Massive Shifts Underway, Rental Market Reacts in Near-Real Time: Rents Plunge in San Francisco & Oil Patch, Drop in Expensive Cities. But Long List of Double-Digit Gainers
There are now at least three factors that have plowed into the US housing market – and the rental market is reacting in near-real time to them: The unicorn-startup bust that began last year and built up into a crescendo this year; the Pandemic-inspired move to work-from-home; and the oil-and-gas bust that took on special vigor this spring when crude oil prices totally collapsed.
People are bailing out of some places and moving elsewhere. In the most expensive cities, rents are dropping, but in other cities – a lot of them – rents are skyrocketing by the double-digits.
Crazy-overpriced San Francisco rents.
Rents in San Francisco plunged more than in any other major market in June. This is still the most expensive city to rent in, though there are a few zip codes in Manhattan and in Los Angeles where rents are more expensive than in the most expensive zip code in San Francisco. But it got less expensive in June.
In June, the median asking rent for a one-bedroom apartment dropped 2.4% from May, to $3,280, down 11.8% from June last year, which made the city the fastest-dropping rental market in the US.
The median asking rent for two-bedroom apartments in June fell 1.8% from May to $4,340 and was down 9.6% year-over-year.
The still crazy-overpriced San Francisco market – it’s called the “Housing Crisis” locally – had hit a ceiling in October 2015, with the median asking rent for a 1-BR apartment at $3,670 and for a 2-BR at $5,000. Then rents declined by close to 10% into 2017 before picking up again. While 1-BR rents eked out a new record in June last year (by $50), 2-BR rents never got close to their October 2015 record and are now 13.2% below it.
These are median asking rents. “Median” means half the asking rents are higher, and half are lower. “Asking rent” is the advertised rent. This is a measure of the current market in near-real time, like the price tag in a store that can be changed from day to day to attract shoppers, depending on market conditions. Asking rent is not a measure of what tenants are currently paying on their existing leases or under rent-control programs.
A sea of red in the 17 most expensive rental markets.
The table below shows the 17 most expensive major rental markets by median asking rents. The shaded area shows their respective peaks and changes from those peaks. Almost all of them have declined from their peaks – with eight of them by the double digits, led by Chicago and Honolulu, where rents have gotten crushed since their respective peaks in 2015.
Seattle is now solidly on the list of double-digit decliners, booking the third largest decline-from-peak in 2-BR rents (-15.1%), behind Chicago and Honolulu, and the ninth largest in 1-BR rents (-9.5%).
Denver, not long ago one of the hottest rental markets in the US, has frozen over, with declines-from-peak in the -10% range.
The rents we’re discussing here are for apartments in apartment buildings, including new construction. Not included are rents for single-family houses, condos for rent, rooms, efficiency apartments, and apartments with three or more bedrooms. The data is collected by Zumper from over 1 million active listings, including Multiple Listings Service (MLS) in the 100 largest markets.
The Cities with the biggest %-declines in 1-BR rents.
The table below shows the 31 cities with the largest year-over-year rent declines in June for 1-BR apartments, with San Francisco at the top, followed by Syracuse, NY, a college town now under siege from the Pandemic. Denver, with a 10% year-over-year decline, rounds out the double-digit decliners.
Then there are a bunch of cities in the Texas-Oklahoma-Louisiana oil-patch on this list, including Tulsa and Houston in 5th and 6th place. There are eight cities in Texas on this list. Louisiana is represented by New Orleans (#18) and Baton Rouge (#31).
The oil patch is in serious trouble. The oil bust started in mid-2014, when the price of crude oil grade WTI began its long decline from $100-plus per barrel to a low of $26 a barrel in early 2016. Then the price began to recover but never made it back to levels where the shale oil industry can survive long-term.
In January this year, WTI started heading lower again, and this April hit a new low, when in some places the price at the wellhead dropped to zero and when WTI futures briefly collapsed below zero for the first time ever.
Hundreds of oil-and-gas drillers have filed for bankruptcy over the past three years, and the speed and magnitude of those bankruptcy filings is picking up, with one of the biggies, Chesapeake, which is based in Oklahoma City, filing for bankruptcy on Sunday.
Houston is the center of the US oil patch, and despite its vast and diversified economy, the city has gotten slammed by the oil-and-gas bust in various ways, including by the highest office vacancy rates in the US, now at a catastrophic 24.5%.
Also on this list are Silicon Valley (San Jose), Southern California (Los Angeles, Anaheim, Santa Ana), and three markets in Florida, among others.
Biggest Declines, in %
1 BR Rent
San Francisco, CA
San Jose, CA
Fort Worth, TX
Los Angeles, CA
New Orleans, LA
Santa Ana, CA
Corpus Christi, TX
San Antonio, TX
Salt Lake City, UT
New York, NY
Baton Rouge, LA
The Cities with biggest %-increases in 1-BR rents.
OK, get ready. Among the 100 largest rental markets are 9 cities where rents skyrocketed by over 15% year-over-year in June. And except for Philadelphia, all of them sport median asking rents for 1-BR apartments that are well below the national median ($1,229 according to Zumper). Meaning these cities with these huge rent increases are still deep in the lower half of the rental spectrum. In total, there are 20 cities with double-digit rent increases:
Biggest Increases, in %
1 BR Rent
St Louis, MO
Des Moines, IA
St Petersburg, FL
Colorado Springs, CO
Among the top 100 cities, 59 cities experienced year-over-year increases in the median asking rent in June. In eight cities, there was no change in rents. And in 33 cities, asking rents declined, including in many of the largest cities in the US.
The top 100 rental markets, from most expensive to least expensive.
The list goes from San Francisco to Tulsa, with asking rents for 1-BR and 2-BR apartments, in order of 1-BR rents, from $3,280 in San Francisco (-11.8%) to $590 in Tulsa (-9.2%).
These rents that are dropping in some markets and surging in others show two things:
Rental markets are local, and the median national rent is irrelevant at the local level.
Big shifts are underway in housing, and the rental market is pointing out the weaknesses in demand where it exists in near-real time.
Markets where rents are increasing 10% or 15% a year are asking for trouble unless they have a booming job market with surging wages – this was the case in San Francisco, Seattle, and other hot markets. But if they don’t have surging wages, many renters, who are already tapped out, will run out of money. And it’s renters that keep the show going.
You can search the list list via the search box in your browser. If your smartphone clips this 6-column table on the right, hold your device in landscape position:
The economic realities that a V-shaped recovery is not possible in the back half of 2020 are being realized in Baltimore’s downtown area.
Downtown Baltimore Skyline
The Downtown Partnership of Baltimore (DPOB) published its annual State of the Downtown report on Tuesday and there are new concerns the COVID-19-induced recession from quarantining healthy people for the first time in history will have long-lasting impacts.
“The areas that were impacted, as you can imagine more significantly tourism, restaurants, some of our cultural institutions… and those are the ones that we really have to rally behind now,” DPOB President Shelonda Stokes told WJZ Baltimore.
DPOB conducted two surveys in mid-March, just around the time, Maryland Gov. Larry Hogan initiated virus-related lock downs. Out of 150 respondents, DPOB said strict public health orders heavily impacted at least 94% of the businesses in the downtown district. About 29% of respondents said it would take upwards of three months to recover.
The survey found hospitality and restaurant/food service industries were the most impacted. It said restaurants, hotels, and retail shopping stand to lose billions of dollars. Nevertheless, DPOB claims COVID-19 has directly and indirectly impacted 46,000 jobs.
“We’re at a place that you could see even from the consumer sentiment survey that we’re still fearful. We’re cautiously re-entering, we’ve been comfortable in our homes, we’ve figured out how to work from home and be effective,” Stokes said.
Baltimore City is facing a double whammy – it’s not just the virus that has deterred people from traveling to the Inner Harbor area – but also crime across the city is out of control. On a per-capita basis, the city is one of the most dangerous in the country. Readers may recall our countless articles on the socio-economic implosion of Baltimore, starting years before the pandemic.
“Any level of violent crime in unacceptable,” said Councilman Eric Costello.
DPOB is confident some businesses may not survive the virus-induced economic downturn and urged residents to support local businesses in this time of crisis.
Businesses, and to be specific, small businesses, and the bottom 90% of Americans, have been devastated in the last couple of months.
Days ago, readers may recall we noted a quarter of all personal income in the US now comes from the government – this shows how reliant the population has become on the government, or should we say socialist Trump checks.
Twitter handle Long View pointed out last week that “Retail sales bounced back like a rubber band because of stimulus (Trump checks, PPP, UE bonus). It’s all over in a few weeks & with the new uptick we likely see at least 6 more weeks of contraction with no plug. The real hit starts now.”
Knowing the backdrop of consumers, as to how they’re very reliant on Trump checks for consumption, there can be no V-shaped recovery this year – nevertheless, commercial shopping districts like the one in Baltimore – will remain depressed for the foreseeable future which will result in a period of high unemployment.
All of this comes at the worst possible time for Baltimore as the population crashes to a 100-year low – the tax base is collapsing as folks are quickly exiting the city for the suburbs. Coronavirus has exposed just how fragile the economy, society, and municipalities really are, which suggests the worst of the crisis is ahead.
Readers may recall, as early as March, city dwellers in California fled to suburbs and remote areas to isolate from the virus pandemic. The proliferation of remote work arrangements has led this shift to become more permanent.
At first, the exodus out of the city was due to virus-related lock downs, then social unrest, and now it appears a steady flow of folks are leaving the San Francisco Bay Area for rural communities as their flexible work environment (i.e., remote access) allows them to work from anywhere, more specifically, outside city centers where the cost of living is a whole lot cheaper.
Bloomberg notes, citing a new report from rental website Zumper, the latest emigration trend out of the Bay Area has resulted in rents for a San Francisco one-bedroom apartment to plunge 12% in June compared with last year, which is one of the most significant monthly declines on record.
“Zumper has been tracking rent prices across the country for over five years but we have never seen the market fluctuate quite like this,” Zumper co-founder and CEO Anthemos Georgiades said. “For example, rent prices in San Francisco have historically only gone up and typically only incrementally, yet now we are seeing double-digit percent rent reductions. This is unprecedented for this generation of renters.”
Georgiades said the ability to work remotely led to the exodus of city dwellers:
“The very real move of many mainly technology employers to a future of remote work, meaning millions of employees now looking outside of dense metropolitan areas for their next home now that their commute time is no longer a factor,” Georgiades said.
“Silicon Valley hubs such as Mountain View and Palo Alto also saw rents plunge — a sign residents of the tech-heavy region are taking advantage of remote work arrangements to flee to cheaper areas,” Bloomberg said.
“This is the strangest downturn I’ve ever seen,” J.J. Panzer with the Real Management Company told San Francisco KPIX 5.
Rental inventory in the Bay Area has increased since the pandemic began – allowing renters to renegotiate leases and ask for a 10-15% reduction in rents.
Other factors for the steep drop in rents is mainly because of the recession and high unemployment. People can no longer afford pricey rentals in San Francisco – must leave city centers for suburbs where rents are significantly less.
“As the pandemic persists on, the demand for rentals has continued to shift away from these pricey areas, and a significant amount of that demand seems to be moving toward neighboring, less expensive areas,” Zumper said on its blog.
“Your landlord, given the widespread nature of the job loss, actually does have an incentive to negotiate a lower rent with you,” said senior Zillow economist Skyler Olsen.
“Vacant units have no value coming upstream to pay their property taxes and their mortgage and that value as part of the system,” said Olsen.
Financial blog Market Crumbs notes, “with the rise of remote work seemingly inevitable at this point, this trend should continue in San Francisco as well as other major cities in the years to come.”
How are 19.29 million workers receiving unemployment insurance when they tell us 17.75 million are unemployed?
It’s official: “data” released from the Bureau of Labor Statistics has just crossed the streams and has given birth to the Stay Puft marshmallow man jumping the shark. Alas, it also means that jobs “data” is now completely meaningless.
For all the analysis of today’s job report, is it good, is it bad, is this data series too hot, and does it mean that the Fed will soon be forced to hike, we have just one response. None of it matters.
Why? Because a simple sanity check reveals that as of this moment the jobs report no longer makes logical sense.
Consider the continuing jobless claims time series, also also referred to as “insured unemployment”, and represents the number of people who have already filed an initial claim and who have experienced a week of unemployment and then filed a continued claim to claim benefits for that week of unemployment.
By its very definition, insured unemployment is a subset of all Americans who are unemployed. In a Venn diagram, the Continuing Claims circle would fit entirely inside the “Unemployed” circle, which also includes Initial Claims, Continuing Claims, and countless other unemployed Americans who are no longer eligible for any benefits.
Alas, as of this moment, the definitionally smaller circle is bigger than “bigger” one, and as the DOL reported today, there were 19.29 million workers receiving unemployment insurance. And yet, somehow, at the same time the BLS also represented that the total number of unemployed workers is, drumroll, 17.75 million.
If you said this makes no sense, and pointed out that the unemployment insurance number has to be smaller than the total unemployed number, then you are right. And indeed, for 50 years of data, that was precisely the case.
And yes, there is a “forced” explanation to justify how this may actually happen in the current situation where everyone is abusing jobless benefits, but in theory this should not be happening, and we fully expect that in the coming weeks, the already highly politicized BLS will quietly close this gap.
ZeroHedge recently penned a piece on a developing nationwide coin shortage sparked by the virus pandemic. As a result of the shortage, at least one major supermarket chain has removed the ability to pay in cash at self-scan checkout machines.
Meijer Inc., a supermarket chain based in the Midwest, with corporate headquarters in Walker, Michigan, announced last Friday, that self-scan checkout machines at 250 supercenters would only accept credit or debit cards, SNAP and EBT cards, and gift.
“While we understand this effort may be frustrating to some customers,” spokesman Frank Guglielmi told ABC12 News Team. “It’s necessary to manage the impact of the coin shortage on our stores.”
Fed Chair Powell admitted to lawmakers last week that The Fed has been rationing coins as the circulation of coins across the US economy ground to a halt due to the pandemic.
“What’s happened is that with the partial closure of the economy, the flow of coins through the economy … it’s kind of stopped,” Powell told lawmakers.
He said the shortage was due to the mass business closures that prevented people from spending their coins, as well as a lack of places that are open where people can trade coins for paper bills.
“We’ve been aware of it, we’re working with the Mint to increase supply, we’re working with the reserve banks to get the supply to where it needs to be,” Powell said, adding he expected the problem to be temporary.
Americans Googling “coin shortage” started to erupt in the back half of June and has since hit a record high. Mainly people in Midwest states are searching for the search term.
Google search “coin shortage” shows the issue isn’t limited to Meijer stores but is widespread.
Social media users report the shortage is happening at many big-box retailers.
(Chris Martenson) As you may know, I was one of the very first voices publicly reporting on Covid-19, issuing an alert that the virus was a significant pandemic event on Jan 23rd, 2020.
This was long before most media outlets even managed to write their first “It’s just the flu, bro!” article.
Using the same logic and scientific methodology I was trained in as a PhD, I was able to “predict” things well in advance of nearly every official or mainstream news source.
I’m using quotation marks around the word “predict” because it’s not really a prediction when you’re just extrapolating trends that are already underway.
Just as it’s not really a “prediction” to estimate where a thrown pitch will travel, it wasn’t much of a prediction to state that a novel virus with an R-Naught (R0) of well over 3 would be extremely difficult to contain once it arrived in a country. Note that I didn’t say impossible — South Korea, Australia, New Zealand, Thailand, Taiwan and Vietnam all get high marks for containment — but certainly difficult.
The US and the UK proved this in spades, as they’re both led by below-average ‘managers’ rather than leaders.
Leaders make tough decisions based on imperfect information. Managers dither and hedge and only make up their minds after the facts are already in and events well underway. Naturally, the US/UK managers were simply no match for the exponential rate that the Honey Badger Virus (aka Covid-19) spreads at.
I call it the Honey Badger virus because of its incredible ability to evade quarantine, as eagerly and easily as Stoffle, as seen in this short enjoyable video:
Such a determined foe as Covid-19 cannot be reasoned with, halted by decree or – much to the puzzlement of the central banks – resolved by printing more thin-air money.
It simply operates by natural laws and rules. Which, by the way, makes it rather easy to predict.
Much more difficult to predict, though, is when we humans will truly wake up to our true plight and begin making better decisions. And I’m not just talking about the coronavirus here. I’m talking about the dangerous levels of social inequity that the Federal Reserve is responsible for creating, both pre- and post-covid-19.
Given the enormous difficulty in getting whole swaths of the managerial and retail classes to grasp such simple and obvious logic as “Everyone should wear a mask!”, it seems thoroughly unrealistic to expect these same folks to thoughtfully tackle the hazards of runaway monetary and fiscal policy.
But they really need to.
Because the current monetary and fiscal trajectory society is on has been well-trod throughout history. We know where it ends — no place we want to be.
Commerce gets destroyed. Households fail. Government and social order fall apart. Fairness and freedoms are lost as it becomes difficult to distinguish between official policies and overt looting.
Real leaders know this history and would both think and act differently in order to avoid the worst risks. But managers? They just keep operating from the same manual, mindlessly repeating the same steps while hoping for a different result.
The Fed’s Dangerous Gamble
I’ve referred to the Federal Reserve as a bunch of psychopaths engaging in cultural vandalism. This is unfair to both psychopaths and vandals.
After all, the most ambitious of them don’t victimize more than several dozen in their lifetime. Maybe a few hundred, tops.
But the Fed? It’s ruining hundreds of millions of lives and livelihoods — both today and in the future.
Sadly, the Federal Reserve has been doing this — unchecked — for a very long time. Here’s a snippet I wrote for MarketWatch.com 6 years ago. Every word remains as true today as it was then:
The academic name for the Fed’s current policy is financial repression. But a more apt name would be “Throw granny under the bus,” because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities.
The cornerstone element of financial repression is negative real interest rates, of which the Federal Reserve is the prime architect and owner.
From the start of the Fed’s post-crisis intervention through 2013, the total cost of these negative real interest rates was over $750 billion just to savers alone. The loss of income to fixed-income investments (such as bonds held in pensions and money markets) was even larger.
But here’s the rub. That loss of income and purchasing power didn’t just vanish. It was transferred from pocket A to pocket B.
It magically appeared again in record Wall Street banking bonuses, in shrinking government deficits (due to lower than normal interest rates), in rising corporate profits (mainly benefiting the already rich), in record stock buybacks (ditto), and in rising wealth inequality.
More directly, when the Fed buys financial assets with printed money and — by definition — drives up the price of those assets, it cannot then act mystified why the main owners of financial assets have grown wealthier. Doing so simply insults our intelligence.
Federal Reserve Chair Alan Greenspan, then Ben Bernanke, then Janet Yellen, and now Jay Powell have all operated as mere managers (not leaders) choosing predictably safe plays from the Federal Reserve cookbook. It prescribes a gruel-thin routine of actions the main ingredient of which is printing currency out of thin air.
Each Fed Chairman has dutifully cooked up unhealthy dishes seasoned with hefty amounts of social corrosion, structural unfairness, elitism, and without even a whiff of historical context.
With no leadership on display and cheered on by a compliant press unable to formulate a single critical question, the Fed is now too deep into its cookbook to do anything besides see the process out to its inevitable conclusion.
The Fed has long pretended to be mystified by the rising inequality its policies are obviously causing. Jerome Powell recently and (in)famously declared during Q&A after a speech that the Fed “absolutely does not” contribute to inequality. That bold-faced lie is infuriating to those who realize just how socially and culturally unfair and damaging the Fed’s actions really are.
When things become too unfair, people stop participating. If laws are too one-sided and rigged, people stop following them. If new hires receive a higher salary for equivalent work, the veteran employees stop working as hard. If students know that their classmates are cheating and getting good grades, they’ll begin to cheat, too.
It’s just how we’re wired. An aversion to unfairness is in our social DNA.
Peak Prosperity readers know I’m a huge fan of this short video. It explains everything about the rising tide of social rebellion in America (and features cute monkeys, to boot!):
By unfairly accelerating the wealth gap between the top 1% and everyone else, the Fed is playing with fire. Seemingly with the same level of ignorance to the consequences as a chimpanzee with a magnifying glass on a tinder-dry savanna.
Money is our social contract.
When that contract is broken, that’s when things really go south for a nation. Zimbabwe, the Wiemar Republic, Venezuela and Argentina are all past (and some current again, sadly) examples of just how badly the standard of living can plummet when a nation’s money system breaks down.
I cannot predict when all this breaks down as easily as I can predict that it will break down. A balance must always be maintained between money, which is a claim on things, and the things themselves. Too many claims and we get inflation. Too few and we get deflation.
The Fed and the other world central banks have always (always!) erred on the side of “too many claims” in this story. When in doubt, they print more currency.
And that process is now on hyperdrive. The post-Covid economy is in a very bad state, and so the money printing at the heart of the “rescue” efforts by the central banks is the biggest ever in history. By a long shot.
So claims go up and up and up, while the economy shrinks. Leaving us with a LOT more money chasing a LOT less “stuff”.
This also applies to financial assets, like stocks and bonds. Printing makes the markets go higher in price and makes investors increasingly dependent on more money printing to support these prices. Eventually, like the era we’re in now, the Fed must keep injecting liquidity on a permanent basis or else the markets will immediately crash.
So, the money printing just keeps happening.
And as a side benefit, those closest to the Fed get stupendously rich from all that fresh money flooding into the world. These are the same Wall Street firms who hire Fed staffers at the end of their tenure there, thanking them with plush jobs that have little responsibility and huge salary.
But, out in real America, there are hundreds of millions of us angry monkeys watching the Fed stuff grapes into the already full bellies of the elites. Eventually wide-scale pushback against the Fed’s injustice will erupt. Protests will increase in size and become more violent. The police will realize that they’re protecting the wrong people and switch sides. Then things will get really messy.
My strong preference in life is to avoid unnecessary pain and suffering. Why wait for the Fed to ruin everything for us? I’d prefer we get pro-active here to avoid a full-blown crisis. If don’t we’ll be forced to repeat history, whether we want to or not.
Sadly, repeating history and preserving the status quo is exactly what the national managers in the US are intent on doing. Most of the public still thinks of the Fed as the hero in this story instead of the villain it truly is, and so too much of the populace cheers the Fed along. The EU and the UK are more or less in the same boat.
All of which means that, just as I warned people to prepare for the Covid-19 pandemic before it hit with full force, you need to prepare now for the coming Fed-created economic/social crisis.
In Part 2: Into The Light: 8 Steps For Surviving What’s Coming, in attempt to be as informative as possible, I share a tremendous volume of the critical data points I’m currently closely monitoring to determine where we are on the timeline to crisis and what’s most likely to happen next. I then provide my eight recommended steps for protecting your wealth, loved ones, and property through the challenges to come.
Posted last day of Q2-Jun 30, 2020 by Martin Armstrong
COMMENT: Facing a vicious circle of conflicting demands and priorities, the California Public Employees Retirement System is turning to debt – a risky scheme to borrow billions of dollars in hopes of juicing its investment returns.
The California Public Employees Retirement System, the nation’s largest pension trust, benefited greatly from the run up in stocks and other investments during the last few years, topping $400 billion early this year.
CalPERS needed it because it was still reeling from a $100 billion decline in its investment portfolio during the previous decade’s Great Recession and was tapping state and local governments for ever-increasing, mandatory “contributions” to keep pensions flowing and reduce its immense “unfunded liability.” But it faced a backlash from local officials who said vital services were being cut to make their CalPERS payments.
Just when CalPERS appeared to be climbing out of its hole, the COVID-19 pandemic erupted early this year, sending the economy into a tailspin. Virtually overnight, the fund saw its value take a $69 billion hit as the stock market — CalPERS’ biggest investment sector — tanked. Stocks have since recovered, but CalPERS is still down about $13 billion from its high early this year.
Further investment erosions would, almost automatically, trigger even greater CalPERS demands for contributions from government employers, but the recession is also eating into their tax revenues, creating substantial budget deficits.
It underscores CalPERS’ vulnerability to capital market gyrations. Investments more immune to fluctuations would be safer but they offer very low returns and CalPERS could not safely meet its lofty earnings goal — an average of 7% a year.
It’s a vicious circle of conflicting demands and priorities, driven by an official policy of providing generous, inflation-adjusted pensions for government workers, bolstered by the political clout of public employee unions.
CalPERS desperately needs an escape route and has chosen the perilous path of debt.
It plans to borrow billions of dollars — as much as $80 billion — to fatten its investment portfolio in fingers-crossed hopes that earnings gains will outstrip borrowing costs. It mirrors the recent and risky practice of local governments borrowing heavily to pay their pension bills via “pension obligation bonds.”
“More assets refers to a plan to use leverage, or borrowing, to increase the base of the assets generating returns in the portfolio,” the system’s chief investment officer, Ben Meng, wrote in the Wall Street Journal recently. “Leverage allows CalPERS to take advantage of low-interest rates by borrowing and using those funds to acquire assets with potentially higher returns.”
What could possibly go wrong?
The new scheme is an implicit admission that CalPERS can’t meet its 7% mark without increasing its exposure to the vagaries of the market. “There are only a few asset classes with a long-term expected return clearing the 7% hurdle,” Meng wrote.
Perhaps, then, the real problem is the 7% goal, much higher than those of private industry pension plans.
CalPERS and other public systems use higher earnings projections because they need them to pay for the expensive pensions that politicians have awarded. Inferentially, if they fall short of the mark, they can tap employers — i.e. taxpayers — to close the gap. However, that option is pretty much maxed out, which may explain why the very risky borrow-and-invest approach is being adopted.
This is serious stuff, so risky that the Legislature should dump its informal hands-off policy toward CalPERS and order up a comprehensive and independent examination of the system’s assets, liabilities, and long-term prospects of meeting its pension obligations.
REPLY: We are looking at state and local pension funds collapsing. There is not much they can do. This is the collapse of socialism of which I am referring to. This is why the 2020 election will be so critical. The left is determined to overthrow Trump because they are looking to raise taxes dramatically. The World Economic Forum is already suggesting a 400% increase in taxation in Europe. These people are insane. We have states raising property taxes between 30-40% because the lock downs have deprived them of revenues that are pushing pension funds over the edge. They are brain dead, for so many people live hand-to-mouth and cannot afford such drastic increases in taxation. The Democrats are really hoping to draft Hillary for they believe that is their best shot to beat Trump. This is the entire objective for career politicians who have no real business to return to and they will always exempt trusts and themselves. Trump would never agree to the agenda and this is the battle to the death here in 2020.
The Supreme Court issued a ruling today preserving the Consumer Financial Protection Bureau, but allowing the president to fire its director at will.
The 5-4 decision agreed with the position of Seila Law, a California law firm that sued the bureau, arguing that the CFPB’s leadership structure – in which a sole director could be fired only for cause – violated the Constitution’s separation of powers rule, CNBC reported.
“The agency may … continue to operate, but its Director, in light of our decision, must be removable by the President at will,” Chief Justice John Roberts wrote in the majority opinion. Roberts was joined in the decision by the other four conservative justices, CNBC reported.
Despite the decision that the CFPB director could be removed at will, Sen. Elizabeth Warren (D-Mass.) – who spearheaded the creation of the agency – celebrated the fact that the agency would be preserved.
“Let’s not lose sight of the bigger picture: after years of industry attacks and GOP opposition, a conservative Supreme Court recognized what we all knew: @CFPB itself and the law that created it is constitutional,” Warren tweeted. “The CFPB is here to stay.”
As colleges attempt to recover from the pandemic and prepare for future semesters, a New York University professor estimates that the next 5-10 years will see one to two thousand schools going out of business.
Scott Galloway, professor of marketing at the New York University Leonard N. Stern School of Business told Hari Sreenivasan on PBS’ “Amanpour and Co.” that many colleges are likely to suffer to the point of eventual extinction as a result of the coronavirus.
He sets up a selection of tier-two universities as those most likely not to walk away from the shutdown unscathed. During the pandemic, wealthy companies have not struggled to survive. Similarly, he says, “there is no luxury brand like higher education,” and the top names will emerge from coronavirus without difficulty.
“Regardless of enrollments in the fall, with endowments of $4 billion or more, Brown and NYU will be fine,” Galloway wrote in a blog post.
“However, there are hundreds, if not thousands, of universities with a sodium pentathol cocktail of big tuition and small endowments that will begin their death march this fall.”
“You’re gonna see an incredible destruction among companies that have the following factors: a tier-two brand; expensive tuition, and low endowments,” he said on “Amanpour and Co.,” because “there’s going to be demand destruction because more people are gonna take gap years, and you’re going to see increased pressure to lower costs.”
Approximating that a thousand to two thousand of the country’s 4,500 universities could go out of business in the next 5-10 years, Galloway concludes, “what department stores were to retail, tier-two higher tuition universities are about to become to education and that is they are soon going to become the walking dead.”
Another critical issue underlying the financial difficulties families and universities both face is the possibility that the quality of higher education has decreased.
Galloway argues that an education in the U.S. is observably unsatisfactory for the amount that it costs, given that if you “walk into a class, it doesn’t look, smell or feel much different than it did 40 years ago, except tuition’s up 1,400 percent,”he said during an interview with Dr. Sanjay Gupta.
And the pandemic, according to Galloway, has served to expose the quality of higher education.
The number of active mortgage forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22.
Increases happened every day for the past five business days.
As of Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months.
This represents 8.8% of all active mortgages, up from 8.7% last week.
After declining for three weeks, the number of borrowers delaying their monthly mortgage payments due to the coronavirus rose sharply once again.
The number of active forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22, according to Black Knight, a mortgage data and technology firm. By comparison, the number of borrowers in forbearance plans fell by 57,000 the previous week. Increases happened every day for the past five business days.
As of Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months. This represents 8.8% of all active mortgages, up from 8.7% last week. Together, they represent just over $1 trillion in unpaid principal.
The mortgage bailout program, part of the CARES Act, which President Donald Trump signed into law in March, allows borrowers to miss monthly payments for at least three months and potentially up to a year. Those payments can be remitted either in repayment plans, loan modifications, or when the home is sold or the mortgage refinanced.
While some borrowers who initially asked for the mortgage bailouts in March and April ended up making their monthly payments, the vast majority now are not. There were expectations that the mortgage bailout numbers would improve as the economy reopened and job losses slowed. But this surge is a red flag to the market that homeowners are still struggling as coronavirus cases continue to increase in several states.
By loan type, 6.9% of all Fannie Mae and Freddie Mac-backed mortgages and 12.5% of all FHA/VA loans are currently in forbearance plans. Another 9.6% of loans in private label securities or banks’ portfolios are also in forbearance.
The volumes rose across all types of loans but were sharpest for FHA/VA loans. FHA offers low down payment loans to borrowers with lower credit scores. Such loans are popular among first-time home buyers. The number of FHA/VA borrowers in forbearance plans increased by 42,000 last week, while government-sponsored enterprise and non-agency loan forbearances increased by 25,000 and 12,000, respectively.
At today’s level, mortgage servicers may need to advance up to $3.5 billion per month to holders of government-backed mortgage securities on Covid-19-related forbearances. That is in addition to up to $1.4 billion in tax and insurance payments they must make on behalf of borrowers.
Why it’s impossible to stop SARS-CoV-2 and what can be done about it …
Retail was hit the worst. The review site has also seen a spike in searches for Black-owned businesses.
Four in 10 retailers listed on Yelp that closed during the pandemic will never reopen. GETTY IMAGES
American states have been slowly reopening their economies in the wake of the coronavirus pandemic, but thousands of businesses are still closed — many of them for good.
As of June 15, 140,000 businesses listed on the Yelp YELP, -3.01% review site remained closed due to the coronavirus pandemic. And of all the business closures since March 1, 41% of them have shuttered permanently, according to Yelp’s latest Local Economic Impact Report.
Los Angeles recorded the largest total number of closures with 11,774 business establishments shuttering, but Las Vegas has had the highest number of closures relative to the number of businesses in the city at 1,921.
Although 20% of the businesses that were closed in April have reopened as states have started relaxing social distancing guidelines, retailers and restaurants remain especially hard-hit. Shopping and retail stores have suffered 27,663 closures, while 23,981 restaurants listed on Yelp are still closed. Beauty (15,348 closures) and fitness (5,589 closures) centers are also among the sectors struggling the most. It’s difficult for these establishments to incorporate the social distancing measures required to reopen in many places.
“By far, retail shopping was hit the hardest,” Justin Norman, Yelp’s vice president of data science, told the Wall Street Journal. “When you look at those two top categories [retail and restaurants], we’re potentially never going to see some of these businesses again.”
Across the country, 41% of businesses on Yelp that closed during the pandemic won’t reopen. YELP
In May, the CEO of the OpenTable restaurant booking service warned that one in four eateries won’t be able to reopen following the coronavirus pandemic, even as David Chang’s Momofuku restaurant group announced that two if its restaurants in Manhattan and Washington, D.C. were among the COVID-19 restaurant casualties. Indeed, total reservations and walk-ins on OpenTable were down 95% on May 14 from that date the year before, and they were down 100% throughout the month of April compared to the same time last year. And the National Restaurant Association estimates that the total shortfall in restaurant and food service sales from March through May has likely surprised $120 billion.
Black-owned businesses have been more devastated by the pandemic than any other demographic group, according to the National Bureau of Economic Research. The number of Black small business owners plummeted from 1.1 million in February to 640,000 in April, or a 41% drop.
In the latest revision to the IMF’s economic outlook published this morning, the fund warns that the world is facing “a crisis like no other”, and now expects global growth to shrink -4.9% in 2020, 1.9% below the April 2020 forecast of -3.0%.
The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, the IMF said, adding that the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4% down from 5.8%, a number which will also be revised lower, with China’s expected 1.0% growth (down from 1.2%) the big wildcard.
As shown in the table below, the IMF has made the following GDP revisions for 2020:
US -8.0%, down from -6.1%
China 1.0%, down from -1.2%
Euro Area -10.2%, down from -7.5%
India: -4.5%, down from +1.9%
Japan -5.8%, down from -5.2%
Canada -8.4%, down from -6.2%
Latin America: -9.4%, down from -5.2%
India suffered the biggest downward GDP revision from the April forecasts, with a 4.5% contraction now expected, compared with a prior projection of a 1.9% expansion. Latin America has been hit by the virus due in part due to less developed health systems; its two biggest economies Brazil and Mexico are now forecast to contract 9.1% and 10.5%, respectively.
“With the relentless spread of the pandemic, prospects of long-lasting negative consequences for livelihoods, job security and inequality have grown more daunting,” the global emergency lender said in its update to the World Economic Outlook. The IMF conceded that as with the April 2020 WEO projections, there is a higher-than-usual degree of uncertainty around this forecast, with the baseline projection resting on key assumptions about the fallout from the pandemic.
In economies with declining infection rates, the slower recovery path in the updated forecast reflects:
persistent social distancing into the second half of 2020;
greater scarring (damage to supply potential) from the larger-than-anticipated hit to activity during the lock down in the first and second quarters of 2020;
a hit to productivity as surviving businesses ramp up necessary workplace safety and hygiene practices.
The fund lowered its expectations for consumption in most economies based on a larger-than-expected disruption to domestic activity, demand shocks from social distancing and an increase in precautionary savings.
For economies struggling to control infection rates, a lengthier lockdown will inflict an additional toll on activity. Moreover, the forecast assumes that financial conditions—which have eased following the release of theApril 2020 WEO—will remain broadly at current levels. Alternative outcomes to those in the baseline are clearly possible, and not just because of how the pandemic is evolving. The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects—as the June 2020 Global Financial Stability Report (GFSR) Update discusses—raising the possibility that financial conditions may tighten more than assumed in the baseline.
Overall, this would leave 2021 GDP some 6.5% percentage points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.
More importantly, the IMF also warned that the rebound in “financial market sentiment appears disconnected from shifts in underlying economic prospects raising the possibility that financial conditions may tighten more than assumed in the baseline.”
Back to the surprisingly gloomy forecast, the IMF said that downside risks remain significant, as “outbreaks could recur in places that appear to have gone past peak infection, requiring the reimposition of at least some containment measures. A more prolonged decline in activity could lead to further scarring, including from wider firm closures, as surviving firms hesitate to hire jobseekers after extended unemployment spells, and as unemployed workers leave the labor force entirely.”
Furthermore, financial conditions may again tighten as in January–March, exposing vulnerabilities among borrowers. “This could tip some economies into debt crises and slow activity further.” Moreover, the sizable policy response following the initial sudden stop in activity may end up being prematurely withdrawn or improperly targeted due to design and implementation challenges, leading to misallocation and the dissolution of productive economic relationships.
The IMF warned of a collapse in global trade volume in goods and services, which is expected to tumble 11.9% in 2020.
Finally, the IMF warned that the pandemic’s impact may significantly increase inequality, with more than 90% of emerging-market and developing economies forecast to show declines in per capita income.
Oddly enough, it had nothing to say about the biggest source of global inequality for the past decade: central banks that have injected over $30 trillion in liquidity in the past ten years, and whose actions assure that the next crash may well be the last.
* * *
Looking ahead, The IMF presents two alternative scenarios: In one, there’s a second virus outbreak in early 2021, with disruptions to domestic economic activity about half the size of those assumed for this year. The scenario assumes emerging markets experience greater damage than advanced economies, given more limited space to support incomes. In that case, output would be 4.9% below the baseline for 2021 and would remain below the baseline in 2022. In the second scenario, with a faster-than-expected recovery, global output would be about a half percentage point better than the baseline this year and 3% above the baseline in 2021.
Under Armour founder Kevin Plank sold his Georgetown, Washington, D.C. mansion for $17.25 million – a steep discount to its initial asking price, reported The Baltimore Sun.
Plank first listed the 200-year-old Federal-style mansion for $29.5 million in 2018. Unable to sell it, he lowered the list price to $24.5 million.
Plank and his wife Desiree bought the home, which was constructed in 1810, for $7.85 million in 2013. It has eight bedrooms, eight full baths, and four half-baths, and sits on a third of an acre of land in Georgetown’s ritzy area.
Variety notes, the new “mysterious buyer paid cash, though his or her identity remains cloaked behind something called the Priory Holdings Trust, an enigmatic entity that traces back to a CPA office on the outskirts of Dallas, Texas.” The buyer bought the home in an all-cash transaction for $17.25 million, or at a 41% discount to the original list price.
Surge in debt leads to loss of AAA credit rating in a disturbing blow to Canada’s financial reputation.
As debt continues to surge, Canada has lost their AAA credit rating.
The rating has been downgraded by Fitch Ratings to AA+.
According to Fitch, Canada’s debt is projected to rise from 88.3% of GDP to 115.1% of GDP.
While many countries around the world are adding lots of debt, Canada’s growth before the crisis had already been very weak.
Various measures such as the carbon tax and excessive regulations have severely weakened Canada’s economy, with the energy sector struggling under the boot of government interference. Manufacturing has also been weak, with Canada clearly being seen as an increasingly challenging place to do business.
Additionally, the Liberal government massively increased our debt in good economic times, yet that huge surge of spending didn’t boost the economy.
White House trade adviser Peter Navarro said on Monday the trade deal with China is “over,” and he linked the breakdown in part to Washington’s anger over Beijing’s not sounding the alarm earlier about the coronavirus outbreak.
“It’s over,” Navarro told Fox News in an interview when asked about the trade agreement. He said the “turning point” came when the United States learned about the spreading coronavirus only after a Chinese delegation had left Washington following the signing of the Phase 1 deal on Jan. 15.
“It was at a time when they had already sent hundreds of thousands of people to this country to spread that virus, and it was just minutes after wheels up when that plane took off that we began to hear about this pandemic,” Navarro said.
U.S.-China relations have reached their lowest point in years since the coronavirus pandemic that began in China hit the United States hard. President Donald Trump and his administration repeatedly have accused Beijing of not being transparent about the outbreak.
Trump on Thursday renewed his threat to cut ties with China, a day after his top diplomats held talks with Beijing and his trade representative said he did not consider decoupling the U.S. and Chinese economies a viable option.
Navarro has been one of the most outspoken critics of China among Trump’s senior advisers.
In other news, Catherine Austin Fitts provides a big picture update with Greg Hunter …
A stunning 30% of Americans didn’t make their housing payment for June – a figure that is likely going to ripple through the housing industry in coming months. According to a new survey by Apartment List, the rate is similar to May and shows that even though other industries are rebounding, the situation has not yet improved meaningfully in housing.
These figures stood at 24% in April and 31% in May, before falling slightly to 30% in June. One third of the 30% in June made a partial payment, while two thirds made no payment at all.
“Missed payment rates are highest for renters (32 percent), households earning less than $25,000 per year (40 percent), adults under the age of 30 (40 percent), and those living in high-density urban areas (35 percent). While the missed payment rate for mortgaged homeowners is just 3 percentage points lower than renters,” the survey showed.
Despite the trend of missing payments at the beginning of the month, households have been able to play catch-up later in the month and “narrow the gap” by making payments in the middle of the month. This was the case in May, where the missed payment rate “dropped from 31 percent at the beginning of the month to 11 percent at the end.”
We’ll see how long people can play catch up.
Meanwhile, as the survey notes, delayed payments in one month are a strong indicator for coming months. 83% of those who paid on time in May did so in June. Meanwhile, only 30% of those who were late in May have made their payment in full for June.
This means the data for the beginning of July is likely to be just as ugly as June.
And, rightfully so, there continues to be concern over eviction notices in the coming months. The survey found that: “over one-third of renters are at least ‘somewhat concerned’ that they will be served an eviction notice in the coming six months.”
The number rises to 56% when polled just among those who have not yet paid their full rent for June.
Recall, just days ago ZeroHedge wrote that Americans had already skipped payments on more than 100 million loans while, at the same time, job losses continue to accelerate.
To put this in perspective, let me once again remind my readers that prior to this year the all-time record for a single week was just 695,000. So even though more than 44 million Americans had already filed initial claims for unemployment benefits before this latest report, there were still enough new people losing jobs to more than double that old record from 1982.
That is just astounding. We were told that the economy would be regaining huge amounts of jobs by now, but instead job losses remain at a catastrophic level that is unlike anything that we have ever seen before in all of U.S. history.
Canadian manufacturing sales plunged by 28.5% in April, the last month for which date is available.
The drop was the largest ever recorded in Canadian history.
While economists had predicted a drop of 20.2% due to the economic damage caused by the CCP Virus, many were caught off guard by the immense scale of the decline.
Out of 21 manufacturing industries which are measured, sales fell in all 21 of them. In addition to the value of sales dropping 28.5%, the volume of sales fell 26.0%, which was also the largest drop of all time.
Some of the hardest hit sectors were oil & gas, coal, and the transport equipment industry.
Many have noted that despite promising support ‘within a day’ for the oil and gas sector over a month ago, no such support has been given by the federal government.
Additionally, the government has gone ahead with carbon tax hikes, worsening the burden on consumers and businesses.
Further, the government has allowed China to buy up some decimated Canadian companies, rather than stepping in to protect those companies from the Chinese Communist State.
As the world makes its way through the coronavirus pandemic together, questions are starting to surface about what the post-coronavirus global economy is going to look like.
Among those questions is an obvious one: how many jobs that were lost due to the virus are going to remain permanently lost and, conversely, how many people will recover the jobs they once had?
The answer looks grim. While there is hope that global financial stimulus could help people head back to work once the pandemic runs its course, there is a very real chance of “lasting damage” in many sectors, according to Bloomberg.
Fed chair Jerome Powell predicted last week that there will be “well into the millions of people who don’t get to go back to their old job.” He continued: “In fact, there may not be a job in that industry for them for some time.”
Bloomberg has predicted that 30% of U.S. job losses between February and May were a result of reallocation shock. It suggests a swift labor market recovery, but one that will ultimately level off and leave millions unemployed.
Among those most at risk are jobs in hospitality, retail, leisure, education and health. Brick and mortar retailers are also even further in the crosshairs of online retailers than they were prior to the pandemic. Hilariously, however, Bloomberg economists say the “markets are already pricing in the risk”.
“50% of U.S. job losses come from the combination of lock down and weak demand, 30% from the reallocation shock, and 20% from high unemployment benefits,” Bloomberg found.
A report by the Becker Friedman Institute at the University of Chicago estimated 42% of layoffs that occurred as a result of the pandemic will be permanent.
Nicholas Bloom, professor of economics at Stanford University who worked on the study said: “There’s a massive reallocation shock. The recession hits different sectors differently. Some benefit and some fall.”
Similarly, The Peterson Institute for International Economics said last week that the shock of the virus may necessitate even further government intervention, including wage subsidies. The Organization for Economic Cooperation and Development said last week that those laid off should be afforded government job training, in order to help a shift in industries, if necessary.
Sharan Burrow, General Secretary of the International Trade Union Confederation, concluded: “The pandemic has exposed the fault lines that already existed for working people and the economy. The ‘new normal’ requires a new social contract between governments and their citizens with the backing of the international community.”
“We are ruined if we do not overrule the principles that the more we owe, the more prosperous we shall be” – Thomas Jefferson
There is no more subversive entity in the US, more destructive, more inflammatory yet out of the spotlight of public outrage, than the Federal Reserve: it is the Fed’s actions over the past 108 years – and especially over the past decade – that have spawned much of the anger, resentment and hatred that has permeated US society to its very core as a result of the Fed’s monetary policies.
Yet because much of the public fails to grasp the insidious implications of endless money-printing which makes owners of assets exorbitantly rich at the expense of regular workers, popular anger at the Fed remains virtually non-existent, despite clear warnings from Thomas Jefferson, and countless others over the decades, about the dangers posed by central banking.
And so, taking advantage of the general public’s general gullibility, the Fed continues to lie and dissemble at every opportunity, of which the most recent example was last week when Powell said that “inequality has been with us for increasingly for four decades” and arguing that monetary policy is not a cause for that. What he forgot to mention is that four decades ago is when the Nixon closed the gold window….
… severing the last link of the US dollar to tangible value, and allowing the Fed to print with impunity, creating the current wealth divide which has now spilled over into the streets of America.
One other thing the Fed has been consistently lying about is that it does not monetize the debt. The chart below is evidence that this, too, is a lie, with US Treasury debt increasing by $2.86 trillion in 2020 (most of it in the past three months) which is less than the $3.0 trillion increase in the Fed’s balance sheet over the same period. In other words, the Fed has monetized 105% of all Treasury issuance this year.
So although Powell may never admit it, Helicopter Money, also known as “MMT”, is now here, and will never go away as Deutsche Bank hinted earlier.
And speaking of MMT, below we republish the latest article from Adventures in Capitalism discussing how MMT is Going Mainstream – yes, even rap musicians endorse MMT now – and how this wanton printing of money to address every social ill will have profound ramifications that will last generations.
So without further ado, here is…
“MMT Going Mainstream…”by Kuppy of ‘Adventures in Capitalism’
My good friend Kevin Muir from Macro Tourist (I highly recommend that you subscribe) has been banging on about Modern Monetary Theory (MMT) for ages. I’ll admit, some of his pieces have been difficult to read as I’m firmly planted in the Austrian school—I believe gold is money and everything else is fiat. I believe governments create inefficiency and corruption while politicizing common sense ideas. I am against MMT in all of its insidious forms as it only legitimatizes all that I disagree with. With that out of the way, I’ve matured enough to know that what I think doesn’t matter. My job isn’t to stake the moral high ground; it is to make money for my hedge fund clients by noticing trends before others do. While I disagree strongly with MMT, Kevin has been right to repeatedly educate himself and his readers on MMT because it’s coming (whether or not you want it).
With Kevin’s permission, I have re-posted his most recent MMT note in full. I think this will be one of the most important macro pieces I’ll post on this site. There’s been a fundamental change in how governments tax and spend, yet most do not yet realize it. MMT is going mainstream. Are you ready…???
Yesterday, MMT-advocate, Stephanie Kelton released her much-awaited book, The Deficit Myth.
You might think MMT to be a crock. It might make every bone in your body shudder. You might feel sick to your stomach as you read the theory. These are just a few of the responses I have heard from traditionally trained hard-money types who learn about MMT.
I suspect most of you know that I am open-minded to many aspects of MMT, but expect it will be taken too far – just like monetarism has been taken too far.
When I see the extreme monetary policy of Europe and other countries with negative rates, all I can ask is how can anyone claim with a straight face that monetarism is working for us? So yeah, I would rather try something new than continue down the current road of easier and easier monetary policy.
Yet, what you or I think about a particular economic policy doesn’t mean squat. I am not here to debate what should be done, but what will be done.
So let’s put aside the economic merits of the different schools of thought, and focus on discounting their probable implementation.
The Deficit Myth
I haven’t yet fully read Prof Kelton’s book, but glancing at the introduction, she does an admirable job sketching out her viewpoint in easy-to-understand layman’s terms. I have taken the liberty of pulling the important bits:
There is nothing new in Kelton’s introduction. MMT’ers have understood these concepts for more than a decade.
But we always must remind ourselves, as traders and investors, what’s important is to discount how the public perceives those ideas. Remember the whole Keynesian beauty contest concept (probably not the most politically correct analogy, but let’s remember that Keynes lived in a different era. In fact, I suspect if Keynes were alive today, he would be more politically correct than some of his most vocal opponents –Niall Ferguson apologizes for remarks).
Keynes rightfully understood that investors discount what the crowd will perceive as the most likely outcome as opposed to the best choice.
Which brings me to my main point. And I know some of you might think this is nuts. But I don’t care.
I have been watching for signs that the concept of “governments are not financially restrained” taking hold within the non-financial community.
I have even postulated that the corona virus crisis might prove to be the tipping point for this theory gaining traction. With all the extreme fiscal measures being put in place (without undue immediate negative effects), the public might realize that the government’s large fiscal response works miracles at staving off short-term economic pain. They might suddenly understand there is nothing holding society back from doing that again for other priorities.
Well, I think I got my signal. Earlier in the week, I noticed a popular rapper tweeting out the following:
Yup. The whole theory behind MMT is being endorsed by rap musicians now!
When disputing the need for a balanced fiscal budget, MMT’ers have often resorted to the argument, “if there is always money for war, then why isn’t there always money for other social programs?”
I don’t want to dispute the validity of their argument. However, the narrative that “we need to balance budgets” has been torn down by the corona crisis better than the war argument ever did.
Over the last month, a growing portion of society has concluded that there was never any financial constraint to spending money.
I know the hard-money and traditionally-trained-economic thinkers will scream bloody murder at that thought. I get it. It doesn’t seem to make any sense. How can there be a free lunch? There is no such thing.
I will repeat again – I don’t want to discuss the merits of MMT. We will save that for another post.
What’s important – and it’s probably the most important thing that has ever happened in my investing career – is that the narrative surrounding deficit spending has changed.
Deficits are no longer “bad”. The budget hawks have all been silenced.
This will have ramifications that will last generations.
If this MMT school of thought continues to gain traction, then many of the investment playbooks from the last few decades need to be thrown out the window. It will be as a dramatic shift as the 1981-Paul-Volcker-stamping-out-of-inflation. It will be an end of an era.
Over the course of the coming months I will discuss the long-term investment consequences. But I wanted to highlight that MMT is about to go mainstream. And as it becomes more popular, it will turn investing as we know it on its head.
Decades from now we will look back at the corona crisis and say it changed more than just our attitudes about viruses, it marked the beginning of a change in the way we think about money.
That criticism takes two forms — one, Fed officials say evidence doesn’t show much effectiveness where they have been tried, and two, negative interest rates might throw markets, such as those for money markets, into turmoil.
But don’t get your hopes up for negative mortgage rates. At best, 30-year mortgage rates will shadow the already low 10-year Treasury yield. It really depends on how the 10-year Treasury yield responds.
On May 29, the office of California Secretary of State Alex Padilla announced that enough signatures were deemed valid for the second version of a ballot initiative to require commercial and industrial properties to be taxed based on their market value. In California, the proposal to assess taxes on commercial and industrial properties at market value, while continuing to assess taxes on residential properties based on purchase price, is known as split roll.
Proposition 13 (1978) requires that residential, commercial, and industrial properties be taxed based on their purchase price. The tax is limited to no more than 1 percent of the purchase price (at the time of purchase), with an annual adjustment equal to the rate of inflation or 2 percent, whichever is lower. According to the state Legislative Analyst’s Office, market values in California tend to increase faster than 2 percent per year, meaning the taxable value of commercial and industrial properties is often lower than the market value.
The first version of the split-roll tax ballot initiative qualified for the November 2020 ballot in October 2018. In August 2019, the campaign Schools and Communities First, which is behind the proposal, announced that signatures would be collected for a revised version of the ballot initiative. Tyler Law, a campaign spokesperson, said that the campaign would not withdraw the qualified initiative from the ballot until the revised initiative qualifies. Law said, “The committee’s got the money. We’re going to get it on the ballot.”
About 1.75 million signatures were filed for the second version on April 2, 2020. At least 997,139 (57.02 percent) of the signatures needed to be valid. Based on a random sample of submitted signatures, 74.60 percent were projected to be valid.
Both versions of the ballot initiative would create a process in the state constitution for distributing revenue from the revised tax on commercial and industrial properties. First, the revenue would be distributed to (a) the state to supplement decreases in revenue from the state’s personal income tax and corporation tax due to increased tax deductions and (b) counties to cover the costs of implementing the measure. Second, 60 percent of the remaining funds would be distributed to local governments and special districts, and 40 percent would be distributed to school districts and community colleges (via a new Local School and Community College Property Tax Fund).
Whereas the first version would have taxed property whose business owners have $2.00 million or more in holdings in California and operate on a majority of the property, the second version eliminated the majority-operation requirement and increased the threshold to $3.00 million.
The second version also redefined the exception for small businesses. The first version would have continued to tax businesses with 50 or fewer full-time employees based on purchase price. The second version would likewise define small businesses as those with 50 or fewer full-time employees but would also require businesses to be independently owned and operated and own real estate in California to be exempted from the change. Other changes involve replacing the state’s existing funding distribution formula for schools and colleges with a new formula for distributing the revenue from the ballot initiative. The second version would also give retail centers, whose occupants are 50 percent or more small businesses, more time before being taxed at market value.
Since the campaign Schools and Communities First will withdraw the first version of the ballot initiative, the qualification won’t change the number of measures on the ballot in California. As of May 31, six citizen-initiated measures have qualified for the ballot (excluding the first version of the split roll tax initiative). Three more ballot initiatives are pending signature verification. The verification deadline is June 25, 2020. June 25 is also the last day that the California State Legislature can place measures on the November ballot.
One of the bedrocks of modern US capitalism – which is now mutating by the day if not hour as the Fed scrambles to preserve at any cost its the towering edifice after decades of malinvestment, even the nationalziation of the very capital markets that made America great – and one of the constants along with death and taxes, is that residential debt is non-recourse, meaning one can simply walk away from one’s mortgage if the bill is untenable, while commercial debt is recourse, or pledged by collateral that has to be handed over to the creditor if an event of default occurs.
However, in the aftermath of the sheer devastation unleashed upon countless small and medium commercial businesses which will be forced to file for bankruptcy by the thousands, this may all change soon.
As the Commercial Observer reports, last Friday, the California Senate Judiciary Committee advanced a bill that would allow small businesses — like cafes, restaurants and bars — to renegotiate and modify lease deals if they have been impacted by shelter-in-place orders and economic shutdowns. If an agreement isn’t reached after 30 days of negotiations, the tenant can break the lease with no penalty, effectively starting a revolution in the world of credit by retroactively transforming commercial loans into non-recourse debt.
Landlord advocates have, predictably, been mobilizing in opposition, arguing that the proposal is unconstitutional, and that it would “upend” leases around the state. Justin Thompson, a real estate partner with Nixon Peabody, told Commercial Observer that it was illuminating to see so many industry organizations come out “so vehemently opposed” in a short period of time. Having heard from industry groups all week, Thompson said the general consensus in the commercial real estate community is that the bill is “overly broad, overreaching, and it is a bit of a sledgehammer” when something less blunt would do.
“Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straits and in need of assistance,” Thompson said. “But I think the implications of SB 939 are really laying it at the feet of landlords, and putting them in the situation where, even if they have tenants that were going to make it through this, they might now rethink that and leave the landlord in the lurch.”
Senate Bill 939 was initially introduced as a statewide moratorium that would prohibit landlords from evicting businesses and nonprofits that can’t pay rent during the coronavirus emergency. But it was amended in the week to also give smaller businesses the ability to trigger re-negotiations if they have lost more than 40 percent of their revenue due to emergency government restrictions, and if they will be operating with stricter capacity limits due to continued social distancing mandates.
If the parties do not reach a “mutually satisfactory agreement” within 30 days after the landlord received the negotiation notice, then the tenant can terminate the lease without liability for future rent, fees, or costs that otherwise would have been due under the lease.
One of the bill’s authors, Sen. Scott Wiener, said during the hearing that the bill is focused on the hospitality sector, which has been most devastated. The renegotiation provision will not apply to publicly owned companies or their businesses. The law would be in effect until the end of 2021, or two months after the state of emergency ends, whichever is later.
Quoted by the Commercial Observer, Wiener argued that the state faces “a mass extinction event of small businesses and nonprofits in every neighborhood,” and the “very real prospect” of them permanently closing due to prolonged mandates that reduce capacity, “chopping in half someone’s business.”
“This would change the face of our state permanently,” he said. “It would severely hamper our ability to recover.”
So, the choice facing California is either a “mass extinction event of small businesses” or “financial collapse.” Sounds about right.
* * *
“This postponement of rents will cause … landlord’s financials to crumble and lead to lenders putting out cash calls to lower loan balance and foreclose when landlords cannot pay, and cripple landlords’ abilities to keep their properties open and maintained,” the letter read. CBPA also argued it is unconstitutional for a state to pass a law impairing the obligation to contracts, and warned it would “allow one party to unilaterally abrogate real estate leasing contracts.”
CBPA is the designated legislative advocate in California for the International Council of Shopping Centers, the California Chapters of the Commercial Real Estate Development Association, the Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, AIR Commercial Real Estate Association, and others. Those groups also warned members and clients about the bill, and voiced opposition during the hearing on Friday.
Thompson added that the bill risks crushing foundational landlord-tenant relationships throughout the state. Worse, if it passes in California and is adopted in other states across the country, the very foundations of modern finance would be shaken resulting in catastrophic consequences.
“Everything we do, especially in real estate, runs on relationships,” he said. “I think that when you tip the balance so far in favor of the tenant the way that [SB 939] does, it certainly strikes at the heart of the idea that we are in this together. … This does not make it feel like landlords and tenants are in this together anymore.”
The law firm Buchalter, which has offices in L.A., Orange County, San Francisco and around the West Coast, warned clients that the bill sets a “terrible precedent” that will “upend all your leases.”
“The rights afforded under SB 939 would effectively rewrite every commercial lease in California”other than publicly traded companies, the firm said. It “negates all current commercial leases to the benefit of one business over another.”
Instead, Buchalter said the state should provide assistance to tenants impacted by the stay-at-home orders, and pointed to the “more reasonable” renter relief proposals introduced by Senate Pro Tem Toni Atkins
Wiener said they are sensitive to the needs of property owners in terms of their loan obligations.
“It’s a complicated issue. We don’t want these property owners to default on their loans,” he said. “But we also need to be clear: these landlords aren’t going to be able to collect the pre-COVID rents from these restaurants, bars and cafes. That is not the reality. The choice is not between full rent and reduced rent. The choice is between reduced rent and no rent.”
He argued current leases negotiated before the pandemic reflect a “different financial reality.”
“Restaurants, bars, and cafes are expected, frankly, to just suck it up, and magically come up with the high rent that was obtained in pre-COVID circumstances,” he said. “This provision is not for leases to be terminated. It is to provide space and incentive to actually get the renegotiation done. … We know that overwhelmingly, these businesses don’t want to close down. This is their life’s work, they want to find a way to survive.”
Wiener said many commercial landlords are already working with renters, waiving back rents, and restructuring leases.
“It’s not in anyone’s interest where the landlord gets no revenue,” he said. “Sadly, on the other hand, all too many commercial landlords are refusing to renegotiate; are insisting that the pre-COVID, unrealistic rent be paid; are invoking lease-rent escalators; are imposing late fees on backrent. That is happening all over the state.”
During a press conference Thursday, Roberta Economidis, a partner with GE Law Group hospitality law practice, said that in order to survive, “hospitality-related businesses need long-term rent relief, not simply a deferral of high rents now that will become an insurmountable debt later.”
A near-real-time roller-coaster of home sales during the pandemic via charts.
(Wolf Richter) On May 28, I reported how the National Association of Realtors’ Pending Home Sales Index for the US had plunged 34% in April. These are sales where contracts were signed in April, and were expected to close over the next month or two. The index gives a preview of what closed sales in May might look like. In the comments, some people said that sales in their bailiwick were jumping while others said that sales were slow. Real estate is local.
So here are pending sales – with contracts reported as signed in May through May 24th, for 15 big metro areas in the US, computed daily and shown as a 7-day moving average. The data is compiled by real-estate brokerage Redfin, from local multiple listing service (MLS) and Redfin’s own data, and was released at the end of the week. The charts are also from Redfin. However, the data is not available for every major city. The percentage in red indicates the change of the 7-day moving average through May 24 this year compared to the same period last year.
And let me assure you that real estate is local, that “nothing goes to heck in a straight line,” as it says on our WOLF STREET beer mugs, and that sales are headed in astonishingly different directions depending on the local market, from red-hot to ice-cold, with whiplash effect, sometimes in the same state as in Texas.
WTF?!? Did pent-up demand from people who’d gotten stir-crazy suddenly collide with the oil bust? Will Houston show a similar phenomenon in a week or two? A mystery for now.
I couldn’t find Miami data in the Redfin data base, so Tampa will do.
I couldn’t pull up the pending sales data for New York City. So here is Nassau County, on Long Island:
I couldn’t get the data for Boston, so west we go.
I couldn’t get Redfin data on Nashville, St. Louis, Detroit, and Kansas City. But here is Minneapolis.
So this was the grand tour of the pending home-sales roller-coaster during the pandemic, with whiplash and all.
(Emily Craine) The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week – even as more businesses reopened and rehired some laid-off employees.
More than 40 million new claims for unemployment benefits have been filed in the past two months ever since the coronavirus started paralyzing the US economy.
It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.
While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then.
Although the total figure for claims in more than 40 million, not all of them are still unemployed. The number of people currently receiving unemployment benefits is 21 million, which is a rough measure of the number of unemployed Americans.
States are gradually restarting their economies by letting some businesses – from gyms, retail shops and restaurants to hair and nail salons – reopen with some restrictions.
As some of these employers, including automakers, have recalled a portion of their laid-off employees, the number of people receiving unemployment benefits has fallen.
The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week. It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.
More than 40 million new claims for unemployment benefits have been filed in the past two months when the coronavirus started paralyzing the US economy
The weekly jobless claims report, the most timely data on the economy’s health, is being watched to assess how quickly the economy rebounds after businesses shuttered in mid-March to control the spread of COVID-19 and almost ground the country to a halt.
The number of claims – stuck at an astonishingly high level even as non-essential businesses are starting to reopen – suggest it could take a while for the economy to dig out of the coronavirus-induced slump despite signs from the housing market and manufacturing that the downturn was close to bottoming.
Economists fear a second wave of private sector layoffs and job cuts by state and local governments whose budgets have been crushed contributed to last week’s unemployment claims.
‘I am concerned that we are seeing a second round of private sector layoffs that, coupled with a rising number of public sector cut backs is driving up the number of people unemployed,’ said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.
‘If that is the case, given the pace of reopening, we could be in for an extended period of extraordinary high unemployment. And that means the recovery will be slower and will take a lot longer.’
The second wave of layoffs could grow bigger with Boeing announcing on Wednesday it was eliminating more than 12,000 US jobs and also disclosing it planned ‘several thousand remaining layoffs’ in the next few months.
Meanwhile, Amazon.com Inc announced on Thursday it has plans to offer permanent jobs to about 70 percent of the workforce it has hired temporarily to meet consumer demand during the pandemic.
The world’s largest online retailer will begin telling 125,000 warehouse employees in June that they can keep their roles longer-term. The remaining 50,000 workers it has brought on will stay on seasonal contracts that last up to 11 months, a company spokeswoman said.
California, Washington, New York and Florida saw the biggest increases in new claims, according to the latest Labor Department report.
In California, where claims increased by 31,764, layoffs were most prominent in the service industry.
Layoffs in insurance, educational services and public administration industries were most common in Washington state where claims rose by 29,288.
The majority of layoffs in New York, which saw its claims increase by 24,543, were felt in the transportation and warehousing, educational services, and information industries.
Florida’s layoffs increased by 2,322 and impacted industries included agriculture, forestry, fishing, and hunting, construction, manufacturing, wholesale trade, retail trade and service industries.
Economists cautioned the 40 million figure does not represent the number of jobs lost due to the pandemic, citing technical difficulties and procedures at state unemployment offices.
The focus, instead, should be on the number of people still receiving unemployment benefits. These so-called continuing claims could shed light on the effectiveness of the government’s Paycheck Protection Program.
The PPP, part of a historic fiscal package worth nearly $3 trillion, offered businesses loans that could be partially forgiven if they were used for employee salaries.
The job cuts reflect an economy that was seized by the worst downturn since the Great Depression after the virus forced the widespread shutdown of businesses.
‘Now is a good time to think how many of those people who lost their jobs are going to get them back, my sense is 25 percent will not and that’s what gives us the double digit unemployment rate well into 2021,’ said Joe Brusuelas, chief economist at RSM in New York.
‘The bankruptcies of small and medium enterprises will result in a much higher rate of permanent layoffs.’
While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then. Pictured above in an unemployment office in Arkansas in April
The economy shrank at an even faster pace than initially estimated in the first three months of this year with economists continuing to expect a far worse outcome in the current April-June quarter.
The Commerce Department reported Thursday that the gross domestic product, the broadest measure of economic health, fell at an annual rate of 5 percent in the first quarter, a bigger decline than the 4.8 percent drop first estimated a month ago.
It was the biggest quarterly decline since an 8.4 percent fall in the fourth quarter of 2008 during the depths of the financial crisis.
Analysts are monitoring incoming economic data to gauge how consumers are responding as many retail establishments gradually reopen.
Jobs won’t return in any significant way as long as Americans remain slow to resume spending at their previous levels.
Data from Chase Bank credit and debit cards shows that consumers have slowly increased their spending since the government distributed stimulus checks in mid-April.
Consumer spending had plunged 40 percent in March compared with a year earlier but has since rebounded to 20 percent below year-ago levels.
Most of that increase has occurred in online shopping, which has recovered to pre-virus levels after having tumbled about 20 percent.
But offline spending, which makes up the vast majority of consumer spending, is still down 35 percent from a year ago, according to Chase, after having plummeted 50 percent at its lowest point.
Existing home sales collapsed but new home sales rebounded in April, which leaves pending home sales to break the tie and analysts expected a 17.3% MoM drop. However, pending home sales disappointed notably with a 21.8% MoM collapse, sending YoY sales crashing 34.6% – the most ever…
“The housing market is temporarily grappling with the coronavirus-induced shutdown,” which reduced listings and purchases, Lawrence Yun, NAR’s chief economist, said in a statement.
So while all sorts of narratives about lower rates were puked out to defend new home sales outlier data, it seems pending home sales did not get the message…
Every region crashed…
Northeast fell 14.5%; Feb. rose 2.8%
Midwest fell 22%; Feb. rose 4.2%
South fell 19.5%; Feb. fell 0.2%
West fell 26.8%; Feb. rose 5.1%
That is the lowest level of pending home sales since records began in 2001…
If there’s a crisis will you be able to get any cash out of the bank? Will the banks even have any cash? Because, as of last March, it is no longer a requirement – the banks aren’t required to have a single dollar bill in their vaults and drawers.
U.S. equity markets surged this week, buoyed by positive vaccine data and on renewed hopes of a V-shaped economic recovery as countries around the world begin the reopening process.
The S&P 500 ended the week higher by 3.1%, closing nearly 35% above its lows in late March despite another slate of ugly unemployment data that looms over the recovery.
Real estate equities led the gains this week, propelled by a bounce-back in many of the most beaten-down property sectors including retail and hotels that were ravaged by the lock downs.
Home builders continued their recent resurgence as high-frequency housing data has indicated that the housing industry may indeed be leaders of the post-coronavirus economic rebound.
Fresh data from Redfin showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels while home values have seen accelerating growth.
Real Estate Weekly Outlook
(via Hoya Capital) U.S. equity markets surged this week, buoyed by news of positive clinical trial results from Moderna (MRNA) and Inovio Pharmaceuticals (INO) and on renewed hopes of a V-shaped economic recovery as most states and countries around the world have begun the post-coronavirus reopening process. Contrary to the predictions of some experts, the virus has remained on the retreat even in states that were among the first to reopen, while emerging evidence – detailed in a report by JPMorgan – suggests that lock downs may have actually aggravated rather than mitigated the impacts of the disease. Uncertainty remains, however, over how quickly the economic damage can be reversed and the “shape” of the economic recovery in the back half of 2020.
Following a decline of 2.1% last week, the S&P 500 ETF (SPY) ended the week higher by 3.1%, closing nearly 35% above its lows in late March. Real estate equities led the gains this week, reversing almost all of last week’s steep declines, propelled by a bounce-back in many of the most beaten-down property sectors that were ravaged by the economic lock downs. Closing roughly 30% off its lows in March, the broad-based Equity REIT ETFs (VNQ) (SCHH) surged 7.0% with all 18 property sectors in positive territory while Mortgage REITs (REM) jumped 10.8% on the week, closing 55% above its March lows amid clear signs of stabilizing in the mortgage markets.
The more pronounced strength this week was seen in the recently lagging Mid-Cap (MDY) and Small-Cap (SLY) indexes which delivered strong out performance, surging by 7.3% and 8.8% respectively. The gains this week came despite another round of ugly economic data including Initial Jobless Claims data that showed that another 2.43 million Americans filed for unemployment benefits last week, bringing the eight-week total to over 38 million. However, flashes of strength have become increasingly more evident in recent weeks – particularly in the all-important U.S. housing market – and commentary from corporate earnings reports over the last two weeks indicated that the economic rebound is already beginning to take hold in many segments of the economy. The Industrials (XLI), Energy (XLE), and Consumer Discretionary (XLY) sectors joined the real estate sectors as top-performers on the week while Healthcare (XLV) was the lone sector in the red.
Home builders and the broader Hoya Capital Housing Index were among the standouts this week as recent high-frequency housing data has indicated that the housing market may indeed be the leader of the post-coronavirus economic rebound. The gains came following fresh data from Redfin (RDFN) that showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels on a seasonally-adjusted basis, gains which have been “driven by record-low mortgage rates as pent-up demand is unleashed.” This data was broadly consistent with recent commentary from home builders and data released earlier this week from the Mortgage Bankers Association which showed that home purchase mortgage applications rose for the 5th straight week and are now lower by just 1.5% from last year compared to the 35% decline in April.
As goes the U.S. housing market, so goes the U.S. economy. Residential real estate is by far the most significant asset on the aggregate U.S. household balance sheet and the value of the U.S. housing market is larger than the combined market capitalization of every U.S. listed company. As we’ve discussed for many years, it’s impossible to overstate the importance of the U.S. housing market in forecasting macroeconomic trends for the broader economy and just as it was impossible to avoid a deep and lasting economic recession from the sub-prime housing crisis, it is difficult to envision the “depression-like” economic environment forecasted by some analysts without first seeing substantial instability in the housing market. While very early in the economic recovery, we’re so far observing quite the opposite as the combination of favorable millennial-led demographics, record-low mortgage rates, and a substantial under supply of housing units after a decade of historically low levels of new construction continue to be relentless tailwinds.
Real Estate Earnings Season Wrap-Up
While the residential real estate sector may be an area of relative out performance during the post-coronavirus economic recovery, other areas of the commercial real estate sector face a more uncertain future. Real estate earnings season wrapped up this week with a handful of late-reporting stragglers, so the final numbers for rent collection are now in. Rent collection has been largely a non-issue for residential, industrial, and office REITs, as each sector has collected over 90% of April rents. For retailers, if you’re not essential, you’re not probably paying the rent. Collection among mall REITs averaged around 22% while shopping center REITs collected roughly 60% of April rents and net lease REITs collected 73% of rents.
Even among the commercial REIT sectors that reported solid rent collection in April, there are some areas of concern regarding their respective long-term outlook in the post-coronavirus world. Earlier this week, we published Office REITs: Coronavirus Killed Corporate Culture. Office REITs have been pummeled during the coronavirus pandemic amid mounting questions over the long-term demand outlook as businesses become increasingly more comfortable with “remote work” environments as reports surfaced this week that Facebook (FB) and others plan to permanently shift workers to work-from-home arrangements. Zoom (ZM) and “work-from-home” technology suites have emerged as the bigger competitive threat to the office REIT sector as more than half of the companies expect to shrink their physical footprint.
Two more equity REITs were added to the Coronavirus Dividend Cut list this week: net lease REIT VEREIT (VER) and Braemar Hotels (BHR). We’ve now tracked 50 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends, the vast majority of which have come from the retail and hotel REIT sectors. Apart from their sector affiliations, the equity REITs that have cut or suspended their dividends have been almost exclusively companies in the smallest third of market capitalization within the REIT sector and in the highest third in terms of leverage metrics as the “outperforming factors” that we discussed earlier this year in The REIT Paradox: Cheap REITs Stay Cheap have been on full display in 2020.
Among the handful of stragglers to report results this week were four hotel REITs including the aforementioned Braemar Hotels along with Apple Hospitality (APLE), CorePoint (CPLG), and Ashford (AHT). While Q1 occupancy and Revenue Per Available Room (RevPAR) metrics were understandably ugly across the hotel REIT sector, commentary on earnings calls this week suggested that we’ve likely seen the worst of the occupancy declines as Ashford’s management noted that “occupancy continues to increase on a weekly basis. We are seeing pick-up of room nights on a short-term basis and the pace of that pickup is increasing almost daily.”
All 18 REIT sectors finished in positive territory this week as hotel and casino REITs including Gaming & Leisure Properties (GLPI) and VICI Properties (VICI) were among the top performers this week as a growing number of hotels and casino properties across the country have announced plans to re-open over the next several weeks. Shopping center REITs, particularly those focused on the big-box segments like Retail Properties of America (RPAI), Kimco Realty (KIM), and SITE Centers (SITC), were also leaders this week after generally positive commentary on reopening plans from several big-box retailers including Best Buy (BBY). The technology REIT sectors – data centers and cell towers – were among the laggards this week, but remain the only two REIT sectors in positive territory on the year.
This week, published Apartment REITs: No Rent Strike, But Fears Of Urban Exodus. We discussed how apartment REITs reported limit issues with rent collection in April and early-May amid the depths of the pandemic-related shutdowns as more than 95% of rents were collected. Ultra-dense metros like NYC, Chicago, and San Francisco, however, may see lasting pain as residents flee to lower-cost and “safer” semi-urban and suburban markets, including faster-growing Sunbelt metros. Several REITs are more exposed than others from this trend and we detailed the geographical exposure of the nine largest multifamily REITs. As one of the more defensively-oriented and counter cyclical REIT sectors, we remain bullish on long-term rental fundamentals.
Strong housing market data over the last several weeks has been good news for mortgage REITs as well as residential mREITs jumped another 10.6% this week while commercial mREITs gained 12.0%, each rebounding more than 50% from their lows in early April. New York Mortgage REIT (NYMT) was among the leaders this week after reporting solid Q1 results. New Residential (NRZ) was also among the leaders after providing an interim update in which it noted that had bolstered its liquidity position through an additional capital raise and noting that forbearance requests have continued to be lower than previously forecasted.
Helping the residential mREITs this week was news the FHFA has issued temporary guidance that should make it easier for homeowners who have taken advantage of COVID forbearance programs to refinance or buy a new home. Borrowers will be allowed to get a new mortgage three months after their forbearance period ends and they have made three consecutive payments under their repayment plan. Roughly 9% of mortgage loans representing roughly 4.75 million homeowners are now in forbearance, according to data released this week from Black Knight (BK), but a recent survey from LendingTree found that the majority of these borrowers chose to enter forbearance not out of necessity but simply because it was offered and available without any apparent penalty under the CARES Act.
Real Estate Economic Data
Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.
Housing Recovery Has Already Begun
Home builder Sentiment data released on Monday showed that confidence among home builders – particularly in the Southern region where the majority of publicly-traded home builders are based – has begun to bounce back from the lows in April. The NAHB Housing Market Index climbed to 37 from last month’s reading of 30, driven by a 12-point rebound in Future Sales expectations and an 8 point bounce in Buyer Traffic. Consistent with recent reports from other home builders, Meritage Home (MTH) announced this week that it believes that May orders could be “in line” with last May’s as the strong sales momentum seen during the last two weeks of April has carried over into early May.
The U.S. housing industry was red-hot before the onset of the coronavirus crisis with Housing Starts, Building Permits, and New Home Sales all eclipsing post-cycle highs in early 2020. Backward-looking data released this week by the U.S. Census Bureau showed the magnitude of the decline in construction activity in April amid the worst of the pandemic. On a seasonally-adjusted annualized basis, housing starts and building permits fell to the lowest level since 2015 in April at 891k and 1,074k units, respectively, following a relatively solid March. Single-family starts and permits were actually quite a bit stronger than expected while the always volatile multifamily construction activity showed sharper declines in April.
Existing Home Sales also beat expectations in April, coming in at 4.33 million versus expectations of 4.30 million. Home purchase mortgage applications – a leading indicator of Existing Home Sales – rose for the 5th straight week and are now remarkably lower by just 1.5% from last year compared to the 35% decline in April according to data released this week by the Mortgage Bankers Association. The 30-Year Mortgage rate remains lower by roughly 90 basis points from the same week last year, a level of decline in mortgage rates that has historically been strongly correlated with robust growth in housing market activity under normal conditions.
2020 Performance Check-Up
REITs are now lower by roughly 24.0% this year compared with the 8.2% decline on the S&P 500 and 14.1% decline on the Dow Jones Industrial Average. Consistent with the trends displayed within the REIT sector, mid-cap and small-cap stocks continue to under perform their larger-cap peers as the S&P Mid-Cap 400 and S&P Small-Cap 600 are lower by 17.7% and 23.9%, respectively. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as data centers and cell tower REITs remain the real estate sectors in positive territory for the year, while industrial and residential REITs have also delivered notable out performance. At 0.66%, the 10-Year Treasury Yield has retreated by 126 basis points since the start of the year and is roughly 260 basis points below recent peak levels of 3.25% in late 2018.
Next Week’s Economic Calendar
A busy two-week stretch of housing data continues next week with Home Price data from the FHFA and S&P Case-Shiller on Tuesday which is expected to show a steady rise in home prices in March during the early stages of the pandemic. New Home Sales data for April is also released on Tuesday while Pending Home Sales data for April is released on Thursday. Initial Jobless Claims data on Thursday will again be another “blockbuster” report with expectations that we will see another 2.5 million job losses, but we’ll be watching closely to the continuing claims for indications that temporarily-unemployed Americans are returning to work.
One of Cristal Clark’s newest listings is a single-level French Country-style home in Birnam Wood designed by Michael L. Hurst, combining contemporary finishes and amenities with French Country elegance. Ms. Clark has remained busy throughout the pandemic, with an average of 10 or more showings a week.
Despite economy, Santa Barbara agents are busier than ever
When Santa Barbara County was sent into lock down in mid-March to combat the growing coronavirus crisis, the residential real estate industry held its breath and expected the worst. Buyers and sellers faced serious fears as jobs were in jeopardy and the prospect of opening one’s house to strangers kept homes off the market.
“Basically in both directions buyers and sellers backed off. It became a real concern,” said Village Properties owner Renee Grubb.
Now it appears those fears have been alleviated.
Over the last two months, real estate activity has remained strong in the Santa Barbara area, and agents are busier than ever despite the transition to virtual showings.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
“I would have to say at least for now things are getting better. When I go on my calls for the California Association of Realtors, and they report on all of California, it’s looking better everywhere,” Ms. Grubb told the News-Press.
“I chose not to lay off any of my staff, and I feel fortunate that now the market is doing better and so my losses haven’t been as great as I thought they were going to be, which makes me happy of course.”
At the end of March and going into April, the forecast was bleak. Village Properties saw a significant dip in closings and properties fall out of escrow. Compared to 2019, they saw a 50% decline in business.
“Things started to pick up around mid-April. I think more people had gotten used to what was going on. We’ve been doing this for a month,” said Ms. Grubb.
“You never know until they close of course, but there are showings of high-end properties three, four, five times a week now. That kind of high-end activity actually started maybe two and a half to three weeks ago to where my agents who sell high end have been very busy.”
While the flurry of activity has been surprising, some agents, like Cristal Clark, did not even see business slow.
“For me there was no lag time,” said Ms. Clark.
“It was constant. I mean long hours working. It’s been nonstop.”
Ms. Clark was concerned at first, but soon saw a lot of interest from buyers from Los Angeles and San Francisco, especially in the under $10 million market.
“I think people want to be here. They see the beauty that Montecito and Santa Barbara has to offer and they’re not thinking about ‘I’d love to live there in the future’. They’re really putting it into place now, be it primary homes or secondary homes,” said Ms. Clark.
Kyle Kemp, district manager for Berkshire Hathaway, believes the slowing of activity in the first week was in part due to the uncertainty around using virtual tools to conduct business. Fortunately, many of his agents were already well versed in digital showings, and those that weren’t quickly caught on.
Lorie Bartron of Bartron Real Estate Group, a real estate team under Berkshire Hathaway HomeServices California Properties, shows off a property at 1060 Cieneguitas Road. Despite a short setback, Berkshire Hathaway is back on track for breaking its record for best year ever.
Although they were down 60% in sales in the first week, Mr. Kemp said his agents have rallied and are now only 20% behind, with a 206% increase in property inquiries in California compared to 2019.
“Once that stopped everybody started to feel comfortable, started to get their feet on the ground, realized Santa Barbara wasn’t going anywhere, the sun wasn’t going away, and all of a sudden people started coming back to real estate again,” said Mr. Kemp.
Mr. Kemp said most buyers seem to be in the technology sector, interested in getting out of Los Angeles and San Francisco and into the open spaces of Santa Barbara and Montecito.
“Those buyers don’t seem to be affected. In fact, a lot of them are telling us their businesses are doing better. We’re hit by the service industry for sure, because Santa Barbara is such an escape for everybody, so we tend to have a lot of hospitality, but that hasn’t for some reason affected the real estate,” said Mr. Kemp.
While the majority of interest and sales have been from California, agents are speaking to a lot of buyers from around the country looking to purchase homes in the area as soon as it is safe to travel.
“There are a lot of clients who want to live here, but they live somewhere where they have to take a plane ride, so they’re just kind of waiting until their areas open up more and they feel comfortable coming. I have a lot of clients coming next month in June from different parts of the U.S.,” said Ms. Clark.
“We would be selling houses all day long if people could get here physically,” said Mr. Kemp.
“They can do as much as they can do on a visual tour but if you’re going to spend $3 to $10 million on a property, you kind of want to walk around it.”
The biggest issue for agents has been a lack of inventory. Going into 2020, there was already a shortage of houses on the market, and the number of sellers has not increased to meet the demand seen in April and May.
“I am seeing every agent overloaded with a large number of buyers and not a lot of houses to sell. We haven’t seen anything happen on prices, where I thought for sure we would see some kind of trend downwards because of what was going on, and that was absolutely not happening,” said Mr. Kemp.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.
This is especially true with houses on the market for $1 million and under, which agents can’t keep on the shelves. If it’s a good house, priced well and in good condition, agents are fielding multiple offers.
“It’s great for sellers, a little tough for buyers. Ultimately sellers are thinking, ‘Well, should I put my house on the market?’ It’s actually a great time because there’s no competition. If you’re a buyer, buy sooner than later because when this really gets going I think there’s more buyers than sellers, so I think we’re going to have a tough market again,” said Mr. Kemp.
Despite a rocky March, real estate agents are preparing for a surge in interest as more people adjust to home buying during COVID-19 and are anticipating a good year for business.
“I think if we’re down at all it will be single digits. If we’re down by any percentage at all it will definitely be single digits, and it’s very possible that we’ll end up matching or coming very very close to what we did last year, and it was a good year last year. I think these last few months will tell, but if it continues I’m pretty optimistic that we’re going to end up in a good year,” said Ms. Grubb.
Is the real estate market on the brink of collapse? The US economy is headed for a recession if not a depression and as a result, real estate prices may drop. But there are no certainties, only probabilities. These are catalysts that could trigger incredible amounts of selling, which would flood the market with additional supply. IF this type of forced selling takes place, prices could collapse.
Will it play out like 2008-2012? Most likely not, but it could rhyme and the net result would be the same, prices plummeting in real terms (adjusted for inflation). If you’re interested in real estate, the housing market or the future of the economy, George Gammon dives deep into the demographic setup that may foreshadow much of tomorrow’s residential real estate market.
Virtually nothing in America’s top-down financial and political realms is actually transparent, accountable, authentic or honest.
Opting out will increasingly be the best (or only) choice for tens of millions of people globally.Opting out means leaving the complicated, costly and now unaffordable / unbearable life you’ve been living for a new way of life that is radically less complex, less costly and less deranging.
Opting out is as diverse as the individuals who choose to opt out. For many people in China, for example, the obvious choice when you’ve lost your job and can no longer afford expensive urban life is to return to your ancestral village, where you’re likely to have grandparents, parents or aunts / uncles with a house and a patch of agricultural land.
Since urbanization has been a feature of American society for generations, this is not an option for most Americans, who are by and large rootless cosmopolitanswho rarely even know their neighbors, as they move around the country out of necessity or ambition.
Just as “capitalism is no longer attractive to capitalists,” (per Wallerstein), urban living has lost its luster in ways few dare even discuss. Urban centers on the Left and Right Coasts have been magnets for jobs and capital, drawing in hundreds of thousands of new residents seeking higher paying employment. This vast influx pushed rents and housing valuations to nosebleed heights, and as a result all the local governments reckoned tax revenues would skyrocket every year like clockwork and all the developers building tens of thousands of over-priced rental units also assumed the trend would continue forever.
Too bad they didn’t read Laozi and learn that The Way of the Tao Is Reversal:whether you call it the Tao or merely reversion to the mean, demanding $3,000 a month for cramped apartments and $1 million for decaying bungalows were extremes that begged for a reversal.
The federal unemployment payments and bailouts make it easier to extend the delusion and denial for a few more months, but eventually the gravity of reality will overpower magical thinking and everyone counting on overvalued assets and overpriced rent, healthcare, childcare, college tuition, etc. remaining at pre-pandemic levels will have to start dealing with deep, permanent declines in sales, employment, income, asset valuations, tax revenues, etc.
The higher the costs and taxes, the greater the sacrifices that will be needed to slash and burn budgets and spending. For high-cost, high-tax urban areas, it’s unlikely the political leadership will be able to force such sacrifices on self-serving insiders and government clerisies. The only real force for evolution / adaptation will be collapse and bankruptcy, which are already baked in as the end-game for every high-cost, high-tax urban region.
Lacking any rooted family place to return to, Americans will have to do what they do best when there’s no other option: re-invent themselves, and in pursuing this, they will re-invent small town and rural living as a by-product of opting out of what’s no longer affordable or bearable.
In my view, the author who best understood the American process of re-invention is Herman Melville. Though famous for his sprawling novel of the sea and whaling, Moby-Dick, my favorite novel of Melville’s is his under-appreciated classic, The Confidence-Man, a book I discussed in Do We Actually Want To Be Conned? All Too Often: Yes (September 3, 2008).
Every con depends on trust, and as trust and confidence are lost, cons become more difficult. Part of the process of re-invention is to find places, people and processes you can trust because they continually demonstrate their authenticity via transparency, accountability, reliability and honesty.
Virtually nothing in America’s top-down financial and political realms is actually transparent, accountable, authentic or honest. Everything in these realms is a simulated, completely self-serving projection intended to fool us–The Big Con.
In re-inventing themselves via opting out, Americans will have to learn to contribute productively to small, localized beach-heads of trust, transparency and accountability that function on the local level in an anti-fragile fashion, meaning that they actually improve and get stronger as the top-down Big Con collapses under the weight of its own lies, frauds and corruption.
The Savior State’s promises to maintain your private status quo regardless of reality are false promises, delusions based on the Big Con that we can create trillions of dollars out of thin air and give them to the top .01%, and this will magically prompt an unsustainable system to keep issuing false signals of stability.
The promises are on permanent back-order, along with trust, transparency and accountability. The choice isn’t whether to opt out or continue hoping delusions and denial will work some sort of magic, but to choose whatever form of opting out works best for you and your household.
Even before the coronavirus pandemic, US malls were in a crisis, with vacancies in January hitting a record high.
However, in the post-corona world, commercial real estate has emerged as one of the most adversely impacted sectors (perhaps because the Fed has so far refused to bail it out), with the number of new delinquencies soaring to a record high in recent weeks.
The gloom facing malls has also helped push the Big Short trade, which was the CMBX Series 6 BBB- tranche (the one with the most exposure to malls), to a fresh all time low last week.
And now, the implosion of the US retail sector has reached the very top, because according to Bloomberg The Mall of America, the largest US shopping center, has missed two months of payments for a $1.4 billion commercial mortgage-backed security, in confirmation that no business is immune to the devastating consequences of the coronavirus.
“The loan is currently due for the April and May payments,” according to a report filed by the trustee of the debt, Wells Fargo & Co., which is also the master servicer for the loan. “Borrower has notified master servicer of Covid-19 related hardships.”
Mall owners reported rock-bottom April rent collections, including about 12% for Tanger Factory Outlet Centers Inc., roughly 20% for Brookfield Property Partners LP and 26% for Macerich. Retailers and their landlords, hurt by competition from online stores before coronavirus-spurred shutdowns made things worse, are struggling to make rent and mortgage payments.
The 5.6 million-square-foot (520,000-square-meter) mall was ordered closed on March 17, and has announced plans to begin reopening on June 1, starting with retailers, followed later by food services and attractions, such as the mega-mall’s aquarium, cinema, miniature golf course and indoor theme park.
“Reopening a building the size of Mall of America is no small task, but we are confident taking the necessary time to reopen will help us create the safest environment possible,” the mall said in a statement on its website.
The Mall of America is owned by members of the Ghermezian family, whose holdings also include the West Edmonton Mall, a 5.3 million-square-foot complex in their Canadian hometown, and American Dream, a 3 million-square-foot mall in East Rutherford, New Jersey.
Just when you thought the world has reached a level of peak absurdity, the Nigerian scheme makes a grand reappearance.
Washington state officials admitted losing “hundreds of millions of dollars” to an international fraud scheme, originating out of Nigeria, that robbed the state’s unemployment insurance system and could mean even longer delays for thousands of jobless workers still waiting for legitimate benefits.
As the Seattle Times reported, Suzi LeVine, commissioner of the state Employment Security Department (ESD), disclosed the staggering losses during a news conference Thursday afternoon. LeVine declined to specify how much money was stolen during the scam, which she said appears to be orchestrated out of Nigeria but she conceded that the amount was “orders of magnitude above” the $1.6 million that ESD reported losing to fraudsters in April.
While LeVine said state and law enforcement officials were working to recover as much of the stolen money as possible, she declined to say how much had been returned so far. She also said the ESD had taken “a number of steps” to prevent new fraudulent claims from being filed or paid but would not specify the steps to avoid alerting criminals.
Thursday’s disclosure helped explain the unusual surge in the number of new jobless claims filed last week in Washington, which as we showed this morningwas the state with the highest weekly increase in claims.
On Wednesday, the state’s monthly employment report for April showed Washington with a seasonally adjusted unemployment rate of 15.4%, up from 5.1% in March. The national unemployment rate for April stood at 14.7%, seasonally adjusted.
For the week ending May 16, the ESD received 138,733 initial claims for unemployment insurance, a 26.8% increase over the prior week and one of the biggest weekly surges since the coronavirus crisis began. That sharp increase came as the number of initial jobless claims nationwide fell 9.2%, to 2.4 million, according to data released earlier in the day by the Labor Department.
Indeed, the surge in claims made Washington the state with the highest percentage of its civilian labor force filing unemployment claims – at 30.8%, according to an analysis by the Tax Foundation, a nonpartisan Washington, D.C., think tank. Nevada, the next-highest state, reported claims from 24.5% of its civilian workforce.
It now appears that many of those claims were fictitious and emanated from some computer in Nigeria.
Love & Hip Hop: Atlanta star Maurice Fayne is back home after he was arrested for allegedly using a $2 million PPP coronavirus loan to buy luxury items and make child support payments.
The reality star, 37, was pictured taking a phone call outside of his home in Georgia over the weekend.
Fayne was sitting upon a slick red BMW and drinking a soda as he pressed the phone against his ear, appearing deep in thought.
Fayne was dressed comfortably in a white T-shirt and flashy red sweatpants.
Fayne was sipping from the soda bottle as he listened intently to the call, before eventually returning back inside his house.
Authorities say Fayne used an emergency loan from the federal government to lease a Rolls Royce, make child support payments and purchase $85,000 worth of jewelry.
Fayne, who goes by Arkansas Mo on the VH1 show ‘Love & Hip Hop: Atlanta,’ was arrested Monday on a charge of bank fraud, the Department of Justice said in a news release.
Fayne is the sole owner of transportation business Flame Trucking and in April he applied for a loan that the federal government was offering to small businesses decimated by the coronavirus pandemic, officials said.
In his application, Fayne stated his business employed 107 employees with an an average monthly payroll of $1,490,200, the release said.
Fayne requested a Paycheck Protection Program loan for over $3,000,000 and received a little over $2,000,000, officials said.
He used more than $1.5million of the loan to purchase jewelry, including a Rolex Presidential watch and a 5.73 carat diamond ring, the release said.
Fayne also leased a 2019 Rolls Royce Wraith and paid $40,000 in child support.
‘At a time when small businesses are struggling for survival, we cannot tolerate anyone driven by personal greed, who misdirects federal emergency assistance earmarked for keeping businesses afloat,’ said Chris Hacker, Special Agent in Charge of FBI Atlanta.
When he met with investigators last week, Fayne denied spending the loan on anything besides payroll and business expenses.
But last Monday, federal agents searched Fayne’s home and seized the jewelry and around $80,000 in cash, including $9,400 Fayne had in his pockets, the release said.
Fayne’s attorney Tanya Miller said there was ‘considerable confusion’ about PPP guidelines and over whether owners could ‘pay themselves a salary’ when asked about the charges by CNN.
She added that she hopes these ‘issues’ will be better explained in the near future.
He was released on $10,000 bond.
Fayne appeared on several episodes of ‘Love & Hip Hop: Atlanta’ as the love interest of Karlie Redd, a longtime cast member, news outlets reported.
If mortgage demand is an indicator, buyers are coming back to the housing market far faster than anticipated, despite coronavirus shutdowns and job losses.
(CNBC) Mortgage applications to purchase a home rose 6% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Purchase volume was just 1.5% lower than a year ago, a rather stunning recovery from just six weeks ago, when purchase volume was down 35% annually.
“Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, an MBA economist. “Government purchase applications, which include FHA, VA, and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months.”
As states reopen, so are open houses, and buyers have been coming out in force, if masked. Record low mortgage rates, combined with strong pent-up demand from before the pandemic and a new desire to leave urban down towns due to the pandemic, are driving buyers back to the single-family home market. It remains to be seen if this is simply the pent-up demand or a long-term trend.
Buoying buyers, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 decreased to 3.41% from 3.43%. Points including the origination fee increased to 0.33 from 0.29 for 80 percent loan-to-value ratio loans.
Low rates are not, however, giving current homeowners much incentive to refinance. Those applications fell 6% for the week but were still 160% higher than one year ago, when interest rates were 92 basis points higher. That is the lowest level of refinance activity in over a month.
“The average loan amount for refinances fell to its lowest level since January — potentially a sign that part of the drop was attributable to a retreat in cash-out refinance lending as credit conditions tighten,” said Kan. “We still expect a strong pace of refinancing for the remainder of the year because of low mortgage rates.”
Federal regulators this week changed lending guidelines for Fannie Mae and Freddie Mac, allowing refinances on loans that were or still are in the government’s mortgage bailout, part of the coronavirus relief package. Those loans can be refinanced once borrowers have made at least three regular monthly payments. Given tough economic conditions and rising unemployment, more borrowers may be looking to save money on their monthly payments.
Weaker refinance demand pushed total mortgage application volume down 2.6% for the week.
The refinance share of mortgage activity decreased to 64.3% of total applications from 67% the previous week. The share of adjustable-rate mortgage activity increased to 3.2% of total applications.
Nothing paints a better picture of how bad things have gotten for the airline industry – and for its working class – than the fact that United Airlines is barely using over 10% of its flight attendant staff.
The airline said this week it only has work for 3,000 of its 25,000 flight attendants in June and said that job losses could be next if demand doesn’t recover by the time the government ends its payroll aid, according to Reuters.
United still intends to pay its flight attendants until September 30 thanks to $5 billion in aid the airline got from the taxpayer’s purchasing power government. The CARES Act prohibits layoffs or pay cuts before October.
United is just one of many airlines feeling the pain of the coronavirus lock down. Its flight schedule is down by an astonishing 90% and it has – along with other airlines – significantly cut the number of flights it is making on a daily basis. Major airlines are burning about $10 billion in cash per month.
United’s managing director of inflight crew resourcing, Michael Sasse, said: “If you just look at a way in which our network is flying we’d need about 3,000 flight attendants to fly our schedule for June.”
United says they will keep their flying schedule at about 10% of normal until demand starts to tick back up.
United President Scott Kirby said: “But if demand remains significantly diminished on Oct. 1, we simply won’t be able to endure this crisis … without implementing some of the more difficult and painful actions.”
United is burning about $40 million in cash per day and executives have said they want to be up front with employees about potential cuts. The airline has warned that its administrative staff will be about 30% smaller by the time Fall comes around.
Has anyone given credit to the coronavirus for exposing the general folly of our time? We’ve yet to find mention of it. Not even on the web. Here we shall do our part to give proper credit where credit is due…
Numerous stimulus proposals are currently being cooked up in Congress. In an election year, with unemployment going vertical, now’s the time to cash in on populist sentiments. The three leading bills, for example, are the Automatic Boost to Communities (ABC) Act, the Emergency Money for the People Act, and the Monthly Economic Crisis Support Act.
With names like that, what’s not to like? The main ingredient for each proposal is a $2,000 monthly stimulus check. The variance between the three is in duration and eligibility.
The ABC Act, which was introduced by Congresswomen Rashida Tlaib and Pramila Jayapal, is the most ambitious. This act is centered on $2,000 monthly payments to all taxpayers – and their dependents – for a payment period that extends one year after the termination of the declared coronavirus emergency… whenever that may be.
So, if we follow, a family of four stands to receive $8,000 per month for well over a year. Incredible! But that’s not all…
There are no eligibility criteria… save the requirement that nonresident aliens have been in the U.S. since December 19, 2019. Plus, an additional $1,000 monthly payment would continue for 12 months after the end of the initial payment period.
The price tag: Upwards of $10 trillion.
Where to begin…
State Sponsored Destruction
By our estimation, these downward steps have been underway since Neil Armstrong first stepped foot on the moon. However, the assassination of Archduke Franz Ferdinand at the hands of Gavrilo Princip may be a more accurate turning point.
By now it’s obvious to any honest observer that western civilization is circling the toilet bowl. The ABC Act of Tlaib and Jayapal, as an answer to state sponsored destruction of the economy, offers a case in point. The solution, you see, is more of the problem.
By and large, the challenges facing the economy have everything to do with central government. Over the last 40 years, as the Fed and the Treasury colluded to rig the financial system in totality, wealth has become ever more concentrated in fewer and fewer insider hands. The effect over the last decade has been a disparity that’s so magnified few can ignore it.
This trend has been further intensified by our current economic depression. Bitterness and contempt for wealthy insiders is much higher than it was during prior business cycles. Without question, this bitterness and contempt will amp up to a fever pitch over the hot summer months.
Discontent throughout the broad population will take a financial crash and an economic collapse, and transform it into a complete societal breakdown. The effect will be helter-skelter. And the central planners have already failed a test of their making.
When the coronavirus panic attacked financial markets in March the central planners at the Fed made a grave error. Rather than employing small government and sound money solutions – that is, rather than letting over indebted corporate dinosaurs go extinct – the Fed flooded financial markets with liquidity.
These bailouts saved the dinosaurs. But they also transmuted them into zombies. Now, with an economy full of zombies, the 18 month depression will extend for a decade.
Tasting the Forbidden Fruit of Free Money
Yet what the Fed wasn’t banking on was that the plebs were on to their mischief. The 2008-09 bailout of Wall Street via AIG had opened their eyes and minds to what’s possible. So as the Fed went into full big business bailout mode, the plebs started asking…where’s the people’s bailout?
What’s more, the people had a moral case to make. Through no fault of their own, state sponsored destruction, in response to the coronavirus, had eradicated their jobs. Hence, it’s only fair that the people get a bailout too, right?
The CARES Act, which included a $1,200 stimulus check and an additional $600 weekly payment for the unemployed, offered many people their first taste of the forbidden fruit of free money. They took a bite and – wow! – they liked it. And now they want more…
A $1,200 stimulus check was nice, and all. But a $2,000 monthly payment is way better. So why stop there?
When money’s free, the supply’s infinite…ain’t it?
There’s something irresistibly magical and intoxicating about the promise of free money. For it promises life without labor… and life without limits. Moreover, once a nation has taken a bite there’s no going back. Free money, you see, is so delicious that too much is never enough.
Who knows if the ABC Act will pass. But some stimulus bill with monthly checks will. And after that another will follow. And another.
Alas, free money is fake money. The Fed’s balance sheet will swell past $10 trillion, as it supplies credits to the Treasury. The national debt will swell past $40 trillion as it sends out monthly payments of fake money.
“There is a great deal of ruin in a nation,” once remarked Adam Smith.
The coronavirus, to its credit, has clarified the source of the ruin.
Excellent perspective. Maybe we don’t have it that bad? It’s a mess out there now. Hard to discern between what’s a real threat and what is just simple panic and hysteria. For a small amount of perspective at this moment, imagine you were born in 1900.
On your 14th birthday, World War I starts, and later ends on your 18th birthday. 22 million people perish in that war. Later in the year, a Spanish Flu epidemic hits the planet and runs until your 20th birthday. 50 million people die from it in those two years. Yes, 50 million.
On your 29th birthday, the Great Depression begins. Unemployment hits 25%, the World GDP drops 27%. That runs until you are 33. The country nearly collapses along with the world economy.
When you turn 39, World War II starts. You aren’t even over the hill yet. And don’t try to catch your breath. On your 41st birthday, the United States is fully pulled into WWII. Between your 39th and 45th birthday, 75 million people perish in the war.
Smallpox was epidemic until you were in your 40’s, as it killed 300 million people during your lifetime.
At 50, the Korean War starts. 5 million perish. From your birth, until you are 55 you dealt with the fear of Polio epidemics each summer. You experience friends and family contracting polio and being paralyzed and/or die.
At 55 the Vietnam War begins and doesn’t end for 20 years. 4 million people perish in that conflict. During the Cold War, you lived each day with the fear of nuclear annihilation. On your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. Life on our planet, as we know it, almost ended. When you turn 75, the Vietnam War finally ends.
Think of everyone on the planet born in 1900. How did they endure all of that? When you were a kid in 1985 and didn’t think your 85-year-old grandparent understood how hard school was. And how mean that kid in your class was. Yet they survived through everything listed above. Perspective is an amazing art. Refined and enlightening as time goes on. Let’s try and keep things in perspective. Your parents and/or grandparents were called to endure all of the above – you are called to stay home and sit on your couch.
The California State University system, commonly recognized as the largest four-year university system in the country with 23 total campus, will not hold in-person classes through the fall semester for the majority of programs due to the coronavirus pandemic.
Chancellor Timothy White informed a board meeting on Tuesday that “nearly all in-person classes” will be canceled, meaning the current remote learning online format will continue.
And additionally concerning the other major system in the state, the University of California, a new statement this week said “it’s likely none of our campuses will fully re-open in fall,”according to a UC spokesman.
As multiple reports have underscored, this means a total of more than 770,000 students will not return to campus — which will no doubt be a huge blow to school finances, which often relies heavily for daily operations on campus-related fees such as housing, to say nothing of the coming likely massive drop in tuition and other crucial funds.
Considering other public and private colleges and universities in California are now likely to also go on-line only, we’re now talking a whopping one million students expected to stay home.
It further introduces the huge unknown of how many students will choose to forgo paying tuition for what many see as a sub-par online education as opposed to the holistic experience of a college campus. As we described before many especially incoming college freshmen are likely to take a ‘gap year’ as they’re not interested in dropping $50K plus for a semester sitting in their living room.
A California State University statement this week said: “First and foremost is the health, safety and welfare of our students, faculty and staff, and the evolving data surrounding the progression of Covid-19 —current and as forecast throughout the 2020-21 academic year,” according to CNN.
And the University of California announcement said it “will be exploring a mixed approach with some material delivered in classroom and labs settings while other classes will continue to be online.”
#CORONAVIRUS IMPACT: The California State University (CSU) system said it plans to cancel all in-personal classes for the fall and to continue instruction online. https://t.co/FvDQDr0AE0
Apparently the few programs which will be deemed as essential to conduct in-person involve professions like nursing, bio-research, and medical related disciplines, where access to labs, medical equipment, and patient interaction are crucial.
Schools across the nation are already losing tens of millions in campus and summer fees given shutdowns, not to mention sports programs being shuttered, also as the the question of whether in-person instruction will even happen next Fall remains the biggest anxiety-inducing huge unknown, potentially delivering a financial fatal blow to a number of already struggling schools.
Endowment values have plunged along with markets to boot. And then there’s a no doubt a greatly diminished incoming freshman class, and with that severely declining numbers of tuition checks coming in. Already faculty members are being furloughed in some cases, or salaries being cut.
Having crashed in March, April industrial production was expected to crash even harder. Industrial production plunged 11.2% MoM (very modestly better than the 12% drop expected) but still the worst in 101 years…
Manufacturers in the U.S. were among the first to experience the pandemic’s economic drag as producers fell victim to supply-chain disruptions, a severe weakening in exports market and a drop in domestic demand.
Capacity Utilization collapsed to a record low 64.9%
The DOW Jones Industrial Average still has a long way to go to catch down to Industrial Production…
Glenn Kelman, Redfin CEO, discusses the state of the residential home market and where he sees it headed as the coronavirus pandemic continues.
“Nobody was selling in March or April unless they absolutely had to. There was a sign of distress or panic in the market so sellers just withdrew. There weren’t many foreclosures because we’ve got so much forbearance in the lending markets, and that just means there was very little inventory in April”
Glen, where do you see markets that are going to be in trouble and distress potentially, and where do you see the opportunity.
“Yeah, well I’m worried about the big cities.
There will be something close to an exodus from these really large cities where housing is so expensive, to places like Charleston, Madison Wisconsin or Boise Idaho, places where it’s just more affordable and you can still walk around town a little bit. That’s where the search traffic has already shifted on our website. If you look where people are searching on Redfin, it is overwhelmingly people living in big cities, looking into small towns”
The core problem is the U.S. economy has been fully financialized, and so costs are unaffordable.
(Charles Hugh Smith) To understand the long-term consequences of the pandemic on Main Street and local tax revenues, we need to consider first and second order effects. The immediate consequences of lock downs and changes in consumer behavior are first-order effects: closures of Main Street, job losses, massive Federal Reserve bailouts of the top 0.1%, loan programs for small businesses, stimulus checks to households that earned less than $200,000 last year, and so on.
The second-order effects cannot be bailed out or controlled by central authorities.Second-order effects are the result of consequences have their own consequences.
The first-order effects of the pandemic on Main Street are painfully obvious: small businesses that have barely kept their heads above water as costs have soared have laid off employees as they’ve closed their doors.
The second-order effects are still spooling out: how many businesses will close for good because the owners don’t want to risk losing everything by chancing re-opening? How many will give it the old college try and close a few weeks later as they conclude they can’t survive on 60% of their previous revenues? How many enjoy a brief spurt of business as everyone rushes back, but then reality kicks in and business starts sliding after the initial burst wears off?
How many will be unable to hire back everyone who was laid off?
As for local tax revenues based on local sales taxes, income taxes, business license fees, and property taxes: the first three will fall off a cliff, and if cities and counties respond to the drop in tax revenues by jacking up property taxes, this will only hasten the collapse of businesses that were already hanging on by a thread before the pandemic.
The federal government can bail out local governments this year, but what about next year, and every year after that? The hit to local tax revenues is permanent, as the economy became dependent on debt and financialization pushed costs up.
Amazon and online sellers don’t pay local taxes, except in the locales where their fulfillment centers are located. Yes, online sellers pay state and local sales taxes, but these sales are for goods; most of the small businesses that have supported local tax revenues are services: bars, cafes, restaurants, etc. As these close for good, the likelihood of new businesses taking on the same high costs (rent, fees, labor, overhead, etc.) is near-zero, and anyone foolish enough to try will be bankrupted in short order.
Now that work-at-home has been institutionalized, the private sector no longer needs millions of square feet of office space. As revenues drop and profits vanish, businesses will be seeking to cut costs, and vacating unused office space is the obvious first step.
What’s the value of empty commercial space? If demand is near-zero, the value is also near-zero. Local government will be desperate to raise tax revenues, and they will naturally look at bubble-era valuations on all real estate as a cash cow. But they will find that raising property taxes on money-losing properties will only accelerate the rate of property-owner insolvencies.
At some point valuations will adjust down to reality, and property taxes collected will adjust down accordingly. If municipalities think they can make up the losses by jacking up the taxes paid by the survivors, they will quickly find the ranks of the survivors thinned.
This doesn’t exhaust the second-order effects: once Main Street is half-empty, the attraction of the remaining businesses declines; there’s not enough to attract customers, and the virtuous-circle of sales rising for everyone because the district is lively and attractive reverses: the survivors struggle and give up, further hollowing out the district.
The core problem is the U.S. economy has been fully financialized, and so costs are unaffordable. The commercial property owner overpaid for the buildings with cheap borrowed money, and now the owner must collect nose-bleed high rents or he can’t make the mortgage and property tax payments.
Local governments spend every dime of tax revenues, as their costs are insanely high as well. They cannot survive a 10% decline in tax revenues, much less a 40% drop.
The metaphor I’ve used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up, but the central banks no longer allow any creative destruction of unpayable debt and mis-allocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.
As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.
The only possible output of this suppression is an economy piled high with explosive risk. Eventually Nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.
Gordon Long and I look at two highly correlated second-order effects: the collapse of Main Street and local tax revenues.
(ZeroHedge) Back in March 2017, a bearish trade emerged which quickly gained popularity on Wall Street, and promptly received the moniker “The Next Big Short.”
As we reported at the time, similar to the run-up to the housing debacle, a small number of bearish funds were positioning to profit from a “retail apocalypse” that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators which had fallen victim to the Amazon juggernaut. And as bad news piled up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities kept rising.
The trade was simple: shorting malls by going long default risk via CMBX 6 (BBB- or BB) or otherwise shorting the CMBS complex. For those who have not read our previous reports (here, here, here, here, here, here and here) on the second Big Short, here is a brief rundown via the Journal:
each side of the trade is speculating on the direction of an index, called CMBX 6, which tracks the value of 25 commercial-mortgage-backed securities, or CMBS. The index has grabbed investor attention because it has significant exposure to loans made in 2012 to malls that lately have been running into difficulties. Bulls profit when the index rises and shorts make money when it falls.
The various CMBX series are shown in the chart below, with the notorious CMBX 6 most notable for its substantial, 40% exposure to retail properties.
One of the firms that had put on the “Big Short 2” trade back in late 2016 was hedge fund Alder Hill Management – an outfit started by protégés of hedge-fund billionaire David Tepper – which ramped up wagers against the mall bonds. Alder Hill joined other traders which in early 2017 bought a net $985 million contracts that targeted the two riskiest types of CMBS.
“These malls are dying, and we see very limited prospect of a turnaround in performance,” said a January 2017 report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”
Alas, Alder Hill was wrong, because while the deluge of retail bankruptcies…
… and mall vacancies accelerated since then, hitting an all time high in 2019…
… not only was 2017 not a tipping point, but the trade failed to generate the kinds of desired mass defaults that the shorters were betting on, while the negative carry associated with the short hurt many of those who were hoping for quick riches.
One of them was investing legend Carl Icahn who as we reported last November, emerged as one of the big fans of the “Big Short 2“, although as even he found out, CMBX was a very painful short as it was not reflecting fundamentals, but merely the overall euphoria sweeping the market and record Fed bubble (very much like most other shorts in the past decade). The resulting loss, as we reported last November, was “tens if not hundreds of millions in losses so far” for the storied corporate raider.
That said, while Carl Icahn was far from shutting down his family office because one particular trade has gone against him, this trade put him on a collision course with two of the largest money managers, including Putnam Investments and AllianceBernstein, which for the past few years had a bullish view on malls and had taken the other side of the Big Short/CMBX trade, the WSJ reports. This face-off, in the words of Dan McNamara a principal at the NY-based MP Securitized Credit Partners, was “the biggest battle in the mortgage bond market today” adding that the showdown is the talk of this corner of the bond market, where more than $10 billion of potential profits are at stake on an obscure index.
However, as they say, good things come to those who wait, and are willing to shoulder big losses as they wait for a massive payoffs, and for the likes of Carl Icahn, McNamara and others who were short the CMBX, payday arrived in mid-March, just as the market collapsed, hammering the CMBX Series BBB-.
And while the broader market has rebounded since then by a whopping 30%, the trade also known as the “Big Short 2” has continued to collapse and today CMBX 6 hit a new lifetime low of just $62.83, down $10 since our last update on this storied trade several weeks ago.
That, in the parlance of our times, is what traders call a “jackpot.”
Why the continued selling? Because it is no longer just retail outlets and malls: as a result of the Covid lock down, and America’s transition to “Work From Home” and “stay away from all crowded places”, the entire commercial real estate sector is on the verge of collapse, as we reported last week in “A Quarter Of All Outstanding CMBS Debt Is On Verge Of Default“
Sure enough, according to a Bloomberg update, a record 167 CMBS 2.0 loans turned newly delinquent in May even though only 25% of loans have reported remits so far, Morgan Stanley analysts said in a research note Wednesday, triple the April total when 68 loans became delinquent. This suggests delinquencies may rise to 5% in May, and those that are late but still within grace period track at 10% for the second month.
Looking at the carnage in the latest remittance data, and explaining the sharp leg lower in the “Big Short 2” index, Morgan Stanley said that several troubled malls that are a part of CMBX 6 are among the loans that were newly delinquent or transferred to special servicers. Among these:
Crystal Mall in Waterford, Connecticut, is currently due for the April and May 2020 payments. There has been a marked decline in both occupancy and revenue. This loan accounts for nearly 10% of a CMBS deal called UBSBB 2012-C2
Louis Joliet Mall in Joliet, Illinois, is also referenced in CMBX 6. The mall was originally anchored by Sears, JC Penney, Carson’s, and Macy’s. The loan is also a part of the CMBS deal UBSBB 2012-C2
A loan for the Poughkeepsie Galleria in upstate New York was recently transferred to special servicing for imminent monetary default at the borrower’s request. The loan has exposure in two 2012 CMBS deals that are referenced by CMBX 6
Other troubled mall-chain tenants include GNC, Claire’s, Body Works and Footlocker, according to Datex Property Solutions. These all have significant exposure in CMBX 6.
Of course, the record crash in the CMBX 6 BBB has meant that all those shorts who for years suffered the slings and stones of outrageous margin calls but held on to this “big short”, have not only gotten very rich, but are now getting even richer – this is one case where everyone will admit that Carl Icahn adding another zero to his net worth was fully deserved as he did it using his brain and not some crony central bank pumping the rich with newly printed money – it has also means the pain is just starting for all those “superstar” funds on the other side of the trade who were long CMBX over the past few years, collecting pennies and clipping coupons in front of a P&L mauling steamroller.
One of them is mutual fund giant AllianceBernstein, which has suffered massive paper losses on the trade, amid soaring fears that the coronavirus pandemic is the straw on the camel’s back that will finally cripple US shopping malls whose debt is now expected to default en masse, something which the latest remittance data is confirming with every passing week!
According to the FT, more than two dozen funds managed by AllianceBernstein have sold over $4 billion worth of CMBX protection to the likes of Icahn. One among them is AllianceBernstein’s $29 billion American Income Portfolio, which crashed after written $1.9bn of protection on CMBX 6, while some of the group’s smaller funds have even higher concentrations.
The trade reflected AB’s conviction that American malls are “evolving, not dying,” as the firm put it last October, in a paper entitled “The Real Story Behind the CMBX. 6: Debunking the Next ‘Big Short’” (reader can get some cheap laughs courtesy of Brian Philips, AB’s CRE Credit Research Director, at this link).
Hillariously, that paper quietly “disappeared” from AllianceBernstein’s website, but magically reappeared in late March, shortly after the Financial Times asked about it.
“We definitely still like this,” said Gershon Distenfeld, AllianceBernstein’s co-head of fixed income. “You can expect this will be on the potential list of things we might buy [more of].”
Sure, quadruple down, why not: it appears that there are still greater fools who haven’t redeemed their money.
In addition to AllianceBernstein, another listed property fund, run by Canadian asset management group Brookfield, that is exposed to the wrong side of the CMBX trade recently moved to reassure investors about its financial health. “We continue to enjoy the sponsorship of Brookfield Asset Management,” the group said in a statement, adding that its parent company was “in excellent financial condition should we ever require assistance.”
Alas, if the plunge in CMBX continues, that won’t be the case for long.
Meanwhile, as stunned funds try to make sense of epic portfolio losses, the denials got even louder: execs at AllianceBernstein told FT the paper losses on their CMBX 6 positions reflected outflows of capital from high-yielding assets that investors see as risky. They added that the trade outperformed last year. Well yes, it outperformed last year… but maybe check where it is trading now.
Even if some borrowers ultimately default, CDS owners are not likely to be owed any cash for several years, said Brian Phillips, a senior vice-president at AllianceBernstein.
He believes any liabilities under the insurance will ultimately be smaller than the annual coupon payment the funds receive. “We’re going to continue to get a coupon from Carl Icahn or whoever — I don’t know who’s on the other side,” Phillips added. “And they’re going to keep [paying] that coupon in for many years.”
What can one say here but lol: Brian, buddy, no idea what alternative universe you are living in, but in the world called reality, it’s a second great depression for commercial real estate which due to the coronavirus is facing an outright apocalypse, and not only are malls going to be swept in mass defaults soon, but your fund will likely implode even sooner between unprecedented capital losses and massive redemptions… but you keep “clipping those coupons” we’ll see how far that takes you. As for Uncle Carl who absolutely crushed you – and judging by the ongoing collapse in commercial real estate is crushing you with every passing day – since you will be begging him for a job soon, it’s probably a good idea to go easy on the mocking.
Afterthought: with CMBX 6 now done, keep a close eye on CMBX 9. With its outlier exposure to hotels which have quickly emerged as the most impacted sector from the pandemic, this may well be the next big short.
California Democrats want to give tenants who’ve lost their jobs or had wages cut during the coronavirus outbreak a decade to repay late rent.
The proposal is part of a broader strategy a handful of Senate Democrats announced Tuesday as a way to keep California afloat in the recession caused by COVID-19. It complements a separate proposal in the Assembly that would give mortgage relief for homeowners struggling with payments and another bill that would suspend evictions.
The rent stabilization proposal, said Sen. Steven Bradford, D-Gardena, would use state funds to purchase outstanding rents from tenants. They’d then have 10 years beginning in 2024 to repay the debt, interest free. Repayment plans would hinge on a tenant’s ability to pay and continued hardship can lead to full forgiveness.
Landlords would then receive a tax credit during the same time period to cover financial losses, depending on their commitment not to evict renters. They could also sell their credits.
Bradford said the rent assistance is not a “free ride.” But, he added, the assistance will help the estimated 2.3 million renting households affected by the COVID-19 economy.
“The last thing we want to do is increase our homeless population,” Bradford said. The assistance is “not for large corporate landlords,” he added, but for “mom and pop” property owners.
The recouped payments will fund “most” of the costs of the tax credits for the landlords, Bradford said, through “maximum flexibility” that keeps vulnerable Californians at the center of the state’s economic recovery plan.
Tom Bannon, CEO for the California Apartment Association, said the organization would work to “refine” the proposal with the Senate.
“During these unprecedented times, we appreciate the Senate Pro Tem’s creative effort to help tenants and rental property owners,” said Tom Bannon, chief executive officer for the association. “The California Apartment Association is committed to working with the Senate to refine this voluntary program to ensure tenants can stay in their homes and rental property owners – especially mom and pop owners – are able to continue to pay their bills and their employees.”
Separately, an Assembly proposal, written by Democrat Monique Limón, D-Santa Barbara, would allow financially burdened Californians for 180 days to seek relief from loans and mortgage payments. Another lawmaker has introduced a measure to place a temporary moratorium on evictions and foreclosure.
Nationally, 78 percent of tenants in 11.5 million units paid their rent by the sixth of April, according to data collected by the National Multifamily Housing Council. In May, about 80 percent had met that deadline.
“At some point, America’s short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed.”
– Strauss & Howe – The Fourth Turning
(Jim Quinn) I’ve been writing articles about the Fourth Turning for over a decade and nothing has happened since its tumultuous onset in 2008, with the global financial collapse, created by the Federal Reserve and their Wall Street co-conspirator owners, that has not followed along the path described by Strauss and Howe in their 1997 book – The Fourth Turning.
Like molten lava bursting forth from a long dormant (80 years) volcano, the core elements of this Fourth Turning continue to flow along channels of distress, long ago built by bad decisions, corrupt politicians and the greed of bankers. The molten ingredients of this Crisis have been the central drivers since 2008 and this second major eruption is flowing along the same route. The core elements are debt, civic decay, and global disorder, just as Strauss & Howe anticipated over two decades ago.
“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.”
– The Fourth Turning – Strauss & Howe
The initial spark for this Crisis was the massive mortgage fraud perpetrated on the nation by the Wall Street banks and enabled by their drug dealer at the Fed – Ben Bernanke. Once he took his Wall Street payoff, becoming a multi-millionaire after departing the Eccles building and reaping his rewards (aka bribes), Yellen stepped into the breach, shoveling billions into the deep pockets of the ruling elite. QE to infinity for the connected billionaire set and .25% interest on granny’s dwindling retirement nest egg.
Then another spineless academic dweeb took over the reins of money printing for the .1% in 2018. Jerome Powell had the gall to raise rates all the way back to 2.25% and wind the Fed’s balance sheet all the way down to $3.8 trillion from $4.5 trillion, before he was sternly told who he works for. And it’s not you and me. I wonder what threats were made to convince him to fall into line.
The financial engine driving the American economy blew a gasket in September 2019. Overnight repo rates soared to 10%, indicating a major malfunction under the hood, threatening the wealth and safety of our beloved Wall Street bankers and billionaire hedge fund managers, picking up nickels in front of steamrollers. Jerome jumped into action, to save his billionaire owners. The QT was turned off and QE spigot was back on. He ramped the Fed’s balance sheet by over $400 billion in three months, with three 25 basis point cuts going into 2020.
Powell, Mnuchin and their buddies at Goldman, Blackrock, JP Morgan and the rest of the banking cabal looked back at what Bernanke, Paulson, Blankfein, and their cohorts pulled off in 2008/2009 and said hold my beer. The chutzpah of what they have done in two months is breathtaking to behold, as the greatest wealth transfer from the former working class to the champagne and caviar class in the history of mankind has been executed with precision and flawlessness by high tech criminals and their propaganda spewing corporate media compatriots.
This global pandemic is the crisis they couldn’t let go to waste. There is a myriad of theories on where, how, and why this global pandemic began. The accidental release of the virus from a bio-weapons lab in Wuhan appears to be the most likely scenario, with the Chinese authorities covering up the nature and seriousness of the virus and allowing infected citizens to spread it throughout the world. This narrative will likely play into the bloody climax of this Fourth Turning.
What we do know for sure is Trump was convinced by government bureaucrat medical “experts”, using seriously flawed models, that more than 2 million Americans would die unless he quarantined the entire nation. Extrapolating the disastrous NYC results across the entire U.S. and shutting down the entire economy will prove to be one of the most disastrous decisions ever made by a U.S. president.
Instead of addressing a virus only marginally more lethal than the yearly flu in a rational fact-based manner, we allowed ourselves to be snowed by “experts” and authoritarian politicians who originally downplayed the threat, instructed everyone to not use face masks, and purposely put infected patients into nursing homes. Cuomo is hailed as a hero by his brother’s joke of a news network, when he should be scorned as an inept bungler who caused the deaths of thousands.
Democrat politicians declared racism when Trump tried to shut the borders. Instead of protecting the most vulnerable in nursing homes (40% to 50% of all fatalities), closing the borders, encouraging the vulnerable to self- quarantine, encouraging people to wear masks, and letting those under 50 years old continue to work and keep the economy from crashing, we used the Chinese tyrannical method of total lock down.
We let the overbearing reach of government and the egomaniacal authoritarian governors, mayors and Karens lock down an entire nation under the threat of incarceration. They had plenty of room in the prisons because they released pedophiles, rapists, and thieves for fear they might catch the virus. The government hammer saw everyone as a nail. And they have been hammering away for two months, with plans to keep hammering for many months to come.
The corporate fascists have utilized the government-imposed shutdown to implement their plan to increase and consolidate their power, control and wealth. The first order of business was the Fed using the shutdown as its excuse to buy the toxic assets, junk bonds, and junk government treasuries in order to bail out hedge fund managers, Wall Street CEOs and government politicians dishing out $4 trillion of payoffs to constituents with the best lobbyists.
The 32% drop in the stock market in March was unacceptable to Powell and his minions. They vowed to do whatever it took to restore the billions in wealth of the .1%. The bottom 99% be damned. Everyone knows you can’t catch coronavirus at Wal-Mart or Target among hundreds of shoppers, but can catch it alone on the beach or in your local hair salon with three people in the shop.
So, Jerome and Neel decided to slash interest rates by 150 basis points, back to virtually 0%. So much for senior citizens getting 2% in their money market fund; Wall Street needed free money again. They’ve increased their balance sheet by $2.7 trillion in seven weeks, a 65% increase. Shockingly, the stock market has skyrocketed along with the Fed balance sheet, as 33 million non-essential workers have lost their jobs and we enter a 2nd Great Depression.
The Fed pretends to care about wealth inequality even though they are solely responsible for the grand-canyon like divergence between the super-rich and the rest of us. Their vow to pump $6 trillion into the financial system will only benefit the Hamptons crowd. Lance Roberts describes what is happening:
“To no one’s real surprise, the driver of the market is simply “The Fed.” As the Fed engages in “QE,” it increases the “excess reserves” of banks. Since banks are NOT lending to consumers or businesses, that excess liquidity flows into the stock market.”
And there you have it. Bailing out Wall Street and screwing Main Street, again. Everything the Fed has done, or will do, does not benefit the 33 million who have lost their jobs and the millions of small businesses which are purposely being snuffed out by tyrannical government overlords, so the mega-corporations, with their patriotic “we’re in this together” bullshit Madison Avenue identical ad campaigns, will be left with 90% of the economic pie instead of the 75% they had before the plandemic.
Even the worst employment figures since the Great Depression (last Fourth Turning) were spun by the government drones at the BLS to appear far better than they really are. The reported 14.7% unemployment rate is complete and utter bullshit fake news. But the mouthpieces for the oligarchs, the propaganda media outlets, had their spokes models and talking head “experts” report the gibberish as if it were true.
Maybe these faux financial journalists should have examined the 42-page press release and found the BLS purposely fudged the number by 5%:
If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis).
So that means even the massaged and manipulated BLS number is 20%. One look at the data shows how ludicrously low they have manipulated the number. The BLS reported the labor force as 164.5 million in February and now says it is 156.5 million. Poof!!! – 8.3 million people willingly left the workforce because they felt like it – not because they were forced out of the workforce by the same government paying the BLS to spew this fake data.
These people did not leave the workforce, they are unemployed by government mandate. The number of employed people is now back to 1999 levels and headed lower. And as if you didn’t already know, the job losses have been borne mostly by blue collar, retail and restaurant workers (heavily skewed towards women and young people), self-employed, and small businesses.
Wal-Mart, Target, Amazon, Wall Street banks and the rest of the mega-corporations are doing just fine – even better since they don’t have those pesky small businesses eating into their profits. At least the Fed was able to propel the stock market 455 points, back towards all-time highs, as 33 million people wonder where their next meal will come from. Winning!
The plain simple fact is there are 260 million working age Americans and 127 million, or 49% are not working. Of the 133 million who are working, 23 million are part-time workers and 19 million are government workers. In another shocking development, while the number of workers in private industries dropped by 18%, the number of government workers only dropped by 8%. It seems our authoritarian rulers know what is good for us, but don’t feel the need to share the pain equally.
But at least our beloved government heroes have time to stage daily parades with their fire engines and $70,000 police vehicles and do patriotic flyovers to keep the unemployed and mandatory masked plebs entertained. Something has to make up for the lack of the normal bread and circuses of double bacon cheeseburgers and watching overpaid privileged athletes play games. I can’t wait to see more tik-tok dance videos from the hero nurses and doctors overwhelmed with coronavirus patients in their empty hospitals.
If you don’t feel the mood of the country turning towards confrontation and civil chaos, you are either a lackey for the establishment, a government paid drone, or propagandized to such an extent you have chosen to be willfully ignorant of your surroundings. This Fourth Turning seemed somewhat dormant since 2012, but government, corporate, and consumer debt continued to balloon; the divide between left and right grew as the Deep State conducted a coup against a duly elected president; and global disorder accelerated in the Middle East, Europe, Asia and South America.
The core elements of debt, civic decay, and global disorder are now coalescing into a perfect storm of consequences for a nation and world built upon a teetering edifice of unpayable debt, unfulfilled promises, the unbridled greed of a blood thirsty ruling class, and the unbelievable delusions of people who think a world built upon borrowing to consume is sustainable.
The dichotomy between what is happening in the real world and what is happening in the world of the financiers will lead to violent upheaval on a timeline not anticipated by the ruling class. There is a good reason gun stores were overwhelmed with business at the outset of this over-hyped flu pandemic. As Strauss and Howe pointed out twenty three years ago, trust in the government, central bankers, the corporate media, and “experts” is disintegrating rapidly. The anger and disillusionment grows by the day and pockets of resistance are propagating throughout the country.
The un-Constitutional destruction of rights and liberties by overbearing governors, mayors and Federal bureaucrats is pushing desperate citizens towards insurrection. The police who carry out the unlawful orders of their superiors for a paycheck should realize they live among those they are bullying and pushing around. There is blow back coming and they should act accordingly. When people have lost everything they had and any hope for the future, while witnessing the privileged continuing to reap the benefits of a rigged financial system, civil disobedience will increase and blood will begin to be shed. The bubble of abnormalcy will be popped.
It is weirdly fascinating to watch a Fourth Turning unfold, while in the midst of it, and knowing we are entering the phase where people have died in numbers that put this pandemic fatality count to shame during the previous two American Crisis periods. From 1861 to 1865 almost 5% of the male population of the country were killed. That would equate to about 8 million today. From 1939 to 1945 an estimated 65 million people were killed.
The 100,000 or so who will die in 2020 from this virus is just a prelude to the death and destruction to follow. The trigger for the climactic phase of this Fourth Turning is not a virus that will not kill 99.97% of the American population, but the economic consequences of the over-reaction and authoritarian response to the virus. I’ve lost respect for numerous bloggers who desperately try to paint Sweden’s response as disastrous in an effort to support their own narrative of doom.
Sweden’s decision to allow its people and businesses to use reasonable precautions and not lock down their country in the dictatorial Chinese way, has resulted in cases per million being in line with the rest of European countries and lower than the U.S. The louder these bloggers scream, the surer you can be they have been proven wrong.
It is mesmerizing to watch those on the left, along with the Republican “Never Trumpers”, flail about as the Obama/Clinton attempted coup against Trump unravels before their very eyes. The reaction of these people, along with their toadies at CNN, MSNBC and the other left wing media, reveals an unbridgeable chasm between those believing in the rule of law and people who are willing to do anything for power.
The pure hatred from those on the left for Trump and his followers can not be contained. They despise the deplorables in flyover country with such a passion, the spittle foaming on their lips as they describe them as gun toting, uneducated, white racists, is an indication of their fury and hate. What these entitled, suit wearing, botox injected, arrogant idiot yet idiot establishment whores fail to realize is we despise them equally and we’re armed and ready. While psychopaths in suits, worthless politicians, government errand boys and remote working white collar parasites of the establishment continue to get paid, they continue to prohibit the lowly wage earner from making a living. A price will be paid.
Trump is not a nice guy. Grey Champions (Lincoln, FDR) use their power in ways not conducive to making everyone happy. They are leading during a time of crisis and will use any means necessary to win. The coup attempt by Obama, Clinton, Comey, Clapper, Brennan, Mueller, and their minions has failed and now the tables will be turned. Trump, Barr, Grennell and Durham have the power to prosecute some of the most powerful left wing politicians and Deep State operatives on the planet.
How this plays out before November will ignite further civil strife and discontent. People have already begun taking to the streets and as this unnecessary shutdown further impoverishes the masses, things will turn nasty. Government attempting to have neighbors rat on neighbors for not obeying the Nanny State commands will backfire on the rats. Animosities and grudges will sway the actions of many, once the gloves come off.
The majority of rule following sheep believe what they are being told by their elected leaders, non-elected self proclaimed medical “experts” and the feckless shills on their boob tube. They do not see what is coming, just over the horizon. The divergence of opinion on how we should proceed from this point onward is immense, with biases, delusions, and inability to grasp the unintended consequences of the actions taken thus far, driving the narratives. Listening to Trump bloviate about the tremendous economic boom which will occur when we re-open the country is laughable. He sounds like a carnival barker.
He allowed himself to be bamboozled by medical “expert” hacks and their immensely flawed garbage in-garbage out models into destroying our economy, and he may end up paying the price in November as the economy is mired in a 2nd Great Depression. But the Dow should be at 50,000 by then, so he’s got that going for him. Trump thinks you can turn the economy on again and things will be as good as new. He evidently has never read Bastiat or Hazlitt. The broken window fallacy now can be called the broken country fallacy. The financial gurus crow about the fantastic job Powell and Mnuchin have done, based upon what they have seen (31% increase in S&P 500), while that which is unseen has yet to reveal itself.
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
– Henry Hazlitt
The hacks who pass for economists and central bankers don’t practice the art of economics. They are enablers of plunder, as their actions benefit a small group of men who have created a legal system that allows and glorifies this as a way of life. Abnormal, morally ambiguous and in many cases illegal actions taken by those pulling the levers of power will have far reaching consequences unseen by these myopic arrogant water boys for the oligarchy.
The destruction caused by this man-made depression is permanent. The millions of small businesses demolished are not coming back. The unemployment rate will never approach 3.5% again, unless the BLS says 30 million people just left the labor market because they got independently wealthy in the stock market.
The number of corporate and personal bankruptcies will exceed anything seen in history. The mortgage, credit card and auto loan defaults are going to make 2009 look like a cake walk. The fear and panic inflicted by the government upon the psyches of the masses has insured bars, restaurants, airlines, cruises, stadiums, movie theaters and anywhere crowds formerly gathered will draw a fraction of what they did three months ago. This will lead to more bankruptcies.
The remote working arrangements forced upon companies will result in a glut of office space, as companies save money by no longer renting overpriced offices. The coming commercial real estate collapse will be one for the record books. Malls, which were barely staying alive before Covid-19, are done, as major retailers declare bankruptcy on a daily basis. Closed stores no longer employ workers.
People whose jobs are gone, with their meager savings depleted, will not be spending on frivolous gadgets and baubles. They won’t be eating out three times per week. They will just be trying to sustain themselves. A society built upon 70% of its GDP coming from consumption is now doomed. The well oiled mechanism of lending money to people so they can buy shit they can’t afford and paying them just enough to make the minimum payments has malfunctioned.
The state and local governments dependent upon sales taxes, gasoline taxes, income taxes, tolls, and property taxes to pay for their bloated bureaucracies are going to be overwhelmed with massive deficits, as their revenue streams have evaporated. This will bring the government pension crisis to a head years earlier than expected. The normal government action would be to increase taxes on the plebs. The plebs are broke and will not stand for higher taxes. They’ll demand government layoff workers. This will just throw another log on the fire of discontent. The us versus them mindset will grow ever larger until violence breaks out.
The average American suffered economic hardship throughout the 1930s, just as average Americans continued to suffer economic hardship since 2008. But the real economic hardship has just begun. As Americans dealt with privation and poverty in the late 1930s the coming global conflict was brewing. Animosities, prejudices and resentments, exacerbated by economic turmoil, stirred militaristic ambitions of hubristic rulers in Europe and Asia. The parallels with the current international dynamic may not be the same, but they do rhyme. Three months ago, the truly chaotic perilous segment of this Fourth Turning seemed far off in the distance. Now it approaches with the speed of a ballistic missile.
The possibility of global catastrophe is not taken seriously by the vast majority of Americans. Their ignorance of history is appalling and a pathetic indictment of our educational system. It’s been seventy-five years since the last global conflict and most of the people who experienced the horror are dead. We’ve forgotten the past and are condemned to relive it, just as we do every eighty or so years.
The extreme volatility seen in financial markets over the last two months only happens during bear markets. The historical perspective and insight into market valuations of the 30 something Harvard and Wharton MBA traders doesn’t reach past last Tuesday. This bear market bounce, generated on nothing but Fed liquidity and belief in Powell’s infallibility, will give way once again to a waterfall like collapse in the equity markets. This will be the final nail in the coffin of trust in the Fed. If this crackup occurs as the election approaches, the consequences and actions taken will propel the global disorder into a new stratosphere. A storm is brewing.
Do you get the feeling the War on Covid-19 will work out just as well as the War on Drugs and War on Terrorism? Do you get the feeling the models being used to panic the world into obeying and submitting to our authoritarian surveillance state benefactors are as accurate as the climate models that said the ice caps would be gone by now? Do you get the feeling this is about control and power and wealth, and not about your health or well-being?
Do you get the feeling the left wingers and their media propagandists want to keep as much of the country locked down for as long as possible in order to defeat Trump in November? Do you get the feeling these people actually want a second wave to kill as many as possible, just to prove they were right? Do you get the feeling the destruction of our economy is being cheered by those waiting to enact their green new deal and using MMT to keep the plebs sedated and non-violent? I get the feeling this is not going to end well for those initiating this take down of a nation. The existing social order is always swept away during a Fourth Turning.
I see a foggy outline of where this crisis is headed. The debt situation is untenable. The inflationists and deflationists both make strong arguments in favor of their disastrous outcome which will beset the nation. The only thing that matters is we will experience a disastrous outcome in the very near future from this reckless issuance of debt. The civic decay has entered the confrontational stage, with sides taken, weapons at the ready, awaiting the spark which will ignite the dynamite.
Fighting in the streets will be next. Which leaves us with global disorder. The attempted take down of the US oil industry by Russia and Saudi Arabia has ramped up the potential for conflict in the Middle East. But, the proxy wars of the last two decades will give way to real conflict, where the losers really lose. Putin is a wily leader who never shows his cards. He probes at our weaknesses and takes advantage when our arrogant leaders make mistakes.
This leads us to Donald J. Trump and what he does and doesn’t do over the next five months and possibly next four years. He is a proud man with a huge ego, prone to impulsive actions, and war-like in his vengefulness against perceived enemies. And his enemies are many. He has every right to throw the full weight of the law against the high-level members of the attempted coup.
In an election year, a strategy of aggressiveness against his enemies, will play well with his base and possibly distract people from the economic depression. When faced with domestic trouble, politicians have always tried to distract the masses with a foreign threat. I believe Trump is angry he allowed Gates and his vaccine squad at the CDC and WHO to bamboozle him into a national quarantine that destroyed “the best economy evah”. He can’t blame himself, so he has turned his ire towards China.
It is the consensus belief this virus originated in Wuhan, China, either from a bio-lab and/or wet market. The narrative now being spun by the U.S. and German spy agencies is China knew they had a major issue in December and colluded with the WHO to cover-up the danger and transmit-ability of the virus, while allowing its citizens to travel the globe, spreading the virus far and wide for at least a month before admitting they had a problem.
The Chinese brutally locked down Wuhan and have supposedly stopped the virus dead in its tracks. The American MSM has bought this bullshit, just like they believe their economic data. Trump has now openly accused China of causing the economic damage to our country, demanding reparations. This war of words is likely to lead to more economic sanctions and retaliatory actions designed to hurt each other’s already dire economic situation.
Just as economic sanctions against Japan in the 1930s and early 1940s backed them into a corner and convinced their leadership to attack the U.S., pushing China and/or Russia into a corner through the use of economic sanctions designed to hurt them, will provoke a reaction that will lead to war. Impossible says the linear thinkers who can’t conceive of such foolish actions. History teaches otherwise.
Egomaniacal leaders, with terrible domestic issues, overestimating their abilities to comprehend the actions of their foes, and miscalculating the odds of war, will stumble into conflict, resulting in the deaths of millions. Global war in this technologically advanced age will not resemble the wars of eighty or one-hundred and sixty years ago. Civilians will likely bear the brunt of the casualties as attacks on electrical grids, water supplies, and computer systems would paralyze our economy, causing death on a grand scale. Maybe a really deadly virus could be released by our enemies.
As Strauss & Howe warned, history offers no guarantees. Many empires before ours have fallen and counting on Providence to protect us is wishful thinking. Any war could go horribly wrong, with all potential enemies capable of launching a nuclear exchange, ending life as we know it. We have gotten our first taste of tragedy with this pandemic, and the early returns on leadership, courage, fortitude, and common sense have been found wanting.
This does not bode well for the trials and tribulations we will face over the next decade. A failure to meet the challenges ahead with bravery, grit, good judgement, adherence to our Constitutional principles, and a fair amount of luck, could lead to a defeat from which we will never recover. No one knows how and when the climax of this Crisis will play out, but the acceleration towards our rendezvous with destiny is in motion. Strauss & Howe laid out four potential outcomes to this Crisis. It’s time to steel yourself to the possibilities.
This Fourth Turning could mark the end of man. It could be an omnicidal Armageddon, destroying everything, leaving nothing. If mankind ever extinguishes itself, this will probably happen when its dominant civilization triggers a Fourth Turning that ends horribly. For this Fourth Turning to put an end to all this would require an extremely unlikely blend of social disaster, human malevolence, technological perfection and bad luck.
The Fourth Turning could mark the end of modernity. The Western saecular rhythm – which began in the mid-fifteenth century with the Renaissance – could come to an abrupt terminus. The seventh modern saeculum would be the last. This too could come from total war, terrible but not final. There could be a complete collapse of science, culture, politics, and society. Such a dire result would probably happen only when a dominant nation (like today’s America) lets a Fourth Turning ekpyrosis engulf the planet. But this outcome is well within the reach of foreseeable technology and malevolence.
The Fourth Turning could spare modernity but mark the end of our nation. It could close the book on the political constitution, popular culture, and moral standing that the word America has come to signify. The nation has endured for three saecula; Rome lasted twelve, the Soviet Union only one. Fourth Turnings are critical thresholds for national survival. Each of the last three American Crises produced moments of extreme danger: In the Revolution, the very birth of the republic hung by a thread in more than one battle. In the Civil War, the union barely survived a four-year slaughter that in its own time was regarded as the most lethal war in history. In World War II, the nation destroyed an enemy of democracy that for a time was winning; had the enemy won, America might have itself been destroyed. In all likelihood, the next Crisis will present the nation with a threat and a consequence on a similar scale.
Or the Fourth Turning could simply mark the end of the Millennial Saeculum. Mankind, modernity, and America would all persevere. Afterward, there would be a new mood, a new High, and a new saeculum. America would be reborn. But, reborn, it would not be the same.
Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it.
The era of waste, greed, fraud and living on borrowed money is dying, and those who’ve known no other way of living are mourning its passing. Its passing was inevitable, for any society that squanders its resources is unsustainable. Any society that makes private greed the primary motivator and priority is unsustainable. Any society that rewards fraud above all else is unsustainable. Any society which lives on money borrowed from the future and other forms of phantom capital is unsustainable.
We know this in our bones, but we fear the future because we know no other arrangement other than the unsustainable present. And so we hear the faint echo of the cries of alarm filling the streets of ancient Rome when the Bread and Circuses stopped: what do we do now?
When the free bread and entertainments disappeared, people found new arrangements. They left Rome.
The greatest private fortunes in history vanished as Rome unraveled. All the land, the palaces, the gold and all the other treasures were no protection against the collapse of the system that institutionalized corruption as the ultimate protector of concentrated wealth.
The most zealously guarded power of government is the creation of money, for without money the government cannot pay the soldiers, police, courts and administrators needed to enforce its rule. Western Rome created money by controlling silver mines; in the current era, governments create money (currency) out of thin air.
Once the government’s money loses purchasing power, the system collapses. And so in the final stages of Rome’s decline, Imperial orders still flowed to distant legions, but the legions no longer existed; they were only phantom entries on Imperial ledgers.
Our “money” is also nothing but phantom entries on digital ledgers, and so its complete loss of purchasing power is inevitable.
Without “money,” the government can no longer enforce the will of its self-serving elites: orders will still flow in a furious flood to every corner of the land, but the legions to enforce the institutional corruption will be nothing but phantom entries on Imperial ledgers.
Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it. The destruction of the value of central bank-created “money” is already ordained, for there is no limit on human greed and the desire to maintain control, and so governments will create their “money” in ever-increasing amounts until the value has been completely leached from the phantom digital entries.
The outlines of a better world are emerging, an arrangement that prioritizes something more than maximizing private gain and institutionalizing the corruption needed to protect those gains. We will relearn to live within our means, and relearn how to institutionalize opportunity rather than corruption designed to protect elites.
We will come to a new understanding of the teleology of centralized power, that centralized power only knows how to extend its power and so the only possible outcome is collapse.
We will come to understand technology need not serve only monopolies, cartels and the state, that it could serve a sustainable, decentralized economy that does more with less, i.e. a DeGrowth economy.
The Federal Reserve will fail, just as the Roman gods failed to sustain the corrupt and bankrupt Roman elites. A host of decentralized, transparently priced non-state currencies will compete on the open market, just like goods, services and commodities. The Fed’s essential role– serving the few at the expense of the many, under the cover of creating currency out of thin air–will be repudiated by the implosion of the economy as all the Fed’s phantom “wealth” evaporates.
The outlines of a better world are emerging. Do you discern them through the smoke as the last frantic phantoms of an unsustainable system issue orders to reverse the tides of history as they dissipate into thin air?
Anyone that was hoping for a “quick recovery” for the U.S. economy can forget about that right now. Yes, many states are attempting to “reopen”, but in most cases it will be a multi-stage process that takes many months to complete. Meanwhile, fear of COVID-19 is going to keep many Americans from conducting business as usual even after all of the restrictions have been finally lifted. Even now, many of the stores, restaurants and movie theaters that have reopened are seeing very, very few customers. Unfortunately, millions of small businesses are not going to be able to survive in such a depressed economic environment for very long.
In America today, the rules of the game are slanted very heavily in favor of huge corporations and are slanted very heavily against small businesses.
It has been this way for years, but millions of small business owners just kept soldiering on because they wanted to work for themselves and not some corporate behemoth.
But for most small businesses things have never been easy. For most of them, it is usually such a struggle to try to eke out a very meager profit at the end of the month after covering expenses and payroll. But now COVID-19 has come along, and many small businesses haven’t had any revenue for weeks.
The good news is that the lock downs are starting to end, but the bad news is that many small business owners are facing a “new normal” in which their monthly revenues will be down by 30, 40 or 50 percent (or more). All of a sudden many small businesses that were once barely profitable have been transformed into businesses that are bleeding a lot of cash each month, and many of them simply are not going to make it.
It was always obvious that this pandemic would kill a lot of those businesses, but the true scope of the problem wasn’t apparent until now. According to Bloomberg, a survey that was just conducted found that 52 percent of U.S. small business owners “expect to be out of business within six months”…
COVID-19 could shutter most American small businesses.
That’s according to a new survey from the Society for Human Resource Management which found that 52% expect to be out of business within six months. The survey of 375 firms was conducted between April 15-21 and doesn’t account for improved business conditions as some U.S. states reopen this month.
Yes, the big corporate giants dominate our society today, but there are still lots and lots of small businesses out there.
“SHRM has tracked Covid-19’s impact on work, workers, and the workplace for months,” said SHRM Chief Executive Officer Johnny C. Taylor, Jr., “but these might be the most alarming findings to date. Small business is truly the backbone of our economy. So, when half say they’re worried about being wiped out, let’s remember: We’re talking about roughly 14 million businesses.”
Around the country, governors can choose to end the lock downs, but they can’t order customers to go out and spend money.
And considering the fact that more than 30 million Americans have lost their jobs over the last six weeks, a lot of them don’t have money to spend anyway.
But even if everyone was still working, there is a large segment of the population that will simply be afraid to venture into public places as long as this pandemic is going on.
If you doubt this, just consider what we are witnessing in Texas. Reuters sent a reporter to one of the most popular malls in Austin, and what that reporter discovered is quite sobering…
A dozen or so people were strolling about the sprawling open-air shopping center Monday afternoon, with three seated on the patio of a Tex-Mex restaurant. Only one shopper wore a mask, and the loudest noises were from songbirds perched in the live oak trees along the deserted pedestrian thoroughfares.
“I’ve seen one customer today – they didn’t buy anything,” said Taylor Jund, who was keeping watch over an empty Chaser clothing store. “There’s absolutely no one coming around here.”
If even 20 percent of customers stay away for the foreseeable future, that is going to be enough to kill millions of small businesses.
So the truth is that we are facing a major national crisis.
A while back, Congress passed a bill that was supposed to help small businesses survive the lockdowns, but as I mentioned in a previous article it looks like that program has been a massive failure…
According to the CNBC/SurveyMonkey Small Business Survey released Monday, which surveyed 2,200 small business owners across America, while the $660 billion Paycheck Protection Program was instituted to give them a lifeline through the coronavirus and economic shutdown, only 13% of the 45% who applied for the PPP were approved.
We really are caught in a downward spiral now. We desperately need to get Americans back to work so that they can start earning paychecks again, but with so few customers right now, businesses will continue to lay off even more workers in the weeks and months ahead.
Fresh meat prices escalated 8.1% in stores, compared to the same period last year, according to Nielsen data for the week ending April 25.
Experts expect prices to skyrocket in the coming weeks, as meat processing plants across the U.S. are forced to close due to the coronavirus pandemic. Pork and beef prices could increase by as much as 20% compared to 2019, according to a new report from CoBank, a cooperative bank that is part of the Farm Credit System.
Now that the worst jobless print and unemployment rate in US history are in the record books, the next questions are i) what does this mean for the US economy and ii) how long before things revert back to normal.
Addressing the second question first, Morgan Stanley earlier this week laid out three scenarios, a bull, base and bear case. What is notable is that even the bull case sees a full recovery only in 2021. The base case tacks on another year to the recovery while the bear case sees double-digit unemployment into 2022 and onward.
Goldman agrees with Morgan Stanley, and even in its optimistic report that the US has now moved past the bottom (assuming the is no second round of closures in late 2020), the bank expects labor market slack to remain substantial even in late 2021 and entering 2022.
The bottom line here is that contrary to expectations for a quick return to normal, it will take years (if ever) before the unemployment rate recorded in late 2019 is back.
As for the first question, namely what is the economic impact from today’s catastrophic jobs report, here is the answer from Bloomberg’s Economic team:
“The extent of job losses is consistent with Bloomberg Economics’ modeling of a near 40% contraction in real GDP for the quarter. While layoffs were concentrated in sectors such as restaurants, hospitality and leisure, losses occurred in nearly all subcategories.”
As Bloomberg concludes:
“the breadth of job losses is a jarring signal of the massive challenge of restarting vast swaths of the economy – not just a few sectors – and it therefore serves as a stark indication that a ‘V-shaped’ recovery will not be possible.”
Meanwhile, stocks are now higher than they were a year ago, when the unemployment rate was about 3.5%. Thanks Fed.
Today’s jobs report was, as expected and as previously discussed, absolutely horrific, although as Bank of America points out there was one silver lining which Larry Kudlow quickly latched on to: with 72% of jobs lost being reflected as temporary layoffs, workers should be able to be more seamlessly rehired as the economy reopens. However, the longer this pandemic goes on, the more likely that what was temporary becomes permanent, and as ZeroHedge pointed out in a previous post, even baseline cases see unemployment not returning back to normal until 2022 or later.
Offsetting this “good news”, however, there was one especially scary aspect of today’s jobs report that has not gotten enough publicity, namely that as BofA writes, the employment to population ratio plunged to a record low, with only 51.3% of the population working. Inversely, this means that in April, 49% of the US population was not working.
As a reminder, the BLS said that if the workers who were recorded as employed but absent from work due to “other reasons” had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported, meaning that the true unemployment rate as of this moment is 20%
White House economic adviser Kevin Hassett laid the groundwork for shocking the US population for this devastating reality, when he said in a CNN interview that next month’s jobs report “should be around 20%,” adding that the U-6, or the underemployment rate, will probably hit around 25% in the next report.
This means that the employment-to-population ratio is also under counted by about 4-5%, and that as of this moment (we will get the May jobs data in 1 month), the employment to population ratio is below 50%, indicating that for the first time in history, more than half of the US population is unemployed!
Which is great news for stocks: think of all the people who have nothing better to do than buy the fucking dip all day with all that helicopter money the Fed will be showering on them for the coming years.
The economic free fall from Covid-19 is taking its toll on what had been very strong housing demand and sentiment just a few months ago.
After falling sharply in March, housing confidence among consumers took an even deeper dive in April, according to the Fannie Mae Home Purchase Sentiment Index. It was the lowest level since November 2011. Back then, the market was reeling from the subprime mortgage crisis, with home prices cratering and foreclosures rampant.
Consumers suddenly have a much more pessimistic view of buying and selling conditions. In addition, more consumers said their household income is now significantly lower than it was a year ago.
“Individuals’ heightened uncertainty about job security, as registered in the survey over the last two months, is likely weighing on prospective home buyers, who may be more wary of the substantial, long-term financial commitment of a mortgage,” said Doug Duncan, chief economist at Fannie Mae.
This comes even as interest rates are hovering near record lows. And that is helping to keep buyer sentiment slightly ahead of seller sentiment: 46% of those surveyed said it was a bad time to buy a home, while 65% said it’s a bad time to sell a home.
“We expect that the much steeper decline in selling sentiment relative to buying sentiment will soften downward pressure on home prices,” added Duncan.
On average, consumers said they expect home prices to fall 2% over the next 12 months, the lowest expected growth rate in the survey’s history, which dates to 2010.
Home sales have already fallen sharply, and active listings were down 15% annually in April, according to realtor.com. Sellers also pulled their homes from the market, as social distancing measures went into place.
Signs of a rebound?
The numbers are expected to get worse in May, but there is still some demand in the market. Agents in states that are starting to reopen are hosting open houses again, and online searches are rising.
Three in 4 potential sellers said they are preparing to sell their homes following the end of stay-at-home orders, according to a new survey from the National Association of Realtors.
“After a pause, home sellers are gearing up to list their properties with the reopening of the economy,” said Lawrence Yun, NAR’s chief economist. “Plenty of buyers also appear ready to take advantage of record-low mortgage rates and the stability that comes with these locked-in monthly payments into future years.”
Home buying and selling will likely vary dramatically by location, as some harder-hit areas stay closed while others reopen. Sales will still be limited by the tight supply of homes for sale. Even before the pandemic struck, the market was incredibly lean.
First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.
(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities (CMBS), an early sign of a pandemic-induced real estate crisis.
Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.
Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.
“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”
A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.
Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.
There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.
Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.
Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.
Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.
Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.
“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”
Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.
“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.
But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.
“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”
Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.
Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.
Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.
CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.
“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.
For context, the largest monthly job loss during the great financial crisis was just 834,700!
Large- and mid-sized companies saw the biggest job-losses…
And the service sector saw the biggest job losses…
If you’re an educator or in “management”, it would appear times remain good…
“Job losses of this scale are unprecedented. The total number of job losses for the month of April alone was more than double the total jobs lost during the Great Recession,” said Ahu Yildirmaz, co-head of the ADP Research Institute.
“Additionally, it is important to note that the report is based on the total number of payroll records for employees who were active on a company’s payroll through the 12th of the month. This is the same time period the Bureau of Labor and Statistics uses for their survey.”
And as we noted previously, far more Americans have lost their jobs in the last month than jobs gained during the last decade since the end of the Great Recession… (22.13 million gained in a decade, 30.3 million lost in 6 weeks)
Worse still, the final numbers will likely be worsened due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31. A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.
As Mises’ Robert Aro noted earlier in the week, the stimulus packages being handed out across this world provide us with an opportunity to document the anti-capitalist process as it unfolds in real time, keeping in mind that when these inflation schemes fail, it will likely be blamed on capitalism.
The combination of increasing the money supply in order to pay people not to produce goods or services has consequences that not a lot of people are talking about.
It flies in the face of the free market and is as nonsensical as a negative interest rate. A loan that is forgivable is unconventional to say the least, because a loan is normally defined as an amount borrowed that is expected to be paid back with interest. When a loan is given on a first-come-first-served basis for the purpose of paying people not to work and is forgivable because it’s guaranteed by the United States government, we shouldn’t call it a loan.
It may be called socialism, maybe interventionism, and some may still prefer the term statism; but one thing is certain when it comes to the Paycheck Protection Program: it’s not capitalism!
Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt, and the CARES Act may have been a serious tipping point.
But, hey, there’s good news… well optimistic headlines as Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August.
Finally, it is notable, we have lost 434 jobs for every confirmed US death from COVID-19 (60,999).
Was it worth it?
You will have only two choices now: do hard things, or submit to Globohomo. What are you doing today to prepare yourself and your people for Hard Tasks?
President Trump’s trade war is back. It’s an election year, and the efforts by the administration to ‘turbocharge’ an initiative to deglobalize that world by removing critical supply chains from China could be seen with new rounds of tariffs to strike Beijing for its handling of the COVID-19 outbreak, US officials told Reuters.
It’s clear that coronavirus lock downs have resulted in a crashed economy with more than 30 million people unemployed have derailed President Trump’s normal campaigning process and the promises of a vibrant economy. This could suggest President Trump is about to unleash tariff hell on Beijing as it would do two things: First, it would pressure US companies with supply chains in China to exit, and second, the president can say the tariffs are a punishment for the more than 68,000 Americans that have died from the virus.
“We’ve been working on [reducing the reliance of our supply chains in China] over the last few years but we are now turbocharging that initiative,” Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the U.S. State Department told Reuters.
“I think it is essential to understand where the critical areas are and where critical bottlenecks exist,” Krach said, adding that the matter was key to U.S. security and one the government could announce new action on soon.
Current and former officials said the Commerce Department and other federal agencies are investigating ways to push US companies away from sourcing and manufacturing in China. “Tax incentives and potential re-shoring subsidies are among measures being considered to spur changes,” they said.
“There is a whole of government push on this,” said one. Agencies are probing which manufacturing should be deemed “essential” and how to produce these goods outside of China.
Another official said, “this moment is a perfect storm; the pandemic has crystallized all the worries that people have had about doing business with China.”
“All the money that people think they made by making deals with China before, now they’ve been eclipsed many-fold by the economic damage” from the coronavirus, the official said.
Amid a pandemic and recession, it appears the comments from US officials suggest geopolitics could soon become major headaches for global markets. President Trump’s latest comments have stirred new concerns that an economic war with China is about to restart. This could be potentially dangerous for investors who are looking for V-shaped recoveries.
Last week, President Trump said China “will do anything they can” to make him lose his re-election bid in November. He said Beijing faced a “lot” of possible consequences for the virus outbreak.
He told Reuters: “There are many things I can do. We’re looking for what happened.”
President Trump recently said he could slap new tariffs of up to 25% tax on $370 billion in Chinese goods currently in place. Officials said the president could introduce new sanctions on officials or companies or project closer relations with Taiwan, all moves that would infuriate Beijing.
Secretary of State Mike Pompeo recently said the administration is working with allies, including Australia, India, Japan, New Zealand, South Korea, and Vietnam, to “move the global economy forward.”
Conversations among US officials have so far been about “how we restructure … supply chains to prevent something like this from ever happening again,” Pompeo said.
And it appears Beijing is preparing for President Trump to strike. We noted on Monday that Chinese President Xi Jinping is preparing for a worst-case scenario of armed conflict with the US.
For years, we have documented the possibility of Thucydides Trap playing out between the US and China. That is when a dominant regional power (the US) feels threatened by the rise of a competing power (China). Read:
“For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.” – Richard Feynman – Rogers Commission
“It appears that there are enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life. The estimates range from roughly 1 in 100 to 1 in 100,000. The higher figures come from the working engineers, and the very low figures from management. What are the causes and consequences of this lack of agreement? Since 1 part in 100,000 would imply that one could put a Shuttle up each day for 300 years expecting to lose only one, we could properly ask “What is the cause of management’s fantastic faith in the machinery? … It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.” –Richard Feynman – Rogers Commission
(Jim Quinn) The phrase “Throttle Up” jumped into my consciousness in the last week when Trump and his coronavirus task force of government hacks and bureaucrat lackeys announced the guidelines for re-opening America, as if a formerly $22 trillion economy, tied to a $90 trillion global economy, could be turned off and on like a light switch. Clap off, clap on. It just doesn’t work that way. The arrogance and hubris of people who think they can declare a global shut down for a virus and think they can easily deal with the intended and unintended consequences of doing so, is breathtaking in its outrageous recklessness and egotistical belief in their own infallibility.
This contemptible belief in their own superiority has permeated every fiber of those who rule over us, particularly among captured central bankers, corrupt politicians, bought off scientists, and billionaire oligarchs. It is the same groupthink, purposeful failure to address risks, and willfully ignoring those in the trenches that murdered seven astronauts on January 28, 1986 and has created the 2nd Great Depression of today. “Throttle Up” is going to result in the same outcome as it did in 1986.
Thirty-four years ago, on a cold January morning, Space Shuttle Challenger thundered into a crystal-clear blue Florida sky on its 10th voyage into space. The seven astronauts, including civilian Christa McAuliffe, put their trust in the “experts” from NASA, Thiokol, and Rockwell that the shuttle was safe and launching when the temperature was 30 degrees would not pose any added risks. When Richard Covey in Mission Control informed the crew to “go at throttle up”, they expected what their training told them would happen.
Instead, Space Shuttle Challenger exploded in a horrific display witnessed live on TV by 17% of the American population. School children all over the country were watching in their classrooms because McAuliffe was a school teacher chosen from thousands to go into space. It was a tragedy that shook the nation and led to one of Reagan’s better speeches that night, where he addressed the nation’s school children.
“I want to say something to the schoolchildren of America who were watching the live coverage of the shuttle’s takeoff. I know it is hard to understand, but sometimes painful things like this happen. It’s all part of the process of exploration and discovery. It’s all part of taking a chance and expanding man’s horizons. The future doesn’t belong to the fainthearted; it belongs to the brave. The Challenger crew was pulling us into the future, and we’ll continue to follow them.”
And he ended with this line from the poem ‘High Flight’:
“We will never forget them, nor the last time we saw them, this morning, as they prepared for their journey and waved goodbye and ‘slipped the surly bonds of Earth’ to ‘touch the face of God.’”
Thus, began the politician’s use of death to create heroes when human error, hubris, and recklessness is the true cause of avoidable tragedy and despair. Those seven astronauts were not heroes, they were victims. Just as we are all victims of the incompetency, arrogance, corruption and greed of those who lead our government, financial system, and corporate fascist oligarchy passing for capitalism in this globalist-controlled fraud of a former republic.
Using victims to create false heroes has now been elevated to an art form by politicians, the corporate media and mega-corporations to push whatever agenda supports their narrative. The propaganda machine is their most useful tool, as decades of dumbing down the public through government school indoctrination has created millions of pliable useful idiots who will believe anything presented by “experts” on the boob tube. The fear and panic created by politicians and the media about a virus only marginally more dangerous than the common flu is the perfect representation of this power over reality.
The Space Shuttle Challenger disaster is a perfect analogy for the current debacle being perpetrated on the American people by fecklessly corrupt authoritarian politicians, IYI medical “experts”, and fear mongering fake news media pushing the narrative in whatever direction benefits their bottom line. There is the simple technical reason why the Challenger blew up and then there is the real reason – the truthful explanation. What we must understand from history and experience is, if we don’t accept the narratives pushed by “experts” and think critically based upon facts, the truth will eventually be revealed.
The immediate cause of the explosion was a failure in the O-rings sealing the aft field joint on the right solid rocket booster, causing pressurized hot gases and eventually flame to “blow by” the O-ring and contact the adjacent external tank, causing structural failure. The truth is, decisions made and not made over years sealed the fate of those victims, just as we are facing today with this man-made global catastrophe.
After the shuttle disaster, politicians do what they do best, create a commission to cover-up the true cause and protect the establishment from blame. It was led by William Rogers, a government bureaucrat for decades, along with numerous other people with a vested interest in protecting NASA, the massive defense corporations sucking off the government teat, and the crooked politicians supporting NASA.
There were a couple of members from the trenches, like Sally Ride and Chuck Yeager, but the thorn in the side of the establishment was theoretical physicist and Nobel Prize winner Richard Feynman. Despite being racked by cancer, Feynman reluctantly agreed to join the commission, knowing he was going to be out of his element in the swamp of Washington D.C. The nation’s capital, he told his wife, was “a great big world of mystery to me, with tremendous forces.”
Feynman immediately created problems by thinking outside the box and having the gall to ignore the excuses and lies of high-level managers at NASA, Thiokol and Rockwell, while seeking the opinions of the actual engineers who did the real work. His unwillingness to toe the company line irritated the old guard looking to cover up the truth. During a break in one hearing, Rogers told commission member Neil Armstrong, “Feynman is becoming a pain in the ass.”
The establishment always thinks anyone who questions their authority or expertise is a pain in the ass, at best. Often, they treat anyone with an opposing viewpoint as the enemy, and will undertake any means to shut them up and destroy them. Witness how YouTube and Google are currently memory holing anything questioning the establishment narrative about this virus or Joe Biden’s sexual assault on a young woman as a Senator. Feynman embarrassed the “experts” on national TV when he conducted a simple demonstration of why the shuttle blew up.
“I took this stuff I got out of your [O-ring] seal and I put it in ice water, and I discovered that when you put some pressure on it for a while and then undo it, it doesn’t stretch back. It stays the same dimension. In other words, for a few seconds at least, and more seconds than that, there is no resilience in this particular material when it is at a temperature of 32 degrees. I believe that has some significance for our problem.” – Richard Feynman
The truth is top management at NASA knew the O-rings were defective in 1977 and contained a potentially catastrophic flaw. NASA managers also disregarded warnings from engineers about the dangers of launching posed by the low temperatures of that morning, and failed to adequately report these technical concerns to their superiors. Thiokol engineer Bob Ebeling in October 1985 wrote a memo—titled “Help!” so others would read it—of concerns regarding low temperatures and O-rings.
There were numerous teleconferences on the 27th of January where Ebeling and other engineers argued against the launch due to the freezing temperatures. According to Ebeling, a second conference call was scheduled with only NASA and Thiokol management, excluding the engineers. Thiokol management disregarded its own engineers’ warnings and now recommended the launch proceed as scheduled. Ebeling told his wife that night Challenger would blow up. He was right.
The Commission attempted to let NASA’s culture off the hook with no recommended sanctions against the deeply flawed organization. Feynman could not in good conscience recommend NASA should continue without a suspension of operations and a major overhaul. His fellow commission members were alarmed by Feynman’s dissent. Feynman was so critical of flaws in NASA’s “safety culture” that he threatened to remove his name from the report unless it included his personal observations on the reliability of the shuttle, which appeared as Appendix F.
The quote at the beginning of this article about upper management believing there was only a 1 in 100,000 chance of disaster, when the odds were really 1 in 100 or less, came from Feynman’s dissent in Appendix F. The fools at NASA and on the Commission didn’t understand or willfully ignored Feynman’s first principle:
“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman
The truth stands on its own and is self-evident. Feynman is an example of an actual hero, not an MSM touted hero like Bernanke, Paulson, Geithner, Powell and the dozens of other psychopaths in suits who have been portrayed in the press as brilliant financial minds that saved the world. Real heroes take a singular stand for the truth, when everyone else goes along with mistruths, half-truths, and false narratives of those with a subversive self-serving agenda. The world is inundated in a blizzard of lies, designed to further the plans of those who control the levers of power and wealth.
Lies, backed by an unceasing stream of propaganda and fear, are being used to panic the masses into willingly abandon their freedoms, liberties and rights for the chains of false safety, security, and state control over every aspect of their lives. It is astonishing to watch in real time as a vast swath of America cowers in their homes, as demanded by their authoritarian elected leaders, while their livelihoods and net worth are purposely destroyed to benefit the .1% ruling class.
I see multiple analogies today with the shuttle disaster and the lessons learned and not learned. The leadership of NASA did not learn, as the same disregard for facts and data led to the Space Shuttle Columbia disaster seventeen years later.
Just as the mid-level engineers at Thiokol warned of imminent disaster for years before the tragedy, there have been voices in the wilderness (scorned and ridiculed as conspiracy theorists) warning about the reckless arrogance of the Federal Reserve and their Wall Street owners, as they pumped up the largest financial bubble in world history as their solution for the catastrophe created by their previous monetary disaster in 2008. Just as the hubristic out of touch leadership of NASA murdered fourteen innocent astronauts, the Fed has now twice destroyed millions of lives in the last twelve years.
These self-proclaimed experts have known the financial system was going to explode since the middle of 2019 when they began a series of desperate ruses, behind the curtain of the debt saturated Ponzi scheme, to keep the Wall Street cabal and hedge fund billionaires from facing the consequences of their fraudulent monetary machinations.
The surprise cutting of interest rates and emergency repo operations every night as we entered 2020 covered up the imminent disaster, as the mindless Harvard and Wharton MBAs programmed their high frequency trading computers to buy, buy, buy. Best economy ever. Greatest in the history of the world. Stock market at all-time highs. Then the China flu arrived, just in time. A quick 30% plunge in the stock market was all the Fed needed to rescue their true constituents – Wall Street and billionaire hedge funds – with $6 trillion, under the guise of saving the financial system for the little people.
If you want to figure out who benefits from a man-made crisis, just follow the money. The Federal government has committed at least $3 trillion of your grandchildren’s money to the crisis thus far, with the Federal Reserve announcing another $6 trillion of monetary support. That’s $9 trillion, or $70,000 per household. The average household size is 2.5. If we assume each household got their $1,200 Covid-19 rebate (actually just giving them back the taxes they already pay), that’s $3,000 per household.
A critical thinking individual might wonder who got the other $67,000 of stimulus, or 95.7% of the money allocated to “save America”. It certainly hasn’t made its way to small business owners who are going out of business faster than burning gas through a defective O-ring. If only $400 billion is making its way into the pockets of formerly working Americans, where did the other $8.6 trillion go?
It went directly into the pockets of Wall Street bankers, hedge fund managers, and the biggest corporations on the planet. The Fed has used this faux crisis to further enrich and bailout the richest men on the planet, while again dropping interest rates to zero and throwing grandma under the bus again. Let her eat cat food, declares Jerome Powell, champion and hero of downtrodden bankers. He’ll be “earning” $25 million a year from Wall Street as his payoff, the minute he saunters out of the Eccles Building in a couple years.
As unemployment approaches 20%, GDP plunges by 30%, food banks are running out of food, citizens remain locked in their homes under threat of arrest, and human misery approaches 1930 Great Depression levels, the Fed has managed to buy enough toxic debt and artificially rig the stock market, to engineer a 27% surge from its March lows. We should all applaud the brilliance of Powell and his fellow sycophants, as they have saved the asses of the .1%, for now.
The fate of this country was sealed well before this overblown hyped coronavirus appeared, to accelerate our demise. The warnings about too much debt, rigged financial markets, unrestrained politicians running trillion dollar deficits, silicon valley giants conspiring with the Deep State to turn the country into a surveillance state, a military industrial complex creating conflict around the globe, and a state media propaganda machine providing false information to the masses, were dismissed by those who could have acted.
The deficit is now expected to hit $3.7 trillion in 2020, pushing the national debt to $27 trillion. This country is 231 years old and 85% of our debt has been taken on in the last 23 years. The Fed’s balance sheet was $800 billion in 2008. It will shortly surpass $10 trillion, just a mere 1,250% increase in 12 years. Do you understand the analogy with the Space Shuttle Challenger yet?
We’ve left the launchpad at the same rate and angle as the Fed balance sheet. Those in charge assure us they have everything under control, but the coronavirus will prove to be our frozen O-ring. It has been decades of mismanagement, corruption, bad decisions, horrible leadership, delusional thinking, herd mentality, and an inability to summon the courage to deal with critical problems before they blew our country into a million smoking pieces of debris.
Average Americans are trapped in the crew cabin relying on Trump, Powell, Mnuchin, and a myriad of other “experts” to safely launch the American economy back into space. Trump has convened a re-opening task force consisting of dozens of CEOs from the biggest mega-corporations on earth. I know because I watched him read their names for fifteen minutes during one of his daily mind-numbing press conferences. If you had any doubt about who your leaders work for, that list tells you all you need to know. No one from your local steak shop, butcher or candlestick maker are represented on this task force. It reminded me of the list of prominent people chosen for the Rogers Commission.
The belief by those in charge that things can just go on as if nothing has happened are as delusional as the NASA administrators who were willfully blind to the truth of an impending disaster. The actions taken by the political and financial arms of the Deep State have guaranteed this malfunction will prove fatal for our country. The only question is how many seconds we have before our throttle up moment. I tend to be a pessimist, so I am leaning towards an explosion before the November election. The forthcoming financial catastrophic detonation will set off a chain of events considered impossible just a few short months ago.
The core elements of this Fourth Turning (debt, civic decay, global disorder) are going to juxtapose and connect, accelerating into a chain reaction of chaos, civil uprising, global war, mass casualties, the fall of empires, and ultimately the destruction of the existing social order (aka Deep State). Hopefully, heroes of Feynman’s stature will arise to help rebuild our country based upon common sense, truthfulness, factual assessment of our situation, and honoring the essential principles of our Constitution. Reality must take precedence over delusions, propaganda, and lies for us to regain our nation. Are we capable of learning the lessons from this major malfunction?
“Flight controllers here looking very carefully at the situation. Obviously, a major malfunction.” – Steve Nesbitt – NASA Mission Control
The Paycheck Protection Program offers an alluring loan of up to $10M tax free. If you comply, you don’t even have to pay it back. What’s more, there is no forgiveness of debt income when your loan is forgiven, something that is standard fare if you are relieved of paying back debt. However, IRS Notice 2020-32 confirms you can’t claim tax deductions, even for the wages, rent, etc. that are normally fully deductible. The CARES Act provisions for small business include the Paycheck Protection Program, which calls for up to $10 million in forgivable loans to cover employee payroll, and immediate tax credits that are designed to do the same thing. After the IRS notice, it now appears that Congress could reverse IRS denial of tax deductions.
Since the PPP came out, it has been roiled in controversy, with the SBA and banks offering a less than seamless roll out, and a true run on the bank that depleted all the money very fast. Congress eventually came to the rescue by authorizing more money, but that seems likely not to last very long either. And the FAQs and other pieces of guidance have been fast and furious. So has speculation about various points. There have been debates about the tax deduction point, with some people saying you could still deduct the wages, since the CARES Act did not seem to say otherwise. But under traditional tax principles, it seemed too good to be true that you could get the free money, not pay discharge of debt income, and still deduct the payments of wages and rent made with the free money. The IRS notice confirms that.
The Paycheck Protection Program allows loans of up to $10 million at 1% interest to employers with fewer than 500 workers to cover two months of payroll and overhead. If you keep your workers and do not cut their wages, the government will forgive most or all of the loan and even repay the bank that actually made you the loan. The loan amounts will be forgiven as long as: (1) The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and (2) Employee and compensation levels are maintained. Payroll costs are capped at $100,000 for each employee. SBA lenders have details, though there has been controversy and hiccups in rolling out the program.
Your loan forgiveness will be reduced if you decrease your full-time employee headcount. Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
You also have to specifically request loan forgiveness. You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
History doesn’t repeat itself, but it often rhymes,” as Mark Twain is often reputed to have said. Before the 2007-2008 GFC, people built real estate portfolios based around renters. We all know what happened there; once consumers got pinched in the GFC, rent payments couldn’t be made, and it rippled down the chain and resulted in landlords foreclosing on properties. Now a similar event is underway, that is, over leveraged Airbnb Superhosts, who own portfolios of rental properties built on debt, are now starting to blow up after the pandemic has left them incomeless for months and unable to service mortgage debt.
Zerohedge described the financial troubles that were ahead for Superhosts in late March after noticing nationwide lock downs led to a crash not just in the tourism and hospitality industries, but also a plunge in Airbnb bookings. It was to our surprise that Airbnb’s management understood many of their Superhosts were over leveraged and insolvent, which forced the company to quickly erect a bailout fund for Superhosts that would cover part of their mortgage payments in April.
The Wall Street Journal has done the groundwork by interviewing Superhosts that are seeing their mini-empires of short-term rental properties built on debt implode as the “magic money” dries up.
Cheryl Dopp,54, has a small portfolio of Airbnb properties with monthly mortgage payments totaling around $22,000. She said the increasing rental income of adding properties to the portfolio would offset the growing debt. When the pandemic struck, she said $10,000 in rental income evaporated overnight.
“I made a bargain with the devil,” she said while referring to her financial misery of being overleveraged and incomeless.
Dopp said when the pandemic lock downs began, “I thought, ‘Holy God. We’re about to lose everything.'”
Market-research firm AirDNA LLC said $1.5 billion in bookings have vanished since mid-March. Airbnb gave all hosts a refund, along with Superhosts, a bailout (in Airbnb terms they called it a “grant”).
“Hosts should’ve always been prepared for this income to go away,” said Gina Marotta, a principal at Argentia Group Inc., which does credit analysis on real estate loans. “Instead, they built an expensive lifestyle feeding off of it.”
We noted that last month, “Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.”
Airbnb spokesman Nick Papas said the decline in bookings and slump in the tourism and travel industry is “temporary: Travel will bounce back and Airbnb hosts—the vast majority of whom have just one listing—will continue to welcome guests and generate income.”
Papas’ optimism about a V-shaped recovery has certainly not been echoed in the petroleum and aviation industry. Boeing CEO Dave Calhoun warned on Tuesday that air travel growth might not return to pre-corona levels for years. Fewer people traveling is more bad news for Airbnb hosts that a slump could persist for years, leading to the eventual deleveraging of properties.
AirDNA has determined that a third of Airbnb’s US hosts have one property. Another third have two and 24 properties and get ready for this: a third have more than 24.
Startups such as Sonder Corp. and Lyric Hospitality Inc. manage properties for hosts that have 25+ properties. Many of these companies have furloughed or laid off staff in April.
Jennifer Kelleher-Hazlett of Clawson, Michigan, spent $380,000 on two properties in 2018. She and her husband borrowed $100,000 to furnish each. Rental income would net up to $7,000 per month from Airbnb after mortgage payments, which would supplement her income as a part-time pharmacist and husband’s work in academia.
Before the virus struck, both were expecting to buy more homes – now they can’t make the payments on their Airbnb properties because rental income has collapsed. “We’re either borrowing more or defaulting,” she said.
Here’s another Airbnb horror story via The Journal:
“That sum would provide little relief to hosts such as Jennifer and David Landrum of Atlanta. In 2016, they started a company named Local, renting the 18 apartments they leased and 21 apartments they managed to corporate travelers and film-industry workers. They spent more than $14,000 per apartment to outfit them with rugs, throw pillows, art and chandeliers. They grossed about $1.5 million annually, mostly through Airbnb, Ms. Landrum said.
They spend about $50,000 annually with cleaning services, about $25,000 on an inspector and $30,000 a year on maintenance staff and landscapers, Ms. Landrum said, not to mention spending on furnishings.
When Airbnb began refunding guests March 14, the Landrums had nearly $40,000 in cancellations, she said. The couple has been able to pay only a portion of April rent on the 18 apartments they lease and can’t fulfill their obligations to pay three months’ rent unless bookings resume. They have reduced pay to cleaning staff and others. Adding to the stress, Georgia banned short-term rentals through April.
“It’s scary,” said Ms. Landrum, who said she has discounted some units three times since mid-March. The Landrums have negotiated to get some leniency from apartment owners on their leases. If not, Ms. Landrum said, they would have to sell their house.”
To make matters worse, and this is exactly what we warned about last month, Airbnb Superhosts are now panic selling properties:
Greg Hague, who runs a Phoenix real-estate firm, said Airbnb hosts are “desperate to sell properties” in April.
“There’s been a flood of people. You have people coming to us saying, ‘I’m a month or two away from foreclosure. What’s it going to take to get it sold now?'” Hague said.
And here’s what we said in March: “We might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.”
Texas factory activity declined further in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, pushed further negative from -35.3 to -55.3, suggesting the contraction in output has steepened since last month.
Other measures of manufacturing activity also point to a sharper decline in April. The new orders index dropped 26 points to -67.0, its lowest reading since the survey began in 2004. Similarly, the growth rate of orders index fell to -62.2. The capacity utilization and shipments indexes fell to -54.5 and -56.6, respectively. The capital expenditures index declined 20 points to -54.3. Each of these April readings represents a historical low.
Perceptions of broader business conditions remained very pessimistic in April. The general business activity index inched down from -70.0 to -73.7, pushing to a new historical low. The company outlook index remained near an all-time low but inched up from -65.6 to -62.6. The index measuring uncertainty regarding companies’ outlooks retreated slightly to 54.4, a reading still indicative of sharply increased uncertainty.
Labor market measures indicate further employment declines and shorter workweeks this month. The employment index held steady at -21.2. Three percent of firms noted net hiring, while 24 percent noted net layoffs. The hours worked index dropped 18 points to -40.2, signaling a notably reduced workweek length. emphasis added
The last of the regional Fed surveys for April will be released tomorrow (Richmond Fed).
Back in the late fall of 2014, when Saudi Arabia broke up OPEC for the first time and unleashed a torrent of crude oil on the world despite the protests of its fellow cartel members, oil prices crashed as a result of what then seemed to be a “calculated” move by Riyadh which hoped to put US shale out of business amid a flawed gamble betting that shale breakeven prices were around $60-80. They, however, turned out to be much lower, which coupled with Saudi misreading of the willingness of junk bond investors to keep funding US shale producers, meant that despite a 3 years stretch of low oil prices, US shale emerged stronger than ever before, with the US eventually eclipsing both Saudi Arabia and Russia as the world’s biggest crude oil producer.
Fast forward to March 2020, when Saudi Arabia doubled down in its attempt to crush shale, only to avoid angering long-time ally Donald Trump, the Crown Prince pretended that the latest flood of oil was an oil price war aimed at Moscow not Midland. And this time, unlike 2014, with the benefit of the global economic shutdown resulting from the coronavirus pandemic, the Saudis may have finally lucked out in the ongoing crusade against US oil, because as Bloomberg writes with “negative oil prices, ships dawdling at sea with unwanted cargoes, and traders getting creative about where to stash oil”, the next chapter in the oil crisis is now inevitable: “great swathes of the petroleum industry are about to start shutting down.”
As the recent OPEC summit so vividly demonstrated, the marginal price of oil is no longer determined by supply or cuts thereof (such as the recently announced agreement by OPEC+ for a 9.7mmb/d output cut), but rather by demand, or the lack thereof, which according to some estimate is as much as 36mmb/d lower, or roughly a third of the global oil market every day, as billions of people are stuck at home instead of driving, while major corporations mothball production in a world where major economies have ground to a halt.
The economic impact of the coronavirus has ripped through the oil industry in dramatic phases, Bloomberg’s Javier Blas writes. First it destroyed demand as lock downs shut factories and kept drivers at home. Then storage started filling up and traders resorted to ocean-going tankers to store crude in the hope of better prices ahead.
Now shipping prices are surging to stratospheric levels as the industry runs out of tankers, a sign of just how distorted the market has become.
Ironically, in its latest attempt to kill off shale, Saudi Arabia may have gone a step too far, as “the specter of production shut-downs – and the impact they will have on jobs, companies, their banks, and local economies – was one of the reasons that spurred world leaders to join forces to cut production in an orderly way. But as the scale of the crisis dwarfed their efforts, failing to stop prices diving below zero last week, shut-downs are now a reality. It’s the worst-case scenario for producers and refiners.“
In short, the entire oil production industry is shutting down, not because it wants to – of course – but because it has no choice. According to Goldman, in as little as three weeks there will be literally no place left on earth to store oil, and unless oil producers want to pay “buyers” to hold the oil as happened on that historic date of April 20, they have no choice but to shut in output.
Which brings us back to why in 2020 Riyadh has succeeded where it failed in 2014: as Bloomberg writes “in theory, the first oil output cuts should have come from the OPEC+ alliance, which earlier this month agreed to reduce production from May 1. Yet after the catastrophic price plunge on Monday, when West Texas Intermediate fell to -$40 a barrel, it’s the U.S. shale patch that is leading”
The best indicator of how the shale industry is reacting is the sudden collapse in the number of oil rigs in operation, which last week fell to a four-year low: “Before the coronavirus crisis hit, oil companies ran about 650 rigs in the US. By Friday, more than 40% of them had stopped working, with only 378 left.”
And while there is a delay between total US oil production and the rig count, it is now obvious that US production is set to collapse next:
“Monday really focused people’s minds that production needs to slow down,” said the co-head of oil trading at commodity merchant Trafigura. “It’s the smack in the face the market needed to realize this is serious.” Incidentally, Trafigura, one of the largest exporters of US crude from the U.S. Gulf of Mexico, believes that output in Texas, New Mexico, North Dakota and other states will now fall much faster than expected as companies react to negative prices…
Until prices collapsed on Monday, the consensus was that output would drop by about 1.5MM barrels a day by December. Now market watchers see that loss by late June. “The severity of the price pressure is likely to act as a catalyst for the immediate turn down in activity and shut-ins,” said Roger Diwan, oil analyst at consultant IHS Markit Ltd.
As detailed last week, this price shock has been especially acute in the physical market where producers of crude streams such as South Texas Sour and Eastern Kansas Common had to pay more than $50 a barrel to offload their output last week.
And so the US industry is finally shutting down as ConocoPhillips and shale producer Continental Resources have all announced plans to shut in output. Regulators in Oklahoma voted to allow oil drillers to shut wells without losing leases; New Mexico made a similar decision. Even North Dakota, which for years was synonymous with the U.S. shale revolution, is witnessing a rapid retrenchment, as Bloomberg notes that “oil producers have already closed more than 6,000 wells, curtailing about 405,000 barrels a day in production, or about 30% of the state’s total.”
However, it won’t be just the US: output cuts can be seen from Chad, a poor and landlocked country in Africa, to Vietnam and Brazil, producers are now either reducing output or making plans to do so. “I wouldn’t want to get sensational about it but yes, clearly there must be a risk of shut-ins,” Mitch Flegg, the head of North Sea oil company Serica Energy, said in an interview. “In certain parts of the world it is a real and present risk.”
In emergency board meetings last week, oil companies small and large discussed an outlook that’s the most somber any oil executive has ever witnessed. For the small firms, the next few weeks will be all about staying afloat. But even for the bigger ones, like Exxon Mobil Corp. and BP Plc, it’s a challenge. Big Oil will offer an insight into the crisis when companies report earnings this week.
Then on Friday, May 1, Saudi Arabia, Russia and the rest of OPEC+ will join the output cuts, slashing their output by 23%, or 9.7 million barrels a day. Saudi Aramco, the state-owned company has already cut production, and Russian oil companies have announced exports of their flagship Urals crude would drop in May to a 10-year low.
And yet, as warned here repeatedly, it may still not be enough, as every week, another 50 million barrels of crude are going into storage, enough to fuel Germany, France, Italy, Spain, and the U.K. combined, with estimates that the world will run out of land-based storage some time in late May or early June. Meanwhile, what’s not stored onshore, is stashed in tankers. As Bloomberg’s Blas points out, the U.S. Coast Guard on Friday said there were so many tankers at anchor off California that it was keeping an eye on the situation.
VIDEO: US Coast Guard says it’s keeping an eye on 27 oil tankers anchored off the coast of Southern California. Another great example of floating storage build-up as demand for oil and refined products plunge | #OOTT#Contango video via @USCGLosAngelespic.twitter.com/B7pjWIsdnp
But if the two dozen or so tankers piled up off the coast of California is bad…
… and those next to Galveston, TX is worse…
… what is going on in that tanker parking lot off of Singapore is absolutely insane.
There is some good news: oil traders say after plunging by a third, US oil consumption has probably hit a bottom, and will start a very gentle recovery, although that also depends on how fast the US economy can reopen from the coronavirus coma.
But before even a modest recovery takes hold, the great shutdown will spread through oil refining too. Over the past week, Marathon Petroleum, one of the biggest U.S. refiners, announced it would stop production at a plant near San Francisco. Royal Dutch Shell has idled several units in three U.S. refineries in Alabama and Louisiana. And across Europe and Asia, many refineries are running at half rate. U.S. oil refiners processed just 12.45 million barrels a day on the week to April 17, the lowest amount in at least 30 years, except for hurricane-related closures.
The closures have already sent thousands packing: the oil and gas industry shed nearly 51,000 drilling and refining jobs in March, a 9% reduction that will only get worse in April. March’s job losses rise by 15,000 when ancillary jobs such as construction, manufacturing of drilling equipment and shipping are included, according to BW Research Partnership, a research consultancy, which analyzed Department of Labor data combined with the firm’s own survey data of about 30,000 energy companies.
“We’re looking at anywhere between five and seven years of job growth wiped out in a month,” Philip Jordan, the company’s vice president said in an interview. “What makes it sort of scary is this really is just the beginning. April is not looking good for oil and gas.”
And so, as the oil industry shuts down – at least for a few weeks (or perhaps months) – more refinery shutdowns are coming, oil traders and consultants said, particularly in the U.S. where lockdowns started later than in Europe and demand is still contracting. Steve Sawyer, director of refining at Facts Global Energy, said that global refineries could halt as much as 25% of total capacity in May.
“No one is going to be able to dodge this bullet.”
I’M A GHOST LIVING IN A GHOST TOWN I’M A GHOST LIVING IN A GHOST TOWN
YOU CAN LOOK FOR ME BUT I CAN’T BE FOUND YOU CAN SEARCH FOR ME I HAD TO GO UNDERGROUND LIFE WAS SO BEAUTIFUL THEN WE ALL GOT LOCKED DOWN FEEL A LIKE GHOST LIVING IN A GHOST TOWN
ONCE THIS PLACE WAS HUMMING AND THE AIR WAS FULL OF DRUMMING THE SOUNDS OF CYMBALS CRASHING GLASSES WERE ALL SMASHING TRUMPETS WERE ALL SCREAMING SAXOPHONES WERE BLARING NOBODY WAS CARING IF IT’S DAY OR NIGHT
I’M A GHOST LIVING IN A GHOST TOWN I’M GOING NOWHERE SHUT UP ALL ALONE
SO MUCH TIME TO LOSE JUST STARING AT MY PHONE
EVERY NIGHT I AM DREAMING THAT YOU’LL COME AND CREEP IN MY BED PLEASE LET THIS BE OVER NOT STUCK IN A WORLD WITHOUT END
PREACHERS WERE ALL PREACHING CHARITIES BESEECHING POLITICIANS DEALING THIEVES WERE HAPPY STEALING WIDOWS WERE ALL WEEPING THERE’S NO BEDS FOR US TO SLEEP IN ALWAYS HAD THE FEELING IT WOULD ALL COME TUMBLING DOWN
I’M A GHOST LIVING IN A GHOST TOWN YOU CAN LOOK FOR ME BUT I CAN’T BE FOUND WE’RE ALL LIVING IN A GHOST TOWN LIVING IN A GHOST TOWN WE WERE SO BEAUTIFUL I WAS YOUR MAN ABOUT TOWN LIVING IN THIS GHOST TOWN IT ISN’T ANY FUN IF I WANT A PARTY IT’S A PARTY OF ONE
Update (April 24): At least ten meatpacking facilities have shuttered operations over the last several weeks, stoking fears of imminent food shortages across the country.
Hormel Foods Corporation announced Jennie-O Turkey Store, Inc., “will temporarily pause operations at its Willmar Avenue and its Benson Avenue facilities, both located in Willmar, Minn.”
“Based on information about the community spread of COVID-19 in the area, the company decided it was the right decision to pause operations to undergo a facility-wide cleaning that will enhance already robust safety and sanitation protocols. Under its pay program, all Jennie-O Turkey Store employees will continue to receive 100 percent of their base pay and benefits during the pause in production. Jennie-O Turkey Store is a wholly-owned subsidiary of Hormel Foods Corporation.”
Steve Lykken, president of Jennie-O Turkey Store, said, “The health, well-being and safety of our team members is our top priority. Out of an abundance of caution, we have decided to take a pause in operations.”
“We are being thoughtful and considerate in our approach to this process. I want to recognize our production professionals for continuing to do an outstanding job as they work to keep food on tables during this unprecedented time. I am very proud of them and I look forward to being back together as soon as we are able.”
“During this pause, we will maintain our thorough food processing sanitation practices, as well as the enhanced procedures that we have been employing since the emergence of COVID-19. The facilities will be deep cleaned, including all common areas and high-touch surfaces,” Lykken added.
“Lastly, we have implemented wellness screenings, provided masks and additional personal protective equipment and enhanced safety and sanitation protocols throughout our facilities. We are working closely with external partners as we also develop our plan for reopening when the time is appropriate. As a longstanding and respected Minnesota company, our goal is to always do the right thing.”
Both facilities are expected to close by the end of the weekend. There were reports earlier in the week that 14 employees out of 1,200 had tested positive for the virus.
We noted on Thursday that “dominos are falling, with meatpacking plants shuttering operations across the country because of the coronavirus outbreak.”
In the days and or weeks ahead, more meatpacking plants will likely close for virus-related reasons – which will lead to food shortages in May.
* * *
Now we’re starting to learn the dominos are falling, with meatpacking plants shuttering operations across the country because of the coronavirus outbreak.
Tyson Foods Inc. has announced the third plant closure in about a week and the second closure within 24 hours. The latest announcement crossed the wires on Thursday afternoon, specifies how a major beef facility in Pasco, Washington, is shutting down operations because of the virus outbreak, reported Bloomberg.
“We’re working with local health officials to bring the plant back to full operation as soon as we believe it to be safe,” Steve Stouffer, head of Tyson Fresh Meats, said in the company’s statement.
“Unfortunately, the closure will mean reduced food supplies and presents problems to farmers who have no place to take their livestock. It’s a complicated situation across the supply chain.”
In total, eight major meatpacking plants have closed in the last several weeks. We noted on Thursday morning that a “rash of coronavirus outbreaks at dozens of meatpacking plants across the nation is far more extensive than previously thought.”
As for the plant in Washington, well, it produces enough beef to feed four million people per day. Just imagine what happens when people who have just lost their jobs experience food shortages, or maybe rapid food inflation. It could be a trigger for social unrest.
* * *
Update (19:50): It appears meatpacking facilities in America’s heartland could be the next epicenter of the coronavirus outbreak.
On Wednesday, Tyson Foods announced two closures of meatpacking facilities because of coronavirus related issues.
Here’s the timeline of closures:
We noted around 0900 ET that Tyson was closing its meatpacking plant in Waterloo, Iowa.
Around 1800 ET, Tyson announced the second closure of a meatpacking plant, located in Logansport, Indiana.
Both plants are preparing for closure due to coronavirus related issues, with planned testing of all workers in the near term.
The Logansport’s facility “produces three million pounds of pork daily and helps support more than 250 independent family farmers from across nine states, suspended production for one day on April 20 for additional deep cleaning and sanitizing. Since then, the facility has been running at limited production and is expected to stop production on or before Saturday, April 25,” said a Tyson Foods press release.
“While we understand the necessity of keeping our facilities operational so that we can continue to feed the nation, the safety of our team members remains our top priority,” said Steve Stouffer, group president of Tyson Fresh Meats.
“Our company is deeply embedded in our plant communities, including Logansport. We’re working with the county to make sure our people and the community are safe. The combination of worker absenteeism, COVID-19 cases and community concerns has resulted in a collective decision to close.”
The reopening of the plant will depend on several factors, including the results of a COVID-19 test of workers.
We have noted the closure of meatpacking plants across the country will trigger supply disruptions and lead to product shortages in the near term.
* * *
Food-security remains a significant problem during coronavirus lock downs. The next big issue unfolding is the shuttering of the nation’s food plants could drive food inflation sky high.
On Wednesday, Tyson Fresh Meats, the beef and pork subsidiary of Tyson Foods, released a statement that said its plant in Waterloo, Iowa, will suspend operations until further notice.
The company said the Waterloo location is its largest pork plant, has been running at reduced output “due to worker absenteeism.”
Tyson is planning to test all 2,800 workers for COVID-19 at the facility later this week.
“Protecting our team members is our top priority and the reason we’ve implemented numerous safety measures during this challenging and unprecedented time,” said Steve Stouffer, group president of Tyson Fresh Meats.
“Despite our continued efforts to keep our people safe while fulfilling our critical role of feeding American families, the combination of worker absenteeism, COVID-19 cases and community concerns has resulted in our decision to stop production.”
Stouffer warned that the closure of the pork plant could ripple through the production chain and cause significant disruptions to the “nation’s pork supply:”
“The closure has significant ramifications beyond our company, since the plant is part of a larger supply chain that includes hundreds of independent farmers, truckers, distributors and customers, including grocers,” Stouffer said. “It means the loss of a vital market outlet for farmers and further contributes to the disruption of the nation’s pork supply.”
The company said workers would be “compensated while the plant is closed.” There was no firm timeline on when the plant would reopen. However, there were several factors, including the “outcome of team member testing for COVID-19.”
The latest plant closure was China-owned Smithfield Food’s factory in Sioux Falls, South Dakota, the largest pork processing plant in the US, due to a coronavirus outbreak, could leave Americans without pork products.
After the plunge in home builder sentiment as they are forced to face reality and the big drop in existing home sales, new home sales were expected to tumble in March (after already dropping in February – bucking the uptrend in existing- and pending-sales).
New Home Sales crashed by 15.4% MoM – the biggest drop since July 2013 – smashing the year-over-year comparison down 9.5%…
This is the biggest decline for March… ever…
From the best levels in 13 years, sales are crashing fast (and the last two months were also revised downward)…
The median sales price rose from the prior year to $321,400.
As Bloomberg notes, March was the first month when U.S. state closures of restaurants, retailers and other non-essential business became more widespread. The data underscore how the pandemic and broader uncertainty about the economy is thwarting potential home buyers.
A historic crash in crude prices is driving U.S. shale into full-on retreat with operators halting new drilling and shutting in old wells, moves that could cut output by 20% for the world’s biggest producer of oil and leave thousands of workers unemployed.
For shale companies, the price of West Texas Intermediate crude went from hunker-down-and-ride-it-out mode to crisis mode in just a few days, with many now unsure whether there will even be a market for their oil. Some 1.75 million barrels a day is at immediate risk of shutting down while the number of new wells being brought online is forecast to plunge almost 90% by the end of the year, according to IHS Markit Ltd.
In short, it’s a swift and brutal end to the shale revolution, which only last year had President Donald Trump proclaiming “American Energy Dominance.”
West Texas Intermediate crude prices turned negative for the first time in history on Monday, meaning at one point sellers had to pay buyers to take it away. Then, the financial squeeze on the May contract spilled over to June and into the wider market, with prices now trading around $14 a barrel, well below the daily pumping cost in large swaths of America’s oil industry.
Even at $15, “everything back in the field, except the newest and most productive wells, is losing money on a cash-cost basis,” said Raoul LeBlanc, a Houston-based analyst at IHS Markit. “At this price you’ll start shutting in large amounts of production.”
It’s a bloodbath whichever way you look.
Operators are switching off wells, retiring one in three drill rigs, abandoning fracking, laying off 51,000 workers, slashing salaries and even going bankrupt just six weeks after the latest price plunge began. Now, with the coronavirus pandemic destroying demand, storage is just weeks away from filling up, a further factor choking back output.
Publicly-traded companies have axed more than $31 billion from drilling budgets, while distressed debt in the U.S. energy sector has jumped to $190 billion, up more than $11 billion in less than a week. Oil companies made up five of the top 10 issuers with the most distressed debt as of Tuesday. Evercore ISI reckons 5 million barrels a day, or around 40% of U.S. production, could be temporarily shut in by the end of June to help balance the market.
Midland oilman David Arrington sent me these photos of his sign in downtown Midland yesterday. Usually the sign gives the price of WTI crude. pic.twitter.com/PRc27BjQ3M
The potential for next to no revenue in the second and third quarters this year may mean that large U.S. oil explorers burn through $7 billion in cash, according Evercore. By the end of it all, as many as 30% of publicly traded shale explorers could be forced to exit the market one way or another, the Evercore analysts said.
For Gene Ames, an 85-year-old, fourth-generation oilman who was born in the East Texas oil rush during the Great Depression, when crude traded for 5 cents a barrel, it’s the worst crash he’s ever seen. “I’ve been through about six major busts and so far this is going to be the worst,” he said by telephone. “It’s the most intense, quickest and deepest collapse.”
The Saudi-Russia price war, which accelerated the price drop due to Covid-19, “has succeeded in hammering the last nail in the coffin of U.S. shale production and posed a major threat to the national security of the United States,” he said. He’s pushing the Texas Railroad Commission to impose mandatory production cuts. The commission deferred a decision on whether to do so on Tuesday.
In Houston, America’s oil capital, the pain is set to reverberate across the broader economy.
The industry is far and away the “best paid” in the city, said Patrick Jankowski, an economist at the Greater Houston Partnership. “Someone who works on the blue-collar side can make $100,000 a year, so when those jobs go away it has a disproportionate impact on the economy.”
Now, the region needs to find its next growth engine. “Energy will still be important, but it’s going to be less important than before,” Jankowski said.
There’s little chance of relief any time soon. Oil traders are on a desperate questto find somewhere — anywhere, really — to store their crude as tanks from Texas to Siberia fill to capacity. Virtually all commercial onshore storage in the U.S. has been booked since the end of February, according to people with knowledge of the matter.
It will likely take months to clear the oversupply, with no clear end in sight for the pandemic’s effects.
“We’re all having to anticipate revenues that are significantly cut or just completely cut for an unforeseen period of time,” said Kyle Armstrong, president of Armstrong Energy Inc., a closely held producer on the New Mexico side of the Permian Basin. “Whether it’s negative $37 or $5, to me it doesn’t matter,” he added. “It’s effectively zero because I can’t operate wells productively at those prices.”
The first taps to be turned off will likely be the 1.75 million barrels a day from older, conventional U.S. wells that produce just a few dozen barrels a day each, according to IHS Markit’s LeBlanc. Producers will seek to ride out the storm with more productive wells providing some cash flow, even if made at a loss, in part due to the costs associated with shut-ins.
“The U.S. oil market actually gets worse fundamentally over the next month,” said Paul Sankey, a veteran oil analyst, in a note to clients. Producers have “nowhere to go with the inexorable production that takes weeks and months to reduce to zero.”
But the bigger problem for the shale industry is the lack of new wells being drilled. Shale wells decline by more than 60% in the first year, meaning new ones are needed to replaced production from old ones.
With few new wells coming online, IHS sees U.S. oil production declining to 10.1 million barrels a day by the end of the year, from 12.8 million barrels a day at the start. That will likely drop further to somewhere around 8.5 million barrels a day in 2021 to 2022, according to Noah Barrett, a Denver-based energy analyst at Janus Henderson.
“A good portion of production, particularly areas of the Bakken and Oklahoma, will go away completely,” said Barrett, whose employer manages $356 billion. “Fresh capital will be needed to grow off that lower base. But there’s zero appetite for that in the foreseeable future.”
The jumbo loan market is facing a classic liquidity crunch. A perfect storm is brewing as millions of homeowners are seeking forbearances as the economy crashes into depression from coronavirus lock downs, and firms who usually bundle up jumbo loans have immediately exited the market.
Jumbo loans are mortgages for the best credit risk borrowers who want to purchase mansions. In pre-corona times, lenders were falling over each other to welcome jumbo borrowers, but not anymore.
Greg McBride, the Bankrate chief financial analyst, recently said demand has dried up for jumbo mortgages as investors shift to mortgage bonds for government-backed loans where “they’re assured of receiving payments even if large numbers of borrowers are in forbearance.”
“Most mortgages get made by lenders who then sell it to someone else,” McBride said. “If there is no willing buyer, lenders will stop closing loans so as not to be stuck holding the bag.”
Tendayi Kapfidze, the chief economist at LendingTree Inc., said in normal times, jumbo loans were all the rage. Now because these loans “don’t have the government guarantee, a lot of those loans end up on the bank balance sheet.”
According to Optimal Blue, a Texas-based firm that monitors mortgage rates, lenders are charging more for jumbos than conventional mortgages, and this is the first time in seven years. Lenders have also tightened lending standards for wealthy households.
David Adler, an aerospace executive in Irvine, California, told Bloomberg that he thought it would be easy to get a jumbo loan at a rate of 3.7% on his $700,000 home. Even with excellent credit, he was told the rate would be much higher.
“I told the guy at the bank, ‘I’m trying to use logic here,'” Adler said in an interview. “And he said, ‘That’s your problem.'”
The Mortgage Bankers Association said the availability for jumbo loans has plunged by 37% since March, making it harder for the best credit risk borrowers to get jumbos versus all other mortgages.
Before the pandemic, lenders welcomed jumbo borrowers, but now, since the economy crashed and 22 million people have lost their jobs, with the expectation the economic downturn could extend into 2021, the market for jumbos has dried up, hence why rates are surging.
Lenders are pulling out of the jumbo loan market because a correction in real estate could be nearing, and many of the loans aren’t government guaranteed.
Wells Fargo has suspended the purchase of jumbo loans from other lenders, but not “direct-to-consumer originations through their retail mortgage channel,” said Tom Goyda, senior VP of consumer lending communications at Wells Fargo.
“Due to unprecedented market conditions, Wells Fargo Home Lending is temporarily suspending the purchase of non-conforming mortgage loans from correspondent sellers, effective immediately and until business conditions stabilize,” Goyda said in an email statement to Bloomberg. “This difficult business decision reflects efforts to prioritize how we serve customers and maintain prudent balance sheet discipline.”
Truist Financial Corp. and Flagstar Bancorp Inc. are other banks that have “pulled back by limiting refinancings, suspending their purchases of new loans made by correspondent lenders or pulling short-term credit lines from smaller mortgage companies they fund that make jumbo loans,” said Bloomberg.
Freedom Mortgage Corp. CEO Stanley Middleman said much of the pullback is from investors who would typically buy these loans no longer want them because of the challenging economic conditions.
“Whether the assets are good or not good is irrelevant because there’s no liquidity to buy them,” Middleman said.
Damon Germanides, a broker at Beverly Hills-based Insignia Mortgage, said closing loans is getting much more difficult than ever before. He said a wealthy client that has good credit and owns a business in the area might not be able to qualify for a mortgage.
“A month ago, he was a no-brainer,” Germanides said. “Now he’s 50-50.”
And if even the army of Robinhood-ers now know how impossible it is to find space for physical oil on the continental US, then Saudi Arabia – which sparked the current crude crisis and which will not stop until shale is completely crushed – is certainly aware.
Which is why with the US unable to store its own output, some 50 million barrels of Saudi oil are on their way to the United States and due to arrive in the coming weeks, piling even more pressure on markets already struggling to absorb a glut of stocks, Reuters and Marine Traffic reported.
Source: Marine Traffic
Shipping data showed the more than 20 supertankers – each capable of carrying 2 million barrels of oil – were sailing to key U.S. terminals, especially in the U.S. Gulf. Three separate tankers, also chartered by Saudi Arabia, were currently anchored outside U.S. Gulf ports.
According to Reuters sources, the kingdom had tried to seek storage options for the cargoes from tanker owners when the ships were chartered last month, but many pushed back given booming rates and not wanting tied up vessels.
The result was an outpouring of anger from the increasingly political hedge fund manager, Kyle Bass, who tweeted earlier that “the Saudis and Russians have declared war against US shale energy companies. It seems they weren’t happy with American energy independence. Storage full..largest glut in history..Saudis are sending us a 50 million barrel oil bomb. How negative will June crude go?”
The Saudis and Russians have declared war against US shale energy companies. It seems they weren't happy with American energy independence. Storage full..largest glut in history..Saudis are sending us a 50 million barrel oil bomb. How negative will June crude go? #Oil#USOILhttps://t.co/oiNfkI2pfM
The anger at the incoming Saudi “bomb” has spread all the way to Washington, and U.S. officials said in recent days that Washington is considering blocking Saudi shipments of crude oil, or putting tariffs on those shipments, adding to difficulties for the cargoes now on the water.
U.S. senator Ted Cruz said on Twitter on Tuesday: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”
20 tankers—filled w/ 40mm barrels of Saudi oil—are headed to the US. This is SEVEN TIMES the typical monthly flow. At the same time, oil futures are plummeting & millions of US jobs in jeopardy. My message to the Saudis: TURN THE TANKERS THE HELL AROUND. https://t.co/gYoQzvHAEQ
In response, two sources said Saudi Arabia was looking into whether it could re-route the cargoes elsewhere if the United States halted imports.
Oil traders active in European and Asian markets said there was expectation that the Saudis would look to divert the cargoes to other markets if a ban was imposed… which in turn would put huge pressure on storage tanks in those two regions, and depress local oil benchmarks.
“Europe looks full, but surely if the Saudis offer it at really cheap levels, buyers would take it,” a source with an international trading firm told Reuters. “Some still have storage spaces or may agree to float it for some time.” A source at a separate oil trading firm active in Asia said they expected many of the barrels that were bound for the United States to flow to the region if exports were blocked.
* * *
“This could prove to be a very expensive exercise for Saudi Arabia as whatever happens with the cargoes and the tanker owners will need to be paid demurrage (for the ships) and those costs would have been locked in when the market was higher to secure the charters,” a shipping source said. “While this is an expensive gamble for the Saudis, shutting off production would have been proved even more costly.”
Additional costs – or demurrage – were estimated at $250,000 a day based on rates last month when a lot of vessels were booked. Daily tanker rates soared to nearly $300,000 in the past month and though they have retreated to $150,000 a day this week, they are still significant and would be in addition to other costs including insurance if the ships are held up.
Even if the Saudi tankers make it to the US, it is not clear who would want their cargo. With the economy shut down, driving virtually non-existent and gasoline demand falling off a cliff, refiners have been absent from oil markets in the United States in recent days as they slash processing rates and as demand dries up, physical oil market sources said. “There is more reluctance now with fresh shipments as refiners in the U.S. have no homes for the oil,” another shipping source said.
Marathon Petroleum, Exxon Mobil, Chevron and Phillips 66, which traditionally among the biggest U.S. buyers of Saudi crude, have gone radio silent.
As Reuters adds, most of the large buyers of Saudi oil are along the West Coast. The region accounts for about half of all Saudi crude imports to the United States, according to the EIA. Storage there was already 65% full as of April 10; two weeks later and that number is approaching100%. The Gulf Coast – which is the second biggest US destination for Saudi oil – was about 55% full.
The imminent arrival of the Saudi tankers comes at a time when the main U.S. storage hub in Cushing, OK, is expected to be full within weeks.
The question reached the very top on Monday, when President Trump said he would “look at” possibly stopping Saudi shipments to the United States. While it wasn’t clear what Trump had in mind, last week, Frank Fannon, the U.S. assistant secretary of state for energy resources, said tariffs were a possibility.
The resentment against publicly-traded companies and major corporations and enterprise who abused the Treasury’s $349 billion small and medium business bailout by applying for the Paycheck Protection Program is growing.
Earlier today, ZeroHedge reported that over 80 publicly listed companies tapped the PPP – which is really a grant if used to pay wages – which not surprisingly ran out of funds just days after it was launched. The most prominent public company to take the funds was Shake Shack, which sparked backlash after receiving $10 million in PPP funds through JPMorgan. Sensing pitchforks in its its immediate future, the company announced on Monday that it would be returning the funds. It then sold 3.4 million shares of stock raising $136MM in gross proceeds.
Another company which tapped into the PPP was Ohio-based biotech Athersys, which received $1 million through the program despite raising nearly $60 million in a Monday stock offering after its shares have nearly doubled YTD. Meanwhile Nikola Motor – backed by Fidelity and hedge fund ValueAct, announced a $4 billion valuation in early March when it announced a merger with VectoIQ. The company borrowed $4 million from the PPP according to a disclosure. Ruth’s Chris steakhouse made $42 million in profit on $468 million in revenue last year, yet tapped $20 million from the PPP.
The figure below lists the 40 largest PPP loans that inexplicably went not to small businesses but to major corporations which not only have access to institutional debt capital markets – unlike most mom and pop shops – but can also sell stock and raise cash overnight, a luxury that America’s small business – which employ over half the US labor force -do not have.
One especially large organization that supposedly received millions in bailout loans was none other than Harvard.
Yesterday ZeroHedge reported that as part of the $2 trillion CARES Act, $14 billion was set aside to support higher education institutions – ostensibly those without billions already in the bank. Harvard, which has a $40 billion endowment, was set to receive $8.7 million in federal aid. Harvard points out that at least half of which has been mandated for emergency financial aid grants to students, which we would note that they can cover themselves
Hilariously, Harvard’s Crimson pointed to the risk that their endowment could shrink due to market volatility – maybe it will request a bailout next too? – and that the University’s financial situation is “grave.”
None of the made an impression on President Donald Trump, however, who during Tuesday’s Wu Flu briefing, said he plans on asking Harvard University to give back more than $8 million given to them under the CARES ACT.
“I’m going to request it,” Trump told reporters at the White House, singling out the Ivy League school. “Harvard is going to pay back the money. They shouldn’t be taking it.”
Asked if he was confident he would be successful in asking Harvard to return the money, Trump said that if the university “won’t do that, then we won’t do something else.” The president also noted the size of the university’s $40 billion endowment.
Harvard responded shortly after Trump’s demand, saying it did not receive funds through the Paycheck Protection Program and that the school is committed to using all of the funds to cover financial assistance to students.
“Like most colleges and universities, Harvard has been allocated funds as part of the CARES Act Higher Education Emergency Relief Fund. Harvard has committed that 100% of these emergency higher education funds will be used to provide direct assistance to students facing urgent financial needs due to the COVID-19 pandemic,” Harvard spokesman Jonathan Swain said. Again, it was unclear how said funds were so critical to the Harvard educational system – which charges $70,000 a year (for video conferences) and has $40 billion in its piggy bank – that the college would be unable to provide “assistance” to students facing financial needs if it did not get money that could have gone to some other business that actually needs it.
“This financial assistance will be on top of the support the University has already provided to students – including assistance with travel, providing direct aid for living expenses to those with need, and supporting students’ transition to online education,” Swain added.
So, basically, bailout funds that are footed by the US taxpayer – in the form of trillion in new debt that will be repaid by all Americans, are now going to poor Harvard students. Wait, did we say “poor” Harvard student? According to the NYT, the median family income of a student from Harvard is $168,800 (95 percentile), and 67% of students come from the highest-earning 20% of American households. About 15% come from families in the top 1% of American wealth distribution.
Harvard is just one example of the thousands of companies which used their banker connections to get to the front of the line in getting “much needed” stimulus funds, even as millions of small business are waiting to this day for their loans.
“I will comment there have been some big businesses that have taken these loans. I was pleased to see that Shake Shack returned the money,” Mnuchin said. “The intent of this was not for big public companies that have access to capital.”
Mnuchin also said he wanted to give companies the “benefit of the doubt” by assuming they didn’t understand the requirements but warned of consequences for large businesses that take advantage of the program. Asked to expand on what those consequences could be, Mnuchin did not provide any specifics.
“We’re going to put up very clear guidance so that people understand what the certification is, what it means if you are a big company,” Mnuchin said.
Some have called for reform to the program, run by the Small Business Administration, in order to ensure that the funds go to small businesses in need.
The good news is that so far there has been little rampant fraud as some feared. Instead, the crony capitalism that the US has become so famous for was on full display, and instead of bailing out the poor, the US government – together with the Fed – has once again bailed out those who spend $10 million for their annual private jet maintenance.
Sales of existing homes fell a wider-than-expected 8.5% in March compared with February to an annualized pace of 5.27 million units, according to the National Association of Realtors’ seasonally adjusted index.
Sales were just 0.8% higher than in March 2019.
These sales figures are based on closings that represent contracts signed mostly in late January and February, before the coronavirus shut down so much of the economy.
“We saw the stock market correction in late February,” said Lawrence Yun, chief economist at the NAR. “The first half of March held on reasonably well, but it was the second half of March where we saw a measurable decline in sales activity.”
Yun indicated sales could fall as much as 30% to 40% in the coming months.
Regionally, sales dropped across the nation but hardest in the West, down 13.6% month to month. Sales fell 9.1% in the South, 7.1% in the Northeast and 3.1% in the Midwest.
The supply of homes for sale fell a sharp 10.2% annually. Toward the end of the month, some sellers de-listed their properties, not wanting potential buyers touring their homes in person. Other measures showed a sharp drop in the number of new listings in March, reflecting fear in the market among both buyers and sellers.
“Homes are still selling fast, we just don’t have enough inventory,” added Yun, saying that real estate agents do report some interest and have ramped up virtual tours as well as live virtual showings.
Price growth was still strong in March, with the median existing home price hitting $280,600, an 8% annual increase.
“Going forward, we’ve seen both home buyers and sellers report feeling less confident and many are making adjustments to the process,” said Danielle Hale, chief economist at realtor.com. “Already, sellers are getting less aggressive with asking price growth, and we’re seeing roughly half as many new listings come up for sale this year versus last year.”
Fewer home sales over the coming months will likely mean slower price growth, and in some of the harder-hit markets, where hospitality and leisure drive the local economies, prices could fall.
(Alasdair Macleod) Commentators routinely confuse the deflationary effects of a contraction of bank credit with the inflationary effects of central bank policies designed to offset it. Central banks always ensure their stimulus is greater, so inflation, not deflation, is always the outcome.
In order to understand bank credit, we must enter the mind of a banker and understand how it is created, why it is expanded and why expansion is always followed by a sharp contraction.
But we have now moved on from a simplistic credit cycle model, given the global economy was already facing a tendency for bank credit to contract before the coronavirus drove supply chains into the greatest global payment crisis in history. The problem is now so large that to maintain both economic stability and price levels for financial assets the central banks, led by the Fed, will have to issue so much base currency that fiat currencies will become almost worthless.
In these conditions the banks that survive the next several months will then begin to expand bank credit anew to buy up physical assets instead of their normal financial fare, sealing the fate of fiat currencies with a final expansion of bank credit as the banks themselves dump worthless currencies for real assets.
Never has it been more important to understand the psychology and motivation behind changes in the level of bank credit at a time when governments and central banks are relying on commercial banks to transmit Keynesian stimuli to distressed borrowers. And never has it been more important for analysts to differentiate between deflationary forces that come entirely from the contraction of bank credit and inflationary forces that arise from central banks’ monetary policy.
Whether policies to rescue economies from the financial and economic effects of the coronavirus will actually get to the intended businesses depends largely on the transmission mechanisms for base money. While special powers for direct funding of large corporations may be implemented and the extension of public ownership to prevent bankruptcies of large players is very likely, commercial banks will be expected to play a central role in distributing monetary stimuli to businesses of all sizes. But since they regard small and medium size businesses as either too risky or not worth bothering with, it will be a struggle to get them to deliver the financial support intended.
In any advanced economy, a Pareto 80% of GDP is provided by small and medium-size enterprises. In a highly centralized banking system, for the banks that have access to the Fed through prime broker subsidiaries, SMEs are simply not worth bothering with. It leaves the majority of enterprises providing goods and services to the public out in the cold. Bankers looking through the dip will want to preserve more profitable relationships with large corporations and reduce their exposure to risky, expensive-to-administer smaller loans.
Investors who are used to getting positive returns solely on the back of expansionary monetary policies are now egging on the authorities to spend, spend and spend one more time. Pension funds and insurance companies in particular will now discover they are being lumbered with the cost of monetary expansion by an increasing depreciation of the currency, which escalates future liabilities. Ever since the investment industry pandered to the inflationary policies of central banks this outcome was inevitable, because both logic and sound economic theory tell us you cannot continually inflate your way out of trouble.
That end point is where we have now arrived. The state has come to rely completely on inflationary stimulation. The helicopters have warmed up and are ready to distribute monetary largess created by the magic of central banking, not just to individuals, but to their employers as well.
Mission impossible is to restore economic activity to where it was before the coronavirus shutdown. Politicians assume is can be achieved by deploying military precision. They have taken for themselves a mandate to sweep aside all bureaucracy and all objections to the role of the state. All it requires is for the banks as well as other critical actors to submit to their authority.
The Credit Cycle Was Turning Down Before The Chicom Virus Hit
It ignores the impact of the credit cycle, which was already turning down in the second half of last year. In response, the Fed first stalled its attempt to restore its balance sheet to normality and from September onward was forced to publicly intervene to inject massive amounts of liquidity into the banking system through the repo market.
All was not well in wholesale dollar markets at least five months before the virus hit, so the problem is more complex than a simple return to normality when the virus passes. Furthermore, the authorities trying to keep the economy from imploding are out of their depth, so much so that individuals in the private sector are gradually realizing it as well. Financial risk has escalated considerably, which has one effect: bankers will use every opportunity to reduce the size of their balance sheets. The authorities will struggle to get banks to hold fast, let alone distribute subsidies to producers and consumers alike.
Attempts at rescuing the global economy and supporting financial asset values upon which bank collateral is based will require massive inflation of base money, as outlined later in this article. But these attempts will have to fight bankers trying to control their lending risk in order to protect their shareholders’ capital from being wiped out. Their motivation to deflate bank credit will be greater than ever before.
An appreciation of the deflationary implications of the current phase of the credit cycle requires an understanding of how bank credit fluctuates and the predominantly psychological factors that drive it.
Origins Of Bank Credit
The general public is not aware that there are two separate sources of money. The central banks are empowered to issue money, but commercial banks do so as well. One way they do this is by taking in deposits and then lending them to borrowers for an interest rate turn. When the borrower draws down the loan to make payments, more deposits are created as the payments are made.
A second course of money creation is simply by lending money into existence. In this case, the loan is created first, and as it is drawn down, deposits are created. This is regarded as the more usual practice, hence the description of the process being the expansion of bank credit. Any imbalances that arise between banks are resolved through the interbank market.
By these means a bank’s own capital becomes a fraction of the bank’s expanded liabilities, hence the term fractional reserve banking. Figure 1 shows the bare bones of fractional reserve banking, with a bank’s balance sheet measured in monetary units (mu), early in a phase of credit expansion.
This balance sheet reflects a cautious approach to bank lending. Shareholders’ equity is valued at one third of customers’ deposits and is covered twice by government bonds, which will all be less than five years to maturity and is regarded in the banking system as the risk-free investment standard. At this stage of the credit cycle and with the banking community generally risk-averse, lending margins are profitable. The ratio of total assets to shareholders’ equity is five times. Put another way, profits and losses from changes in asset values are multiplied five times at the shareholder level.
Figure 2 shows the same bank’s balance sheet towards the end of the expansion phase of the credit cycle.
The economy has responded to both monetary stimulation from the government’s deficit spending and interest rate suppression by the central bank. The cohort of bankers has seen a lessening of lending risk and has responded by actively seeking lending opportunities among large corporations. Bankers are now lending increasingly to medium size corporations as well as investment grade rated borrowers where the margins are better. Falling unemployment and growing economic confidence decreases lending risk for credit card and other consumer debt, and the bank has extended additional credit for creditworthy customers. Liquidity from government bonds and bills has been drawn down in order to increase allocation to higher-yielding corporate debt. The balance sheet has expanded to give an overall gearing on shareholders’ equity of 12.5 to 1.
This means a two per cent margin averaged across total assets yields a 25% profit on share capital. But by the time this snapshot is taken, competition from other banks will have likely reduced lending margins generally, and the bank has responded by taking an even more aggressive lending stance, so lending margins overall are likely to be less generous than at the start of the credit cycle and loan quality will have deteriorated.
While shareholders are enjoying excellent returns, it has become a highly risky situation for the bank. The slightest pause in the economic outlook, whether it be from interest rates being raised by the central bank attempting to control the boom, or perhaps an exogenous factor, such as trade tariffs being raised between the bank’s jurisdiction and a major trading partner, will cause the directors of our bank to switch from greed to fear in a heartbeat. In our example, all it takes is losses of 12.5% of the bank’s assets to wipe out shareholders’ equity.
If one bank suspects there may be a deterioration in trade conditions, it is certain that others will as well, because they have similar business information. Due to the dangers of balance sheet gearing, bankers are exceedingly prone to group think.
When it happens, the switch from greed to fear travels like wildfire. But some banks are likely to be caught out, having been aggressive lenders trying to increase the size of their bank, often with a chief executive on an ego trip. Fred Goodwin at Royal Bank of Scotland was a recent example. Ignoring all signs of the ending of a cycle of credit expansion, Goodwin pushed through a consortium takeover of ABN-AMRO in October 2007, with RBS’s portion funded by debt. The bank’s balance sheet gearing became twenty-four to one.
With gearing of that sort very little needs to go wrong to wipe out shareholders equity, which is what happened. Failures of this type are an acute risk when the banking cohort has been lulled into a false sense of lending risk by a prolonged period of business stability combining with the siren’s beckoning of a financial bubble.
Reducing bank balance sheets without creating economic instability is virtually impossible. Driven by their group think, frightened bankers will seek to reverse credit expansion all at the same time. They sell corporate bonds in a market with no buyers. Spreads, the difference in yield between government bonds and riskier corporate debt, blow out, catastrophic for book values. Business and personal loan facilities are capped and withdrawn, driving many companies into the hands of insolvency practitioners. It can become a race between bankers to reduce the size of their balance sheets before their competitors, as the rapid withdrawal of bank credit triggers bankruptcies and unemployment. It has happened repeatedly for the last two hundred years.
The economic effect was summed up by economist Irving Fisher in the 1930s, who is forever associated with the theory of debt deflation. As the oxygen of credit is withdrawn, businesses get into trouble and banks begin to liquidate collateral. Liquidation of collateral drives their values even lower, exposing additional formally secured lending as no longer secured. Further collateral sales follow, driving collateral values down even further. And so on.
That was in the depression years, and Fisher’s point was to link the collapse of businesses, asset values and also the failure of banks themselves with the contraction of bank credit. Subsequently, central bank policy has focused on trying to anticipate and stop the deflation of bank credit in the first place, always ready to turn on the money spigot. The government then subsidized the economy by increasing its spending without raising taxes. By using the stimulus of unfunded government spending and central bank money creation, the government and its central bank are following the Keynesian economic playbook, which now sets the relationship between the state and private sectors.
Despite everything attempted by statist intervention, we still have periodic bouts of bank credit deflation. But matters have evolved from the simple model illustrated in Figures 1 and 2 above. Banking has become highly regulated, and banks now lend on a formulaic basis, set globally by the Basel Committee (we are on rules version 3) and by local regulators.
Earlier versions of these controls permitted Fred Goodwin to take the RBS balance sheet gearing to credit hyperspace. They say lessons were learned, but the only lessons learned by the regulators were new ways to keep their eyes shut and ears plugged. Stress testing of bank balance sheets assumes little more than a moderate recession and denies the likely consequences of anything worse. The economic crisis starts with a change in banking cohort group think, and not, as regulators with their useless stress tests assume, a decline in GDP, a rise in unemployment, a rise in price inflation, or Heaven forbid, an unexpected financial crisis. And if you think extreme bank leverage would have been controlled following the Fred Goodwin episode, think again. Figure 3 shows current balance sheet to equity ratios for a selection of major banks. Through the magic of modern accounting practice, they are almost certainly higher than reported.
From the few examples in Figure 3 we can anticipate bank failures to originate in Europe in the event of a general contraction of bank credit. Despite reducing its balance sheet significantly in recent years, Deutsche Bank is in Fred Goodwin territory, closely followed by BNP and Barclays. And the credit cycle has very obviously turned down again. The regulators persist in behaving like the three wise monkeys, wholly unaware there is a credit cycle and what these ratios indicate.
The large American banks are not so heavily geared, but that will not protect them from the global credit contraction that will now intensify.
Enter The ChiCom Virus
We have made the important point that before the coronavirus lock down, the credit cycle was already turning down. Liquidity strains had surfaced last September, with the Fed routinely supplying tens of billions of dollars of liquidity through the repo market.
The monetary base, which represents the quantity of money in public circulation created by the Fed, is now growing at the fastest pace on record. But since January, a new problem arose: the disruption to production supply chains from the virtual shutdown of Chinese production due to the coronavirus.
The manufacture of anything requires multiple inputs, commonly referred to as supply chains. The concept of a supply chain suggests they are one dimensional: a series of production steps that go towards a single product. This is not the case. Supply chains are multidimensional and involve supplies from many sources in many jurisdictions at every production stage. The sequential shutdown of China, South Korea and much of South East Asia was followed by Europe, Britain and America. During these shutdowns almost all production and sales of non-food goods and non-essentials ceased.
While the assembly of a product progresses in one direction, payments flow backwards down the chain as each production step is delivered. The sum of the payments involved is far greater than the value of the final product. The global payment disruption is therefore significantly greater than the GDP number, which only consists of the sum total of final products bought by consumers. In the case of the US, an approximation of domestic payment disruption is contained in the gross output statistic, which is $38 trillion compared with a GDP of $21 trillion.
The US economy is significantly services-driven, with shorter supply chains on average than an equivalent manufacturing-based economy, such as China or Germany. If you add together supply chain payments abroad that feed into final goods sold in America, total payments for intermediate production stages in dollar-driven production probably add up to more than $50 trillion, the majority of which are now frozen.
To understand the impact of this new factor on bank credit, we must divide business customers into two classes; those with cash and those that depend on bank loans for working capital.
Both categories have establishment and other costs that continue despite the collapse in production. Those with cash liquidity draw it down to make payments, reducing bank deposits, which are recycled into other deposits which may or may not be with the same bank. When those deposits reduce existing overdrafts, bank credit contracts reflecting a loan repayment. When they amount to a simple transfer of deposit ownership, they do not.
The greater problem is with businesses that need loan cover for missed payments. There are so many of them with payment failures, bankers are being overwhelmed. Whether they realize it or not, they cannot afford to say no to demands for credit because Irving Fisher’s debt deflation problem is so urgent that to deny loan requests would likely end up wiping out the banks’ own shareholders’ capital and then some.
Supply chain payment failures are becoming a banking problem many times larger than the banking cohort shareholders’ capital. The ratio of US gross output to total equity capital for commercial banks in the US is nineteen times. In other words, unless the Fed can increase base money by at least that and somewhat more to compensate for a degree of bank credit contraction, the economy and the banking system will almost certainly crash.
In Germany, where the two major private banks shown in Figure 3 have balance sheet to equity ratios of 15.1 and 22.6, supply chain disruptions seem certain to lumber them with a fatal combination of dramatically widening commercial bond spreads and payment failures from themittelstand.
Everywhere else, the problem is the same. The Fed has responded by reducing the cost of drawing down established central bank liquidity swaps lines, but they were only available to the ECB, the Bank of Japan, The Bank of England, Bank of Canada and the Swiss National Bank. Recognizing the wider problem, on 19 March the Fed extended swap lines temporarily to the central banks of Korea, Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore and Sweden for six months. A notable absentee from the list is China, which one would have thought is the most important user of dollar liquidity based on trade. Politics trumps the delivery of monetary policy in defiance of the scale and urgency of the crisis.
The problems facing the whole banking system have never been greater. Individually, commercial banks are bound to take every opportunity to reduce their risk exposure before the market values of collateral, particularly equities, corporate debt and both residential and commercial property categories fall further in value. Banks will attempt to reduce their interbank exposure, particularly to European banks. Eurozone banks are likely to be the first to fail, needing state bail outs. Counter party risk in over-the-counter derivatives becomes a major concern for all. And central banks are on a wing and a prayer if they think commercial banks will simply ensure liquidity gets to the right places in time to prevent a financial crisis.
The Final Crack-Up, BOOM
The Fed and other central banks can only blag solutions to a rapidly debasing currency, but the commitment to maintain financial asset values by printing money in the manner of John Law three hundred years ago will require such enormous amounts of base money as to bring forward the destruction of the fiat dollar and all the other fiat currencies. Banks will have fought for survival in this changed world, with many of them succumbing to public ownership.
In this rapidly deteriorating environment, it won’t be long before the smarter bankers realize that they can deploy the expansion of bank credit to acquire not financial assets, which will become worthless being priced in worthless currency, but real assets. The model adopted is likely to be that of Hugo Stinnes, who in 1920-Germany was known as the inflation king. Stinnes borrowed rapidly depreciating marks to buy up factories and property, amassing an empire of 4,500 companies and 3,000 manufacturing plants. Stinnes died in 1924, the year after the great inflation, and his empire subsequently collapsed.
Banks emulating Stinnes have an additional advantage. They can make acquisitions as principals by expanding bank credit again when they are confident that repayments when falling due will be worth significantly less. Bankers under the cover of nationalized banks might even direct the expansion of bank credit into newly created vehicles in which they have personal interests. This behavior is atypical and might even have the support of a hapless state desperate for any form of financial stability.
This last act, the restoration of bank credit in its relationship with base money will add a rising multiple of the trillions of central bank base money scheduled to be issued in the coming months and will be a vital component of the crack-up boom with which all currency collapses end. The role of the banks as the medium with which the state seeks to tame free markets will ultimately hasten the end of the fiat currencies from which they have profited so much, and the end of central banking as well.
The Great Crash of 2020 was not caused by a virus. It was precipitated by the virus, and made worse by the crazed decisions of governments around the world to shut down business and travel. But it was caused by economic fragility. The supposed greatest economy in US history
actually was a walking sick man, made comfortable with painkillers, and looking far better than he felt—yet ultimately fragile and infirm. The coronavirus pandemic simply exposed the underlying sickness of the US economy. If anything, the crash was overdue.
Too much debt, too much malinvestment, and too little honest pricing of assets and interest rates made America uniquely vulnerable to economic contagion. Most of this vulnerability can be laid at the feet of central bankers at the Federal Reserve, and we will pay a terrible price for it in the coming years. This is an uncomfortable truth, one that central bankers desperately hope to obscure while the media and public remain fixated on the virus.
But we should not let them get away with it, because (at least when it comes to legacy media) the Fed’s gross malfeasance is perhaps the biggest untold story of our lifetimes.
Symptoms of problems were readily apparent just last September during the commercial bank repo crisis. After more than a decade of quantitative easing, relentless interest rate cutting, and huge growth in “excess” reserves (more than $1.5 trillion) parked at the Fed, banks still did not have enough overnight liquidity? The repo market exposed how banks were capital constrained, not reserve constrained. So what exactly was the point of taking the Fed’s balance sheet from less than $1 trillion to over $4 trillion, anyway? Banks still needed money, after a decade of QE?
As with most crises, the problems took root decades ago. What we might call the era of modern monetary policy took root with the 1971 Nixon Shock, which eliminated any convertibility of dollars for gold. Less than twenty years later, in October 1987, Black Monday wiped out 20 percent of US stock market valuations. Fed chair Alan Greenspan promised Wall Street that such a thing would never happen again on his watch, and he meant it: the “Greenspan Put” was the Maestro’s blueprint for providing as much monetary easing as needed to prop up equity markets. The tech stock crash of the NASDAQ in 2000 only solidified the need for “new” monetary policy, and in 2008 that policy took full flight under the obliging hand of Fed chairman Ben Bernanke—a man who not only fundamentally misunderstood the Great Depression in his PhD thesis, but who also had the self-regard to write a book titled The Courage to Act about his use of other people’s money to re-inflate the biggest and baddest stock bubble in US history.
James Grant of Grant’s Interest Rate Observer characterizes the Fed’s recent actions as a “leveraged buy-out of the United States of America.” The Fed is assumed to have an unlimited balance sheet, able to provide financial markets with “liquidity” as needed, in any amount, for any length of time. Pennsylvania senator Pat Toomey urges the Fed to do more, and Congress to spend more, all in the unholy name of liquidity.
But liquidity is nothing more than ready money for investment and spending. In the current environment it is a euphemism for free manna from heaven. It is “free” money—unearned, representing no increase in output or productivity. It has no backing and no redeemability. And not only are there no new goods and services in the economy, there are far fewer due to the lock down.
So monetary “policy” as we know it is dead as a door nail. What central banks and Fed officials do no longer falls within the realm of economics or policy; in fact the Fed no longer operates as what we think of as a central bank. It is not a backstop or “banker’s bank,” as originally designed (in theory), nor is it a steward of economic stability pursuing its congressionally authorized dual mandate. It does not follow its own charter in the Federal Reserve Act (e.g., impermissibly buying corporate bonds). It does not operate based on economic theory or empirical data. It no longer pursues any identifiable public policy other than sheer political expediency. Fed governors do not follow “rules” or targets or models. They answer to no legislature or executive, except when cravenly collaborating with both to offload consequences onto future generations.
The Fed is, in effect, a lawless economic government unto itself. It serves as a bizarro-world ad hoc credit facility to the US financial sector, completely open ended, with no credit checks, no credit limits, no collateral requirements, no interest payments, and in some cases no repayments at all. It is the lender of first resort, a kind of reverse pawnshop which pays top dollar for rapidly declining assets. The Fed is now the Infinite Bank. It is run by televangelists, not bankers, and operates on faith.
The largest US bank is quietly shutting down ahead of a historic default shit storm that is about to hit the U.S.
Earlier this week, JPMorgan reported that its loan loss provision surged five fold to over $8.2 billion for the first quarter, the biggest quarterly increase since the financial crisis (even if its total reserve for losses is still a fraction of what it was during the 2008-2009 crash).
And while Jamie Dimon was mum on how much more losses the bank may be forced to take in coming quarters to offset the coming default surge (something we discussed in Houston: The Banks Have A Huge Problem), it hinted that things are about to get much worse when it first halted all non-Paycheck Protection Program based loan issuance for the foreseeable future (i.e., all non-government guaranteed loans) because as we said “the only reason why JPMorgan would “temporarily suspend” all non-government backstopped loans such as PPP, is if the bank expects a default tsunami to hit coupled with a full-blown depression that wipes out the value of any and all assets pledged to collateralize the loans.”
Then, just a few days later, the bank also said it would raise its mortgage standards, stating that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value, a dramatic tightening since the typical minimum requirement for a conventional mortgage is a 620 FICO score and as little as 5% down. Reuters echoed our gloomy take, stating that “the change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market, after measures to contain the virus put 16 million people out of work and plunged the country into recession.”
In short, JPM appears to be quietly exiting the origination of all interest income generating revenue streams over fears of the coming recession, which prompted us to ask“just how bad will the US depression get over the next few months if JPMorgan has just put up a “closed indefinitely” sign on its window.”
That question was especially apt today, when JPM exited yet another loan product, when it announced that it has stopped accepting new home equity line of credit, or HELOC, applications. The bank confirmed that this change was made due to the uncertainty in the economy, and didn’t give an end date to the pause according to the Motley Fool.
Like in the other previous exits, the move doesn’t affect customers who already have HELOCs with the bank. They’ll still be able to withdraw funds on their existing HELOCs as they wish.
With HELOCs generally seen as riskier for banks than purchase or refinance mortgages as they represent a second lien on the home, it was only a matter of time before the bank – which had already exited new first-lien loan issuance would but up a “closed” sign on this particular product.
In short, JPMorgan wants no part of the shit storm that is about to be unleashed on middle America, and especially the housing sector which is about to be hammered like never before.
While the U.S. housing market was on a steady footing earlier this year, all hell broke loose as a result of the economic paralysis and deepening depression resulting from the Coronavirus pandemic. And with would-be home buyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector, especially as banks are going to make it next to impossible to get a new mortgage.
To be sure, as we reported last week the residential mortgage market is already free falling after borrower requests to delay mortgage payments exploded by 1,896% in the second half of March. And unfortunately, this is just the beginning: last week, Moody’s Analytics predicted that as much as 30% of homeowners – about 15 million households – could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond. Bloomberg called this the “biggest wave of delinquencies in history.”
This would result in a housing market depression and would lead to tens of billions in losses for mortgage servicers and originators such as JPMorgan.
Desperate times call for desperate measures. And with the Fed in the process of destroying the monetary system as we know, we can’t say we were surprised to hear that some landlords are attempting to use the age-old system of barter to accept payments.
The problem? They’re reportedly asking their broke tenants for sex, according to BuzzFeed.
Citing the Hawaii State Commission on the Status of Women, the report details several complaints of sexual harassment since the coronavirus outbreak began.
One woman says when she texted her landlord about a more affordable property after being unable to pay her April rent, “he responded with a dick pic.” A different woman claimed that her landlord told her she could come over and “spoon him” instead of paying her April rent.
Khara Jabola-Carolus, the executive director of the commission said: “We’ve received more cases at our office in the last two days than we have in the last two years.”
She thinks the cases are becoming more egregious as tenants become unemployed, broke and more vulnerable. “Of course that’s not the root cause of why it’s happening, but it makes it easier because now [landlords] have access to people at their fingertips,” she said.
Sheryl Ring, the legal director at Open Communities, a legal aid and fair housing agency just north of Chicago said: “We have seen an uptick in sexual harassment. Since this started, they [landlords] have been taking advantage of the financial hardships many of their tenants have in order to coerce their tenants into a sex-for-rent agreement — which is absolutely illegal.”
She says sexual harassment complaints related to housing are up threefold in the last month. Ring was already working on six cases before the epidemic began and says that women of color and trans women are the most likely to be targeted. Ring advises women not to give in to trying to negotiate with landlords at all if the topic comes up.
“You can’t really negotiate how much illegality the landlord is willing to do,” she said. “We’ve heard some landlords are attempting to use the situation where a tenant falls behind to pressure a tenant into exchanging sex for rent,” she continued.
“It’s important to know what your rights are as quickly as possible. Even now, just because courts are closed to most things, it doesn’t mean you do not have recourse right now and can’t be protected,” Ring concluded.
“The conditions are ripe for sexual exploitation,” said Jabola-Carolus, noting that since Hawaii’s tourism industry has fallen apart, many immigrant and native Hawaiians are out of work.
Jabola-Carolus concluded: “The power dynamic goes without saying. All of us feel intimidated by our landlords because shelter is so critical.”
(Bloomberg) — Tension is rising in the messy fight over commercial rent payments.
With stores shuttered, struggling retailers are skipping rent and asking for concessions, while landlords are demanding payment and having their own tricky conversations with lenders.
There are no easy answers as officials ponder how to safely get the economy back open. So far this month, some mall owners and other retail landlords collected as little as 15% of what they were owed, according to one estimate. And it’s expected to get worse, with more than $20 billion in rent payments coming due in May.
“It’s all over the map what’s happening out there,” said Tom Mullaney, a managing director in restructuring at Jones Lang LaSalle Inc. “More and more defaults are coming in every single day.”
Companies across the U.S. — from small mom-and-pop operations to giant corporations — have missed April payments or sent out relief requests citing store closures because of the pandemic.
Landlords have been pitching rent deferment, saying tenants can make reduced payments now as long as they pay the balance at some point. Some businesses are pushing back on that option and asking for rent cuts even after stores are open again.
U.S. retail landlords typically collect more than $20 billion in rent each month, according to data from CoStar Group Inc.So far, April rent collection has ranged from 15% to 30% for landlords with higher concentrations of shuttered businesses, according to an estimate from brokerage firm Marcus & Millichap.
Landlords, who are facing their own debt defaults, are getting frustrated. Some are complaining that large corporations are using the crisis to skip out on rent. Others say they’re not responsible for bailing out tenants and that the federal government or insurance companies should cover the costs instead.
“The landlords are triaging the battlefield,” said Gene Spiegelman, vice chairman at Ripco Real Estate Corp. “The super powerful and strong are not going to get any help and the ones that’ll die anyways, landlords will say why would I help them?”
To be sure, some landlords and tenants are working out deals on a case-by-case basis. And some companies are paying rent for their stores. That includes AT&T Inc. and T-Mobile USA Inc.according to people familiar with the matter. J.C. Penney also said it paid for April.
Ross Stores Inc. and fitness chain Solidcore, meanwhile, are among those standing firm on requests for rent abatements and asking for additional concessions. Williams-Sonoma Inc. is another chain that has stopped paying rent, according to people familiar.
Ross has told landlords that after the shutdown ends their rent on some stores should be cut until sales rebound. Solidcore hasn’t agreed to rent deferral and said it likely won’t be able to pay the same rent as it was before pandemic.
“We’re not going to be bullied by the landlords during this time,” said Anne Mahlum, the fitness company’s founder and chief executive officer said. “We have some leverage here. What are they going to do, say get out and then have vacancy for months on end?”
The firm, which owns more than 1,700 properties, has seen requests for rent relief since the crisis started. But several of those tenants ended up paying, according to Hsieh.
One agreed to pay after getting loans from the government’s relief package, while another did so after being asked to provide financial information. A discount retailer and a company in the auto industry paid after Spirit refused to consider their rent deferral requests.
“If a tenant just says I’m not going to pay, fine, I’ll default you, I’m going to go to the courts, and you have 30 days to pay or quit,” Hsieh said. “I don’t want to be negative, but we own the building.”
Many landlords are rushing to work out deals with lenders to stave off their own defaults. Banks and insurance companies are negotiating deals on a case-by-case basis, but borrowers in commercial mortgage-backed securities have fewer options.
About 11% of U.S. CMBS retail property loan borrowers have been late on April payments so far, according to preliminary analysis by data firm Trepp. If that number holds up, $13 billion worth of CMBS loans could miss payments for the month.
“The banks are a little more fluid and often there’s recourse,” said Camille Renshaw, CEO brokerage firm B+E. “But many large properties have CMBS debt and when there’s a crisis, no one is there to pick up the phone to negotiate.”
It’s just not retail stores that are suffering. Office space is a ghost town thanks to the Wuhan (bat) virus outbreak. But with tools like Zoom, Webex, Microsoft Teams, GotoMeeting, Skype, etc., one wonders if the days of massive office building demand is over. Other than for socializing and monitoring employees (as Bill Lumbergh did in “Office Space.”)
Carnage in home builder sentiment following a record collapse in home buyer sentiment means it really should not be a total surprise to see Housing Starts crashed 22.3% MoM (the biggest drop since 1984). Building Permits also plunged, but by a lower amount, down 6.8% MoM.
Under the hood, Single-family starts fell to 856k from 1,037K SAAR, a 17.5 drop, while multifamily starts crashed 32.1% to just 347K, the lowest since July, from 511K in February.
Permits were ugly too, although here multi-family units actually rose 5.2% to 423K, while it was single family that tumbled to 884K from 1,005K, a 12% drop.
And this is all before most of the national Chinese Flu lock downs came into effect!
Two weeks ago ZeroHedge reported how the “steepest decline in global oil consumption ever recorded” spelled negative prices for crude in what Goldman’s Jeffrey Currie as “the largest economic shock of our lifetimes.”
Now, the unprecedented collapse in consumption has hit the other end of the industry – gasoline.
According to Bloomberg, gasoline in Fargo, North Dakota has hit 12 cents a gallon at ‘the rack’ – the wholesale market where gas station owners buy fuel before marking it up at the pumps – which have become “little more than makeshift storage for ballooning inventories.”
“When you see gasoline down around 12 cents a gallon, no one is going to be making money,” said Ron Ness, President of the North Dakota Petroleum Council, who added that it’s nearly impossible for retailers to turn a profit at that price.
“Our gasoline business has been cut in half,” said David Olson, general manager of RJ’s Gas Station outside of Fargo. Nearby, Shaun Lugurt told Bloomberg that he estimates sales at his station have tumbled 80% in a month.
“The biggest part for us that has been so hard is the unknown,” said Lugurt, adding “It’s been kind of a roller coaster.” Lugert co-owns Don’s Car Washes, and has also been forced too cut back store and worker hours.
The slump in rack prices, which are typically stable due to intense competition among distributors, is the latest sign that the coronavirus pandemic is wreaking havoc on every aspect of the fuel market. American gasoline consumption fell to the lowest level on record last week as lock downs take drivers off the road while gasoline stockpiles rose to a record high. That’s caused rack prices across the U.S to collapse. Milwaukee this week beat out Fargo for the lowest price in the nation. –Bloomberg
“The local racks are just inundated with material,” according to Patrick De Haan, head of petroleum analysis at GasBuddy – who suggested that some refineries may be selling gasoline “at a break even or even a loss.”
“What we are seeing is that a lot of the big pipelines are being used as storage, and the product will just get pushed and pushed until it has no place else to go,” said DTN refined products analyst, Brian Milne. “Those places are at the end of the line.”
Retail gas prices, meanwhile, are catching up.
“You’re not going to be able to flip a switch and go back to what it was before coronavirus,” said Olson, the station manager at RJ’s. “Even with businesses opened back up again, people are going to be apprehensive.“
Olson is probably right – as a recent Gallup poll found that 80% of Americans say they will wait to return to normal activities after the government lifts the nationwide coronavirus lock down.
VIRGINIA — (CHINESE OWNED) Smithfield Foods, Inc. announced today that its Sioux Falls, SD facility will remain closed until further notice. The plant is one of the largest pork processing facilities in the U.S., representing four to five percent of U.S. pork production. It supplies nearly 130 million servings of food per week, or about 18 million servings per day, and employs 3,700 people. More than 550 independent family farmers supply the plant.
“The closure of this facility, combined with a growing list of other protein plants that have shuttered across our industry, is pushing our country perilously close to the edge in terms of our meat supply. It is impossible to keep our grocery stores stocked if our plants are not running. These facility closures will also have severe, perhaps disastrous, repercussions for many in the supply chain, first and foremost our nation’s livestock farmers. These farmers have nowhere to send their animals,” said Kenneth M. Sullivan, president and chief executive officer, for Smithfield.
“Unfortunately, COVID-19 cases are now ubiquitous across our country. The virus is afflicting communities everywhere. The agriculture and food sectors have not been immune. Numerous plants across the country have COVID-19 positive employees. We have continued to run our facilities for one reason: to sustain our nation’s food supply during this pandemic. We believe it is our obligation to help feed the country, now more than ever. We have a stark choice as a nation: we are either going to produce food or not, even in the face of COVID-19,” he concluded.
In preparation for a full shutdown, some activity will occur at the plant on Tuesday to process product in inventory, consisting of millions of servings of protein. Smithfield will resume operations in Sioux Falls once further direction is received from local, state and federal officials. The company will continue to compensate its employees for the next two weeks and hopes to keep them from joining the ranks of the tens of millions of unemployed Americans across the country.
“We are looking at the machine that feeds society shutting down under controlled demolition”