Tag: news

The Treasury’s report on cross-border capital flows showed total foreign ownership of Treasuries rose $209.7 billion from January, to $7.067 trillion with Japan, UK, Hong Kong, and China the biggest buyers in February (ahead of the main virus impacts).

The breakdown is as follows:

• Foreign net buying of Treasuries at $4.9b

• Foreign net buying of equities at $11.5b

• Foreign net selling of corporate debt at $20.5b

• Foreign net buying of agency debt at $39.4b

In Treasury-land, China bought $13.7 billion of US Treasuries in February – the most since August 2017 – to the highest level since Oct 2019…

Source: Bloomberg

But Japan bought over $56 billion – near a record monthly purchase – for the second month in a row, pushing Japanese holdings to record highs at $1.27 trillion…

Source: Bloomberg

With Japan now dominating China as America’s largest creditor…

Source: Bloomberg

The UK Was also a massive buyer of Treasuries – adding $30.5 billion to a record $403 billion overall…

Source: Bloomberg

On the downside, Korea (-$5bn), Thailand (-$4.7bn), and UAE (-$2.5bn) were the biggest sellers of Treasuries in February.

As Bloomberg notes however, the release largely pre-dates the global spread of Covid-19, and while China was already feeling its toll with much of the population under quarantine, economic data had yet to show the hit to growth. Next month’s update could show more volatility, judging by the Fed’s report of a record $109 billion drop in custody holdings over March.

Today was a bloodbath for economic data (and that is before tomorrow’s horrific continuation of jobless claims) with almost every item experiencing record collapses (from Empire Fed to Retail Sales to Homebuilder and Homebuyer Sentiment). In fact the last four weeks – despite analysts knowing it was all coming – has seen the fastest crash and most disappointing collapse in US Macro data ever…

Source: Bloomberg

And while The Fed keeps printing money to rescue the (INSERT YOUR CHOICE OF – stock market, junk bond market, banks, airlines, or ‘Average Joe’ Americans), it’s not working…

Source: Bloomberg

Or put another way…

The chart below illustrates why it is that the government must ensure that bear markets never happen. There is too much at stake to end the “casino economy” when people’s net worth is so crazily hitched to the stock market. Question is – at what cost?? pic.twitter.com/abaXPwFvBD

— David Rosenberg (@EconguyRosie) April 14, 2020

But The Fed would never “manipulate” markets?

And even the big bounce in stocks stalled after The Dow managed to scramble back to a 50% retracement of the drop…

Source: Bloomberg

And Nasdaq was unable to hold on to its 50- and 200-DMA…

On the week, Small Caps are down almost 5% and Nasdaq up around 3%…

Sending Nasdaq to its highest since Oct 2000 against the Russell 2000…

Source: Bloomberg

TSLA surged again today – up 35% in the last 3 days (GS upgraded today)…

And FANG Stocks extended gains – almost back to their record highs…

Source: Bloomberg

Bank stocks were ugly for the 3rd day but Goldman was bid after an ugly open…

Source: Bloomberg

Value factor is getting slayed this week…

Source: Bloomberg

Cyclicals were dumped today…

Source: Bloomberg

HY Bonds were down again… despite The Fed put…

Source: Bloomberg

Treasury yields plunged today led by a huge drop in long-end yields (30Y -12bps, 2Y -1bp)…

Source: Bloomberg

10Y back below 70bps (biggest yield drop in almost a month)…

Source: Bloomberg

The yield curve flattened notably today…

Source: Bloomberg

Elsewhere in the world, Italian bonds blew out…

Source: Bloomberg

The dollar surged higher today (biggest jump in a month) after dropping for 5 of the last 6 days (NOTE that the dollar reversed lower as soon as the US cash equity market opened)…

Source: Bloomberg

Cryptos were rangebound today unable to hold modest intraday gains…

Source: Bloomberg

WTI closed below $20 today (but Brent was harder hit)…

This is the lowest close since Feb 2002…

Source: Bloomberg

The front-month spread compressed a little today but remains a signal of a massive glut…

Source: Bloomberg

As Gasoline demand crashes to a record low…

Source: Bloomberg

Gold futures were lower today (not entirely surprising given the big surge in the dollar) and compressed the premium to spot…

Source: Bloomberg

Finally, as Gerard Minack notes, the key to my medium term view is not what is happening now amidst the Covid-19 crisis. The key is that these arrangements remain in place in the recovery phase. The crucial difference is that I expect fiscal policy, backstopped by QE, will remain expansionary in the recovery phase, unlike in the post-GFC expansion when fiscal policy was typically tightening as QE programs were deployed.

I don’t expect many markets to price today the prospect of this seismic policy change…However, it may be that gold is now sniffing out this shift.

Source: Bloomberg

Through the past few years gold has behaved as a deflation hedge. The spot gold price was highly correlated to the value of negative yielding debt. That correlation is breaking down. Market alchemy may be transforming gold from a deflation hedge to an inflation hedge.

And as far as inflation is concerned… Avocado prices have never been more expensive at this time of year…

Source: Bloomberg

Since Trump signed the $2.2 trillion “CARES Act” into law, millions of Americans – especially the roughly 1 in 10 who have lost their jobs during the fallout of the coronavirus outbreak – have been eagerly awaiting the arrival of their stimulus payments. While the first round of checks was direct-deposited into Americans’ bank accounts over the weekend, the rest of the money will be sent out – either digitally or via paper check – in the coming weeks.

If you’re curious about the status of your payment – or whether you’re slated to receive one – the IRS has created a web portal allowing Americans to ‘check on their check’.

Just go to the ‘Get My Payment’ page of the IRS’s website. You can find the link here.

To check the status, individuals will need their 2018 tax return, and their 2019 return, if they’ve already filed.

For anybody who’s still confused about eligibility, the “Economic Impact Payments” – which will act as one-time payments to tide people over until unemployment and other benefits kick in – could be as much as $1,200 for an individual and $2,400 for a couple. People with children are eligible for an additional $500 per child under the age of 17. The payments aren’t subject to taxes and won’t impact peoples’ tax returns for 2020.

Taxpayers who filed as “head of household” in the past will receive the full $1,200 if their income is less than $112,500. Payments will go out to heads of household whose income is as much as $136,500, with people earning less as their income moves closer to the cap.

If readers have other questions, the IRS has set up a Q&A page here.

Don’t spend it all in one place.

Authored by Paul Sperry via RealClearInvestigations

Ever since a “senior official in the Trump administration” penned an anonymous 2018 New York Times column attacking President Trump as unfit for office, Washington has been engrossed in a high-stakes whodunit. After an exhaustive investigation, the White House believes it’s cracked the case, identifying Trump’s turncoat as his former deputy national security adviser, Victoria Coates, according to people familiar with the internal probe.

Rather than fire Coates, the White House has quietly transferred her to the Department of Energy, where she awaits special assignment in Saudi Arabia — far from the president.

Trump effectively demoted Coates just four months after promoting her last fall to the No. 2 spot on his National Security Council. The move was made amid a whisper campaign, started in January, that identified Coates as “Anonymous,” the person who wrote the Times Op-Ed and a subsequent book, “A Warning,” claiming to be part of a cabal of “fellow Republicans” resisting Trump and his policies from inside the administration.

The Washington press corps has for the most part been uninterested in learning the author’s identity. But the sources said the identification of Coates was based on circumstantial evidence generated from a months-long White House investigation led by sleuths within the NSC. Top White House adviser Peter Navarro, who works with the NSC on trade and other issues, also was heavily involved in the probe of Coates.

She declined to discuss the matter on the record with RealClearInvestigations and has retained an attorney, friends say, although several colleagues have rushed to her defense, insisting the White House has the wrong person. But a source involved in the NSC probe who asked not to be identified said there was little doubt. “It’s her,” the source said of Coates. “That’s why she was shown the door.”

The multiple sources interviewed by RealClearInvestigations either participated in the investigation of Coates or have direct knowledge of it. They spoke only on condition of anonymity to discuss a sensitive matter. They say their evidence exposing Coates includes the following: 

• Computer textual analyses revealing strikingly similar language, turns of phrase and historical references by both Coates and Anonymous.
• Firsthand accounts by Anonymous of events witnessed only by Coates and a small number of others, the latter of whom were ruled out as suspects.
• Hawkish foreign policy views held by Anonymous, many of which have been rejected by Trump.
• The fact that Coates and Anonymous share a high-profile Washington literary agent with an author roster of disaffected ex-Trump officials.
• Her long history of writing anonymously, and
• Personal details revealed by Anonymous that are consistent with Coates’ biography.

For political reasons, the White House decided against officially unmasking Coates and firing her, at least not before the Nov. 3 election, the sources said. Publicly outing her would merely create an unwelcome distraction ahead of the election. Coates is a well-connected conservative, who has a staunch ally in Republican Sen. Ted Cruz of Texas. White House political operatives want to avoid the divisions that marked the 2016 race, and are focused on unifying the party ahead of this summer’s GOP presidential convention.

Illustrating the sensitivity of the internecine GOP affair is the insistence of some ex-Trump White House officials that Coates is wrongly accused. “The suggestion that Victoria is ‘Anonymous’ is preposterous,” said K.T. McFarland, Trump’s first deputy national security adviser, who helped recruit Coates to the NSC and then supervised her for much of 2017. She said Coates was a committed member of the Trump team.

McFarland added that Coates denied being the author not only to her, but also to White House security officials, who include FBI agents.

“Victoria herself has denied being ‘Anonymous’ during her routine security clearance review,” she told RCI. “Anyone familiar with the security clearance process knows that it would have been a criminal offense, punishable by jail time, for her to lie about this.”

Although “A Warning” opens with a preemptive denial that it discloses any classified information, the Justice Department has been looking into a potential violation by the author of a federal regulation requiring officials with access to classified information to get prior approval before publishing books about their roles in the government.

The probe has exposed a less prominent faction secretly undermining Trump inside the White House, sources say: not just Democratic holdovers from the Obama White House, but disloyal “Never-Trump” Republicans, who,  as Anonymous complained in the book, don’t believe the president can be trusted to uphold “conservative principles.” The author admitted conspiring with several other “like-minded” officials to obstruct Trump and his policies and directives from the inside.

White House investigators say they are looking into at least four other White House staffers whom they suspect were part of the “resistance” with Coates. The behind-the-scenes story of how the White House fixed on Coates as the anti-Trump mole is told here for the first time.

The Hunt for ‘Anonymous’

In September 2018, the New York Times agreed to hide the identity of a senior administration official bashing Trump in an opinion piece headlined “I Am Part of the Resistance Inside the Trump Administration.” The author claimed to be one of several “like-minded” officials “thwarting” the president’s agenda and even plotting to try to remove him from office.

Incensed, Trump declared the screed an act of “treason” and ordered an investigation to unmask the “gutless” official. The White House drew up a short list of suspects, but the search soon fizzled out for lack of leads. The mystery went unsolved for more than a year, as the White House continued to spring leaks compromising the president, mostly from within the NSC, including some that led to his impeachment.

The major break came in November 2019, when the same anonymous official doubled down on anti-Trump grievances with the release of “A Warning.” The best-selling expose leaked details of the president’s private conversations and trashed him as “unjust” and a “nasty man,” as well as a “misogynist” and “grifter in chief.”

“He should be fired,” wrote the disgruntled insider in the book’s final chapter. “The Trump administration is an unmitigated catastrophe.”

The book dared the president to try to unmask the nameless author, boasting the text had been “carefully written to prevent any inadvertent disclosure.” But to White House sleuths, the 260-page book offered a wealth of clues, and the author’s challenge only intensified the desire to track down and unmask the rogue aide.

At first, the 51-year-old Coates was not an obvious suspect because she was not known to clash with the president and seemed to go along with his policies, even though she was a longtime and loyal operative of Cruz, once a leading critic of Trump. Over the course of the months-long investigation, more than 30 other suspects were considered and abandoned before the focus settled on Coates. Unlike other widely rumored suspects who eventually were ruled out — including former NSC official Fiona Hill and former Pentagon speechwriter Guy Snodgrass — Coates checked virtually all the boxes.

After a careful deconstruction of details in the book, the White House investigators found that Coates’s profile, as well as her persona as a highly opinionated moralist, matched up with that of the clandestine Trump official.

Anonymous is a woman, the investigators deduced, noting the author’s disapproving remarks alleging a Trump habit of addressing accomplished female professionals as “sweetie” and “honey.” The official’s area of responsibility was, like Coates’, national security and foreign policy — with expertise on Syria, Iraq, Iran, Israel and other Mideast hot spots. The book’s author claims to have been present, as Coates was, at many White House meetings, including with the president. The author shows an insider’s understanding of the workings of the NSC and, most telling, started work during Trump’s presidential transition, as Coates did.

“That gave her away,” another source involved in the investigation said. “She was in those early meetings and briefings. That put her high on the suspect list.”

By January, Coates was the prime suspect.

Authorship Recognition Tools

The sources said that to crack the identity of the rogue Trump official,  investigators ran previously published works authored by Coates through forensic author identification programs, and they matched the prose style of Anonymous.

Investigators were able to profile the author of the op-ed and book by sentence structure, grammar, punctuation and syntax. They then compared that writing profile to Coates’. The stylistic traits synced up, sources said.

Researchers have found that authorship recognition tools can identify an author with a high level of accuracy when there are several thousand words of available content to analyze, as was the case with the sample size the White House analyzed. Coates’ own body of written work spans two decades and includes several books and dozens of columns, as well as policy papers, speeches and a doctoral thesis.

In short, the authors share the same punchy but at times breezy writing style, with pithy sentences punctuating a fluid narrative.

What’s more, the same manners of expression and phrases, such as “like-minded” and “clear-eyed,” kept turning up in the writings of both Coates and the secret Trump betrayer. The two also shared distinct vocabulary — such as the uncommon “sextant” — another linguistic fingerprint that pointed to the same authorship.

Deepening suspicions, both Anonymous and Coates boast of being “students of history,” and tend to cite the same historical periods. With a Ph.D.in art history, Coates has written extensively about the rise and fall of Athens. She did so in her book “David’s Sling: A History of Democracy in Ten Works of Art,” and a 2012 column for the conservative blog  RedState.com about how the U.S. has “claimed classical Athens as an ideological ancestor.”

Anonymous spends no fewer than five pages of the book lecturing readers about the fall of Athens, calling it a “cautionary tale of how self-government could go wrong” and descend into mob rule, even in America. “Like Athens, we also have a Cleon in our midst, a foul-mouthed populist politician who uses rhetoric as a loaded gun,” the author writes, comparing Trump to the boorish Athenian representative.

Anonymous and Coates are obsessed with the same political figure from ancient Rome: Cicero. They also share an affection for Alexis de Tocqueville. As in “David’s Sling,” the anonymous author invokes the French historian, writing that Americans have a duty as citizens to get involved to preserve democracy. They can start, Anonymous says, “by firing Donald Trump” this November.

Other figures whom both write or talk about admiringly: British-Austrian free market economist F.A. Hayek, the late British Prime Minister Margaret Thatcher, former President Ronald Reagan, and Sen. Mitt Romney of Utah. In 2012, FEC records reveal, Coates personally donated at least $1,500 to Romney’s campaign for president. “Those who know Mitt believed he would have been a capable leader,” Anonymous wrote on page 114.

‘First Principles’

Coates previously wrote speeches for Cruz about the importance of reestablishing the “first principles” advanced by America’s founders. Anonymous also cares deeply about these “first principles.” In the Times piece, the author complained, “Anyone who works with [Trump] knows he is not moored to any discernible first principles that guide his decision making.” Anonymous hits that concept in the book, warning against straying from “first principles” while citing the “Founding Fathers.”

In addition, whoever wrote “A Warning” evidently worked with Trump’s son-in-law Jared Kushner in the White House. Kushner is the president’s point man on the Middle East. Coates was promoted in 2017 to work directly with Kushner on Israel and has met with him to help hammer out a Middle East peace plan.

Ideologically, Coates and Anonymous are cut from the same cloth. Both are committed to stopping Iran from developing nuclear weapons in order to protect Israel. Both champion free trade and oppose Trump’s “America First” brand of “protectionism” and “isolationism,” as Coates made plain during the Cruz campaign.

Like Coates, Anonymous supported the Iraq War and still defends George W. Bush and his administration for acting on what proved to be flawed intelligence on weapons of mass destruction. The  2003 invasion was justified because, Anonymous writes, it was “at least based on real information collected at the time, backed by intelligence community analysts, and accepted by bipartisan majorities in Congress.”

A protégé of Bush administration Defense Secretary Donald Rumsfeld, Coates embedded with the U.S. military to cover the Iraq War for RedState.com, a blog run by Erick Erickson, an early critic of Trump but who has since modulated his opposition. She filed positive reports from Baghdad, while knocking down criticism that the war was a debacle.

NSC investigators put stock in the fact that Coates has a history of concealing her identity in her writings. For years she blogged anonymously for RedState.com. The site eventually revealed that Coates was the blogger writing under the pseudonym “Academic Elephant.” In February 2018, several months before the anonymous Times opinion piece appeared, a Reddit user posted an unusual question using the same “Academic Elephant” pseudonym Coates employed. “Could I be sued by the company I work for if I write an anonymous opinion piece for the local newspaper, if everything I say is true?” the poster asked, adding that “I’m reasonably certain that I’ll have support from my coworkers.”  Anonymous expressed a similar concern in the opening pages of “A Warning,” noting that Trump has a habit of suing critics “to intimidate and silence them.” Fear of such a lawsuit is one of the reasons offered by the author for choosing to remain anonymous.

Anonymous also used Reddit to promote the book, hosting a Q&A on Nov. 26, 2019.

Further, both share an affinity for Philadelphia. In more than one passage in her book, Anonymous makes a point to remind readers that Philadelphia was the birthplace of American liberty. When she’s not in Washington, Coates lives with her family in a renovated Victorian mansion in a tony neighborhood of Philadelphia called Chestnut Hill. In her blog bio, moreover, she proudly described herself as a “Philadelphian.” Her family has deep roots in the area dating back to 1709. Coates is descended from Andrew Curtin, Pennsylvania’s governor during the Civil War.

There’s another Pennsylvania connection: On page 230, Anonymous quotes from a lesser-known Founding Father — John Dickinson — to further support her preoccupation with following “first principles.” Dickinson is well-known within Coates’ home state as the author of “Letters From a Farmer in Pennsylvania.”

Anonymous quotes another figure who’s not exactly a household name: American historian Bernard Bailyn. But Coates would know him from her days earning her masters in art history from Williams College – Bailyn’s alma mater. His writings are required reading there for early American history courses.

Anonymous and Coates also share a passion for Thomas Paine, whose pamphlet “Common Sense” was required reading at their prep school. Anonymous waxed nostalgically about a war veteran teaching her about Paine. Coates has counted among her “mentors” a war veteran who taught history at her Pennsylvania boarding school.

Another clue, sources said, was the fact that Coates shares with Anonymous the same book agent — the Washington-based Javelin Literary Agency. One of Javelin’s founding partners, Keith Urbahn, has been a close friend of hers since 2006, when Rumsfeld asked them to conduct research for his 2011 memoir. Emails previously obtained under the Freedom of Information Act in an unrelated case show Coates and Urbahn worked side-by-side on the book project for several years, reporting to an office on M Street in downtown D.C. that Rumsfeld opened under the name, DHR Holdings LLC.

In 2016, Urbahn helped Coates secure a three-book deal with Encounter Books focusing on political culture. Coates knocked out the first manuscript, “David’s Sling,” while still working on the Cruz campaign that year. The second book, tentatively titled “Seeing the Light: A History of Christianity in Twelve Works of Art,” was due for release last year, but was delayed for undisclosed reasons. Industry sources confirmed that Coates is late delivering the manuscript. Investigators believe she was tied up writing “A Warning,” published in November. Urbahn happened to help broker that book deal, too.

But Javelin denied in a statement that Coates is the author in question, brushing aside the fact it counts Coates as a client as just a “bizarre” coincidence.

“To be very clear, so there is no chance of any misunderstanding: Dr. Coates is not Anonymous,” Javelin said. “She did not write it, edit it, see it in advance, know anything about it, or as far [as] we know ever read it.”

That’s an utterly unambiguous denial. But here’s the problem: That’s exactly what Anonymous said would be the response to any such attempt to out her in the book’s Introduction: “If asked, I will strenuously deny I am the author of this book.”

Javelin maintains a full stable of anti-Trump authors, including former National Security Adviser John Bolton and fired FBI Director James Comey. The agency just signed Marie Yovanovitch, the ousted State Department official who testified against Trump during his impeachment. Since landing a $3 million advance for Comey, Javelin has become “a popular destination for Trump administration officials, especially those contemplating an exit,” The New York Times recently reported in a lengthy profile of Urbahn and his partner, Matt Latimer, who also worked for Rumsfeld and is chummy with Coates.

Yet other Coates defenders insist that she is a loyal member of Team Trump and that they never heard her say anything disparaging about the president. “The rumors are absolutely false and I’m ashamed of those pushing this B.S.,” said Fred Fleitz, who worked closely with Coates while serving as chief of staff to Bolton.

Former NSC spokesman Michael Anton, who worked alongside Coates in the early days of the Trump administration, said he doubts she was involved in any skullduggery. “I don’t believe it,” he said.

Added K.T. McFarland: “‘Anonymous’ sanctimonious, elitist tone, and [the writer’s] implication that Trump is an immoral idiot doesn’t match up with the Victoria Coates I have known for years.”

“She went out on a limb to support Trump when few in the Republican foreign policy community did,” she added.

‘Very Anti-Trump in Private’

While Coates’ supporters are adamant that she is not Anonymous, some co-workers said she was careful to hide her opposition to Trump and his agenda during meetings with principals.

“She was very anti-Trump in private,” said a former NSC official who worked with Coates on the Mideast desk. “She even defended Obama holdovers to me. They’re all fighting Trump.”

If Coates supports Trump, she has not been vocal about it. There are no examples of her publicly praising the president, based on a search of the Lexis-Nexis database of her speeches, articles and interviews, though she has expressed support for some of his policies.

A review of Coates’ Twitter feed going back to the November 2016 election turns up no tweets in which she supports Trump directly, though she remarked in a March 2017 tweet that she was “proud” to have joined the NSC team.

On the other hand, Coates reportedly was furious that Cruz decided several weeks before the election to throw his support behind Trump, after famously snubbing him at the GOP convention.

“She was livid when the Texas Republican endorsed Trump and cited national security as one of his reasons for supporting the Republican nominee,” according to a Politico.com article citing people familiar with her alleged meltdown over her boss’ about-face.

Supporters struggled, moreover, to explain why Coates would accept what effectively was a demotion — just four months after being promoted to deputy national security — if she were innocent of the accusations.

Fleitz, who says he has not read “A Warning,” speculated that Coates was ready to move on from the NSC after serving three years there, and that her reassignment to the Energy Department had been in the works for a while. But her failure to appear at the Hudson Institute for a recent speech on the White House’s “plan for peace in the Middle East” made it look more like a shake-up.

The event’s moderator was clearly taken off guard.  “I feel a little bit like Clint Eastwood talking to the empty chair,” the moderator nervously quipped, motioning to a seat the think tank had reserved for Coates on the stage with an unopened bottle of water beside it.

Just two days before Coates was officially reassigned on Feb. 20, Trump told reporters he knew the identity of the anonymous official, but he would not divulge the person’s identity.

“Can’t tell you that, but I know who it is,” he said. “I know all about ‘Anonymous.’”

For many years after the financial crisis, US commercial banks were mocked when instead of generating earnings the old-fashioned way, by collecting the interest arb on loans they had made, or even by frontrunning the Fed with their prop (and flow) trading desks, they would “earn” their way to just above consensus estimates by releasing some of their accumulated loan loss reserves, which thanks to creative accounting, would end up boosting the bottom line. The thinking here went that having suffered massive losses during the financial crisis “kitchen sink” when all banks suffered crushing losses to they would get bailed out, banks would then “recoup” billions in losses over time that would be run through the income statement as a reversal of accrued loss provisions.

Well, after the longest expansion in history, it’s time for this process to go into reverse, and instead of releasing loan loss reserves the banks are now starting to build them up again in preparation for a wave of consumer defaults due to the US economic shutdown.

As we reported earlier, this big story from earnings season so far – now that all major US money center banks have reported earnings – has been how much in loan loss provisions and reserves have the big US banks taken as precaution for the economic upheaval due to the coronacrisis. As shown below, on average most banks – this time including the hedge fund known as Goldman Sachs which has since pivoted to becoming a subprime lender to the masses with “Marcus” – saw their loan loss provisions surge by roughly 4x from year ago levels, with JPMorgan’s jumping the most, or just over 5x, hinting the other banks are likely undercapitalized for the storm that is coming.

Alas, these provisions amounts are nowhere near enough if history is any indication.

What if instead of using JPMorgan as a benchmark, one takes the financial crisis as a reference: after all, we already know that both GDP and unemployment will be far, far worse in Q2 compared to even the worst levels of the financial crisis, something today’s Empire Fed number vividly demonstrated…

… and even though the duration of the coming recession remains unclear and is a function of how quickly the coronavirus vaccine is developed, it is more than likely that total loan losses will match, if not surpass what happened in 2008, especially since this time the crisis is global and not just US based.

So as banks are set to be hit with tens of billions in charge offs – for which they are trying their best to reserve even if they have no idea just how bad the hit will be – we decided to look at what the banks did in the aftermath of the financial crisis. What we found is that most banks reserved total losses anywhere between 4 and 6% of total loans. This time around? So far it is less than 2%, as shown in the chart below.

This means that there is a reason why banks did not want to discuss what their future provisions would and could be – because they know very well that if the financial crisis is a template, there is a long way to go before banks are properly provisioned. It also means that in Q2, loan loss provisions will explode, and we expect bank loss expectations to soar by double digits across the board.

So to put it all in context, so far the Big 4 banks have reserved an additional $24BN in Q1 for future loses. But if the GFC is any indication of the defaults that are about to be unleashed, the real amount of losses, discharges and delinquencies will increase 3x-4x compared to the current baseline, meaning that over the next several quarters, banks will have to take another $75-$100BN in reserves on loans that go bad, wiping out years of profits, which were used not for a rainy day fund but to pay for – drumroll – buybacks.

This, to put it mildly, is a major problem for banks which until now were seen as generously overcapitalized, because if the US banking sector is facing $100BN (or more) in loan losses, then the Fed will have no choice but to once again step in and bail out the US financial sector.

How will we know if banks are indeed facing an Everest of loan losses instead of a mole hill? Keep an eye on those charge-off updates. While they have yet to pick up, once they do it will be an avalanche of consumers refusing or unable to pay down their loans, sticking banks with the loss. The only question then is whether the banks will stick taxpayers with what is shaping up as yet another taxpayer bailout of the US financial system.

Via SchiffGold.com,

Venture capitalist Chamath Palihapitiya made waves when he said during a CNBC interview that the government should not bail out companies impacted by the coronavirus shutdowns.

“On Main Street today, people are getting wiped out. Right now, rich CEOs are not, boards that have horrible governance are not,” he said.

“What we’ve done is disproportionately prop up poor-performing CEOs and boards, and you have to wash these people out.”

During an interview on RT, Peter Schiff said he’s been saying the same thing since day one.

You know, the real beneficiaries of the bankruptcies are not the employees of the company. I mean, they will benefit, although some of these companies in a restructured bankruptcy will end up shedding some of their workers, which is a good thing, because many of these companies have too many workers, and in order to survive, they need to be more competitive, especially if demand is down in their industries. But the big winners in bankruptcies are the customers.”

CNBC acts as if the government has to bail out the airlines or there won’t be any more airlines. Or if the government doesn’t save the hotels, there won’t be any more hotels. Peter called this “nonsense.”

They don’t blow up the hotels. They don’t blow up the planes. What happens is, in a bankruptcy, new owners come in, all the debt is wiped out, and now you have an efficient management team with an un-levered company that can actually lower prices. So, consumers end up with a better deal once the companies are restructured. But by keeping them afloat with more debt, the companies are never viable and they have to keep overcharging customers based on a government subsidy. And once the government steps in and prevents them from restructuring, they’re going to be in constant need for additional government money.”

Rick Sanchez summed it up: let things happen the way they normally do in the marketplace. If somebody doesn’t do a good job, somebody else comes along and does it better and in the end, everybody wins.

The problem is that during the 2008 crisis, everybody decided some businesses were too big to fail. And the CEOs must be the smartest people in the room. So, how dare we think about replacing them. So, they had to be bailed out.

Peter said if we had let more businesses fail in 2008, there would be fewer businesses failing now.

We wouldn’t have created the moral hazard. Businesses would have known that there’s no government to bail them out, so they would have acted more responsibly. And had the Federal Reserve not kept interest rates so low, companies wouldn’t have done all the buy-backs. They wouldn’t be all levered up. They would be able to withstand this temporary emergency.”

Peter said you can’t let the workers off the hook in the current situation either.

You’ve got all these people who have lost their jobs who have no savings. They can’t make it without a paycheck because they have a big mortgage. They have credit card debt. They have auto loans. They have student loans. Why is that? Why don’t Americans have any savings either? That’s part of the problem. And nobody should be bailed out. No company should be bailed out. No individuals should be bailed out. Everybody needs to deal with the consequences of their own actions.”

That’s not to say lenders and borrowers, or landlords and tenants, or banks and companies can’t get together and work out deals to help each other out on their own.

But nobody should be getting a check from the government because the government doesn’t have any money.  All the government is doing is printing money and they’re destroying the value of everybody’s savings.”

Peter warned that we are going to have “massive inflation” in the United States.

The government is doing far more damage with the bailouts and the stimulus. None of this money is free. If you’re wondering who is going to pick up the tab – if you have money in the bank, if you have bonds, if you have a retirement account, if you have savings, if you have cash value in an insurance policy, if you have an annuity, if you have a pension, you’re going to get wiped out. Because you’re going to pick up the tab because your purchasing power is going to be destroyed by all the money the Fed is creating.”

Whitney Tilson wants you to know that he called the stock market bottom. Or the coronavirus top. Either way, Tilson swears he was right about something and he needs you to know it. 

Tilson, famous for blowing up two hedge funds before becoming a newsletter writer, wrote exactly that to his mailing list on April 13, referring to comments he had made in weeks prior.

“I nailed the timing of the top,” Tilson boasted in the subject line of an April 13 e-mail. His e-mail continued:

From its intraday low on Monday, March 23 of 2,191.86 – the very hour that Enrique and I were recording our coronavirus webinar (which aired the next evening), in which we pounded the table and said this was the best buying opportunity we’d seen since the global financial crisis – the S&P 500 has soared 27.3% (as of Friday’s close). It’s been one of the fastest, biggest rallies in history.

In fact, last week and three weeks ago were two of the top 10 weeks for the Dow Jones Industrial Average in its entire 135-year history!

And the stock market has reacted exactly as I expected it would.

Tilson then answered a question that nobody asked of him, offering up his prediction on the market going forward and rounding it all out by joining every other useless bull on Wall Street with an S&P target of “just over 3,000”. 

“My best guess – and it’s only an educated guess – is that the market trades in a 10% to 15% range for a few months, as investors wait to gauge the impact of the coronavirus crisis. Then, as clarity emerges and we start to recover, the market moves materially higher and closes the year roughly 10% higher than today (which would be just over 3,000 for the S&P 500),” Tilson said.

Tilson’s “Empire Financial Research”, which has actually garnered quite a following according to our sources, now spams inboxes relentlessly – sometimes two, three or even four times daily – with whatever pompous diatribes the former hedgie comes up with while on his latest skiing trip. 

In addition to boasting about his unaudited “track record”, Tilson also recently sent out an e-mail to clients/prospective clients, letting them know that he started with just $1 million and turned it into “a series of funds worth more than 200 times that amount”.

As a reminder, Tilson famously blew up closed Kase Capital Management in 2017 (5 years after shuttering its predecessor T2) after getting his ass handed to him by the market “sustained underperformance”. 

“Reporting sustained underperformance to you was making me miserable,” Tilson wrote to his investors in 2017.

He continued: “I couldn’t in good conscience continue to manage your money unless I had a high degree of confidence that I could turn things around within a reasonable time frame.” And with that, he wasn’t managing money anymore.

Recall, Tilson had relaunched his first fund, T2 Partners, as Kase Capital in 2012 after losing 24.9% in 2011.

It’s too bad (and dare we say a bit curious) that Tilson couldn’t get the market to react “exactly as he expected it would” when his results were being audited and he was a professional money manager. But now, in the unaudited realm of being a financial publisher/analyst, we are predicting many more grand slams to make appearances on Tilson’s track record. 

In the same promotional e-mail, Tilson also boasts about hypothetical, unaudited peak-to-trough gains in names like Netflix, Amazon and Apple and meeting President Obama. 

And then, of course, there’s this:

The Whitney Tilson transition from lovable loser to bad actor is accelerating pic.twitter.com/1u4A9xfIR8

— Dan Hurley (@ApexHurley) April 15, 2020

Regardless, stock talk could be a continued welcome change for Tilson’s former e-mail subscribers, who over the years have been treated to e-mails about a vast array of non-finance related topics, like Tilson’s time at Navy SEAL bootcamp with Bill Ackman and his most recent colonoscopy. 

“I had a colonoscopy last week and, while the prep wasn’t so fun, overall it was a perfectly tolerable experience and I’m glad I did it,” Tilson said in a 2017 e-mail he fired out to his mailing list.

If you’re looking for a couple additional laughs, we stumbled upon this Tilson promotional video a couple of days ago, which labels him as “one of America’s most famous investors”. 

There was only bad news in the latest Fed Beige Book.

After years of “modest” and “moderate” growth across the US, in the latest Fed Beige Book released this afternoon, the assessment of the economy downgraded sharply with the Fed reporting that “Economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic” with the hardest-hit industries—because of social distancing measures and mandated closures— were leisure and hospitality, and retail aside from essential goods.

To be sure, this will hardly come as a surprise to anyone who has looked at the latest US macro surprise index, which just suffered its biggest 4-week crash on record.

Looking at specific industries, most Districts reported declines in manufacturing, but cited significant variation across industries, according to the report. Producers of food and medical products reported strong demand but faced both production delays, due to infection-prevention measures, and supply chain disruptions. Other manufacturing industries, such as autos, mostly shut down. The energy sector, suffering from low prices, reduced investment and output.

All Districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months.

One particularly ominous observation was that all districts reporting on loan demand said it was high, both from companies accessing credit lines and from households refinancing mortgages. This is hardly a surprise at a time when a record $300+ billion in revolvers were drawn down and as small and medium business rushed to obtain funding in lieu of cash flow. This manifested itself in a record $500 billion surge in loans and leases in just the past two weeks.

Contrary to some superficial observations, this is not a “good” thing as it means that hundreds of billions in new loans may soon turn sour unless the economy recovers quickly, and with banks credit loss provisions already surging, those numbers are only going to increase in the coming weeks, further impairing US banks.

Some other observations from the Beige Book, first on employment and wages, which declined across the board:

• Employment declined in all Districts, steeply in many cases, as the COVID-19 pandemic affected firms in many sectors.  Employment cuts were most severe in the retail and leisure and hospitality sectors, where most Districts reported widespread mandatory closures and steep falloffs in demand. Many Districts said severe job cuts were widespread, including the manufacturing and energy sectors. Contacts in several Districts noted they were cutting employment via temporary layoffs and furloughs that they hoped to reverse once business activity resumes. The near-term outlook was for more job cuts in coming months. No District reported upward wage pressures. Most cited general wage softening and salary cuts except for high-demand sectors such as grocery stores that were awarding temporary “hardship” or “appreciation” pay increases.

A similar picture emerged in prices where deflation was rampant:

• The general direction of price inflation was down for both selling prices and non-labor input prices, as Districts reported either slowing price growth, flat prices, or modest to moderate declines in prices on balance. These trends were seen as reflecting weaker demand for many goods and services in the wake of the COVID-19 pandemic. Four Districts also reported further declines in energy prices. It wasn’t all deflation however, and supply chain disruptions and shifts in the composition of demand led to significant price increases for some essential services—such as freight—and some agricultural commodities and consumer goods. While expectations concerning agriculture prices were mixed, the outlook calls for further downward pressure on prices on average.

Amusingly, the biggest bogeyman of the Beige Book for much of 2019 – tariffs – was gone and forgotten, without a single mention of the term in the entire report. That however, was replaced by mentions of “coronavirus” and/or “Covid” which saw a whopping 878 instances, up notably from the 57 instances in March when the terms made their first ever appearance. Finally, slowness prevailed, literally, with no less than 41 mentions of the “slow” in the Beige Book.

And speaking of coronavirus, here are some specific ways in which the pandemic affected the country:

• “In general, there is great uncertainty and concern about the duration of the coronavirus pandemic and its economic effects.”
• “Bankers were also asked, in light of the coronavirus pandemic, if they had adopted more lenient policies on loan repayments. The vast majority said they had done so on residential mortgages, compared with about half on commercial & industrial loans, and a somewhat over half on commercial mortgages.” – we know that this is an outright lie, at least for JPM which has shuttered new non-PPP loan issuance.
• “A law firm said that they saw an increase in business as clients were looking for help understanding recently passed coronavirus aid legislation.”
• “Consumption of services fell precipitously, particularly in the hospitality, entertainment, and food service sectors as the coronavirus crisis led to reduced travel and prohibitions of large gatherings. Vehicle sales fell sharply and dealerships across the District closed”
• “Most manufacturing contacts had not revised their employment plans as a result of COVID-19. A packaging firm said headcount fell but that was planned long before the pandemic.”
• “One contact said that only sales that were under contract before the beginning of the coronavirus crisis were being completed.”
• “Income prospects for the agricultural sector deteriorated substantially as the spread of the coronavirus led to a dramatic fall in many commodity prices. A large drop in ethanol prices led ethanol plants to cut production and corn consumption, which pushed corn prices lower”
• “Builders reported a higher-than-normal cancellation rate, though some said they had managed to meet their March sales goal due to strong demand in the earlier half of the month. Showings dipped as many sellers took their homes off the market. Several new land and lot deals were on pause, and builders were renegotiating existing lot contracts. Outlooks weakened considerably, with sales and starts expected to slow because of the coronavirus outbreak.”
• “A drug company said that the COVID-19 pandemic led it to cancel a planned price increase. Despite pockets of softness in demand, software and IT services contacts said they currently had no plans to alter selling prices.”
• “Some companies still hiring have postponed pre-employment background checks like drug tests and finger printing, largely in an effort to reduce physical contact”

And so on. The full report can be found here.