Tag: finance

Authored by Daniel Lacalle,

In February, the general consensus between large investment banks and supranational entities was that there would be a one-time hit on GDP in the first quarter from the coronavirus impact, followed by a stronger, V-shaped recovery. IMF expected a modest correction of global GDP of 0.1%, and the largest cut on estimates for 2020 growth was 0.4%.

Those days are gone.

The latest round of global growth revisions includes a slash of growth estimates for the first and second quarters and a very modest recovery in the third and fourth.

Average GDP estimates are now down 0.7%, and JP Morgan expects the eurozone to enter into a deep recession in the next two quarters (-1.8% and -3.3% in the first and second quarters) followed by a very poor recovery that would still leave the full-year 2020 estimate in contraction. The investment bank also assumes a slump in the United States of 2% and 3% respectively, but a full-year modest growth. Capital Economics estimates a hit on the U.S. economy for the full-year that would cut 0.8% off previous estimates, with the U.S. still growing, but a larger impact on the eurozone, with full-year 2020 growth at -1.2%, led by a -2% in Italy. This, unfortunately, looks like just the beginning of a downgrade cycle that adds to an already slowing economy in 2019.

The decision to shut down air travel and close all non-essential businesses is now a reality in major global economies. The United States has banned all European flights at the same time as Italy enters into a complete lockdown, Spain declares state of emergency and France closes all non-essential activity. These decisions are key to contain the spread of the virus and try to prevent the collapse of healthcare systems, and our thoughts are with all of those infected and the victims. Shutting down travel and businesses generates a negative ripple effect on the economy. It is an important measure to avoid rapid spread and there will be more cancellations of events and activity.

By now, we can at least get a clearer picture of the severity of the pandemic and in this blog we discuss economic consequences, so I believe it is important to remind of a few important factors:

1. We cannot assume that the above-mentioned estimates are too pessimistic. If we have learned anything from the history of global growth estimates is that most of us tend to be more optimistic than realistic even in crisis periods. Most analysts did not see a crisis in 2008 and, even more importantly, a majority still did not see it in 2009, when it was evident. It is true that 80% of estimates at the beginning of any given year have to be revised, but not because they are too pessimistic, rather the opposite.

2. Calls for large fiscal packages to offset the pandemic may be useless Allen-Reynolds at Capital Economics warned that “even if governments agreed on a larger tax and spending package, the economic impact would be much smaller than it would have been in the past, particularly if the fiscal stimulus was concentrated in Germany”, because output gaps are almost inexistent. This is not a demand problem, it is a supply shock, and you don’t address supply shocks with bricks, mortar and deficit spending.

3. A third-quarter rapid recovery is now virtually impossible. The shutdown of developed economies is now granted and will likely take us more than a couple of weeks. The shutdown of emerging economies is likely to start in May, and impact 2020 and 2021 estimates. Every analysis we have seen so far only factors a 2020 recession, not a crisis and even less a 2021 large hit to the economy, but the financial implications in an already over-leveraged world add a strong of credit events to an economic shutdown.

4. The latest wave of downgrades already assumes a large-scale stimulus, rate cuts, and quantitative easing. The diminishing returns of monetary easing were already evident in 2018 and especially in 2019, with global manufacturing PMIs in contraction and growth estimates that came down significantly throughout the year. Average growth downward revisions by country averaged 20% between January and December in the middle of a massive coordinated central bank injection operation that injected up to 170 billion USD a month in the economy (considering PBOC, BOJ, ECB, and Fed) and saw widespread rate cuts.

5. The economic implications of a pandemic are not solved with massive spending increases. Governments will implement large demand-side policies that are the wrong answer to a shutdown of the economy. Most businesses will suffer from the collapse in sales and subsequent working capital build and none of that will be solved with deficit spending. You cannot mitigate a supply shock with demand policies, which increase debt and overcapacity in the already indebted and bloated sectors and do not help the sectors that suffer an abrupt collapse in activity.

6. A forced temporary shutdown must also include a shutdown of the tax collection system. Governments already finance themselves at negative rates. They must eliminate (not defer) tax payments for companies in the period of crisis to avoid a massive unemployment increase and a domino of bankruptcies, and facilitate working capital lines at zero rates to allow businesses and self-employed workers to navigate a shutdown. Governments that make the mistake of maintaining the current tax structure or just prolong the payment period for six months will see the massive negative consequences of a shutdown in the next nine months.

If, as expected, the shutdown is extended to more countries every week, the negative effects on the economy will be longer and exponential, and the mirage of a third-quarter recovery even more difficult.

It is very likely that the shutdown of the major developed economies will be followed by a shutdown of emerging markets, creating a supply shock as we have not seen in decades. Taking massive inflationary and demand-driven measures in a supply shock is not only a mistake, it is the recipe for stagflation and guarantee of a multi-year negative impact generated by rising debt, weakening productivity, rising inflation in non-replicable goods while deflation creeps in official headlines, and economic stagnation.

Sunday evening The Hill reports that a second Congressional aide has tested positive for Covid-19. 

“A staff member in Rep. David Schweikert’s (R-Ariz.) D.C. office has tested positive for COVID-19, the congressman said Sunday,” according to the report.

The individual is resting “comfortably at home and following guidance from local health officials,” Schweikert said in a statement. 

This follows the first known instance of a congressional aide getting the virus after on Thursday Washington state Democratic Senator Maria Cantwell announced the immediate closure of her office due to a confirmed case on her staff.

The Capitol building also closed to all external visitors and the public at that time, amid more and more Congress members announcing they would be working from home.

As Vox describes: 

Capitol hallways, usually bustling with visitors at this time of year, are mostly empty as public tours have been canceled. Some members of Congress, including Sens. Lindsey Graham and Ted Cruz, are self-quarantining after coming into contact with individuals diagnosed with Covid-19, the disease caused by the coronavirus, and they’re now waiting for the results of their own tests. A handful of House and Senate offices are also making the decision to close down their DC offices and directing staff to work remotely.

At least 16 cases of Covid-19 were confirmed in DC as of Saturday after days before the mayor declared a state of emergency in the city, also with newly announced restrictions on bars and restaurants starting Sunday.

My statement on COVID-19 and office closures: https://t.co/zXJZBtintV pic.twitter.com/icH2YLWgeQ

— Rep. David Schweikert (@RepDavid) March 15, 2020

Rep. Schweikert announced his office will be closing until further notice as staff members work remotely. His office in Scottsdale, Arizona is also preparing to work from home out “an abundance of caution.” 

Many more such announcements for Capitol Hill staffers to “go remote” are expected this week as the crisis continues, and as more confirmed positive cases emerge. 

However, House Speaker Nancy Pelosi previously pledged to lawmakers that as “captains of the ship” they would be “the last to leave.”

Joe Biden will face off with Sen. Bernie Sanders (I-VT) during tonight’s Democratic debate.

The former Vice President will need to remain calm and focused after several recent gaffes – including telling a Detroit autoworker that he’s “full of shit” for criticizing him over his plans for the Second Amendment, causing some to question his mental fitness to be president.

Watch live:

With the world focused on combating the deadly coronavirus pandemic, and whole societies across the West hunkering down in quarantine mode, President Putin authorized a controversial law on constitutional changes that could theoretically allow him to be president until 2036. 

The 67-year old Russian president signed the measure Saturday, which barely made a blip in world headlines considering highly impacted Covid-19 countries are simply now fighting to survive and stabilize their economies through the outbreak. The proposed change to the Russian constitution is still subject to a national vote, however.

First the Constitutional Court must rule on the legality of the changes, which would lead to the next step, a planned nationwide vote on April 22. It passed easily through Russian parliament last week with a mere single vote against it.

Currently, Putin is barred from running for president again when his term expires in 2024, given term limits, but the new law would reset this. A single presidential term is 6 years.

Speaking at the State Duma last Tuesday, Putin appealed the stability of the nation during chaotic and uncertain times of enemies both within and without:

It’s important, he said, for a president to ensure the country’s “evolutionary development.” Now, he said, is not the time to move too quickly to change how Russian state power operates: “We have had enough revolutions.”

Perhaps most interesting was that he actually appealed to the historical development of the same issue in the United States:

Putin told lawmakers on Tuesday that he did not endorse completely eliminating presidential term limits, one element of the proposal by Tereshkova. But he strongly backed the idea of resetting the number of terms for which he could run.

In his appeal to parliament, Putin also pointed to other countries that have no restrictions on presidential terms. Even in the United States, he said, the two-term limit has only been in place since the 22^nd Amendment was ratified in 1951.

Among other constitutional changes authorized by Putin are a permanent constitutional outlawing of same-sex marriage, as well as inclusion in “a belief in God” named as one of Russia’s traditional values.

All of this follows Putin’s major January shake-up which led to the resignation of the government. Though Putin touted the move as giving more power to parliament and democratic institutions, critics in the West saw it as ultimately leading to his solidifying his further rule and hold across other Russian branches of government.

Since Trump’s Europe travel ban went into effect, Americans returning home have been diverted through just thirteen US airports, also as new federal travel requirements and coronavirus ‘enhanced’ screening instituted by President Trump are implemented.

Videos and photos posted to social media reveal a weekend of insanity and packed airport queues in an increasingly ‘high risk’ health crisis.

Chicago’s O’Hare International Airport revealed the most chaotic scenes: thousands standing should-to-shoulder in an airport corridor amid a deadly pandemic, reportedly for at least seven hours before entering the screening area and airport exit.

Coronavirus screening at U.S. Airports causes 7-Hour wait in crowded lines. https://t.co/YH1BgiNbco pic.twitter.com/I3XWSg04Mp

— Breaking Aviation News (@breakingavnews) March 15, 2020

Airports authorized to receive return flights from Europe, and which are set up for Covid-19 screening, include the following according to the advisory:

• Atlanta: Hartsfield–Jackson Atlanta International Airport (ATL)
• Boston: Boston Logan International Airport (BOS)
• Chicago: Chicago O’Hare International Airport (ORD)
• Dallas/Fort Worth: Dallas/Fort Worth International Airport (DFW)
• Detroit: Detroit Metropolitan Airport (DTW)
• Honolulu: Daniel K. Inouye International Airport (HNL)
• Los Angeles: Los Angeles International Airport (LAX)
• Miami: Miami International Airport (MIA)
• New York City: John F. Kennedy International Airport (JFK)
• Newark, N.J.: Newark Liberty International Airport (EWR)
• San Francisco: San Francisco International Airport (SFO)
• Seattle: Seattle-Tacoma International Airport (SEA)
• Washington, D.C.: Washington-Dulles International Airport (IAD)

O’Hare Airport acknowledged Saturday in a public statement that screening and control areas were taking “longer than usual”. The ‘enhanced screening’ includes a temperature check and questions about flyers’ recent travel history.

This is the scene at O’Hare airport. The traveler who took the photo said it’s a 6-hour wait for bags then on to customs for 2-4 more of waiting in shoulder-to-shoulder crowds. Police are handing out water and disinfectant wipes. @fly2ohare #ord #coronavirus #COVID19 pic.twitter.com/UTx9E0nj1s

— Brooke Geiger McDonald (@BrookeGMcDonald) March 15, 2020

The airport chaos led to a response from Illinois Gov. J.B. Pritzker who tweeted that the situation at O’Hare and the massive crowds were “unacceptable”.

Other officials slammed the intensifying situation as creating a serious health risk. 

Over 4 hours later…back in the large hall, not sure where the #Covid19 screening happens. They’ve handed out snacks, water & r/r breaks. Def missing my flight home tonight. Not sure what’s next #ohare #StillStanding #BreathingLessons #MouseInAMaze pic.twitter.com/iT9jYvNKoN

— Michael A Sadler (@Michael_Sadler) March 15, 2020

Airport staff at O’Hare and other airports were seen handing out snacks, water, hand sanitizer and disinfectant wipes to the anxious crowds. 

Passengers waited in line for hours at customs at @DFWAirport. Many concerned about being so close to others during the #COVIDー19 outbreak. The airport saying “CBP officers and the CDC are following federal guidelines to conduct enhanced screening for passengers” @FOX4 pic.twitter.com/4BFUEau0Hg

— Steven Dial (@StevenDialFox4) March 15, 2020

The WSJ interviewed one frustrated passenger who described the Covid-19 screening measures: 

Lonnie Corpus was returning from Iceland with friends—retired teachers from Wisconsin. Their flight landed at 6:40 p.m. They made it out at about 11 p.m. The questioning itself, and a quick temperature check, didn’t take long once they made it to the front of the line that snaked around corners.

State and local officials are now urging the federal government to step in and assist with the massive delays and airport infrastructure strain, but whatever drastic action might be taken increasingly looks too little too late. 

Last week it was the oil and energy companies. This week it will be the banks.

Moments ago the largest US bank by assets and market cap, JPMorgan, announced that it is suspending its stock repurchase, in a move that will i) spark concerns about JPM’s liquidity state and ii) trigger a kneejerk reaction as all other banks follow suit, and the bank sector plunges tomorrow as the biggest buyer of bank stocks is no longer there.

The question, of course, is whether the buyback suspension will end with US banks, or if all US companies will follow suit in a panicked scramble to preserve liquidity, something which already started in recent months, as we reported previously in “Stock Buybacks Crash Just As Markets Need Them Most.”

That the disappearance of buybacks is a problem is an understatement: as we reported recently for the past decade, the only source of buying have been companies themselves, repurchasing their stock.

Ironically, while companies should have stopped repurchasing their stock a long time ago, buyback appetite remained strong in recent weeks, and in the final week of February, when the S&P 500 tumbled the most since 2008, Goldman’s corporate clients snapped up their own shares at the fastest rate in two years, with volume running at 2.3 times the average in 2019. Unfortunately, it now appears they used up much of their dry powder just as stocks were about to take another leg lower. 

And here is a modest proposal: instead of rushing to bail out all these companies that repurchased trillions in stock in the past decade, lifting their stock price to all time highs, making their shareholders and management extremely rich at the expense of corporate viability (corporate debt is at an all time high) while leaving rank and file workers out to dry, how about forcing companies to shore up liquidity by selling their stock now, as the party of the last decade ends with a bang.

Powell better explain why the market’s reaction is wrong or else…

Rep. Ilhan Omar (D-MN) has come under renewed fire after marrying Tim Mynett – head of political consulting firm E Street Group, which made approximately $586,000 for a “range of services that included digital advertising, fundraising consulting, digital communications and design,” as well as banging their clients behind their wives’ backs, apparently. Mynett was personally paid $7,000 directly for fundraising before his firm was hired.

Payments to the firm in the 2019-2020 cycle for Omar’s reelection campaign comprised 40 percent of total campaign expenses, federal filings show.

Representatives for Omar’s campaign and Mynett’s firm said this week that there was nothing improper about the payments because they were made for legitimate work. –WaPo

On Wednesday, Omar announced on Instagram that she and Mynett had filed for their marriage license that same day, according to the Washington Post.

Of note, a campaign finance violation investigation was launched after revelations of their relationship emerged.

On Friday, E Street Group co-founder Will Hailer said that the payments from Omar’s campaign were for legitimate campaign work, and that most of the advertising-related payments had been passed on to vendors.

The firm has about 18 employees and “on any given day, eight or more people could be touching her account at some point, between design, digital ads, social media, email content creation, high-dollar fundraising, political support and many other things that we provide for the campaign, Hailer said. “Similar to what we provide for countless other clients across the country.”

Hailer said he and Mynett began working for Omar’s campaign after years of political experience in her district and in Minnesota. –WaPo

David Mitriani, Omar’s campaign attorney, said in a Thursday memo echoing Hailer’s comments that the firm provided legitimate services to the campaign at a fair market value.

“There is simply nothing unusual about the services that E Street Group provides to Ilhan for Congress — and nothing inappropriate with a vendor being reimbursed for travel for bona fide services — even if that vendor is run by a candidate’s spouse,” he wrote.

In August 2019, Omar was accused in a divorce filing by Mynett’s estranged wife, Dr. Beth Mynett, of stealing her husband. Tim and Beth have a 13-year-old son together.

“The parties physically separated on or about April 7, 2019, when Defendant told Plaintiff that he was romantically involved with and in love with another woman, Ilhan Omar,” reads the court filing, which adds “Defendant met Rep. Omar while working for her.”

“It is clear to Plaintiff that her marriage to Defendant is over and that there is no hope of reconciliation,” the filing continues.

Omar, meanwhile, filed for divorce against her previous husband in October amid allegations that she was having an affair with Mynett, citing an “irretrievable breakdown” in her marriage.

Update: Emini is now limit down in an absolutely catastrophic response to the Fed’s bazooka; expect negative interest rates across the curve momentarily.

* * *

The Fed may have a very big problem on its hands.

After firing the biggest emergency bazooka in Fed history, one which was meant to restore not just partial but full normalcy to asset and funding markets, Emini futures are not only not higher, but tumbling over 4% at the start of trading – perhaps because the Fed has not only tipped its hand that something is very wrong by simply waiting an additional three days until the March 18 FOMC, but that it can do nothing more to fix the underlying problem...

… while gold is surging over 3% following today’s dollar devastation as US Treasury futures soar, as it now appears that the Fed’s emergency rate cut to 0% coupled with a $700BN QE is seen as note enough by a market which is now openly freaking out that the Fed is out of ammo and has not done enough.

In short, as FX strategist Viraj Patel puts it, “the Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX. Fed making US risky assets relatively more attractive may support $USD”

The Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX. Fed making US risky assets relatively more attractive may support $USD pic.twitter.com/zqBLJ3e1dA

— Viraj Patel (@VPatelFX) March 15, 2020

Developing.

Now that the Fed has fired what appears to be its final bazooka – at least until it cuts rates to negative and/or buys stocks/oil outright should we end up with a full blown financial panic/crisis – the market’s attention will be on whether the Fed has done enough.

And according to some very early indication, the Fed did a lot… but maybe not enough. Take the FRA/OIS which is sharply lower, down by over 20bps in illiquid Sunday trading, but the drop only takes it back to where it was late on Thursday. This means that the market may be expecting even more, and that more did not come – as we explained earlier, STIR traders were hoping for the Fed to backstop and announce a Commercial Paper facility – which would have had the most impact on dollar funding – which did not come, and instead the Fed enhanced international swap lines, cutting the rate by a modest 25bps which while generous may not be sufficient.

As a reminder, with the Fed firing its biggest bazooka ever, the market has to restore normalcy for the Fed’s action not to be in vain, and so far it has failed to do so.

That said, we will get a better sense of what traders are thinking when futures reopen in a few minutes, where anything less than a surge higher could be catastrophic for the Fed.