Monthly Archives: June 2020

Into Darkness: Where The Fed Is Leading Us

(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.

Why?

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.

(Source – MarketWatch)

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.

The Inevitable

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.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

Source: by Chris Martenson | Peak Prosperity

Lock Downs Have Pushed Government Pensions Over The Edge

Blog/Pension Crisis

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.

SB

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.

Supreme Court Rules On CFPB Constitutionality

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.”

Source: by Ryan Smith | Mortgage Professional America

NYU Prof: “Hundreds, If Not Thousands” Of Universities Will Soon Be “Walking-Dead”

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. 

Mortgage Forbearance Surge Following A Three Week Decline

  • 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 …

Source: by Diana Olick | CNBC

41% of Businesses Listed on Yelp Have Closed Forever During Coronavirus Pandemic

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

Retailers got some good news last week with a 17.7% surge in sales in May following two months of sinking sales, which was largely thanks to the easing of lockdown restrictions combined with millions of Americans getting an influx of spending money from stimulus checks and tax refunds. But sales were still 6% lower compared to last May’s figures. And food service sales were still down 40% compared to the year before.

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.

One silver lining: Yelp reports that support for Black-owned businesses has skyrocketed on its site during the last few weeks of renewed activism for racial equality. In the three weeks since George Floyd was killed while in Minneapolis police custody, there were more than 222,000 Yelp searches for Black-owned businesses, compared to less than 9,000 the three weeks before. And user reviews highlighted Black ownership jumped by 426% since Floyd’s death on Memorial Day.

Every single state has shown an increase in searches for Black-owned business, with the highest number of searches appearing in Washington, D.C., Minnesota, Maryland, Michigan and Georgia.

It remains to be seen what economic recovery will look like, and which businesses will reopen and be able to remain open, as coronavirus cases continue to spike in southern and western states.

The U.S. recorded a one-day total of 34,700 new confirmed COVID-19 cases on Wednesday, the highest level since late April. Apple AAPL, +1.32% announced it was reclosing stores it had recently reopened last week due to a resurgence in coronavirus cases in Florida, Arizona and the Carolinas, for example. And New York, New Jersey and Connecticut have announced a 14-day quarantine on anyone traveling from coronavirus hot spot states. 

Source: by Nicole Lyn Pesce | MarketWatch

“A Crisis Like No Other”: IMF Sees Even Deeper Global Recession, Warns Markets Disconnected From Reality

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.

Source: ZeroHedge

Housing Rebound? Under Armour Founder Unloads Washington DC Mansion At 41% Below Asking Price

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.

Plank is not the only wealthy person unloading real estate as the recession crushes households and decimates businesses – Elon Musk recently sold one of his mansions and has listed five others. Kylie Jenner just sold her Beverly Hills home for $17 million in a cash deal. Khloe Kardashian listed her mansion not too long ago. 

Wealth managers are likely informing clients that now is the time to sell real estate before the market cools and shifts lower. 

The confluence of high unemployment and the end of the forbearance program could unleash hell on the real estate market by 2021. This all suggests a surge in defaults and foreclosures are ahead. 

ZeroHedge’s latest coverage on the real estate market does not bode well for the industry: 

A seismic shift in the real estate market could be ahead… 

Source: ZeroHedge

Canadian Government Loses AAA Debt Rating

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.

Source: Spencer Fernando Blog

White House Adviser Navarro Says China Trade Deal Is ‘Over’

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 …

Source: Reporting by Eric Beech | China News

30% Of Americans Didn’t Make Their Housing Payment In June

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. 

“The number of Americans that filed new claims for unemployment benefits last week was much higher than expected,” we noted.

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.

Source: ZeroHedge

Devastating: Canadian Manufacturing Sales Plunge 28.5%

It’s the largest drop on record.

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.

Source: by Spencer Fernando

Millions Of Jobs Lost From COVID-19 Are Never Coming Back

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.”

Source: ZeroHedge

The Fed Has Monetized All Treasury Issuance In 2020

“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.

Source: ZeroHedge

All Aboard The 2020 Recall Gavin Newsom Train Now

Governor Gavin Newsom Has Failed Californians

Reasons to Recall Gavin Newsom

  • Granting Clemency for Felons: Those who raped and murdered, even committed heinous crimes against children.
  • AB 5 – Affecting Truckers & Independent Contractors
  • Highest Homeless Rate in our Nation
  • Infringements of our 2nd Amendment Rights
  • Countless new Gun and Ammo Laws
  • Allowing undo influence by the CCP and Latin Cartels
  • Sanctuary State for Illegals and Criminals
  • Made it Legal for Illegal Aliens to sit on State Boards
  • Highest State Income Tax in our Nation
  • One of the Highest State Sales Tax
  • Prop 13 – Attempting to Restructure = Increased Property Tax
  • Highest Vehicle Registration Costs in our Nation
  • Highest Poverty Rate in the Nation
  • Vaccination Requirements for Children or be Fined
  • Water Tax
  • Children’s Medical Records Automatically Entered into Database
  • Mandatory Health Insurance or be Fined to Pay for Illegals Health Insurance
  • Prop 47: Reduces Felonies to Misdemeanors of Violent Criminals
  • Release of Violent Criminals
  • Constricting Ability for Law Enforcement to do their Jobs
  • No Longer Illegal NOT to Help an Officer in Need
  • Highest Gas Tax in our Nation BEFORE the Chinese Corona Virus
  • Teachers No Longer can Discipline Disruptive Students
  • Illegals are Given: Income Tax Refunds, Welfare, Medical Insurance, Housing, Education, Food Stamps, Cell Phones…. FREE!
  • Government Overreach – Example: Overruling Vote of the People to Reinstate the Death Penalty, and the list goes on!
  • Redirecting the Gas Tax – Not being used for Improving our Infrastructure: roads, dams, bridges
  • Funds for the Bullet Train to Nowhere!
  • Refusing to set up Water Claim System with Taxes Collected  to do just that!
  • Dismantled Death Chamber and Redistributed Death Row Inmates Through the System
  • PG&E Power Outages & Threatening to Take Over PG&E.
  • $20,000,000 of Your Tax Dollars Directed to Study Vaping
  • Seeking billions of dollars in collateralizd loans from China
  • Funding Illegal Alien owned businesses in the amount of $50 Million because CA received federal funding for the Communist Chinese Party (CCP) Virus [Covid-19/Corona]

Hold Gavin Newsom accountable. Gavin Newsom must go.

Follow instructions in this link to do your part now.

St. Louis Fed Researchers Say Negative Rates May Be Needed For Economic Recovery

Market Watch: Federal Reserve officials from Chair Jerome Powell on down have been pretty consistent in their scorn toward negative interest rates, even as the market briefly priced in the expectation that U.S. rates would fall below zero.

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.

So it’s notable, if not a signal of future intention, that a publication from the St. Louis Fed argues in favor of negative interest rates.

Like Rudebusch’s -13.52% Fed Funds target rate?

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.

Lowering the Fed Funds Target rate to negative territory may simply steepen the US Treasury yield curve. Or flatten it like in Japan. Note that the Japanese 10-year sovereign yield is .01% and Japan mortgage rates are around 0.440%.

Ignoring the damage done to savers (how low will CDs and deposit rates drop?), the US will likely not see actual negative mortgages.

Fed Chair Jerome Powell will resist negative target rates.

Source: Confounded Interest

Second Version Of California Split Property Roll Tax Initiative Qualifies For November Ballot

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.

Source: by Ryan Bryne | Ballotpedia News

California Faces “Financial Collapse” As It Moves To Allow Businesses To Walk Away From Commercial Leases

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.”

Governor Gavin Newsom already gave local governments authority to halt commercial evictions, and some cities like San Francisco and Los Angeles quickly did so. But SB 939 would cover all California businesses and nonprofits from eviction, whether their local jurisdictions have acted to do so or not.

SB 939 will be heard in the Senate Appropriations Committee this month; if passed it will trigger the next wave of devastation in the commercial real estate space.

Source: ZeroHedge