what they are being paid to work and would receive on unemployment is no doubt the most crushing. Many struggle to pay their bills as is and receive no benefits to complicate the equation. While they are dodging coughs and bringing in masks from home for $10 an hour, others who made the same money are now being paid to sit safely at home.

While the situation might create a temporary imbalance, it is important to remember the unemployment boost will end July 31st. Unemployment checks will be back down to the state level, an amount many struggle to exist on. We do not know how long many of these unemployed workers will struggle to find jobs or what shape the economy will be in August.

*  *  *

Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt, and the CARES Act may have been a serious tipping point.

The Fed just went full retard (even fuller retard than it had gone two weeks ago) and along with its promise to buy pretty much anything and make all collateral money-good, it has eased an apparent resurgence in dollar liquidity stresses.

The FRA-OIS spread had been blowing out, signaling dollar tightness… well that’s eased now…

And the dollar is losing ground fast…

And as the extreme policies of The Fed ripple through markets, so gold is soaring, reflecting the abuse of fiat that is occurring in real time…

And the paper-physical gold markets are decoupling once again…

As Egon von Greyerz recently reminded,  remember you are not holding gold to measure the gains in debased paper money. Instead you are holding physical gold as insurance against a broken financial system that is unlikely to be repaired for a very long time.

Back on March 23, when the Fed unveiled it would start buying investment grade corporate bonds, we said “now that the Fed is effectively all in, it will buy stocks and junk bonds next.”

Two weeks later, we were right and this morning the Fed announced it would, as expected, start buying junk bonds (we have to wait for the next crash before the Fed goes literally all in and starts buying stocks and pretty much anything else).

But let’s back up. A few days ago, we pointed out that the day so many credit bears had been waiting for had arrived, when a record $150BN in investment grade bonds were downgraded to junk, becoming so-called fallen angels, and sparking concerns about what will happen to the $1.3 trillion junk bond market as hundreds of billions of formerly investment grade debt is downgraded to junk and violently reprices the entire high yield space.

Those concerns were answered this morning when as part of the Fed’s expanded $2.3 trillion loan/bailout program, the Fed announced the expansion of its Primary and Secondary Market Corporate Credit Facilities, which will now purchase – drumroll – junk bonds.

In the term sheet of the revised term sheet of the Secondary Market Corporate Credit Facility, the Fed now writes that “to qualify as an eligible issuer, the issuer must satisfy the following conditions”

The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.

An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase.

The section in question:

The same logic applies to Fed purchases in the Primary Market: going forward the Fed’s Primary Market Corporate Credit Facility, where a Fed SPV will purchase qualifying bonds as the sole investor in a bond issuance; and purchase portions of syndicated loans or bonds at issuance, it will also include junk bonds and junk loans:

But wait there’s more: in addition to buying the IG ETF LQD as we noted two weeks ago, going forward the Fed will also be buying junk ETFs such as JNK:

The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds

Translation: buy JNK with leverage as market prices are now terminally disconnected from underlying fundamentals.

Finally, the Fed also laid out the type of leverage it will apply using the Treasury’s equity “investment” as a capital base, noting that the facility “will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds from issuers that are investment grade at the time of purchase and when acquiring ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds.” Additionally, “the Facility will leverage its equity at 7 to 1 when acquiring corporate bonds from issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.”

In short, the only asset that the Fed is now not directly buying is stocks, and here too it’s just a matter of time before the Fed unveils it will start buying the SPY.

In a historical move, the Bank of England announced this morning that it will begin to finance the short-term needs of the Treasury, in other words it will directly monetize the UK deficit, something central banks had – for the past decade – denied they do or would do.

The BOE move will allow the government to bypass the bond market entirely until the Covid-19 pandemic subsides, financing unexpected costs such as the job retention scheme where bills will fall due at the end of April. Ironically, as the FT notes, although BoE governor Andrew Bailey opposed monetary financing earlier this week, Treasury officials felt it was best to have the insurance of the central bank willing to finance its operations in the short term.

In a statement on Thursday, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility”, which normally stands at just £370m. This will rise to an effectively unlimited amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the facility rise briefly to only £20bn.

And so helicopter money has arrived, with the UK Treasury now taking de facto control of the central bank.

The Ways and Means facility had long been used as a financing means of government for day-to-day spending before the BoE would sell government bonds to the market, but by 2006, it had become an emergency fund with the financing of government undertaken by the Debt Management Office on a scheduled basis. Less than a month ago, the Bank of England said there was little chance there would be any need to use the facility, demonstrating just how much stress government finances have come under in the past few weeks.

In a call with journalists on March 18, Mr Bailey said the facility was just a “historical feature”.

“I don’t think at the moment we’re facing an inability of the government to fund itself, so, yes, it’s there, but it’s not a frontline tool,” Bailey said just weeks ago.

Then, just a few days ago, the governor pledged not to slip into permanent monetary financing of the government in a Financial Times op-ed. Well so much for central bankers having any insight into what will happen in the future… or even in just a few days.

The move highlights the extraordinary demands on cash the government has experienced in recent weeks, which it feels it cannot finance immediately in the gilts market.

The scale is likely to be large. The government has already tripled the amount of debt it wanted to raise in financial markets in April from £15bn announced in the March 11 Budget to £45bn by the start of this month.

Although the gilts market showed severe stress in the middle of March as the coronavirus crisis deepened, the government has so far had little difficulty raising finance, especially as the BoE had already committed to printing £200bn to pump into the government bond market to ensure there was sufficient demand for gilts and improve market functioning.

This direct monetary financing of government would be “temporary and short-term”, the Treasury said in its statement.

“As well as temporarily smoothing government cash flows, the W & M Facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets.”

Market reaction was muted. Sterling was trading 0.1 per cent higher against the US dollar at just below $1.24 shortly after the announcement, while the yield on the benchmark 10-year UK gilt was flat at 0.37 per cent.

However, While the BoE stated that the debt monetization would be “temporary and short-term”, it will be no such thing. Richard Barwell, head of macro research at BNP Asset management and a former BoE official, said temporary moves such as this often became more permanent as time passed.

“Persistent monetary financing feels inevitable. Central banks just need to figure out a plan for how to best get into it and how they might eventually want to get out of it,” he said.

Tuomas Malinen of GnS economics however put it best:

It would result in the complete socialization of the capital allocation process. The last time this happened on a systemic scale was in the former Soviet Union, a socialist controlled-economy experiment and global superpower which existed from 1917 till 1990.  The thing to remember with socialist experiments is that they always concentrate power—economic and political—in the elite.

A few weeks ago, Dr. Anthony Fauci sat down in front of Congress and warned that millions of Americans could die if the federal government didn’t take the outbreak seriously.

And now, after the Trump Administration scrambled to ramp up testing capacity and the states worked with the Feds, private entities, and others (including in some cases foreign nations) to distribute ventilators as Gov. Andrew Cuomo painted a horrifying portrait of sickened New Yorkers suffocating to death in hospital hallways because there were no ventilators available.

Well, yesterday, NYC Mayor de Blasio said that, after a few days of near capacity numbers, hospitalizations have dropped by such a steep degree that the city believes it has enough ventilators on hand, and won’t need any more.

Now on Thursday, Dr. Fauci is taking to cable news to spread the message of optimism that has lifted US stocks over the past few days: Instead of the 240k figure used by President Trump as recently as two weeks ago, Dr. Fauci told NBC News that if the public continued to stick to the “mitigation efforts”, that the death toll might be as low as 60k.

To be sure, while lockdown conditions are in place around the world, there are still a dozen or so states who don’t have mandatory closure or curfew orders in place.

Watch @savannahguthrie’s full interview with Dr. Anthony Fauci, who talks about efforts to control the spread of coronavirus, and how much longer social distancing will last. pic.twitter.com/GLZAy5Ox39

— TODAY (@TODAYshow) April 9, 2020

Dr. Fauci, director of the National Institute of Allergy and Infectious Diseases, said he’s “cautiously optimistic” that the US might soon see cases reach the back-side of the curve as the “turnaround and that curve not only flatten, but are coming down.” He made clear, however, that the virus is never going to disappear, and things will still be different even after we’ve finished going “back to normal”.

“When we attempt to get back to normal, we have to have in place the ability, when it starts to try and rear its ugly head, we can absolutely suppress it by identification, isolation, contact tracing,” he said.

He also warned that this outbreak is a “wake up call”, warning that more serious outbreaks might occur in the future.

“When you’re talking about getting back to normal, we know now that we can get hit by a catastrophic outbreak like this,” he said. “It can happen again, so we really need to be prepared to respond in a much more vigorous way.”

Additionally, during an interview with CBS News (the good doctor routinely makes at least 2-3 appearances on cable news a day, an extremely rigorous media schedule in light of his many responsibilities), Dr. Fauci warned that Americans might be able to take their summer vacations if we continue sticking to the “mitigation strategies”, and prevent a full-one “resurgence” of the virus, he said on “CBS This Morning”.

“It can be in the cards,” he said.

But, Dr. Fauci warned, “and I say that with some caution, because as I said, when we do that, when we pull back and try to open up the country, as we often use that terminology, we have to be prepared that when the infections start to rear their heads again that we have it in place a very aggressive and effective way to identify, isolate, contract trace and make sure we don’t have those spikes we have now. So the answer to your question is yes, if we do the things that we need to do to prevent the resurgence.”

Getting back to normal is not like a light switch that you turn on and off, Fauci said, adding it’ll be gradual and depend on where in the country you live.

“The bottom line of it all is, that what we see looking forward, it is very likely that we will progress towards the steps towards normalization as we get to the end of this thirty days. And I think that’s going to be a good time to look and see how quickly can we make that move to try and normalize. But hopefully, and hopefully, by the time we get to the summer we will have taken many steps in that direction,” he added.

Asked if he would be taking a vacation, Fauci smiled and laughed: “I don’t take vacations,” he replied.

US F-22 fighter jets intercepted two Russian IL-38 patrol aircraft entering the Alaskan Air Defense Identification Zone on Wednesday, according to a Thursday report by the North American Aerospace Defense Command. The US jets were accompanied by a KC-135 Stratotanker and an E-3 AWACS aircraft.

The aircraft were intercepted in the Bering Sea, north of the Aleutian Islands – and did not enter US or Canadian airspace.

F22 LYNX01 (blue track) joined up with KC-135R BITE63 from Eielson AFB, Alaska and proceeded southwest for refueling over Cold Bay. pic.twitter.com/ClSnZ7VJJX

— Aircraft Spots (@AircraftSpots) April 9, 2020

“This is the latest of several occasions in the past month in which we have intercepted Russian aircraft operating near the approaches to our nations. We continue to execute our no-fail homeland defense missions with the same capability and capacity we always bring to the fight,” said NORAD in a statement.

“This is the latest of several occasions in the past month in which we have intercepted Russian aircraft operating near the approaches to our nations. We continue to execute our no-fail homeland defense missions with the same capability and capacity we always bring to the fight.”

— North American Aerospace Defense Command (@NORADCommand) April 9, 2020

In our report from last night that JPM has halted all non-government guaranteed small business loans on what we surmised was fears of a default tsunami set to hit America’s companies, we asked “just how bad is it going to get” and implicitly, if not commercial banks, then who will fund America’s “main street” businesses?

We got the answer this morning when the Federal Reserve announced its latest series of sweeping steps to provide as much as $2.3 trillion in additional aid during the coronavirus pandemic, including starting programs to aid small and mid-sized businesses as well as state and local governments.

According to the Fed, the “funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.”

Among the various initiatives are:

• The Main Street Lending Program will “ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans.” This means that the Paycheck Protection Program will likely be expanded by an additional $250BN to reach a total of $600BN.
• Expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities and the Term Asset-Backed Securities Loan Facility to support as much as $850 billion in credit
• A Municipal Liquidity Facility which will offer as much as $500 billion in lending to states and municipalities, by directly purchasing that amount of short-term notes from states as well as large counties and cities
• Starting the Paycheck Protection Program Liquidity Facility, “supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses”

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Chair Jerome Powell. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

As we explained previously, this is part of the Fed’s “Multitrillion Dollar Helicopter Credit Drop“, whereby the Treasury provides the Fed with $454 billion set aside in the passed $2.2 trillion aid package for Treasury to backstop lending by the Fed. The Treasury’s contribution, can be thought of as “equity” — that is, Treasury will stand in a “first loss” position on every loan made to corporate America.

The Fed then contributes the “leverage” — the money that will help make loans using the Treasury’s equity and be levered 10-to-1. Such leverage assumes no more than 10% capital losses (on “AAA-rated” paper), as the Fed is not allowed to be impaired. Of course, in a real crash the losses will be far greater but we’ll cross that particular bailout of the bailout when we get to it. The loan fund, now levered up ten-fold thanks to the Fed’s own $4.1 trillion, will then make loans to businesses.

“Effectively one dollar of loss absorption of backstop from Treasury is enough to support $10 worth of loans.” Fed Chair Powell said in in a rare nationally-televised interview two weeks ago. “When it comes to this lending we’re not going to run out of ammunition” and he is right – the Fed can apply any leverage it wants; after all the value of the collateral it lends against is whatever the Fed decides!

Visually, the magic of the Fed’s 10x leverage looks as follows:

The overall size of the Fed-Treasury loan fund depends on how much Fed money will be supplied for every dollar of “equity” the Treasury contributes.

In theory, the answer is a function of what is called the “credit box.” If the loan program makes loans only to investment grade companies (those rated BBB or higher), the Fed will contribute more capital than if the loan program makes loans to companies with lower credit ratings or no ratings at all. In other existing Fed loan programs, the Fed supplies about $9 for every $1 of Treasury capital, but in those programs the loans are secured by extremely high-quality collateral (often AAA).

In practice, the Fed – which can “print” an infinite amount of dollars in exchange for any “collateral” including baseball cards, donkey turds, used condoms or oxygen – can lever up 20x, 50x, even 100x or more with zero regard for the underlying collateral.

Fast forward to today when we are now seeing this “credit paradrop” in action.

Commenting on the new Main Street Lending Program, the Fed said that it “will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5 percent share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans. Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Firms that have taken advantage of the PPP may also take out Main Street loans.”

Separately, to support further credit flow to households and businesses, the Federal Reserve will broaden the range of assets that are eligible collateral for TALF. As detailed in an updated term sheet, TALF-eligible collateral will now include the triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility will remain $100 billion, and TALF will continue to support the issuance of asset-backed securities that fund a wide range of lending, including student loans, auto loans, and credit card loans.

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

This may not be the end of it: the Fed explained that it and the Treasury “recognize that businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds. Comments may be sent to the feedback form until April 16.”

Powell is scheduled to speak at 10 a.m. New York time in a webinar hosted by the Brookings Institution.

Two weeks ago it was a record 3.3 million initial claims;  last week it was an  additional (upwardly revised) 6.875 million in initial claims, and this week another 6.606 million claims (almost exactly our expectation of 6.5 million).

That is a shocking 16.78 million people who have applied for unemployment benefits in the last three weeks.

Source: Bloomberg

And of course, last week’s “initial” claims and this week’s “continuing” claims… the highest level of continuing claims ever

Source: Bloomberg

Put another way, we have lost 1132 jobs for every confirmed US death from COVID-19 (14,817).

This is simply stunning.

“The U.S. labor market is in free-fall,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York.

“The prospect of more stringent lockdown measures and the fact that many states have not yet been able to process the full amount of jobless claim applications suggest the worst is still to come.”

And another important note is that weekly jobless claims data are based on “hard facts”, UBS points out, unlike survey data
which is subject to quirks around:

a) some of the treatment of supply chains, which has flattered data,

b) the fact that many respondents will not be replying to surveys during the virus disruption period, and

c) survey data will give more accurate assessments during ‘normal’ times, perhaps not as much in unusual times.

Of course, the government is coming to the rescue. As a result of the freshly-passed ‘relief’ bill, self-employed and gig-workers who previously were unable to claim unemployment benefits are now eligible. In addition, the unemployed will get up to $600 per week for up to four months, which is equivalent to $15 per hour for a 40-hour workweek. By comparison, the government-mandated minimum wage is about $7.25 per hour and the average jobless benefits payment was roughly $385 per person per month at the start of this year.

“Why work when one is better off not working financially and health wise?” said a Sung Won Sohn, a business economics professor at Loyola Marymount University in Los Angeles.

With more than 80% of Americans under some form of lockdown, up from less than 50% a couple of weeks ago, this is far from over.

Picking up on our analysis from last week, BofA notes that data from Google Trends reveals further pickup in searches for “unemployment benefits” and “filing for unemployment,” which could argue for even more upside from here.

Worse still, the final numbers will likely be worsened due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31. A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.

The COVID-19 pandemic is having a significant impact on every aspect of life, including how people shop for their necessities, and their not-so-necessities.

With online retail sales estimated to reach an eye-watering $6.5 trillion by 2023, the ecommerce sector was already booming. But, as Visual Capitalist’s Katie Jones details below, since the outbreak, online shopping has been catapulted into complete overdrive. Even the largest retailers on the planet are struggling to keep up with the unprecedented consumer demand – but what exactly are people buying?

To answer this question, retail intelligence firm Stackline analyzed ecommerce sales across the U.S. and compiled a list of the fastest growing and declining ecommerce categories (March 2020 vs. March 2019) with surprising results.

The Frenzy of Buyer Behavior

As people come to terms with their new living situations, their buying behavior has adapted to suit their needs. While panic buying may have slowed in some countries, consumers continue to stock up on supplies, or “pandemic pantry products”.

Many consumers are also using their newfound time to focus on their health, with 85% of consumers taking up some kind of exercise while in social isolation, and 40% of them saying they intend to keep it up when restrictions are lifted.

These changing behaviors have resulted in a number of product categories experiencing a surge in demand — and although a lot of them are practical, others are wonderfully weird.

The Fastest Growing Categories

While the below list features several shelf-stable items, it seems as though consumers are taking matters into their own hands, with bread making machines sitting in second place and retailers selling out of their top models.

It’s clear from the list that consumers are considering positive changes to their lifestyle while in isolation, as fitness, smoking cessation, and respiratory categories are all experiencing growth.

Explore the 10 fastest growing product categories below:

Interestingly, toilet paper has seen more growth than baby care products, and cured meats have seen more growth than water. But while some categories are experiencing a drastic increase in demand, others are slumping in the pandemic economy.

The Fastest Declining Categories

An unprecedented wave of event and vacation cancellations is having a huge impact on the products people consume. For instance, luggage and suitcases, cameras, and men’s swimwear have all seen a dip in sales.

See the full list of 10 fastest declining categories below:

Regardless of which list a product falls under, it is clear that the pandemic has impacted retailers of every kind in both positive and negative ways.

The New Normal?

Officially the world’s largest retailer, Amazon has announced it can no longer keep up with consumer demand. As a result, it will be delaying the delivery of non-essential items, or in some cases not taking orders for non-essentials at all.

This presents a double-edged sword, as the new dynamic that is bringing some retailers unprecedented demand could also bring about an untimely end for others.

Meanwhile, the question remains: will this drastic change in consumer behavior stabilize once we flatten the curve, or is this our new normal?