Month: April 2020

China is no longer fixed.

Having lied for the past month that it has the coronavirus crisis “under control” just so people return to work, full of hope and enthusiasm, rejoicing at the surge in China’s just as fabricated PMI numbers, and willing to work their asses off (with Beijing so generously willing to risk everyone’s lives as the alternative is a complete collapse in China’s economy), earlier today the US finally cracked down on the relentless barage of Chinese lies, when US intelligence accused China of deliberately lying about its coronavirus figures.

Then, in a miraculous coincidence, just moments later Reuters reported that a county in central China’s Henan province announced on Wednesday it had “virtually banned all outbound movement of people, following several cases of coronavirus infection in the area.”

According to a post on its social media account, Jia county – which has a population of about 600,000 – said that no one can travel out of Jia county without proper authorization. Additionally, residents are not allowed to leave their homes for work unless they have clearance to do so.

According to local media reports, on March 29, Henan Province broke its 30-day streak of reporting no new coronavirus cases, saying one person tested positive after a trip to Pingdingshan, where Jia County is located.  Specifically, on Saturday, Henan province reported one confirmed case in Luohe city; local authorities said the infected person had been in contact with two doctors based in Jia county who later tested positive for the virus even though they had showed no symptoms.

As a result, Bloomberg adds that starting April 1, all residential compounds will be under “closed-off management” and all residents need to wear masks and have temperature taken entering or exiting the compounds.

And so the virus is back to China, despite the best intentions of the Chinese World Health Organization and its Beijing sponsors to make it seem that China had managed to defeat the virus.

Needless to say this is a problem, because the risk of stop-start restrictions on people’s movements mean that any calls for a V-shaped rebound in global economies and stocks can now be ignored as China will soon be forced to go through the entire shut down exercise all over again.

Indeed, as Bloomberg’s Simon Flint wrote presciently overnight, “as China’s economy restarts, there is every risk infection rates to tick higher once again, requiring renewed control measures and potentially the beginning of a stop-start pattern of lockdowns followed by eased restrictions.”

“Multiply that pattern by the growing number of countries in lockdown – and the unknown impact of a rampant virus in nations with fewer restrictions – and the much hoped for V-shaped recovery could quickly become a series of W’s”… and since “there is no blueprint for jump-starting a stalled economy in the midst of a global pandemic, a fresh waves of infections following production restarts could quickly snuff out any rally in global stocks.”

In other words, back to square one we go, only maybe this time China will tell the truth.

Shares of Conagra rose almost 4% on Tuesday and will likely continue to be volatile as the coronavirus pandemic prompts a nation full of locked down consumers without access to restaurants to make more trips to the food store than usual. 

Since March 12, however, the company’s stock is up more than 20%, according to Yahoo. Not unlike stay-at-home software names and online retailers, Conagra appears to be one of the few stocks getting a tailwind from the coronavirus outbreak. 

Demand for the company’s brands, which include staple snack and read-to-eat names like Birds Eye, Udi’s and Vlasic, is on the rise as Americans rush to their local groceries to stockpile as much food as they can.

And with the President extending the nation’s social distancing guidelines to the end of April, it’s looking as though the tailwind can continue heading into the spring. Some analysts are predicting that social distancing guidelines could continue even further, into the beginning of summer.

Conagra said during Tuesday’s earnings report that it has witnessed a “significant increase” in demand for its fourth quarter and that it expects improved top and bottom line numbers. It also boosted its full year guidance expectations.

For its fiscal year 2020, the company projects adjusted earnings from continuing operations to be above the high end of prior range of $2.00 to $2.07 per share. 

“On a quarter-to-date basis, shipments and consumption in our domestic retail business have increased by about half, more than offsetting the effect of worsening trends in our food-service business,” CEO Sean Connolly said.

These gains will help offset what is expected to be a 50% to 60% slowdown in the company’s Foodservice sales. 

Previously, the company had been mired by a slowdown in revenue and earnings that had caused it to lower estimates less than two months ago in February. Those worries have now been forgotten. The company now says it expects a more than 50% gain in domestic retail sales for its fourth quarter and says its supply chain has “effectively serviced demand” throughout the pandemic crisis so far.

Furthermore, surging food stocks were one leg of the “Virus fear” trade that, despite last week’s easing, remains a winner in the last month…

Authored by Robert Rapier via OilPrice.com,

It’s no secret that the growth of U.S. shale oil has been a thorn in the sides of both Saudi Arabia and Russia. They have seen their market shares erode as the shale boom made the U.S. the world’s largest producer of crude oil. But Saudi Arabia’s national oil company, Saudi Aramco, is a single entity that produces 13 percent of the world’s oil and controls 17 percent of the world’s proved reserves. That puts them in a very powerful position. They can withhold a lot of oil from the market, or they can flood the market with oil and crash the price.

I have warned many times that Saudi Aramco’s power shouldn’t be underestimated, even as some were suggesting the shale oil had rendered OPEC (which they control) toothless. In an article I wrote in 2016, I observed:

“OPEC is a big reason oil prices fell into $20s earlier this year, and they were a big reason oil prices were at $100 a few years ago. What other organization has the power to move the price of oil so dramatically — both up and down? That is real market power. So they may sometimes behave like a paper tiger. But they are capable of rapidly moving the global oil markets.”

Saudi Arabia should not be underestimated. They started a price war in 2014 that drove oil prices into the $20s. No other single entity could have done that. The strategy temporarily stalled U.S. oil production, and although they did bankrupt a few shale oil producers, the industry proved resilient. So Saudi Arabia switched back to cutting production to prop up prices in 2016, and until recently they had maintained that strategy.

But this year’s coronavirus (COVID-19) outbreak has caused an enormous decline in oil demand, putting oil under tremendous price pressure. Saudi Arabia wanted more emergency production cuts in response. They had been working with Russia to enact this strategy.

This time, Russia said “Enough is enough. No more cuts.” So, Saudi Arabia responded by ramping up production. When they did so, we saw a mind-boggling 30 percent drop in the price of oil overnight.

However, this time Saudi Arabia may succeed where they failed in 2014. They struck at a very vulnerable time. U.S. producers were already reeling from the decline in production, and this now places them under tremendous pressure.

The energy sector is suffering from a triple whammy. The collapse of oil demand, the overall decline in the stock market, and finally – and most importantly – the price war that Russia and Saudi Arabia have started have crushed the U.S. energy sector.

Now I am seeing some sentiment from people that we should just let the industry go bankrupt. I have seen people cite the oil industry’s subsidies, or the fact that too many producers took on too much debt, and that it should therefore be allowed to fail.

Let me make a brief point about subsidies. Recently, President Trump suggested using funds from a program that helps low-income Americans afford heating oil to combat coronavirus. Some Democrats howled at the potential cut in this program.

Well, guess what? As I have pointed out in the past, that’s an oil subsidy. The reality is that the vast majority of oil subsidies in the world are consumer subsidies like this. The people who get angry about oil subsidies are sometimes the same people that complain about cutting these kinds of subsidies — because they don’t recognize them as oil subsidies.

Subsidies aren’t direct payments to oil companies, even though that’s what most people envision. So, they get angry about something they misunderstand.

That’s the first point. But a more important question to ponder is “What are the consequences of letting the U.S. shale oil industry go bankrupt?”

Look, you may think the U.S. oil industry deserves to go bankrupt. You may believe we should all be driving around in wind-powered electric vehicles or riding bicycles. But that’s not the world we live in today.

Should we use less oil? Yes. And we will over time. But right now the U.S. still uses a lot of oil, and we will continue to do so for several years, even as we transition to electric vehicles.

The real consequences of letting the U.S. shale industry fail is to hand global control of oil production back to Saudi Arabia. Millions of Americans will lose jobs, domestic oil production will fall, and our oil imports will soar. Saudi Arabia will then be free to once again withhold production to drive up the price.

Some producers will go bankrupt as a result of the current crash. And those that made really poor decisions should go bankrupt. But letting too much of the industry fail will begin toppling dominoes that will have enormous ramifications on the U.S. economy and on our national security.

Russia is going to make decisions about the interest of its domestic oil industry. Saudi Arabia is going to do the same, and it has a powerful instrument with which to do so through Saudi Aramco.

The U.S. must do the same, but there are those in government that seem like they would be glad to see the oil industry go out of business. Unlike Russia and Saudi Arabia, our oil industry has decidedly mixed support from the federal government.

The American economy runs on energy. The energy industry is a matter of national security. We can’t give up control of our energy security to Saudi Arabia. That is the consequence of letting this price war destroy the U.S. oil industry.

Across California, high unemployment and crashed economic activity are starting to pressure households as tens of millions of people have been forced by the government to “shelter in place” amid the COVID-19 outbreak. 

A frightening new reality is starting to develop, one where households are becoming fractured because of the stress related to the virus outbreak. Many are experiencing job loss, limited savings, insurmountable debts, and or alcohol or drug abuse problems to cope with the financial pain as the economy dives into a depression in the second quarter. As a result of this unbearable stress, domestic abuse calls have skyrocketed in Sacramento, California, reported CBS13 Sacramento.

“Right now as we speak, one in five women are being assaulted, right here in Sacramento County,” said Donna Brown, an employee at A Community Peace organization that helps victims of domestic violence. “It puts most of the abusers in the home with the family more frequently than usual.”

Brown said she had seen a massive influx in the number of domestic violence calls in the last several weeks. 

“Abusers that are maybe not going to work or the victims aren’t going to work and the children are home, or there’s a loss of income so it’s just a pressure cooking the environment that they’re in,” said Incoming Executive Director Laura Clegg.

CBS13 called several county and state resources that would typically help victims, and some were operating on limited schedules and or others were entirely closed. Since the shutdowns began, the Victims of Crime Resource Center in Sacramento recorded a 40% jump in domestic violence calls across the county. 

Cracking households suggest that the onset of social unrest is on the horizon. This is a huge concern for the Trump administration, who is attempting to dish out hundreds of billions of dollars in universal basic income in the next several weeks to prevent protests and riots. 

We noted last Friday that the Federation of Red Cross and Red Crescent Societies warned that social unrest could unfold across major Western cities in the weeks ahead. 

Americans should be deeply disturbed about the near-total meltdown of normal life – the unraveling’s of the economy and social fabric could quickly result in protests. Stress starts at work, then transmits into the household, with millions out of work, households breaking down, it is becoming increasingly clear that a perfect storm of social destabilization is nearing. 

Down the coast in Los Angeles, more specifically in Beverly Hills, high-end stores have boarded up their windows and doors in anticipation of civil unrest.

In Beverly Hills, the Pottery Barn and West Elm stores near Rodeo Drive were spotted with boards across the windows.

Meanwhile, stores in New York, San Francisco, Seattle, Chicago, Paris, Vancouver, and elsewhere were similarly boarded up.

The “Magnificent Mile” in Chicago today. It looks like Chile in November. All fancy stores boarded up. Are they afraid of #Covid19 or of something else? @DMatamala pic.twitter.com/Ag2SU2iJ2a

— Zingales (@zingales) March 29, 2020

The next chapter of the virus crisis could be social unrest. Maybe the US could take a page from Greenland and or even France, as local governments in those regions have banned alcohol sales to prevent social decay while in shutdowns.

Authored by Bill Blain via MorningPorridge.com,

Long-held investment equations are all changing. The laws of financial physics are not as unchanging as we think. 

What to worry about next…

I got a call from a Swiss Broker chum y’day telling me they see a rise in demand for TIPs – Inflation Linked bonds. Although I’m not seeing any significant action in the inflation linked ETFs I watch, it makes sense to keep a weather eye on inflation: the global economy isn’t actually producing anything much, but we are still buying lots of stuff. If demand exceeds supply – that pushes prices higher = inflation. 

You could argue that no one is earning any money, therefore can’t spend anything, that’s deflationary – but we just created billions of billions of cash. The real issue is where all that ersatz cash actually goes. 

Last time we did that – 8 years of the experimental madness of QE – the result was massive inflation in financial assets, even as contradictory austerity policies in the real economy cut services. Money that would have been directed to building industrial and service capacity, therefore increasing productivity, and raising consumer wages, was siphoned off into financial assets, meaning we got deflation instead.. Too many goods were chasing consumers with stressed wallets whose real incomes tumbled for 10 years. 

This time we’re talking about Helicopter money in some economies, and paying wages of otherwise unemployed workers in others by nationalising payrolls. It might just work this time and generate inflation…

Well, at least the ECB will be happy.

They should be careful what they wish for… Inflation – for those of you too young to remember – is a vicious and unpredictable bounder, destroying savings, and financial asset values. 

If goods are in short supply then prices will rise through the mechanism of the market. 

Or…

Governments can chose to avoid riots, and ration goods and services through legislation.

I am sure there will be many politicians thinking rationing will not be an issue…  they’ve already done just about everything else… How long before we get food stamps entitling us to a rasher of bacon a month, a pound of lard and a packet of dehydrated mashed potato from the Government emergency stocks? 

It begs a wider question. Where does government stop? When Jeremy Corbyn called for the nationalisation of the railways a few months ago we fulminated at his socialist communistic insanity. The government did it the week before last, and nobody even noticed. 

Or Victor Orban promising to hand back power when the crisis is over. Sure. We know how that ends… although the inhabitants of the US city of Cincinnati could tell us the story of about the only example of a politician voluntarily laying down power. 

Global Risk Sentiment – Stressed! 

I read a very interesting report y’day – The Crisis Sentiment Index (CSI) produced by the Directors and Chief Risk Officers group (DCRO). The CSI has been reactivated for the Covid-19 crisis. They surveyed over 200 CROs at leading investment firms. The higher the number from 0-100 the worse the crisis. Their current number is 68 – “indicating substantial stresses”.(No Sh*t Sherlock award winging its way to them.) 

• 64% expect a 50% change of Global Depression with GDP falling 15%

• 64% are planning for significant disruptions in activity for 6 months or more.

• 93% believe there is 50% change of material unrealised global impact

• 10% believe it is likely the Pandemic will be under control within 3 months. 

Interesting snapshots from the survey include: 

“We are engaging with our people and teams to assess emotional resiliency – which has not been considered in prior planning.” 

While China talks about recovery, a North American exec said: “for my industry, the estimate is for a 40% decline in global revenue for 2020.”

An Asian manager commented how China, Taiwan and Singapore have dealt with it through a combination of “social controls, social action and top-quality medical careavailable to all. The danger is re-contagion from the West where there is little social discipline and regressive health care systems.”

Bigger Changes are Coming

That last comment from Asia is particularly interesting, highlighting the increasing divide between the Occident and Orient in terms of society. Socialised or liberal?  

Let me pose a question: 

What is the difference between the state threatening to jail a doctor for complaining about the lack of preparedness to address a new disease, and a medical company threatening to dismiss and prosecute staff who go on social media to reveal the lack of protective gear in stressed hospitals? 

I’d like to hope voters will eventually look back on the crisis and fundamentally assess just how well their elected representatives did. But you know that’s unlikely to happen. But maybe politicians will be smart enough to refocus priorities – perhaps its time to rebalance western economies… National Heathcare that’s properly acknowledged as the primary public good would be a great start. (And that’s going to be a massive investment opportunity!)

Because it made me laugh out loud, I’d like to finish by pinching a line from the daily blog of my old chum Ara Levonian at BGC:

 “The US look all over the place in a coordinated response to the pandemic and the Trump administration is coming unstuck due to its lack of attention to detail. The problem is the administration seems to consist of 4 men, 2 of whom do not really believe in science.”

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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

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

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