Month: March 2020

What better time could there be than a global pandemic, that has led to closures of museums and public landmarks across the world, to stage a historic heist in Europe, which has been rocked by several high-profile heists from the UK to Germany in recent years.

The Associated Press reported Monday morning that a priceless Van Gogh painting was stolen from a museum in the Netherlands, the home country of the post-impressionist painter who is one of the most important figures in western art. Van Gogh died in 1890, when he was in his late 30s, committing suicide after a life of poverty, marred by mental illness and substance abuse.

There are rumors that the stolen painting was “Spring Garden”, but they have not been confirmed.

The painting was stolen during a brazen overnight raid that took advantage of the weak security at all museums around Europe as the virus lowers staffing levels in industries from security to tech to…everything.

There’s no word yet on which painting as stolen, but the museum is reportedly the Singer Laren Museum in Laren, a town in suburban Amsterdam.

“I dream of painting and then I paint my dream” – Vincent Van Gogh pic.twitter.com/SEUyisZc4c

— 👽 (@sidyeylaugo) March 30, 2020

Though the art word will no doubt be curious to hear…

Ironically, March 30 is Van Gogh’s birthday…he would have been 167 today.

The fast-spreading virus has frightened law enforcement agencies across the US as confirmed cases now exceeded China’s and are now the highest in the world.

AP News says 20% of Detroit’s police force is now in quarantine; two officers have died from COVID-19, and 39 tested positive.

For the 2,000-person department, it has been nothing more than headaches as officers have been working multiple shifts to fill in for those who are in quarantine. The force is under severe stress, and that could mean with a loss of patrol units, any outbreak of social unrest would be hard to contain. Hence why Michigan’s National Guard was activated several weeks ago.  

To the Graduating Class of 2020-C, the @detroitpolice Department and the City of Detroit are proud of you! “You will forever be known as the class that started their days handling one of the biggest crisis of American History” said @ChiefJECraigDPD #ProtectandServe #OurCommunity pic.twitter.com/Vo3yrBHZHs

— Detroit Police Dept. (@detroitpolice) March 20, 2020

Law enforcement agencies across the country are reporting their officers are dropping like flies. Many are getting sick as the virus consumes the nation.

“I don’t think it’s too far to say that officers are scared out there,” said Sgt. Manny Ramirez, president of Fort Worth Police Officers Association.

As of Saturday, AP says a survey it conducted last week found that 690 officers and civilian employees at 40 law enforcement agencies across the country tested positive for the virus. A majority of the infected officers were part of the New York City Police Department (NYPD).

In the days ahead, it appears the virus will infect more officers across the country. Groups representing American police and fire chiefs, sheriffs, mayors, and county leaders urged President Trump last week to invoke a Korean War-era law that would boost private industry production of supplies needed for the health crisis that would better equip officers.

“We’re in war footing against an invisible enemy and we are on the verge of running out of protective supplies,” said Houston Police Chief Art Acevedo, president of the Major Cities Chiefs Association. “We’ve got hospitals calling police departments, police departments calling each other, and it’s time to nationalize in terms of our response.”

Former Boston Police Commissioner Ed Davis said the virus is unlike anything any law enforcement force has ever dealt with:

“We’re in unprecedented territory here,” said Davis, who was the top cop in Boston during the 2013 marathon bombing.

AP says 10% of NYPD officers called in sick on Friday, straining the force and jeopardizing the safety of civilians:

“In New York, which has rapidly become the American epicenter of the pandemic, more than 500 NYPD personnel have come down with COVID-19, including 442 officers, and the department’s head of counter-terrorism was hospitalized with symptoms. Two NYPD employees have died. On a single day this week, Friday, 4,111 uniformed officers called in sick, more than 10% of the force and more than three times the daily average.

Leadership at America’s largest police department maintains that it’s continuing enforcement as usual. But they’ve also said that if the disease continues to affect manpower the NYPD could switch patrol hours, or pull officers from specialized units and other parts of the city to fill gaps — steps also taken after the Sept. 11, 2001, terrorist attacks.” 

It’s becoming evident that the virus is already hurting major police forces across the country. If social unrest breaks out in the weeks or months ahead, as per a new warning from the Federation of Red Cross and Red Crescent Societies, then some forces might not have the capability to contain the riots.

That’s why President Trump on Friday signed an executive order that would give the Defense Department “the authority to activate the ready reserve components of the armed forces.”

With the economy crashed, millions out of work, and a pandemic sweeping across the nation, the evolution of this crisis could be social unrest. 

Authored by Charles Hugh Smith via OfTwoMinds blog,

We can anticipate a federal bailout of pension funds and one-time aid to state and local governments, but bailouts won’t repair the eroding foundations of tax revenues.

As we all know, the federal government can “print” money but state, county and city governments cannot. The Treasury can sell bonds to fund deficit spending, and the Federal Reserve can create currency out of thin air to buy the bonds, so federal spending can increase even as tax revenues crash.

State, county and city governments do not have this printing press. Yes, states and counties can sell municipal bonds for infrastructure projects, but they can’t sell bonds to support General Fund (i.e. everyday government services) expenditures.

As a result, massive declines in State, county and local tax revenues are already baked in as sales and payroll taxes drop and capital gains taxes–an essential source of revenues for many states–are set to collapse along with the stock market.

Longer term, the other primary source of tax revenues–property taxes–will fall off a cliff as the commercial real estate bubble and Housing Bubble #2 implode later this year. Lower sales, lower employment and lower profits all undermine the fundamentals of real estate, and the institutionalization of remote work and education will gut demand for commercial space.

Real estate transactions are also sources of transfer taxes and capital gains, and as values plummet so will transfer taxes and capital gains.

Every locale has a different mix of tax revenues, but since all sources will fall sooner or later, no state or local government will escape the decline in revenues. Sales (excise) and payroll tax revenues will fall first, and capital gains will vanish as stock market losses replace gains.

In states like California that depend heavily on capital gains taxes, the holes being blown in budgets will be catastrophic. Roughly 10% of all General Fund revenues in California flow from capital gains–over $15 billion in the previous fiscal year. As noted in the California State Revenue Estimate 2019-2020:

“The amount of capital gains revenue in the General Fund can vary greatly from year to year. For instance, in 2007, capital gains contributed $10.9 billion to the General Fund. By 2009, the contribution from capital gains had dropped to $2.3 billion. For 2018, capital gains are forecast to contribute $15.7 billion to General Fund revenue–the highest amount ever.”

Were this to drop to previous recession-era lows, that would open a $13 billion hole in tax revenues, completely erasing the state’s $8 billion “rainy day fund” and leaving a $5 billion deficit–a sum that will only increase as sales and payroll taxes decline.

Once Silicon Valley Unicorns, Big Tech and zombie corporations start laying off highly paid staff, income tax revenues will crater as well. As the California State Revenue Estimate 2019-2020 explains:

“The highest-income Californians pay a large share of the state’s personal income tax. For the 2016 tax year, the top 1 percent of income earners paid just under 46 percent of personal income taxes. This percentage has been greater than 40 percent in 12 of the past 13 years. Consequently, changes in the income of a relatively small group of taxpayers can have a significant impact on state revenues.”

Many states and counties are increasingly dependent on a dominant revenue source which may well prove to be an Achilles Heel. California has increasingly come to depend on income taxes from high earners (who also garner most of the capital gains as well):

“In 1950-51, sales tax revenue made up over 50 percent of General Fund revenues while personal income tax revenue made up just more than 11 percent. That relationship has changed dramatically over time, and, for 2019-20, personal income tax makes up 68.8 percent of all General Fund revenues.”

A steep decline in tax revenues isn’t the end of the pain for local government. Public-sector pension funds heavily invested in stocks are absorbing shattering losses that will have to be compensated by higher contributions by cash-strapped taxpayers. If bond yields rise despite central bank interventions, bond holdings could crash along with stocks.

We can anticipate a federal bailout of pension funds and one-time aid to state and local governments, but bailouts won’t repair the eroding foundations of tax revenues. Sales: down. Income: down. Capital gains: down. Vehicle sales: down. Fuel taxes: down. Property taxes: down, once bubble valuations crash to earth.

Cash-strapped taxpayers, many of whom may have lost their jobs, will be in no mood to absorb enormous tax increases to fund insiders, cronies and vested interests.

The gravy train of state and local government spending has just been derailed. The declines in tax revenues will be too steep and too enduring to support the magical-thinking hope that a V-shaped recovery will make all the blown budgets whole next quarter, much less next year.

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Earlier this morning we showed something remarkable in the Fed’s ongoing attempt to inject a record amount of liquidity into the financial system: on Friday morning, the Fed held a $500 billion term repo operation and nobody showed up. There were zero submissions of either Treasury, Agency of MBS securities by Dealers who appear to have run out of securities, or are unwilling to pledge to the Fed.

Today’s “zero bid” auction was merely the logical endgame of a recent collapse in Treasury submissions into the Fed’s massive daily term and overnight repo operations, which climaxed two weeks ago, only to plunge as soon as the Fed announced the start of unlimited QE.

With dealers now able to sell unlimited amounts directly to the Fed, and at a premium to carrying values, most of them appear to have picked that option instead of holding on to paper that may be worthless especially with an avalanche of debt coming down the pipeline as the Treasury has to fund its $2 trillion corporate handout package.

“Why on Earth you would tie something up for three months in repo with the Fed buying,” said Ian Burdette, managing director at Academy Securities, who followed up with a very apt observation: “I think people are getting wise to the fact that an absolute tsunami of global sovereign debt issuance is on its way. Best to sell it all to the fed now probably.“

Another hint that the Fed may have overliquified the market, soaking up too much “safe, money-like collateral” such as Treasuries and MBS, and injecting too many reserves (i.e., cash) came from the Fed itself which 30 minutes before the close today announced it would taper “QE-unlimited” and cut the amount of TSY purchases starting April 1 from $75BN to $60BN, while also trimming its MBS QE from $50BN to $40BN.

But the clearest hint yet that there has been a sea change in the US financial system, which has gone from reserve scarce to collateral(Treasury) scarce was in today’s fixed-rate reverse repo operation. As the name suggests, this is the opposite of repo, where instead of borrowing cash from the Fed in exchange for Treasury collateral, while paying a modest borrowing fee, Dealers borrow Treasurys in exchange for cash collateral.

If the presence of a reverse repo is news to some, there’s a reason for that: for much of the past 3 years, when the Fed was draining reserves as part of QT and banks were cash strained, there was an abundance of Treasurys.

Until today, because today’s reverse repo operation exploded to a record $210BN from $138.4BN yesterday, after virtually no usages for years.

This means that after scrambling to park treasuries at the Fed in exchange for cash, Dealers are now doing the opposite, because as a result of the Fed’s historic QE spree in which the Fed has bought $1 trillion in TSYs and MBS in the past two weeks, there is now an unexpected Treasury shortage among the financial community. Either that, or simply nobody wants to park their Treasurys with the Fed if they can sell them.

But don’t worry: if there is indeed a Treasury shortage, it won’t last. With the US Treasury on deck to issue hundreds of billions in debt in the coming weeks, a scarcity of US paper is the last thing the world will have to worry about…

As the left grapples with a presidential candidate who has difficulty completing full sentences and was just slapped with a sexual assault allegation that the staunch feminists in the #MeToo movement have chosen to ignore – New York Governor Andrew Cuomo has emerged as a fantasy pick to supplant Joe Biden and beat President Trump in November.

Cuomo has received heaping praise over his response to the COVID-19 crisis – holding near-daily briefings as New York now has the most infected residents in the United States – with just under half the country’s cases and deaths. His broadcasts have become somewhat of a Democratic counterpoint to President Trump’s daily appearances, according to Bloomberg – which notes that unlike Biden (whose own briefings have been more ‘old man shaking fist’ than action), Cuomo can take action.

Cuomo was U.S. housing secretary in the Clinton administration and is the oldest son of beloved Democratic New York Governor Mario Cuomo, who dallied with running for president in the 1980s and 1990s. As if that wasn’t enough of a Democratic political dynasty, Cuomo, 62, was once married to a Kennedy. –Bloomberg

As Bloomberg notes, the hashtag #PresidentCuomo was trending on Twitter last week as rumors of a Cuomo nomination swirled on the left – including from MSNBC‘s Rachel Maddow, who called him “president of the coronavirus response,” and NYT columnist Maureen Dowd. Cuomo has also made regular appearances on his hot-headed brother Chris Cuomo’s CNN show where the two have traded brotherly barbs to inject levity.

Networks even preempted a Biden speech last week to broadcast one of Cuomo’s briefings.

Betters at online oddsmaker PredictIt even have Cuomo neck and neck with Bernie Sanders! (I-VT)

To top it off, longtime New York political player, Jim Larocca – who worked with Andrew when his father Mario was the governor, recently wrote in Long Island newspaper Newsday that Democrats should swap him for Biden, Bloomberg reports.

“The governor is displaying a real measure of passion about the subject, compassion for the victims, and humanity about the impacts,” wrote Larocca, adding “The contrast with the president’s behavior could not be more pronounced.”

That said, experts on the Democratic nominating process say a Cuomo run is a pipe dream.

Biden was on track to win a majority of delegates, allowing him to easily win in the first round of voting at the Democratic national convention, when the coronavirus stopped the nominating process in its tracks. That left him and Bernie Sanders — who is still actively running for the job — with little to do but rail against the president and offer alternative plans via live-stream to combat the virus.

The deadline has passed for more candidates to join the race, so the only way Cuomo could become the nominee is if voting went into a second round, when delegates are free to choose. But there are still hundreds of delegates pledged to Sanders, and a few pledged to former candidates like Pete Buttigieg or Elizabeth Warren. They would all have to switch as well. –Bloomberg

According to NYU Law School election expert Richard Pildes, Cuomo’s nomination is a “far-fetched scenario” which may only seem likely now because Democratic primaries are on hold – with contests having been postponed until May or June thanks to the Chinese coronavirus.

“Given the volatility of the world right now, you can imagine a lot of things happening between now and June 2,” said Pildes – adding that a brokered convention – which last occurred in 1952, is also a longshot unless Biden was seriously ill or dead.

Bloomberg suggests that the sudden surge for Cuomo may be Democratic ‘buyer’s remorse’ over picking Biden, who may not be the strongest candidate.

Echoing many of Jim Grant’s recent fears, Guggenheim Investments’ CIO Scott Minerd fears the consequences of policymakers returning to the same tools employed in the financial crisis as a grand Faustian bargain.

“In Goethe’s 1831 drama Faust, the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied upon quantitative easing (QE) instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history.“

– Scott Minerd “Global CIO Outlook”, August 21, 2012

With the global economy slipping into recession and many economists estimating second-quarter gross domestic product (GDP) growth in the United States will fall by 15 percent or more, the world is being confronted with the worst downturn since the 1930s.

In the post-Keynesian era, the standard policy solution to a business cycle downturn has been for governments to temporarily offset any decline in demand with increased fiscal stimulus and easy money. This prescription has provided for smaller and less frequent slowdowns. The ultimate consequence is that businesses and households have been carrying larger debt loads and smaller cash reserves, confident that policymakers will restrain the severity of the consequences created by any shock to the economy.

This process of accumulating larger debt balances after each successive downturn is often referred to as the great debt super cycle. Over the past decades, the successful use of Keynesian stabilization policies has increasingly raised the confidence of investors and creditors alike that government can successfully truncate the downside of any recession.

The massive debt accumulation by U.S. households following accommodative monetary policy and easy credit led to the housing bubble. The collapse of this bubble destabilized the global financial system and could only be halted with unorthodox monetary policy and fiscal programs that led to partial or total nationalization of many financial institutions and manufacturers.

In the wake of that crisis governments themselves have become highly indebted, requiring virtually continuous support from central banks to acquire that debt to maintain low interest rates to support growth. The average ratio of government debt to GDP for G-7 economies reached 117 percent in 2019, up from 81 percent in 2007. Any attempt to taper or reverse the accumulation of government debt or other assets is quickly reversed as financial markets become unruly and economies slow.

Now faced with the exogenous shock of the COVID-19 pandemic, policymakers are returning to the same tools employed in the financial crisis a decade ago. They are desperately searching for programs that will fill the demand gap created by massive shutdowns and travel restrictions while simultaneously finding ways to prop up businesses that to a large degree are overly indebted as a result of artificially low interest rates from the past decade.

The ultimate policy goal is to stabilize the economy by salvaging industries that will need to provide employment when the pandemic ends. Given the high level of leverage in these companies, any gaps in cashflow will make it impossible for many companies to service their debt. The total debt of U.S. nonfinancial businesses has grown by about $6 trillion since 2007, while cash on hand has only grown by $1.7 trillion. A big driver of that debt growth has been buying back stock.

Lending these companies more money will only compound the long run problem resulting from over-leverage and make the companies even more vulnerable to failure in the long run.

We are experiencing the end game of the great debt super cycle. As the private sector has become increasingly over-levered, the baton is being passed to the public sector where resources are so strained that the printing press has become the last resort. At 4.6 percent of GDP, the U.S. federal budget deficit in FY 2019 was larger than anything we’ve seen outside of a recession or war.

The truth is that the only policy solution short of socialism is to accomplish a great transfer of wealth from investors to debtors. In the normal course, companies reorganize and creditors haircut debts on a case by case basis. This process, however, is time consuming and expensive. Given the systemic nature of the current crisis, the sheer volume of reorganizations would swamp the financial and legal systems and large defaults would be followed by asset liquidations that would depress the value of collateral backing other loans and likely set off a downward spiral.

Another answer is negative interest rates, where creditors accept a slow erosion of value. The hurdle to successfully implement this solution expeditiously seems completely unrealistic. To reach levels of negative interest rates that would effect a solution would require a rapid shift to a cashless global society and an overhaul of regulation around pension funds and the insurance industry, not to mention the logistical challenges of immediately implementing the systems throughout the financial industry.

Of course, there remains a tried and true method to achieve this policy: debasement. The process of inflating prices would result in shifting wealth from investors to creditors. Many believe inflation is dead and such a policy would not work. The question of how to succeed in raising the price level is more a degree of commitment than ability.

By quickly turning up the printing presses, global central banks would need to provide reserves at a faster rate than the collapse in the velocity of money. This is a delicate exercise and one that would be difficult to execute successfully.

The risks on both sides is not moving quickly enough and overdoing it. If there is too little money made available, the prices of assets used as collateral backing loans will spiral downward. If there is too much, inflation will spiral out of control.

Almost eight years ago I wrote of the Faustian bargain in which policy makers had engaged to solve the financial crisis. The awful consequence of these policies is that the bill may now be coming due.

China’s central bank joined the global easing bandwagon early on Monday when it unexpectedly cut the rate on reverse repurchase agreements by 20 basis points, the largest in nearly five years, as authorities stepped up measures to relieve pressure on an economy ravaged by coronavirus pandemic.

Without giving a reason for the move, the People’s Bank of China said on its website that it was lowering the 7-day reverse repo rate to 2.20% from 2.40%, the lowest on record. This was the first rate cut since a 10bps cut in December 2019, and the third cut in the 7-day rate since November.

“The larger-than-usual rate cut is an expression that China is willing to join the coordinated consortium for economic stabilization,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong as quoted by Bloomberg. “Small and medium-sized businesses are collapsing for lack of cash flow.”

Also on Monday, the PBOC injected 50 billion yuan ($7 billion) into money markets through seven-day reverse repos, breaking a hiatus of 29 trading days with no fresh fund injections via the liquidity tool.

“The unexpected cut is a response to the politburo meeting last Friday,” said Xing Zhaopeng, markets economist at ANZ in Shanghai. “The medium-term lending facility (MLF) rate and Loan Prime Rate (LPR) will be cut at the same pace this month. We believe this cut is a signal to urge all loans to refer LPR as the benchmark so that the PBOC can improve the effectiveness of monetary policy transmission.”

At Friday’s meeting, the Communist Party’s Politburo said the government will step up policy measures and tighten enforcement in a bid to achieve full-year economic and social development targets. The government pledged to appropriately increase budget deficit ratio, guide market interest rates lower, and keep liquidity level reasonably ample.

Speaking to the media after the rate cut announcement, central bank adviser Ma Jun said China still has ample room for monetary policy adjustment and the rate decision took into consideration the return of Chinese companies to work, the global virus situation and a deterioration in the external economic environment. The rate cut took place one day after we reported that “China’s Consumer Default Tsunami Has Started.”

In a note to clients, Capital Economics said “a lot more easing will be needed, especially on the fiscal front, to help the economy return to its pre-virus trend.”

While the Politburo statement and the PBOC move signal the response is moving up a gear, it still falls short of a no-holds-barred stimulus.

“Certainly, the policy easing is continuous and today’s liquidity injection at least suggests that the policy aid will be mildly constant and will be more proactive when the authorities deem necessary,” said Zhou Hao, an economist at Commerzbank AG. “The PBOC is signaling its full support on the special bond issuance, so cuts to the medium-term lending rate and benchmark deposit rate are coming. China is joining the global easing wave.”

Of course, while a rate cut stimulates the economy, it’s bad news for China’s banks. As Bloomberg notes, a reduction in the central bank’s main tool to adjust the price of market liquidity also signals coming reductions in its main one-year funding tool, and potentially a corresponding cut to the benchmark deposit rate. Reductions to policy rates should also be reflected in the main market benchmark of the cost of lending to companies, the loan prime rate.

“Lowering banks’ lending rates without a reduction in the cost of their liabilities will squeeze banks’ net interest margin, eroding their profitability and capital base,” said Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Bank Ltd. “A benchmark deposit rate cut is necessary.”

Chinese 10-year government bond futures initially responded positively to the cut, with the most-traded contract for June delivery rising as much as 0.23%, before pulling back to last trade down 0.07%; at the same time China’s money market rates ticked up on tighter quarter-end liquidity despite the PBOC injection. The overnight repo rate climbed 25 basis points to 1.36% while the 7-day rate climbed 43 basis points to 2.10%.

“There’s stronger liquidity needs ahead of the quarter end and there had also just been a round of tax payment – albeit small – last week,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “Both factors tighten interbank liquidity conditions temporarily, therefore injecting 7-day money into the system to meet such short-term needs is appropriate.”

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As Reuters notes, analysts expect China’s economy to contract sharply in the first quarter due to widespread disruptions to business and consumer activity caused by the virus as authorities put in place tough public measures to contain the pandemic. Nomura has lowered its annual GDP growth forecast to 1.0% this year, and adjusted quarterly GDP forecasts to a 9.0% annual contraction.

“We all expected the PBOC to announce some cuts. If it was deposit rates, it would be a big move, but now it seems to be repo only,” said a senior portfolio manager.