Are gold and silver becoming what Mike Maloney has always suggested, Unaffordium and Unobtainium? The last few weeks have given us a preview of how stretched the physical gold and silver markets can become when the markets move. Join Mike as he welcomes GoldSilver.com President Alex Daley for a special Retail Bullion Update.
“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”
With the Fed buying $622 billion in Treasury and MBS, a staggering 2.9% of US GDP, in just the past five days…
… any debate what to call the current phase of the Fed’s asset monetization – “NOT NOT-QE”, QE4, QE5, or just QEternity – can be laid to rest: because what the Fed is doing is simply Helicopter money, as it unleashes an unprecedented debt – and deficit – monetization program, one which is there to ensure that the trillions in new debt the US Treasury has to issue in the coming year to pay for the $2 (or is that $6) trillion stimulus package find a buyer, which with foreign central banks suddenly dumping US Treasuries…
… would otherwise be quite problematic, even if it means the Fed’s balance sheet is going to hit $6 trillion in a few days.
The problem, at least for traders, is that this new regime is something they have never encountered before, because during prior instances of QE, Treasuries were a safe asset. Now, however, with fears that helicopter money will unleash a tsunami of so much debt not even the Fed will be able to contain it resulting in hyperinflation, everything is in flux, especially when it comes to triangulating pricing on the all important 10Y and 30Y Treasury.
Indeed, as Bloomberg writes today, core investor tenets such as what constitutes a safe asset, the value of bonds as a portfolio hedge, and expectations for returns over the next decade are all being thrown out as governments and central banks strive to avert a global depression.
And as the now infamous “Money Printer go Brrr” meme captures so well, underlying the uncertainty is the risk that trillions of dollars in monetary and fiscal stimulus, and even more trillions in debt, “could create an eventual inflation shock that will trigger losses for bondholders.”
Needless to say, traders are shocked as for the first time in over a decade, they actually have to think:
“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”
And while equity investors may be confident that in the long run, hyperinflation results in positive real returns if one sticks with stocks, the Weimar case showed that that is not the case. But that is a topic for another day. For now we will focus on bond traders, who are finding the current money tsunami unlike anything they have seen before.
Indeed, while past quantitative easing programs have led to similar concerns, this emergency response is different because it’s playing out in weeks rather than months and limits on QE bond purchases have quickly been scrapped.
Any hope that the Fed will ease back on the Brrring printer was dashed when Fed Chairman Jerome Powell said Thursday the central bank will maintain its efforts “aggressively and forthrightly” saying in an interview on NBC’s “Today” show that the Fed will not “run out of ammunition” after promising unlimited bond purchases. His comments came hours after the European Central Bank scrapped most of the bond-buying limits in its own program.
The problem is that while this type of policy dominates markets, fundamental analysis scrambling to calculate discount rates and/or debt in the system fails, and “strategic thinking is stymied and some prized investment tools appear to be defunct”, said Ronald van Steenweghen of Degroof Petercam Asset Management.
“Valuation models, correlation, mean reversion and other things we rely on fail in these circumstances,” said the Brussels-based money manager. Oh and as an added bonus, “Liquidity is also very poor so it is difficult to be super-agile.”
The irony: the more securities the Fed soaks up, be they Treasuries, MBS, Corporate bonds, ETFs or stocks, the worse the liquidity will get, as the BOJ is finding out the hard way, as virtually nobody wants to sell their bonds to the central bank.
Another irony: normally the prospect of a multi-trillion-dollar government spending surge globally ought to send borrowing costs soaring. But central bank purchases are now reshaping rates markets – emulating the Bank of Japan’s yield-curve control policy starting in 2016 – and quashing these latest volatility spikes.
In effect, the Fed’s takeover of bond markets (and soon all capital markets), means that any signaling function fixed income securities have historically conveyed, is now gone, probably for ever.
“Investors shouldn’t expect to see much more than moderately steep yield curves, since the Fed and its peers don’t want higher benchmark borrowing costs to undermine their stimulus,” said Blackrock strategist Scott Thiel. “That would be detrimental to financial conditions and to the ability for the stimulus to feed through to the economy. So the short answer is, it’s yield-curve control.”
Said otherwise, pretty soon the entire yield curve will be completely meaningless when evaluating such critical for the economy conditions as the price of money or projected inflation. They will be, simply said, whatever the Fed decides.
And with the yield curve no longer telegraphing any inflationary risk, it is precisely the inflationary imbalances that will build up at an unprecedented pace.
Additionally, when looking further out, Bloomberg notes that money managers need to reassess another assumption that’s become widely held in recent years: that inflation is dead. Van Steenweghen says he’s interested in inflation-linked bonds, though timing a foray into that market is “tricky.”
Naeimi also said he expects that the coordination by central banks and governments will spike inflation at some stage. “It all adds to the volatility of holding bonds,” he said. But for the time being, he’s range-trading Australian bonds — buying when 10-year yields hit 1.5%, and selling at 0.6%.
That’s right: government bonds have become a daytrader’s darling. Whatever can possibly go wrong.
But the biggest fear – one we have warned about since 2009 – is that helicopter money, which was always the inevitable outcome of QE, will lead to hyperinflation, and the collapse of both the US Dollar, and the fiat system, of which it is the reserve currency. Bloomberg agrees:
Many market veterans agree that faster inflation may return in a recovery awash with stimulus that central banks and governments may find tough to withdraw. A reassessment of consumer-price expectations would be a major setback for expensive risk-free bonds, especially those with the longest maturities, which are most vulnerable to inflation eroding their value over time.
Of course, at the moment that’s hard to envisage, with market-implied inflation barely at 1% over the next decade, but as noted above, at a certain point the bond market no longer produces any signal, just central bank noise, especially when, as Bloomberg puts it, “central bank balance sheets are set to explode further into unchartered territory.” Quick note to the Bloomberg editors: it is “uncharted”, although you will have plenty of opportunity to learn this in the coming months.
Alas, none of this provides any comfort to bond traders who no longer have any idea how to trade in this new “helicopter normal“, and thus another core conviction is being revised: the efficacy of U.S. Treasuries as a safe haven and portfolio hedge.
Mark Holman, chief executive and founding partner of TwentyFour Asset Management in London, started questioning that when the 10-year benchmark hit its historic low early this month.
“Will government bonds play the same role in your portfolio going forward as they have in the past?” he said. “To me the answer is no they don’t — I’d rather own cash.”
For now, Mark is turning to high-quality corporate credit for low-risk income, particularly in the longer maturity bonds gradually rallying back from a plunge, especially since they are now also purchased by the Fed. He sees no chance of central banks escaping the zero-bound’s gravitational pull in the foreseeable future. “What we do know is we’re going to have zero rates around the world for another decade, and we’re going to have the need for income for another decade,” he said.
Other investors agree that cash is the only solution, which is why T-Bills – widely seen as cash equivalents – are now trading with negative yields for 3 months and over.
Yet others rush into the safety of gold… if they can find it. At least check, physical gold was trading with a 10% premium to paper gold and rising fast.
Ultimately, as Bloomberg concludes, investors will have to find their bearings “in a crisis without recent historical parallel.”
“It’s very hard to look at this in a historical context and then apply an investment framework around it,” said BlackRock’s Thiel. “The most applicable period is right before America entered WW2, when you had gigantic stimulus to spur the war effort. I mean, Ford made bombers in WW2 and now they’re making ventilators in 2020.”
Update (2040ET): 12 hours after the Senate was supposed to originally release the full text– all 889 pages of it – of the $2 trillion stimulus bill, it finally did just that, detailing in a whopping 889 pages, detailing its plans to stimulate spending, push tax breaks and generally boost the U.S. economy during and after the coronavirus outbreak.
Here is the part most relevant to capital markets, discussing the limitations on dividends and buyback:
The Secretary may enter into agreements to make loans or loan guarantees to 1 or more eligible businesses… if the Secretary determines that, in the Secretary’s discretion—(A) the applicant is an eligible business for which credit is not reasonably available at the time of the transaction; (B) the intended obligation by the applicant is prudently incurred; (C) the loan or loan guarantee is sufficiently secured or is made at a rate that— (i) reflects the risk of the loan or loan guarantee; and (ii) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of the coronavirus disease 2019 (COVID–19); (D) the duration of the loan or loan guarantee is as short as practicable and in any case not longer than 5 years…
… and the punchline:
(F) the agreement provides that, until the date 12 months after the date the loan or loan guarantee is no longer outstanding, the eligible business shall not pay dividends or make other capital distributions with respect to the common stock of the eligible business.
In other words, as noted earlier, no dividends or buybacks for any company that uses the bailout loan. By implication, it means that all other companies can continue to repurchase their stock.
And here, courtesy of Bloomberg, are some additional observations on the winners and losers:
There was something strange about today’s continuation rally in stocks: while risk assets soared, the VIX barely moved. In fact the Vix is now roughly where it was on Monday, largely ignoring the move in stocks.
But there was another more sinister move in today’s risk rally, which as we noted earlier, appears to have been mostly a massive short squeeze, in fact the biggest two-day short squeeze in history…
… namely the persistent buying of safe havens such as Treasury’s but more importantly, Bills.
And so, one week after we reported that yields on many T-Bills through 3 months turned negative for the first time since the financial crisis, today virtually all Bills maturing around July had a negative yield.
Needless to say, a scramble for both cash-equivalents (i.e. Bills) and stocks is rather unorthodox, and sparked debate among Wall Street desks what may be behind it. One answer that emerged is that for those who did not have faith in today’s stock rally and wanted to allocate their funds elsewhere, yet in the absence of available physical gold as a result of the unprecedented scarcity described yesterday, the one place where investors could find “cash equivalent” securities was among the short T-Bill maturities.
If this theory is correct, it would mean that the pent up demand for physical gold is unprecedented and any newly available precious metal will be quickly snapped up as soon as it is available, which in light of the unprecedented expansion in central bank balance sheets as virtually every state is now pursuing helicopter money, is hardly that surprising.
Even before the coronavirus pandemic ground the US economy to a halt, the US brick and mortar retail sector was facing an apocalypse of epic proportions with dozens of retailers filing for bankruptcy in recent years as Amazon stole everyone’s market share…
Since June 2015, retail chains have accumulated more than $45 billion in aggregate chapter 11 liabilities in connection with over 80 bankruptcy filings: pic.twitter.com/Q1XO9pSWij
… resulting in tens of thousands of stores across the nation shuttering.
So what has taken place in the retail sector in just the past few weeks is straight out of the the 9th circle of hell.
With cash flows dwindling, and their survival in question every day, the total collapse in revenue has meant that firms such as (recently reorganized) Mattress Firm and Subway are among some of the major U.S. retail and restaurant chains telling landlords they will withhold or slash rent in the coming months after closing stores to slow the coronavirus, Bloomberg reports citing sources.
Aware that one way (out of bankruptcy) or another (in bankruptcy), they will end up renegotiating their leases, retail chains are proactively calling for rent reductions through lease amendments and other measures starting in April.
Mattress Firm, with about 2,400 stores, sent landlords a letter last week saying it would cut rent in exchange for longer leases and offering two options to do so. This week, it sent a more urgent note revoking its earlier offer.
“The decline in revenue and forced store closures across the nation are more drastic, compressed and immediate than we originally anticipated,” the company wrote in a letter reviewed by Bloomberg. “Our need is now more severe,” the firm said, invoking the virus as a force majeure event that “will prevent or prohibit us” from paying rent.
After being contacted by Bloomberg, Mattress Firm confirmed that it has requested a temporary suspension of rent.
“We appreciate our landlord partners, and the responses have been encouraging so far,” Randy Carlin, chief real estate officer for Mattress Firm, said in a statement. “We will continue to do everything we can to maintain business continuity and to ensure there are jobs available for our people to return to when this crisis ends.”
Subway Restaurants, which has more than 20,000 U.S. locations, sent out a letter to landlords last week saying that it might cut or postpone rental payments due to the virus, according a person with knowledge of the situation. The Real Deal, a real estate trade publication, reported on the communication earlier.
Virtually every other US retailer has also told their landlords the same, and if not, they will soon.
Worse, if landlords refuse to budge, it’s unclear how this mutually assured destruction will conclude in anyone’s favor. The fiscal stimulus packages being considered don’t directly address rents. But the Federal Reserve’s actions may give banks the leeway to defer mortgage payments, allowing property owners to delay rent. Some retailers may also declare a “force majeure,” a contract clause that covers highly unusual events, although whether or not landlords or banks accept this is a different question.
“The court system is just going to get flooded with a million of these disputes between tenants and landlords,” said Vince Tibone, an analyst at Green Street Advisors. “If the government doesn’t step in in any form or fashion, it could get ugly. They need to respond quickly.”
In short: this will be the biggest in court mess ever, and whether it involves in court bankruptcy or not, will not matter one bit, as there is simply no money.
The good news is that some landlords have recognized they need to help smaller tenants. For example, California’s Irvine Company Retail Properties, is allowing rent to be deferred for 90 days and then paid back with no interest over a year starting in January. The firm confirmed the practice without further comment. Bedrock, a Detroit developer, said it will waive rent and other fees for three months for its smaller retail and restaurant tenants.
However, for many other landlords, who themselves are highly levered, forbearing on rent is simply not an auction as the lack of even a few months of liquidity could mean the different between life and death. Indeed, it may also be the tipping point for America’s malls, many of which should have shuttered long ago yet subsisted as zombie creatures kept alive by cheap money. Well, no more, and the result is a massive victory for all those who had the “Big Short 2.0” trade on their books: also known as the great mall armageddon trade via CMBX Series 6, and which we discussed yesterday, has made its long-suffering fans very right.
But even if retailers succeed in getting a rent reprieve for a month or two, in the grand scheme of things it will hardly make much of a difference. The reason: in just the past 10 days, more than 47,000 chain stores across the US shut their doors –temporarily, or so they hope – as retailers took extreme measures to help slow the spread of the coronavirus pandemic according to Bloomberg data. At least 90 nationwide retailers, ranging from Macy’s to GameStop to Michael Kors have temporarily gone dark.
While most have pledged to remain closed for at least two weeks, many if not all will likely have to stay closed for much longer, because as we showed earlier, the US is very early on the coronavirus curve, and many weeks have to pass before the peak is hit.
It has been an unprecedented moment for shopping in America, a country that contains more retail selling space than any other.
“In the space of a week, the retail landscape has changed from being fairly normalized to being absolutely disrupted beyond what we’ve ever seen before outside of the Second World War,” Neil Saunders, managing director of GlobalData Retail, said.
After Apple, Nike and Urban Outfitters were among the first to announce store closures on Saturday, March 14, the store shuttering pace quickened over the remainder of the week. Then shopping centers closed by the hundreds, with developers like Simon Property Group and Westfield, owned by Unibail-Rodamco-Westfield, locking up their entire U.S. mall networks. By Monday, March 23, at least 47,000 chain stores were shut. Most told customers that goods would be available online, but even store websites weren’t immune. Victoria’s Secret, T.J. Maxx and Marshalls decided to cease operations in their distribution centers and shut down their e-commerce businesses.
There is some hope that when the virus is contained, shopping will get back to normal but in all likelihood the shopping experience in America may never be the same. People could still lean towards social distancing and be fearful of crowds, said Simeon Siegel, an analyst at BMO Capital Markets.“Even when companies are given the all-clear, we don’t yet know when consumers are going to embrace that,” he said. On the other hand, should the lock down duration extend, many of the stores listed above will simply liquidate and never be heard from again.
Given where Ford’s CDS was trading – more in line with B1/BB- rated American Axle – it should hardly come as a surprise that S&P has finally bitten the bullet and downgraded Ford debt to junk.
The decision to downgrade Ford Motor Co. from investment grade to speculative grade reflects that the company’s credit metrics and competitive position became borderline for the investment-grade rating prior to the coronavirus outbreak, and the expected downturn in light-vehicle demand made it unlikely that Ford would maintain the required metrics.
Ford Motor Co. announced it is suspending production at its manufacturing sites in Europe for four weeks and halting production in North America to clean these facilities and boost containment efforts for the COVID-19 coronavirus. We expect Ford’s EBITDA margin to remain below 6% on a sustained basis and believe that its free operating cash flow to debt is unlikely to exceed 15% on a consistent basis.
Ford has drawn $13.4 billion on its corporate credit facility and $2 billion on its supplemental credit facility. We believe the company’s current cash position stands at about $36 billion.
We are downgrading our long-term issuer credit rating to ‘BB+’ from ‘BBB-‘. At the same time, we are assigning issue-level ratings of ‘BB+’ on Ford’s unsecured debt.
We are also placing the ratings on Credit Watch with negative implications, which reflects at least a 50% chance that we could lower the ratings depending on factors such as the duration of the plant shutdowns, the rate of cash burn, and the adequacy of Ford’s liquidity position.
This S&P move follows Moody’s cutting Ford’s long-term corporate family rating to Ba2 from Ba1 earlier in the day.
With a total amount of public bonds & loans outstanding around $95.8 billion, according to data compiled by Bloomberg, Ford has just become one of the largest fallen angels yet.
Will this sudden large fallen angel lead to further repricing in the junk bond market, just as the market is dead-cat-bouncing on Fed intervention?
Perhaps of most note, the downgrade to junk means – we think – that this disqualifies Ford debt from The Fed’s corporate-bond-buying bandwagon – which is likely to make the cliff for Ford debt even more dramatic (especially after rallying so hard the last two days).
Previously we reported that the US restaurant and retail industries have all but shut down. We can now add airlines.
According to this stunning chart from Deutsche Bank’s Torsten Slok, US airline passenger traffic is currently just 10% of normal. As Slok explains, “on a normal day in March, over 2 million people travel by air in the United States. Yesterday that number was 279,018.”
Yesterday the Chair of the FDIC released an astonishing video asking Americans to keep their money in the bank.
Accompanied by soft piano music playing in the background, the official said:
“Your money is safe at the banks. The last thing you should be doing is pulling your money out of the banks thinking it’s going to be safer somewhere else.”
(Simon black) Amazing. I was half expecting her to waive her hand and say, “These aren’t the droids you’re looking for…”
As I’ve written before, there’s $250 TRILLION worth of debt in the world right now: student debt, housing debt, credit card debt, government debt, corporate debt, etc.
And let’s be honest, some of that debt is simply not going to be paid.
Millions of people have already lost their jobs. Millions more (like the 10 million waiters and bartenders across America) are barely earning anything right now because their businesses are closed.
The government has already suspended evictions and foreclosures, which is a green light for people to stop paying the rent or mortgage.
And that means banks will take it in the teeth.
This is what happened back in 2008– millions of people across the country stopped paying their mortgages, and the banking system nearly collapsed as a result.
Today it’s a similar situation; a lot of people are going to stop paying their mortgages, credit cards, auto loans, etc. And that directly impacts the banks.
Businesses are in deep financial trouble too.
According to the Wall Street Journal, the median small business in the United States has a cash balance that will last them just 27 days.
And many are operating with an even smaller safety net; the median restaurant, for example, has a cash balance of just 16 days.
These businesses have been told to close down due to the Corona Virus. And it’s likely that many of them will never re-open.
A lot of these companies also have debt. And if they close, those debts will never be repaid.
Even big businesses are susceptible to failure.
Every airline, cruise ship operator, hotel, retail chain, etc. is on the ropes, and each of these companies has borrowed billions of dollars.
This pandemic could easily push several big companies into bankruptcy.
You probably know that old saying– if you owe the bank a million dollars and can’t pay, you have a problem. If you owe the bank a billion dollars and can’t pay, the bank has a problem.
That’s what we’re seeing now.
Countless unemployed individuals, millions of shuttered small businesses, and bankrupt big companies collectively owe the banks trillions of dollars. And many of them can’t pay… which means the entire banking system has a problem.
How much money will the banks lose because of this pandemic?
It could easily end up being hundreds of billions of dollars, even several trillion dollars.
No one knows. But it’s not going to be zero. It’s silly to think that banks are immune to the Corona virus, or to assume that not a single bank is going to run into problems.
Don’t get me wrong– I’m not saying that the banking system is about to collapse. There are stronger banks and weaker banks. Many of them will survive, others will fail.
What I am saying is that there are enormous and obvious risks that threaten the banking system.
As I’ve written several times over the past few weeks: Anyone who says, “No, that’s impossible,” clearly doesn’t have a grasp of what’s happening right now. EVERY scenario is on the table, including severe problems in the banking system.
But the FDIC insists that there’s nothing to worry about.
That’s ridiculous. The FDIC only has $109 billion to insure the entire $13 trillion US banking system. That’s less than 1%!
The FDIC also insists that they’ve always been able to prevent depositors from losing money. “Not a single depositor has lost money since 1933.” And that’s true.
But they’ve never had to deal with this before. Neither the FDIC, nor any bank, has ever had to deal with a complete shutdown of the economy… or potential losses of this magnitude.
The Covid-19 impact on the banking system could be 10x bigger than the housing meltdown in 2008.
If the pandemic ends up causing trillions of dollars of loan losses, the FDIC won’t have enough ammunition to fix it… and that doesn’t even consider trillions of dollars more in potentially toxic derivatives exposure.
So to casually brush off these risks and claim that everything is 100% safe seems incomprehensible.
It also raises an interesting point: why is the FDIC asking us to NOT withdraw our savings?
If the financial system is so safe, it shouldn’t matter to them whether or not people keep their money in the banks.
Yet they still felt the need to specifically ask people to NOT withdraw their money… and tell us that we shouldn’t keep cash at home.
I’ll reiterate a point that we’ve made again and again at Sovereign Man over the years: it makes sense to have some physical cash in an at-home safe.
I’m not suggesting you keep your life’s savings in physical cash. But a month or two worth of expenses won’t hurt.
There’s very little downside– your bank probably only pays you 0.01% anyhow, so it’s not like you will be giving up a ton of interest income.
And given that the FDIC is specifically saying that you shouldn’t do this, a prudent person might wonder what’s really going on.
(ZeroHedge) We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields…
At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning.
Well, they are not alone.
As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government).
And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls.
Flagstar Bancorp,one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans.
One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”
Things escalated over the weekend, according to Bloomberg, when some firms rushed to raise cash by requesting offers for their bonds backed by home loans.
“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”
And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter.
The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public.
ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said.
As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.
It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website.
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
“The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department.
“But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.”
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
The global pandemic has shut down several mining jurisdictions around the world, taking off a large chunk of silver production, this according to Keith Neumeyer, CEO of First Majestic Silver. “In 2018, we produced, as a global industry, 855 million ounces of silver. So far, we’ve had Peru come offline, with 145 million ounces, we’ve had Chile come offline with 42 million ounces, we’ve had Argentina come offline with 26.5 million ounces. That’s a total of 213.5 million ounces that has now been shut down,” Neumeyer told Kitco News.
Discount silver bullion dealers via the internet are all out of stock, as of this writing, leaving us to explore retail silver price discovery via eBay auction for bargains today:
Gasoline futures in New York fell as much as 13% to 50.00 cents a gallon, the lowest level since the current contract started trading in 2005.
The previous gasoline contract last traded that low in 2001…
All of which means Americans – on average – except Californians – can expect gas-prices at the pump to plunge below $2/gallon very soon…
Energy prices slid toward this multi-decade low on plunging demand due to the economic fallout from the coronavirus crisis, and as prospects for a OPEC-Texas production deal faded.
“The government is taking a ‘whatever it takes’ approach,” said Marshall Steeves, an analyst at IHS Markit.
“That doesn’t change the fact that demand destruction is going to continue. There are still so many unknowns on the demand front. The duration of this economic shutdown is so uncertain that it’s making me believe the bottom may not be in yet.”
As Bloomberg notes, the prospects for the oil market remain bleak with more nations going into lockdown to tackle the virus. At the same time, supply is surging. The chance that either Saudi Arabia or Russia will back down from their price war seems remote, with President Vladimir Putin unlikely to submit to what he sees as the kingdom’s oil blackmail, according to Kremlin watchers.
Even if crude demand recovers to normal levels by the middle of the year, 2020 is still on course to suffer the biggest decline in consumption since reliable records started in the mid-1960s.
“We are now looking at a scale of surplus in the second quarter we probably never have seen before,” said Bjarne Schieldrop, chief commodities analyst at SEB.
Until now, the biggest annual contraction was recorded in 1980, when it tumbled by 2.6 million barrels a day as the global economy reeled under the impact of the second oil crisis.
On the day when The Fed unveils it will be buying agency MBS and CMBS (along with IG corporate debt) in unlimited size “to maintain the smooth functioning of markets,” The Wall Street Journal reports that for at least one major mortgage investor – it could be too late.
For a sense of the scale of collapse in CMBS markets alone, here is CMBX Series 6 BBB- tranche (a popular hedge fund “next big short” trade that is heavily exposed to malls/retail)…
And mortgage markets are becoming notably illiquid (hence The Fed’s unlimited injections)…
And the infamous ‘basis’ trade in ETF land, is extreme…
All of which has left an investment fund focused on mortgage investments struggling to meet margin calls from lenders.
WSJ’s Greg Zuckerman reports that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counter parties,” AG Mortgage said Monday morning.
The company said it had met “or is in the process of meeting all margin calls received,” though it acknowledged missing the wire deadline for some on Friday.
On Friday evening, the company “notified its financing counter parties that it doesn’t expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term,” AG Mortgage said in its statement, which said the company is in discussions with its lenders “with regard to entering into forbearance agreements.”
It’s stock has collapsed…
As have the Preferreds…
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
As a result of the coronavirus outbreak, and the ensuing lock down, the commercial property market has essentially frozen.
Buildings that were used for all types of purposes: offices, diners, restaurants, hotels – they’ve all been shut down. And industries like the travel industry are forgoing $1.4 billion per week in revenue, according to Bloomberg.
The shutdown is also having an effect on apartment buildings and industrial properties. Nothing is off limits, and it’s sending the commercial property market into chaos.
Alexi Panagiotakopoulos, partner at Fundamental Income, a real estate strategy firm, said: “On the investor side, there’s widespread panic. There’s downward pressure on every aspect of every asset class.”
And there’s no way to value a market when you don’t have a bid and an offer – and you’re not sure when the market will “re-open”. Further, there’s no way to try and model the future value of such properties when everyone is unsure of what the real estate landscape will look like when everything is said and done.
Scott Minerd, chief investment officer at Guggenheim Partners said: “There will likely be long-lasting changes.”
It’s estimated that investment activity in the space could fall by 45% this year, which would be further than post-9/11 or the 2008 financial crisis.
Viacom also announced last week that it’s suspending its plans to sell the Black Rock building in Manhattan because potential buyers can’t visit the property. Simon Property Group’s proposed acquisition of Taubman Centers, Inc., is also now up in the air.
More than $13 billion in funds in the UK has been frozen in property funds while appraisers warn that the virus makes it impossible to assess their value. China’s office market has been devastated with plunging rents and spiking vacancy rates, which could climb as high as 28% next year in Shanghai, according to estimates.
REITs in the U.S. have been destroyed. Names like Brookfield Property Partners, which made a $15 billion bet on malls in 2018, expects “severe consequences” in coming weeks. The company’s CEO says it has $6 billion in undrawn credit lines and cash.
Matthew Saperia, an analyst at Peel Hunt, commented on the potential threat to landlords: “The implications could be far-reaching, but quantifying these is highly speculative at present.”
As the uncertainty grows, the level of credit available begins to shrink. Financing has dried up for hotel, mall and senior living projects and it’s estimated that up to 15% of loans on commercial property could default over the next couple of years if the recession continues. The value of commercial mortgage-backed securities is collapsing…
Mark Fogel, CEO of Acres Capital, commented: “Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it’ll affect the underlying collateral.”‘
And Minerd believes there won’t be a “back to normal” once this is all over: “I think there’s going to be a permanent change. People are more comfortable at home. Why do they need to commute?”
In the aftermath of the great Commercial Paper panic of 2020, which erupted over the past two weeks when initially the Fed failed to launch a Commercial Paper backstop facility, something it did with a two day delay on Tuesday, countless blue chip (and less than clue chip) companies found themselves with gaping liquidity shortfalls, and to bridge their funding needs, they rushed to draw on their existing credit facilities (also a hedge in case the banking system imposes a lending moratorium similar to what happened in the 2008 crash).
As a result, corporate borrowers worldwide, including Boeing, Hilton, Wynn, Kraft Heinz and dozens more, drew about $60 billion from revolving credit facilities this week in a frantic dash for cash as liquidity tightens.
On Wednesday alone, another seven more companies – CEC Entertainment, Metropolitan Transportation Authority, Diamondrock Hospitality, Tailored Brands, J Jill, Boyd Gaming, and National Vision – announced intentions to draw down credit lines.
As of Friday morning, the week recorded $58BN of draw downs, more than a five-fold jump from the $11BN for the whole of the previous week, according to Bloomberg data. The total drawdown would bring the utilization ratio above 24%, double from the 12% as of 4Q19 for US Investment Grade companies.
Thursday alone saw $21BN of facilities drawn, just short of the $21.3BN recorded on Tuesday, with Ford ($15.4BN), Kohl’s ($1BN), TJX ($1BN) and Ross Stores leading the revolving charge.
What is concerning is that despite the Fed’s CP backstop, companies continue to draw down on revolvers, whether because the rate on their CP is too high, or they simply do not trust banks.
The BofA table below summarizes all the companies that have drawn down on their revolver in response to the the Global Corona/Crude Crisis…
… and here is pipeline of upcoming deals, via Bloomberg.
No one alive has experienced an economic plunge this sudden…
We can’t say we’re in a recession yet, at least not formally. A committee decides these things—no, really. The government generally adopts the view that a contraction is not a recession unless economic activity has declined over two quarters. But we’re in a recession and everyone knows it. And what we’re experiencing is so much more than that: a black swan, a financial war, a plague.
Maybe things feel normal where you are. Maybe things do not feel normal.
Things are not normal. For weeks or months, we won’t know how much GDP has slowed down and how many people have been forced out of work. Government statistics take a while to generate. They look backwards, the latest numbers still depicting a hot economy near full employment. To quantify the present reality, we have to rely on anecdotes from businesses, surveys of workers, shreds of private data, and a few state numbers. They show an economy not in a downturn or a contraction or a soft patch, not experiencing losses or selling off or correcting. They show evaporation, disappearance on what feels like a biblical scale.
What is happening is a shock to the American economy more sudden and severe than anyone alive has ever experienced. The unemployment rate climbed to its apex of 9.9 percent 23 months after the formal start of the Great Recession. Just a few weeks into the domestic coronavirus pandemic, and just days into the imposition of emergency measures to arrest it, nearly 20 percent of workers report that they have lost hours or lost their job. One payroll and scheduling processor suggests that 22 percent of work hours have evaporated for hourly employees, with three in 10 people who would normally show up for work not going as of Tuesday. Absent a strong governmental response, the unemployment rate seems certain to reach heights not seen since the Great Depression or even the miserable late 1800s. A 20 percent rate is not impossible.
State jobless filings are growing geometrically, a signal of how the national numbers will change when we have them. Last Monday, Colorado had 400 people apply for unemployment insurance. This Tuesday: 6,800. California has seen its daily filings jump from 2,000 to 80,000. Oregon went from 800 to 18,000. In Connecticut, nearly 2 percent of the state’s workers declared that they were newly jobless on a single day. Many other states are reporting the same kinds of figures.
These numbers are subject to sharp changes; things like large plant closures lead them to jump and fall and jump and fall. But for them to rise so precipitously, across all of the states? To stay high? That is new. The economy is not tipping into a jobs crisis. It is exploding into one. Given the trajectory of state reports, it is certain that the country will set a record for new jobless claims next week, not only in raw numbers but also in the share of workers laid off. The total is expected to be in the range of 1.5 million to 2.5 million, and to climb from there.
None of that is surprising.
The economy needs to halt to protect lives and sustain the medical system. Planes have been grounded, conferences canceled, millions of Americans told not to leave their homes except to get groceries and other necessities. Because of the emergency measures now in place, businesses have had no choice but to let workers go. The list of employers laying off workers en masse includes cruise lines, airlines, hotels, restaurants, bars, cabinetmakers, linen companies, newspapers, bookstores, caterers, and festivals. I started adding up numbers in news reports, and quit when I hit 100,000.
The economy had been plodding along in its late expansion, growing at a 2 or 3 percent annual pace. Now, private forecasters expect it will contract at something like a 15 percent pace, though nobody really knows. A viral quarantine is impossible to model, because modeling would mean knowing how long the necessary emergency measures will last and how well the government will respond with some degree of accuracy. Still, real-time measures show a consumer-economy apocalypse. One credit-card processor said that payments to businesses were down 30 percent in Seattle, 26 percent in Portland, and 12 percent in San Francisco. Nearly every state is seeing dramatic declines, with hotels and restaurants hit particularly hard.
The markets are not normal, either. The stock market lost 20 percent of its value in just 21 days – the fastest and sharpest bear market on record, faster than 1929, faster than 1987, 10 times faster than 2007.
The financial system has required no less than seven emergency interventions by the Federal Reserve in the past week.The country’s central bank has wrenched interest rates to zero, started buying more than half a trillion dollars of financial assets, and opened up special facilities to inject liquidity into the financial system.
Yet in the real economy, everything has halted, frozen in place. This is not a recession. It is an ice age.
Back in December, someone in China made bat soup (at least according to the officially accepted narrative that doesn’t get you banned on Facebook, Twitter, etc), and the rest is history: in the next three months, the global equity market has lost $24 trillion in value, more than the $22 trillion in US GDP. And here is a staggering chart from BofA putting the crash of 2020 in its historic context: in the past month, the US stock market has crashed faster than both the Great Depression and Black Monday, and in terms of the total draw down, the crash of 2020 is now worse than 1929 and is fast approaching 1987.
Below, courtesy of BofA CIO Michael Hartnett, are several other stunning observations on the Crash of 2020:
Calls for Fed corporate bond buying, New Deal fiscal policies, new Plaza Accord to stabilize US$, closure of stock exchange coincide with week of Wall St devastation.
Peak-to-trough crash in global equity market cap = $24tn (c/o US GDP = $22tn).
Monday’s 12.0% drop Dow Jones = 3rd largest crash all-time (c/o -20.5% Oct 19th 1987, -12.9% Oct 28th 1929 – Chart 2).
Liquidation of “safe havens” e.g. gold & US Treasuries (TLT ETF sank 20% after oil shock); epic US$ surge reflects funding pressure of excess US$-denominated debt & zero liquidity.
Leverage in bond & stocks savaged (see REM, PFF, EMB, homebuilders like TOL – Chart 3); bond yields rise + bank stocks fall = classic sign of deflationary bear market.
Feral Wall St means vicious bear market rallies…WTI oil surged 24% today.
Stock exchange has closed just 4 occasions: 1914 & WW1, 1933 bank holiday, 1963 Kennedy assassination, 2001 9/11.
Global “lockdown” on movement people, goods, services unprecedented but note June 1930 passage of protectionist Smoot-Hawley bill saw US stocks -16.5% in one month.
Policy panic: 42 rate cuts since Feb 1st (note was 36 cuts in 2 months following Lehman); average COVID-19 rate cut has been 70bps; massive global central bank liquidity promised with no upper bound; $2.4tn in global fiscal stimulus (2.7% of GDP) in public aid, loan & income commitments (rises to $3.7tn with US Treasury/Senate proposals = 4.2% global GDP); acceleration toward yield curve control, UBI, MMT, industrial intervention…utterly unprecedented stimulus & intervention that will ultimately cause higher inflation expectations.
Note US GDP = $22tn, consumption $15tn so 20% drop in income & spending in 2-month period means GDP -$750bn, US consumption -$500bn.
Big pressure on corporate sector not to raise prices, cut employment…EPS takes Q2/Q3 strain.
2020 SPX EPS of $140 (-20%) generates SPX 2100 on historic mean 15X multiple, SPX 1700 on 12X policy-failure multiple, 2400 on 17X “some policy success” multiple (see Chart 12).
The “big stuff” will signal virus/recession/default fully-priced…volatility, Treasury yield, credit spreads, oil key.
The Reckoning: big shocks, big tops, many big political & social changes ahead…localization of supply, relationship with China, new inflationary era, using technology to “live” without human interaction, geopolitical instability of Middle East/Africa, end of era of PE, buybacks, financial engineering, comeback of active vs passive investing.
Q2 Strategy: aftershocks likely but assets with growth (tech), quality (best of breed stocks), yield (credits with fortress balance sheets) favored.
Q2 Tactics: policy makers winning “Intervention vs. Deleveraging” war; small cap, cyclicals, oil, banks…bear market rally plays.
In the lead up to this morning’s must-watch initial jobless claims data, searches for unemployment-related services have exploded as national lock downs have led to mass layoffs across both the services and manufacturing sectors.
And while analysts expected a modest 220k jump, the print came at 281,000 new jobless claims in the last week…
However, worse is guaranteed to be coming with claims will start moving sharply higher in the next few weeks (as only a small relative share of the moves was captured in today’s data which corresponds to the week ended March 14).
As Bloomberg’s Carl Riccadonna notes, scaling up the trends around the landfall of Hurricane Katrina in 2005 and the start of the Great Recession in late 2007 provide some context for understanding the severity of the economic shutdown currently underway.
Claims could continue to show an influx in that range for an extended period of time – possibly moving above 500k. Claims topped over 660k in early 2009, during the financial crisis.
After soaring unexpectedly to two-year highs in February (as stocks ignored the global disruptions), Philly Fed’s Business Outlook Survey has collapsed in March. From 36.7 in February, Philly Fed plunged to -12.7 (massively worse than the +8 estimate from clearly cognitively challenged analysts). That is the weakest level since September 2011…
This is the biggest drop in Phily Fed… ever…
Under the hood – everything tumbled…
March prices paid fell to 4.8 vs 16.4
New orders fell to -15.5 vs 33.6
Employment fell to 4.1 vs 9.8
Shipments fell to 0.2 vs 25.2
Delivery time fell to -9.1 vs 2.7
Inventories fell to 1.7 vs 11.8
Prices received fell to 6.8 vs 17.1
Unfilled orders fell to -7.4 vs 7.4
Average workweek fell to 0.5 vs 10.3
And worse still, the outlooks plunged…
Six-month outlook fell to 35.2 vs 45.4
Six-month outlook for capex fell to 12.0 vs 29.8
New Orders crashed and jobs are set to fall further…
So the question is – WTF were people thinking in February?
At the urging of UAW leaders, all three of Detroit’s “Big 3” automakers announced around midday on Wednesday that they would shutter all domestic production. The decision follows Daimler, BMW and a handful of other car makers in Europe and Asia shuttering factories to combat the coronavirus outbreak – and to prevent a glut of supply.
Here’s the rest of the update, courtesy of the AP:
Detroit’s three automakers have agreed to close all of their factories due to worker fears about the coronavirus, two people briefed on the matter said Wednesday.
Automakers are expected to release details of the closure later in the day. The United Auto Workers union has been pushing for factories to close because workers are fearful of coming into contact with the virus.
The people didn’t want to be identified because the closures have not been formally announced.
The decision reverses a deal worked out late Tuesday in which the automakers would cancel some shifts so they could thoroughly cleanse equipment and buildings, but keep factories open. But workers, especially at some Fiat Chrysler factories, were still fearful and were pressuring the union to seek full closures.
Fiat Chrysler temporarily closed a factory in Sterling Heights, Michigan, north of Detroit after workers were concerned about the virus. The company said a plant worker tested positive for the coronavirus but had not been to work in over a week. One shift was sent home Tuesday night and the plant was cleaned. But that apparently didn’t satisfy workers, and two more shifts were canceled on Wednesday.
Under an agreement reached with the union, companies will monitor the situation weekly to decide if the plants can reopen, one of the people said.
Honda is also planning on closing its North American factories, the company said.
Honda Motor Co. announced Wednesday that it will temporarily close its North American factories for about one week starting on Monday. The move by General Motors, Fiat Chrysler and Ford will idle about 150,000 auto workers. They likely will receive supplemental pay in addition to state unemployment benefits. The two checks combined will about equal what the workers normally make.
Automakers have resisted closing factories largely because they book revenue when vehicles are shipped from factories to dealerships. So without production, revenue dries up. Each company has other reasons to stay open as well. Ford, for instance, is building up F-150 pickup inventory because its plants will have to go out of service later this year to be retooled for an all-new model.
As the story explains, factories are typically reluctant to close factories since these companies book revenue when they ship vehicles, not when they’re sold – so it’s all gravy to them.
Holidaymakers have been asked to leave and others warned to avoid the area surrounding Dockweiler Beech RV site (pictured) in the city of El Segundo, California, amid preparation for the growing Coronavirus pandemic
Los Angeles’ homeless population could find themselves self-isolating inside a beachside RV in the coming months – as California frees up hundreds of motorhomes and hotel rooms for those in need.
Holidaymakers have been asked to leave and others warned to avoid the area surrounding Dockweiler Beech RV site in the city of El Segundo, California, amid preparation for the growing Coronavirus pandemic.
Hand washing stations have popped up in Los Angeles and San Francisco around large homeless populations and Governor Gavin Newsom revealed the state is acquiring around 900 hotels with tens of thousands of rooms to be converted for the use of both hospital patients and the homeless.
In the next few weeks, dozens of camper vans parked along the beach front are expected to become home to vagrants ordered into quarantine.
California boasts a homeless population of more than 100,000 and with no way for them to wash their hands or maintain hygiene, it was a highly at-risk group – diseases already run rife with central LA’s Skid Row recently seeing outbreaks of typhus and Hepatitis A.
Coronavirus has started a race into cash for all types of market participants. That has fueled rallies in reserve currencies—especially the dollar.
The U.S. dollar is approaching its highest level on record against other leading global currencies, according to the Bloomberg Dollar Spot Index. The index was up 1.1% in early trading Wednesday, and has climbed 6.5% in the past nine days. And derivatives markets indicate that even investors and banks in countries with their own major reserve currencies want to secure dollars.
Banks, companies, and investors have many good reasons to rush to secure dollar liquidity. Many businesses are facing the prospect of a steep decline in revenue as federal and local governments ask their constituents to stay home to prevent the spread of coronavirus.
That means businesses could struggle to keep paying leases, wages, and other costs. Workers (especially hourly workers) could struggle to pay their own living expenses. And banks could be met with withdrawal requests and surging demand for credit denominated in dollars.
“[The economic] front line in the crisis is the damage the pandemic is wreaking on companies in exposed sectors and on the economy more widely as the crisis spreads,” wrote Kit Juckes, a strategist at Société Générale. “So while market participants scramble [to] deleverage, the banks need money to lend to companies whose cash flow situation has changed almost overnight.”
The cash grab is echoing through markets in some striking ways. Even the lowest-risk markets—Treasuries and municipal bonds for example—have seen steep losses as investors move into cash. Benchmark 10-year and 30-year bond yields posted their steepest single-session jump since 1982 on Tuesday.
“This matters on a day-to-day basis for the [currency] market because liquidity stress, and a rush to get hold of dollar liquidity in particular, sends the dollar higher against everything,” Juckes wrote.
The widespread bid for liquidity has shown up in fund-flows data as well. Mutual funds in nearly every sector of markets lost billions of dollars in investor funds over the week ended March 11, the latest data reported by Refinitiv Lipper.
Taxable bond funds saw outflows of $11 billion that week, while equity funds lost $3.2 billion of cash and municipal (tax-exempt) bond funds lost $1.7 billion.
Money-market funds, on the other hand, brought in piles of cash. Investors put a net $87 billion into the sector as a whole over the week ended March 11, according to Refinitiv, the biggest inflow on record.
Government money-market funds pulled in $97 billion, their second-biggest inflow on record, Refinitiv data show. The biggest week was in Sept. 2008, at the height of the financial crisis.
The results for the week ended March 18 won’t be out until Thursday. But if the steep declines in stocks, longer-term Treasuries, and corporate bonds are any indication, investors are still racing for the exits.
“That need for funds to flow into the economy isn’t going away any time soon,” Juckes wrote. “The result is that while direct financial effects of this crisis might be less acute than in ‘08, they will continue being felt for a long time.”
The Century Bar, Dayton Ohio (image from Facebook)
Is a global recession already beginning as the vast majority of the US and other countries’ workforce grinds to a halt while large cities begin to receive ‘shelter in place’ directives? Yes, says Goldman; and more and more top economists are saying Tuesday it’s a near-certainty. State unemployment numbers are about to bear that out.
A new Marist poll this week for NPR/PBS News found 18% of US adults responding they’d already either been laid off or had significant reduction of hours due to the ripple effect of the pandemic.
For an indicator of just how high national unemployment may skyrocket, look no further than Ohio, which on Sunday night declared a ‘health emergency’ and shut down all bars and restaurants state-wide. Journalist Liz Skalka for The Toledo Bladereports that Ohio Senator Rob Portman (R) received“new data on Ohio’s unemployment claims today: 45,000 claims this week compared to 6,500 last week.”
The state-wide ordered shutdown of dining and drink establishments by Ohio Governor Mike DeWine on Sunday night impacted about 10% of the state’s workforce, some 500,000 people.
A 45,000 unemployment claims number jump from 6,500 means a whopping one-week increase of 592%, and surely now already to soar past 600% into next week.
Likely, Ohio is the canary in the coal-mine at a moment restaurants and bars across New York, California, and other large states are also fast being ordered to shutter their doors.
if this is accurate, and if representative of nat'l trends, that would suggest new UI claims are jumping by a factor of 7., putting them in the 1.4-1.5 million range. That's more than double where they were at the peak of the last recession. Hmmm.https://t.co/oxSYAUs9yJ
As of Tuesday Ohio announced67 confirmed Covid-19 cases across 16 counties, resulting in 17 hospitalizations thus far.
Federal data issued in February counts11,674,000 employees in restaurants in bars across the nation. These jobs are about to be decimated, assuming the latest breaking Ohio numbers of just the past week sets the trend.
“I think that the odds of a global recession are close to 100 percent right now,” Kevin Hassett, Trump’s former chair of the Council of Economic Advisers told CNN on Tuesday. “I think in the US, we’re going to have a very terrible second quarter.”
“You’re looking at one of the biggest negative jobs numbers that we’ve ever seen,” he added, warning further the US is set to shed 1 million jobs in March.
WASHINGTON (AP) — The Trump administration says individuals and businesses will be allowed to delay paying their 2019 tax bills for 90 days past the usual April 15 deadline. The extension announced Tuesday is an effort to inject up to $300 billion into the economy at a time when the coronavirus appears on the verge of causing a recession.
Treasury Secretary Steven Mnuchin speaks during a press briefing with the coronavirus task force, at the White House, Tuesday, March 17,… (AP Photo/Evan Vucci)
Treasury Secretary Steven Mnuchin said individuals will be able to delay paying up to $1 million in payments. Corporations will be able to defer payment on up to $10 million.
Taxpayers will still have to file their tax returns by the April 15 deadline. But they won’t have to pay their tax bill for 90 additional days. During that time, individuals and corporations will not be subject to interest or penalty payments.
“All you have to do is file your taxes,” Mnuchin said.
The Treasury secretary said President Donald Trump had approved the final details of the program, including its expansion to include the potential of allowing taxpayers to keep $300 billion in the economy for now. Last week, Mnuchin had estimated that deferred payments would amount to $200 billion.
Mnuchin had said the delay would apply to all but the “super rich” but did not spell out how the payment delay will work. The IRS has yet to release specific guidelines for the program.
The IRS is using authority under Trump’s national emergency declaration to take the step of approving the 90-day payment delay. Mnuchin encouraged taxpayers to keep filing their returns because many of them will be receiving refunds that they will be able to use to pay bills during the economic downturn.
As of Feb. 21, the IRS had issued more than 37.4 million refunds averaging $3,125.
Mark Zandi, chief economist at Moody’s Analytics, said that the tax delay program was only a stop-gap program but that it should help cushion the economy during a period of severe stress.
“Individuals and small businesses need cash right now,” Zandi said. “Anything that delays them having to send a check to the IRS will allow them to pay for their groceries and make mortgage payments and pay other bills.”
Under normal filing procedures, taxpayers must pay their obligations by April 15, although they can get a six-month extension to file the full return.
Mnuchin, who spoke to reporters at the White House, said that as part of a stimulus plan being negotiated with Congress, the administration is considering ways to send checks to Americans to help alleviate the impact of job losses from layoffs at restaurants and the tourism industry.
“Americans need cash now, and the president wants to give cash now and I mean now in the next two weeks,” Mnuchin said.
With the travel industry staggered by the coronavirus outbreak, Marriott International said Tuesday it planned to furlough tens of thousands of workers in the face of unprecedented booking cancellations.
The world’s largest hotel company, with 30 hotel brands and more than 7,000 properties worldwide, confirmed reports that it will be forced by a surge in cancellations to either cut back work hours or issue furloughs to a large portion of its workforce. Marriott International employed 174,000 people around the world at the end of 2019, according to securities filings.
“We are adjusting global operations accordingly, which has meant either reduction in hours or a temporary leave for many of our associates at our properties,” the company said in a statement Tuesday. “Our associates will keep their health benefit during this difficult period and continue to be eligible for company-paid free short-term disability that provide income protection should they get sick.”
Marriott’s announcement signals that the blow that has already shook the airline industry, theme parks, ski resorts and restaurants has started to rattle the U.S.’s $660-billion hotel and lodging industry.
Already the impact has surpassed the economic blow of the Sept. 11, 2001, terrorist attacks, according the American Hotel and Lodging Assn. and the U.S. Travel Assn., which estimates that the hotel industry is losing $1.4 billion a week.
“Based on current estimates, approximately 1 million direct hotel jobs, or 45% of all hotel jobs, have either been eliminated or will be eliminated in the next few weeks,” the two trade groups said in a statement. ” Current forecasts for a 30% drop in hotel occupancy over a full year would result in nearly 4 million total jobs being lost.”
Marriott did not address how many workers would be furloughed, but the company confirmed that news reports Tuesday about “tens of thousands” of employees being furloughed were accurate.
“While the ultimate impact is difficult to predict at this time given the fluidity of the situation, we remain confident in our long-term prospects,” the Marriott statement said.
In Las Vegas, 14 hotels along the Strip temporarily closed Tuesday, as well as all the hotels and restaurants in Yosemite National Park.
In Southern California, the opening of the 466-room JW Marriott that was scheduled for Monday in Anaheim was postponed indefinitely. The Disneyland Hotel and the Grand Californian at the Disneyland Resort have closed, along with the Great Wolf Lodge in Garden Grove.
The Los Angeles City Council is scheduled to consider Tuesday an emergency measure to require employers faced with economic hardships to fire workers with the lowest seniority first and to have a documented just cause before permanently dismissing employees.
To help hotel workers who have already been fired, a coalition of labor groups, including Unite Here, Local 11, organized a food distribution program Tuesday at the Hospitality Training Academy.
Update (1005ET): As we detailed below, Amazon was already struggling to meet delivery goals and having problems with stock, but now, in a blog post, Amazon told sellers on Tuesday that it’s suspending shipments of all non-essential products to its warehouses to deal with the increased workloads following the coronavirus outbreak.
“We are temporarily prioritizing household staples, medical supplies, and other high-demand products coming into our fulfillment centers so that we can more quickly receive, restock, and deliver these products to customers,” the message said.
That means sellers who use Amazon’s storage and delivery network for a fixed fee, through a program called Fulfillment by Amazon, will no longer be able to ship their products to Amazon.
“We are seeing increased online shopping, and as a result some products such as household staples and medical supplies are out of stock.”
Additionally, Amazon claims it is trying top crack down on gouging…
“We’re also working to ensure that no one artificially raises prices on basic need products during this pandemic and have blocked or removed tens of thousands of items, in line with our long-standing policy. We actively monitor our store and remove offers that violate our policy.”
So, we can’t leave our homes and all we can buy online is staples and medical supplies…
Amazon suspending deliveries. Just when you thought today couldn't get worse.
The online retailer updated its blog post on Saturday and told customers that “we are currently out of stock on some popular brands and items, especially in household staples categories.”
It said that certain items could experience longer than normal delivery times.
“We are working around the clock with our selling partners to ensure availability on all of our products, and bring on additional capacity to deliver all of your orders,” the post added.
In the last two months, Prime members have noticed notifications saying “inventory and delivery may be temporarily unavailable due to increased demand” for certain products, such as 3M N-95 virus masks. More recently, the shortage of products has significantly expanded to bottled water, hand sanitizer, toilet paper, and vitamins. Amazon noted that it has worked extremely hard to crack down on price gouging, especially seen with third-party sellers selling masks and hand sanitizers for many folds over the suggested retail price.
Social distancing has led to the max exodus of shoppers at brick and mortar stores, who have now gravitated to online shopping to prevent spreading.
“As COVID-19 has spread, we’ve recently seen an increase in people shopping online,” Amazon wrote. “In the short term, this is having an impact on how we serve our customers.”
Amazon is gearing up for increased online activity as the virus crisis is expected to worsen in the weeks ahead. A Wall Street Journal report on Monday said the online retailer is expected to add 100,000 workers to cope with the surge in new demand.
The virus crisis will forever change how consumers shop. Social distancing will ensure more online shopping. But in the meantime, Amazon has been caught off guard by the rapid surge and will result in shortages of products and shipping delays.
In many ways the US economy is currently in the eye of the coronavirus storm: cities and states are under quarantine lockdown, the CDC has prohibited any groupings of more than 50 people; stores, clubs, restaurants, bars and hotels are voluntarily shuttering indefinitely as the economy grinds to a halt and yet besides a tapestry of ghost cities across the nation, the immediate impact of the devastating viral storm on the service economy has yet to manifest itself.
But the hurricane is about to hit front and center, and the service-industry mecca of New York City is leading the way.
As the Daily News reports,New York’s unemployment website was overwhelmed Monday as the coronavirus pandemic put tens of thousands of people across the state out of work.
The flood of suddenly jobless workers hitting the Department of Labor website with applications for unemployment benefits was unleashed by a drastic move by Gov. Cuomo, who announced all of the state’s restaurants, bars, movie theaters, gyms and casinos would close by 8 p.m. Monday to contain the corona outbreak.
So many people tried to apply that the website crashed several times throughout the day, while the DOL’s hotline was so jammed up that callers seeking aid could not get through to someone who could handle their claim.
The unemployed can apply from 7:30 a.m. to 5 p.m. on weekdays. DOL spokeswoman Deanna Cohen said the department saw a “spike in volume comparable to post 9/11,” adding there are more than 700 staffers assigned to handle the high demand.
Gabe Friedman, unemployed drag queen
“I’m completely unable to log in and apply” said 26-year-old Gabe Friedman, a drag queen who performs under the name Kiki Ball-Change. “Me and so many other drag queens are completely out of work for at least two months. If I pay rent at the end of April, I would be broke.”
It’s not just the drag queens that find themselves with zero demand for their unique “skills”: tens of thousands of workers across New York’s service industries have already been, or are about to be let go as their employers are forced to either shut down permanently or hibernate until the economy recovers.
The DOL on Sunday waived a seven-day waiting period on unemployment benefits for people out of work due to coronavirus — but that concession proved to be moot as many people could not apply at all.
Rita Lee, 57, who works in the film industry (hopefully not as a drag king), said she started to apply Sunday night after movie productions shut down across the city. She hit a wall once applications opened Monday.
From 11 a.m. to 3 p.m. Lee tried and failed to apply on the website, saying she kept “getting either a system or server error message, or the page will never load.”
“I’ve called all the toll-free numbers, which are recordings that redirect you to a main menu or a message saying that all the operators are overloaded now and to call back,” said Lee. “Can’t reach a human to help.”
David Stollings, a sound engineer at a now-shuttered Broadway theater, called the situation a doozy. “I got the site to load once,” said Stollings. “Before this it was just not loading at all.”
Marnia Halasa, a Manhattan-based figure skating coach, said she was also unable to apply and became worried about paying rent. “What if I have to blow the New York popsicle joint and run back to Ohio to live with my father?,” asked Halasa, who’s lived in the city for 28 years.
* * *
While it is not clear how many New Yorkers will lose their jobs due to the pandemic, Empire Center founder E.J. McMahon told the NYDN the hit could be worse than the Great Recession of the late 2000s when roughly 370,000 people lost their jobs in a more than two-year span.
“The website crashed, that’s evidence that there has never been anything like this so quickly,” said McMahon. “You can fix a computer glitch. But I don’t think the problem is how the safety net operates. I think the problem is how the economy operates in the future for all these people.”
Incidentally, the chief economist of a multi-billion macro hedge fund advised us that they are now modeling approximately 10 million job losses over the next two to three months. We leave it up to readers to decide if that’s too little, too much or just right.
Last week investors were shocked when a barrage of major US corporations – including Boeing, Hilton, Wynn and a handful of PE portfolio companies – announced their decision to fully draw down on their existing credit lines. That said, for all the ominous banking crisis undertones – many still remember that one of the early symptoms of the global financial crisis was countless companies whose revolvers were pulled by a panicking banking sector – there was a common theme linking all these companies: they were all in sectors (airlines, casinos, lodging, energy) that were directly impacted by either the coronavirus pandemic or the recent oil price war.
Today, that changed when food giant Kraft Heinz – which should be benefiting generously from the recent food hoarding panic – was set to also draw down on its credit facility of as much as $4 billion, even though it faced none of the same coronavirus/oil headwinds as so many other companies that jumped the gun to boost their liquidity while they still could.
“We maintain our $4.0 billion senior credit facility, and subject to certain conditions, we may increase the amount of revolving commitments and/or add additional tranches of term loans in a combined aggregate amount of up to$1.0 billion,” the company said.
Speaking to Bloomberg, which first reported the draw down of the Buffett-owned company, a Kraft Heinz spokesman said that “the demand for our brands, our cash flow and our balance sheet remain strong,” which is a rather bizarre explanation why it would need billions more in liquidity. “As a matter of practice, we typically maintain a conservative liquidity posture, which is even that much more important as we focus on making sure all our products remain available to the public during these challenging times.”
One possible reason for Heinz’s liquidity problems is that while other sectors have been crippled by the ongoing dual viral-oil shock, the ketchup maker has seen it share of corporate woes in recent years, most recently its downgrade to junk by S&P Global Ratings and Fitch Ratings, when it also warned that the downgrades may limit its access to financing sources such as the commercial paper market, requiring it to use alternative funding sources such as its senior credit facility.
And, as we discussed yesterday, the commercial paper market is starting to freeze up (something the Fed failed to address in its emergency Sunday announcement) which is forcing companies like Heinz to seek alternative, last ditch sources of liquidity.
Indeed, as Bloomberg noted today, issuance of commercial paper dropped to 3,125 transactions on March 13, according to figures released Monday; that’s down 13% from the average daily rate in the week ending March 6 and 18% since February. At the same time, a closely watched CP spread – that between three-month AA rated financial and non-financial commercial paper rates versus overnight index swaps – shows some of the most stress since the financial crisis.
“I am not surprised, liquidity is the lifeblood of these types of programs,” said Scott Kimball, a portfolio manager at BMO Global Asset Management. “When markets lock up like this, interest rates surge to levels that are unsustainable for business.”
Yet what is odd, is that Kraft Heinz said in a regulatory filing last month that it had no commercial paper outstanding at the end of 2019 and that the maximum amount it held during last year was $200 million.
So maybe the company’s rush to its banking syndicate is simply that: a panicked attempt to grab as much cash as it can before it is locked out as banks go into cash conservation mode, something their halt of stock buybacks made quite clear is coming.
Created in a catastrophic merger five years ago orchestrated by Warren Buffett’s Berkshire Hathaway and private equity firm 3G Capital, Kraft Heinz is in the midst of a turnaround as its brands fall out of favor with consumers. Its shares have crashed 16% in the past month, less than the decline of the S&P 500 Index, amid ongoing consumer demand for food and beverages, although today’s revolver news will hardly excite investors.
The numbers: The New York Fed’s Empire State business conditions index plunged a record 34.4 points to -21.5 in March, the regional Fed bank said Monday. Economists had expected a reading of 4.8, according to a survey by Econoday. This is the lowest level since the financial crisis in 2009.
What happened: The new-orders index fell 31.4 points to -9.3 in March. Shipments fell 20.6 points to -1.7. Labor-market indicators weakened. The average workweek fell to -10.6 in March from -1. The number of employees fell to -1.5 from 6.6. Optimism about the six-month outlook dropped to 1.2 from 22.9.
Big picture: This is one of the first readings of the coronavirus outbreak’s impact on the economy and the results are not pretty. The worst seems yet to come. Fed Chairman Jerome Powell said Sunday that he expects negative GDP growth in the second quarter.
What are they saying? “The impact of the coronavirus was still in its early stages at the time of this survey. Nonetheless, the early indications suggest that the impact was substantial,” said T.J. Connelly, head of research at Contingent Macro.
Market reaction: A major rate cut by the Federal Reserve has failed to stemmed pessimism in financial markets. Stock market futures remained limit down ahead of Monday’s open. On Friday, the Dow Jones Industrial Average DJIA, -12.92% soared 1,985 points.
Right now, today, the retail food supply-chain is trying to recover from previous panic buying. Across the nation grocery stores are wiped out. Warehouses are emptying trying to replenish the stores. The upstream suppliers are trying to resupply the warehouses.
Supermarkets are closing early and opening late while trying to stem panic and fulfill customer demand. Now is exactly the wrong time to limit food choices and push more people into those retail food stores.
No advance notice. No time to prepare or plan… just an immediate order.
Imagine what will happen tomorrow morning in Ohio and Illinois at grocery stores.
Notice these orders from short-sighted governors are in effect almost immediately. Meaning no-one has had the time to prepare for this type of a disruption in the total food supply chain.
These governors do not have any experience, policy framework, or previously established state-wide systems (having been tested through experience) for a process of rapid food distribution as a result of a state emergency. They are flying by the seat of their pants, and taking advice from the wrong people with the wrong priorities and the wrong frame-of-reference.
A government cannot just shut down 30 to 50 percent of the way civil society feeds themselves, without planning and advanced preparation for an alternative. Those who ARE the alternative, the retail food grocers, need time to prepare themselves (and their entire logistical system) for the incredible impact. Without preparation this is a man-made crisis about to get a lot worse.
Some states have emergency food distribution and contingency plans. Those states are hurricane prone states; and those states have experienced the intense demand on the food distribution system when restaurants are closed and people in society need to eat.
Those states have, by necessity, developed massive logistical systems to deal with the food needs of their citizens. These current short-sighted states are not those prepared states.
Any governor who shuts down their restaurant industry without a civil contingency plan is being incredibly, catastrophically, reckless. It really is a terribly dangerous decision.
Any policy that drives more demand, when demand is already outpacing supply, is a bad policy. This is the food supply chain we are talking about. This is not arbitrary stuff being discussed. This supply chain is critical.
People freak out about access to food.
For the past 20 to 30 years there have been exhaustive studies on the growth of the restaurant sector. It has been well documented that as the pace of society increased, as efficiencies and productivity increased; and as less of the population learned how to cook and prepare meals; approximately 30% of retail food growth dropped.
Multiply the impact of lower food shopping over all those years. More Americans eat at restaurants now. Depending on the area, there are estimates that fifty percent of all food consumed is from “dining out” or “food consumed outside the home.”
Most of the current panic shopping is because people are preparing by buying weeks worth of food products. Closing restaurants will only magnify that panic shopping.
If state officials are going to make these decisions, they need to coordinate closely with the retail grocers and food outlets in their states. The decision to shut down restaurants must be very closely coordinated and timed with a civil society need for alternatives. Those providing the alternatives need time… not much time…. but they need time.
This is exactly the wrong time to shut restaurants and put additional pressure on a national food supply chain that is trying to meet overwhelming demand.
Either these officials are intentionally trying to create civil unrest, or they are just inexperienced politicians without the ability to think through the logical conclusions to their mandated orders. I’m not sure which it is. However, regardless of intent or stupidity, these types of knee-jerk decisions will harm more people than the virus itself.
Drive-thru and curbside services will not work. Yes, McDonalds and similar do and can provide drive-thru services… but they are not designed for exclusive “drive-thru” services. Approximately eight percent of all daily fast-food comes from McDonalds imagine a line of cars a mile long for a drive-thru hamburger. Then imagine that car, after waiting four hours in that line, orders a month’s worth of hamburgers…. and then that supply chain collapses…. See, it ain’t that simple.
These decisions create the snow-ball effect…
Most restaurants are not not set-up for immediate delivery…. Yes, all of these challenges can and will be overcome; restaurants will limit their curbside products, fast food will put a limit on orders, kitchens will modify to adjust to the work-flow, etc. However, it takes a time to prepare for these necessary shifts and changes.
A more prudent step would be for state officials to provide mitigation directives, simple and prudent changes, during a phase that allows restaurants to adapt:
Position all tables 6 feet apart.
Provide single use condiments and utensils.
Provide disinfecting wipes at the front door and on tables.
Limit the opportunity for virus spread by modifying the consumer engagement.
These types of dining out measures can be prudent and allow for the mitigation of the virus without spreading wide-scale panic that only worsens the issues for alternative options.
Arbitrarily shutting down restaurants, effective immediately, is not a good idea and will only increase the panic and anxiety…. Then again, maybe that’s the goal.
I was just at the Target in Boca Park in Las Vegas and the food shelves are empty.
There was plenty of produce, cereal, and snack foods available but most essential items were out of stock. pic.twitter.com/NYcL7grrw0
The gold / silver ratio. It’s simple: Take the price of an ounce of gold and divide it by the price of an ounce of silver. Presto; the resulting number is the gold / silver ratio.
104 Gold Silver ratio
The ratio is most useful at its extremes. When the ratio has topped 80, it has signaled a time when silver was relatively inexpensive relative to gold. Silver went on to rally 40%, 300%, and 400% the last three times this happened.
Likewise, the three times the gold / silver ratio has fallen below 20 in the past, it has marked a period when gold was relatively inexpensive compared to silver.
This is the best of savvy investment strategy; take a simple mathematical equation and track historical price behavior. When relative valuations hit extremes and then revert to historical means time and time again, we seek to buy these temporary under valuations and wait for their inevitable pendulum swing in the opposite direction.
For the above-mentioned period, we have served 2,626 customers with a sales revenue of more than SGD 50 M, which is 477% higher compared to the same period last year.
The last few days have been our busiest days of all time. Our staff members have been doing a fantastic job in going out of their way to serve as many customers as possible.
Gold & Silver Shortages – Supply Squeeze
The enormous increase in demand is straining our supply chains. BullionStar has supplier relations with most of the major refineries, mints and wholesalers around the world. Most of our suppliers don’t have any stock of precious metals and are not taking orders currently. The U.S. Mint for example announced just this Thursday that American Silver Eagle coins are sold out. The large wholesalers in the U.S. are completely sold out of ALL gold and ALL silver and are not able to replenish.
We are already sold out of several products and will sell out of additional products shortly if this supply squeeze continues. All products listed as “In Stock” on our website are available for immediate delivery. For items listed as “Pre-Sale”, the items have been ordered and paid by us with incoming shipments on the way to us.
This means that the physical gold market is a price taker, inheriting the price from the paper market, and that the derivative markets are the exclusive and dominant price makers. The entire market structure of this financialized gold trading is flawed. So while there is unprecedented demand for physical gold, this is not reflected in the gold price as derived by COMEX and the London unallocated spot market.
By now it is abundantly clear that the physical gold market and paper gold market will disconnect.
If the paper market does not correct this imbalance, widespread physical shortages of precious metals will be prolonged and may lead to the entire monetary system imploding.
Mainstream media assertions that “Gold has been stripped of its Safe Haven Status” are utterly ridiculous and distorted beyond belief, when in fact the complete opposite is true. Unbacked paper gold and silver may be stripped of safe haven status, but certainly not real physical gold bullion.
Physical Premiums & Spreads
The current supply squeeze and physical bullion shortage has caused and is causing an increase in price premiums. It’s currently difficult and expensive for us to acquire any inventory. We have therefore had to increase premiums on products to compensate for the constraints. We have endeavored to also raise our prices offered to customers selling to us, but with the extreme volatility and wild price fluctuations, the spread between the buy and sell price may temporarily be larger than normal. It is regrettable that premiums and spreads are larger than normal but it is outside our control that the paper market is not reflecting the demand and supply of the physical market. As many of you know, we are one of the largest critical voices of the LBMA run paper market and its bullion bank members in London.
Please note that premiums are likely to be higher on weekends when the markets are closed compared to weekdays.
We do not take lightly the decision to alter premiums but feel that it is a better alternative than to stop accepting orders altogether during weekends. Likewise it is a better alternative than to stop accepting orders when the paper gold market is in turmoil and failing to reflect the demand and supply realities of the physical bullion market.
Currently, we are completely sold out on BullionStar Gold Bars, BullionStar Silver Bars and are running low on several other products which we are not able to replenish for now. Several stock items will therefore likely go out of stock shortly. This is despite us having been aggressively buying bullion to create a buffer reserve inventory.
By now everyone is familiar with the abundant pictures on social media of empty shelves in local stores. Having some familiarity with the supply chain might help people to understand some of the challenges; and possibly help locate product. (Pics from Twitter)
There are essentially two types of distribution centers within the retail supply chain for most chain markets, food stores and supermarkets. The first type is a third party, or brokered, distribution network. The second type is a proprietary, company owned, distribution center. Knowing the type of distribution helps to understand what you can expect.
If your local retail store is being replenished from a third party distribution center, you can expect greater shortages and longer replenishment times; we will see entire days of empty shelves in these stores. However, if your local retail store owns their own warehouse and distribution network, the replenishment will be faster. In times of rapid sales, there is a stark difference.
These are general guidelines: An average non-perishable distribution center will replenish approximately 60 stores. Those 60 stores will generally not extend beyond 100 miles from the distribution center. The typical company owned warehouse will have approximately 20 tractors (the semis) delivering trailers of goods to those sixty stores.
In this type of network… On a typical day a truck driver will run three loads. Run #1 Delivery-Return; Run #2 Delivery-return, Run #3 Delivery Return. End shift.
If every tractor is operating that’s a maximum capacity of 60 trailers of merchandise per day. Many stores receiving more than one full trailer.
A typical store, during a non-emergency, will receive 1 full trailer of non-perishable goods three to five times per week. However, under current volume the purchased amount of product is more than triple normal volume. It is impossible to ship 180 trailers of merchandise daily to sixty stores with 20 fixed asset tractors. This is where the supply chains and logistics are simply incapable of keeping up with demand.
Thinking about distribution to a 100 mile radius. The stores closest to the distribution center will be delivered first, usually overnight or very early morning (run #1). The intermediate stores (50 miles) will be delivered second, mid-morning (run #2). The stores furthest from the distribution center will be delivered third, late afternoon (run #3).
So if you live close to a distribution center, your best bet is early morning. If you live in the intermediate zone, late morning to noon. If you are in the distant zone in the evening.
The current problem is not similar to a holiday, snow event or hurricane. In each of those events typical store sales will double; however, during holidays or traditional emergencies the increase in product(s) sold is very specific: (a) holiday product spikes on specific items are known well in advance and front-loaded; and (b) snow/hurricanes again see very specific types of merchandise spikes, with predictability.
In the current emergency shopping pattern the total business increase is more than triple, that’s approximately 30% more than during peak holiday shopping. Think of how busy your local store is on December 23rd of every year. Keep in mind those customers are all purchasing the same or similar products. Now add another 30%+ to that volume and realize the increases are not specific products, everything is selling wall-to-wall.
Perishable and non perishable products are selling triple normal volume. This creates a replenishment or recovery cycle that is impossible to keep up with. The first issue is simply logistics and infrastructure: ie. warehouse (selectors, loaders), and distribution (tractors, trailers, drivers). The second issue is magnifying the first, totality of volume.
A hurricane event is typically a 4 or 5 day cycle. A snow event might be 2 days. The holiday pattern is roughly a week and all the products are well known. However, the type of purchasing with coronavirus shopping is daily, everything, with no end date.
Once the store is wiped out, a full non-perishable recovery order might take four tractor-trailers of merchandise. In our common example, if every store needed a full recovery order that would be 240 tractor-trailers (60 stores x 4 per store). This would need to happen every day, seven days a week, for the duration of the increase. [And that is just for the non perishable goods]
That amount of increase is a logistical impossibility because: (a) no warehouse can hold four times the amount of product from normal distribution; (b) the inbound supply-chain orders to fill the distribution center cannot simply increase four fold; and (c) even with leased/contracted drivers doubling the amount of tractors and trailers, there’s still no way to distribute that much product.
Instead what we see are priorities being assigned to specific types of product that can be shipped to maximize “cube space” in outbound trailers going to stores. A distribution center can send 100 cases of canned goods (one pallet) in the same space as 15 cases of paper towels or toilet tissue (one pallet). So decisions about what products to ship have to be prioritized.
Club stores (ex. BJ’s, SAM’s, or Costco) can ship bulk paper goods faster because they do not carry a full variety of non-perishable items. The limited selection in Club stores naturally helps them replenish; they carry less variety. Meanwhile the typical supermarket distribution center has to make decisions on what specific goods to prioritize.
Nationally (and regionally) the coronavirus shopping panic is far outpacing the supply chain of every retailer. Instead of a weeks worth of food products, people are now trying to purchase a months worth. Every one day of coronavirus sales is equal to three or four normal days.
To try and get a handle on this level of volume we will likely see changes in operating hours. Expect to see stores closing early or limiting the amount of time they are open every day…. the reason is simple: (1) they don’t have the products to sell over their normal business hours; and (2) they need to move more labor into a more compact time-frame to deal with the increases in volume.
Has anybody been to the grocery store today? I shop every Friday morning at a west Georgia Walmart. This is how it looked. My Sister lives in northern Alabama and said the shelves were empty at Walmart too. My Daughter said Publix was the same.#panicbuying#Walmart#Publix DAMN! pic.twitter.com/9XKLxILBt7
We just witnessed a global collapse in asset prices the likes we haven’t seen before. Not even in 2008 or 2000. All these prior beginnings of bear markets happened over time, relatively slowly at first, then accelerating to the downside.
This collapse here has come from some of the historically most stretched valuations ever setting the stage for the biggest bull trap ever. The coronavirus that no one could have predicted is brutally punishing investors that complacently bought into the multiple expansion story that was sold to them by Wall Street. Technical signals that outlined trouble way in advance were ignored while the Big Short 2 was already calling for a massive explosion in $VIX way before anybody ever heard of corona virus.
Worse, there is zero visibility going forward as nobody knows how to price in collapsing revenues and earnings amid entire countries shutting down virtually all public gatherings and activities. Denmark just shut down all of its borders on Friday, flight cancellations everywhere, the planet is literally shutting down in unprecedented fashion.
At the start of January, when the market euphoria was at an all time high, the blow off top melt up was raging and an army of millennial Robinhood day traders was about to be unleashed (only to be crucified at the end of February), we first warned our readers that “Institutions, Retail And Algos Are Now All-In, Just As Buybacks Tumble.” In the markets, nobody noticed and the warning fell on deaf ears as the relentless melt up, which we called for what it was, namely a clear “distribution” from smart to dumb money – continued.
Exactly two months and one bear market later, the first in 11 years, they finally noticed, with Bloomberg today writing that US companies, which until now were quite happy to sell some BBB-rated bonds and use the proceeds to buy stocks to prop up their stock price, have stepped back from repurchasing their shares even before the coronavirus outbreak (something we made quite clear in January).
Using a calculation by the permabulls over at Birinyi, Bloomberg reports that companies have announced $122 billion of share repurchases in January and February, which as we warned was the lowest in years and down 46% from a year ago for the biggest drop to start a year since 2009.
The numbers above fail to capture the crash in markets the followed the acute phase of Coronavirus pandemic, as well as the most recent oil plunge that has caused a plunge in oil prices and hammered all junk-bond funded companies. As such, Bloomberg’s reporters correctly point out that the “reduction underlines a concern that will get bigger should the virus inaugurate an age of prudence among corporate treasurers. Luxuries such as share repurchases, while showing signs of picking up amid the rout, are easy to cut when cash preservation and creditworthiness become the priorities.“
Which is not to say that companies do not buyback their stock when markets tumble: indeed during prior corrections, repurchases may have prevented equity losses from snowballing. For example, in the middle of the sell-off in May 2019, repurchases by BofA’s corporate clients surged 23% for the eighth-busiest week in a decade. The market bottomed on the first day of June. During the route in February 2018, the rebound in stocks came in a week when Goldman Sachs’s corporate-trading desk saw the most buyback orders ever.
This time however, with a global recession over the corner, it may be different. Indeed, with companies now rushing to draw down on revolvers in a liquidity procurement panic, the last thing they will be spending money on ahead of the recession is buybacks. In fact, one can argue that the main reason why we are now in a bear market and on the verge of a recession is because of companies such as Boeing, which until recently spent billions on buybacks; companies which are now drawing down on their revolvers.
“If they’re forced to use that for other areas of the business, you’ll lose some of that key support in the market,” said Mike Stritch, chief investment officer for BMO Wealth Management. “That’s a key underpinning for the stock market, and you do worry you’re going to see some companies folding up on this.”
That the disappearance of buybacks is a problem is an understatement: as we reported recently for the past decade, the only source of buying have been companies themselves, repurchasing their stock.
Ironically, while companies should have stopped repurchasing their stock a long time ago, buyback appetite remained strong in recent weeks, and in the final week of February, when the S&P 500 tumbled the most since 2008, Goldman’s corporate clients snapped up their own shares at the fastest rate in two years, with volume running at 2.3 times the average in 2019. Unfortunately, it now appears they used up much of their dry powder just as stocks were about to take another leg lower.
In a perfect world, companies should maximize their buybacks at the lows and halt them at the highs, yet in the real world the opposite happens, even if there are plenty of experts who will tell you what “should” happen, experts such as Don Townswick, director of equity strategies at Conning, who told Bloomberg that “when your stock price is undervalued, buybacks become more attractive. At these levels in the marketplace, smart management is looking at this and thinking, ‘This is the time to actually realize those buybacks. We’re buying our stock 15% below where we thought it was.’”
Ah yes, but what Don is forgetting is that the bulk of buybacks in recent years was debt-funded, and unfortunately right now credit markets are slammed shut which means that companies have to rely on their own cash flow generation and cash balances to fund management’s favorite stock option boosting activity. There is just one problem: as we first reported last year, corporate America’s cash is draining at the fastest rate in decades, with balances at S&P 500 companies excluding financial firms plunging 15% in the past 12 months.
What’s worse is that the market now appears to be frontrunning the inability of companies to prop up their own stock prices, and is punishing those companies that have relied the most on buybacks. As Bloomberg notes, while the whole market is down more than 11% this year through yesterday, the S&P 500 Buyback Index that tracks stocks with the highest payout ratio has fared far worse, falling 19% this year.
Almost as if traders know that the golden goose, that propped up the market on so many occasions in the past, is now dead.
Payments on mortgages for families and small businesses will be suspended across the whole of Italy due to the coronavirus outbreak’s worsening impact on the country’s economy, the deputy economy minister said today.
‘Yes, that will be the case, for individuals and households,’ Laura Castelli, Italy’s deputy economy minister, said in an interview with Radio Anch’io today, when asked about the possibility.
Italy’s banking lobby ABI said on Monday lenders representing 90 per cent of total banking assets would offer debt moratoriums to small firms and households grappling with the economic fallout from Italy’s coronavirus outbreak.
The news comes as Italy announced that it had doubled the amount it plans to spend on tackling its coronavirus outbreak to £6.5billion and is raising this year’s deficit goal to 2.5 per cent of national output from the current 2.2 per cent target.
After the bloodbath caused by Saudi Arabia’s decision to ramp up output, European oil companies at first blush look enticingly cheap.
The Johan Sverdrup oil field in the North Sea, west of Stavanger, Norway, Getty Images
The dividend yield in BP, for example, is a mouth-watering 9.35%, according to FactSet Research. For perspective, the yield on a British 10-year gilt is 0.27%.
But with oil prices so low, how could BP possibly afford to pay such a dividend?
In a note to clients with little in the way of commentary, Morgan Stanley ran the numbers on what European major oil companies would look like with Brent crude at $35 a barrel.
Probably the most jarring numbers are the dividend cover at that level.
Equinor this year could cover just 1% of its dividend versus its previous estimate of 93%, according to the Morgan Stanley calculation of life at $35 a barrel.
The best positioned is OMV, which can still cover 107% of its dividend at $35, down from an estimated 198%.
BP’s dividend cover falls to 54% from 107%; Shell’s drops to 72% from 115%; Total’s goes to 62% from 125%; Eni’s drops to 57% from 87%; Repsol’s falls to 79% from 123%; and Galp’s drops to 52% from 115%.
Stock buybacks for the European major oil companies would drop by two-thirds on the Morgan Stanley numbers.
SANTA BARBARA, Calif. – The Employment Development Department (EDD) of California is providing workers who are unable to work because of the coronavirus with various insurance claims they may be eligible for.
Governor Gavin Newsom informed the public about these claims on Twitter Monday afternoon.
If your hours have been reduced or your employer has shut down operations due to Coronavirus — you can file an Unemployment Insurance claim.
The Unemployment Insurance claim provides partial wage replacement benefit payments to workers who lose their job or have their hours reduced, through no fault of their own.
The department says workers must remain able and available and ready to work during their unemployment for each week of benefits claimed and meet all other eligibility criteria. Eligible individuals can receive benefits that range from $40-$450 per week.
The department is also reminding individuals that they can file a Disability Insurance claim if they become sick or quarantined with the coronavirus. This claim, which is available for non-work-related illness, injury or pregnancy, provides short-term benefit payments who are losing money due to their health condition.
In order to file for this claim, the worker’s claims must be certified by a medical professional. Benefit amounts are listed as being around 60-70 percent of wages (depending on income) and would range from $50-$1,300 a week.
Those who are unable to work because they are caring for someone sick with the coronavirus are able to file a Paid Family Leave claim. This claim provides up to six weeks of benefit payments to workers who are losing wages while caring for a family member with a serious illness.
The benefits from the Paid Family Leave claim would cover 60-70 perfect of the worker’s wages (depending on income) and would range from $50-$1,300 a week as well.
For more information from the EDD about potential insurance claims related to the coronavirus, you can visit their website here.
(Denise Lones) There are many ways to react about the virus breakout. It doesn’t seem to matter where you go – the news is talking about it everywhere. It is completely normal to feel concerned, unsure, nervous, worried, and more.
However, the reality is that there is not a lot that any of us can do about the virus other than be informed and be aware of the things that we can do to keep ourselves and our families safe. From a business perspective it may seem like there is a lot of doom and gloom out there, but there are many things you could be doing to keep yourself busy and productive.
If you find yourself more home bound than usual, there are some things that you can do to make that time productive. You can:
Catch up on your client connections by sending out a mailer or cards,
Work on your Annual Client Reviews which often get put off because you are too busy,
Do custom research for each of your potential clients and send it to them now, while they too may be home bound and have extra time.
While it may feel like the world is slowing down and that real estate may come to a screeching halt, that is just not realistic, and it is not worth worrying about. Stop panicking and start taking action to catch up on projects or to help your potential buyers and sellers plan to do the things that they haven’t had time to do. How many times does a seller tell you that they can’t put their home on the market until they paint a room or put away their belongings or do a deep cleaning? This could be the perfect time for them to complete this project that never seems to make it into their regular schedule.
While the rest of the world may be focusing on only the negative try to keep your mind focused on something more positive and productive. Sit down and make a list of all the projects you would love to complete and then start tackling them.
Don’t spend your time focusing on the “what ifs” of this virus. Focus on what you have control over which is making a huge dent in the things you have been putting off. It is normal to worry, but try to put things into a more positive light.
This comes as demand has been slashed due to the coronavirus outbreak
Prince Abdulaziz, energy minister of Saudi Arabia
Saudi Arabia will increase its oil output next month to more than 10 million barrels per day, following talks between OPEC and its allies which failed to come to an agreement.
KSA has cut its oil prices drastically, more than it has in 20 years, with discounts to buyers in Europe, the Far East, and the US meant to draw more refiners to Saudi crude rather than other crude oil suppliers.
Bloomberg reported that Saudi Arabia has privately said it could raise production to 12 million barrels per day, citing anonymous sources.
This comes as demand is slashed due to the ongoing coronavirus outbreak.
… amid a (long-overdue) investor revulsion to the highly levered energy sector, much of which is funded in the high yield market, as crashing oil prices bring front and center a doomsday scenario of mass defaults as shale companies are unable to meet their debt and interest payment obligations, investor focus is shifting up the funding chain, and after assessing which shale names are likely to be hit the hardest, with many filing for bankruptcy if oil remains at or below $30, the next question is which banks have the most exposure to the energy loans funding these same E&P companies.
Conveniently, in a note this morning looking at the impact of plunging interest rates on bank profitability, Morgan Stanley also lays out the US banks that have the highest exposure to energy in their Q4 loan books.
With stocks tumbling, the VIX has, predictably, soared, briefly tipping above 50 intraday on Friday and last trading above 46, surpassing the levels hit during the Volmageddon in Feb 2018 and the highest level since the US credit rating downgrade in August 2011.
Just as dramatic is the accelerating VIX term structure inversion, which has pushed the curve to the steepest backwardation since the financial crisis…
Remember, Maiden Lane LLC? The loan to Maiden Lane LLC loan was extended under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual andexigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations.
Will The Fed declare unusual and exigent circumstances, like they did with Bear Stearns, JP Morgan Chase and Maiden Lane?
Perhaps The Fed will add stocks, corporate bonds and real estate citing unusual and exigent circumstance.
“The bond market is rallying because The Fed has reacted the seizure in the corporate bond market – which is not getting enough attention.”
The Fed cut rates, he added, “in reaction to even the investment being shutdown for 7 business days.“
Gundlach noted that Powell’s background in the private equity world – rather than academic economist land – has meant that his reaction function is driven by problems in the corporate bond market as “this will be problematic for the buyback aspect of the stock market.”
As HY is already at its widest since 2016…
And that’s why Gundlach is long gold:
“I turned bullish on gold in the summer of 2018 on my Total Return webcast when it was at 1190. And it just seems to me, as I talked about my Just Markets webcast, which is up on DoubleLine.com on a replay, that the dollar is going to get weaker.
And the dollar getting weaker seems to be a policy. And the Fed cutting rates, slashing rates is clearly going to be dollar negative. And that means that gold is going to go higher.“
Rascoff purchased the house in 2016 for $19.7 million
Spencer Rascoff and the property (Credit: Twitter, Zillow, and Google Maps)
Spencer Rascoff, the co-founder and former CEO of Zillow, has put his Brentwood Park estate on the market for $24 million, according to Redfin. The asking price is $7 million over the “Zestimate,” or Zillow’s appraisal of what the home is worth.
Property records show that Rascoff paid $19.7 million for the property in 2016.
The listing states that the 12,700-square-foot home – remodeled by architects Ken Ungar and Steve Giannetti – is located on a half acre in a gated neighborhood. The Zillow Zestimate for the house suggests it’s worth $16.7 million.
Josh and Matt Altman of Douglas Elliman have the listing.
Rascoff purchased the house from investment banker Michael J. Richter, who reportedly paid $9.3 million for the Parkyns Street manse in 2012.
The home has six bedrooms and nine bathrooms, along with a “spectacular” chef’s kitchen, a state-of-the-art theater with stadium seating, a fitness studio and a large master suite with a large balcony. The estate also features a two-bedroom guest wing, a motor court, and a spa, pool and mudroom.
Rascoff is currently launching dot.LA, a news and events company that will cover the tech scene in Los Angeles.
It’s not just in China where the effects of the novel coronavirus are being felt – it’s in China Towns situated worldwide. Fear is gripping people around the world and, coupled with the uncertainty that is inevitable with the WHO and world leaders dragging their feet, it is keeping people out of Chinese businesses.
As Chinese citizens of other countries try to go about business as usual in the midst of what is likely a growing pandemic, business is collapsing. Lily Zhou’s Chinese restaurant in Australia, for instance, has seen business fall 70%, according to Bloomberg. It now has a board out front where “The restaurant has been sanitized!” is written in Chinese.
Zhou says at this rate, she can only stay in business “at most three months”.
The affect on the local economy has been so bad that the neighborhood of Eastwood is planning on setting up a A$500,000 assistance fund.
But the affects aren’t just being felt in Australia. There are Chinatowns and Chinese businesses in places like Sydney, New York and San Francisco that are all feeling the impact.
99 Favor Taste, a hotpot and BBQ restaurant in lower Manhattan, is now seating customers immediately. The restaurant usually has a half hour wait on weekdays to get a table. “Booths are empty,” said manager Echo Wu.
Wu believes that the fear keeping people out of Chinese businesses is “irrational”. He says customers have even gone so far as to phone ahead to check and make sure the food wasn’t being imported directly from China.
Wu said: “They may have a bias toward Chinese restaurants now. I hope people can be more reasonable. After all, there’s no cases in town yet.”
In Toronto, it’s a similar scene. Business at the Rol San Dim Sum restaurant is down as much as 30% and the sidewalks of Chinatown are quiet. The restaurant’s manager said it was “of course” due to the coronavirus.
At the Chinatown in Manchester, U.K., students stopped showing up after returning from the Chinese New Year holiday. The head of the local business association said: “There are less visitors, less customers. They’re really, really suffering — at the moment we haven’t come up with any solution yet. The group is discussing options such as opening a weekend market with free food tasting and discounts to bring back clients.”
San Francisco’s Chinatown has seen its lunch rush “evaporate”. One business owner, Henry Chen, said: “Usually we have a line out the door. There are less people on the street. Lunch, dinner, breakfast, there is no business.”
Philip Wu, who manages a hot pot restaurant in Sydney’s Chinatown, says that lifting travel restrictions is crucial for business.He has seen a 60% drop in business and has asked all 100 of his workers to cut their hours to four days a week.
“If the government says ‘Okay, we’ll stop the ban on the flights, and the people can travel to Australia,’ then I think the business will go up very quickly, because tens of thousands of Chinese people will be coming back,” he said.
But that looks extremely unlikely. And these are still just minor examples compared to the disruption in places like China and Hong Kong, where schools are closed and people are stuck in their apartments under quarantine. These types of lockdowns are now spreading to Italy and other neighboring countries.
And, unfortunately, we feel like it’s going to get worse before it gets better.
More and more New York City hotels are defaulting on their mortgages, signaling an alarming trend in the industry as “challenging market fundamentals” and new supply act as headwinds for the industry.
This has resulted in room rates declining and sites like Airbnb gaining traction in the market, according to The Real Deal.
The main metric to watch is the average daily room rate, which has dropped in New York City to its lowest point since at least 2013: $255.16, according to STR. More than 22,000 new hotel rooms remain in the pipeline, as well, which will further add to the supply glut and likely push room rates even lower.
As a result, loans like a $260 million loan on the Row Hotel near Times Square have been in default. In the case of the Row Hotel, it’s lender is looking to offload the loan on the secondary market for as little as $50 million. Meanwhile, the hotel itself has been on the market since last year, but has little interest from buyers.
Colony Credit, the lender, says there has been a “significant deterioration” in the hotel market and that feedback during the sales process has led them to mark down the value of the loan.
In 2019, Heritage Equity Partners defaulted on a $68 million loan for the Williamsburg Hotel. That property is now in the process of heading toward receivership. Lenders to Maefield Development’s hotel at 20 Times Square have also sought to foreclose on $650 million in loans that were made for the project. East West Bank has also moved to foreclose on loans secured by the Selina Chelsea.
The Blakely Hotel was shut down altogether last month by its owner, Richard Born, who blamed challenges facing the industry.
Finally, there are an additional 21 CMBS mortgages backed by New York hotels that remain under watch for potential difficulties.
As if the industry wasn’t facing headwinds of its own, it also now has to deal with the backlash of the coronavirus outbreak. We’re guessing that the droves of Chinese tourists usually meandering their way around Manhattan on any given day will likely continue to thin out, as travel restrictions between China and the U.S. remain in place. As we’ve already noted, the virus has already taken its toll on Chinese owned businesses in New York.
Now Wah Tea Parlor’s owner, Wilson Tang, said that on February 3, his restaurant saw an unprecedented 40% drop in business, according to Eater New York. It was a similar story out of critically acclaimed Sichuan restaurant Hwa Yuan, which also saw a steep plunge in sales 2 weeks ago.
Tang said: “It sucks. The past couple days suck. We’ve been letting people go early, just to let them take some extra time off. It’s slow in general.”
Elizabeth Chin, a travel agent in Fort Lee, N.J. told the NY Times: “It’s going to be a serious financial burden. The flights are canceled. The tour operators have canceled.”
Bruce Zhu, the manager of China Tour Travel Services in Flushing, Queens said: “It’s a big problem. We have to cancel the bookings, cancel the hotels. We lose a lot of money on the bookings.”
“It’s all stopped — zero,” another travel agent in Flushing lamented.
The rate of credit card balances that are 30 days or more delinquent at the 4,500 or so commercial banks that are smaller than the top 100 banks spiked to 7.05% in the fourth quarter, the highest delinquency rate in the data going back to the 1980s (red line).
While mom and dad on Main St. still aren’t getting the dire warning that the coronavirus has been offering up to Asia and the rest of the Eastern world over the last several weeks, perhaps a light bulb will finally go off when Jane Q. Public heads to the grocery store and is unable to buy shampoo and toothpaste.
Proctor and Gamble, one of the world’s biggest “everyday product” manufacturers, has now officially warned that 17,600 of its products could be affected and disrupted by the coronavirus. The company’s CFO, Jon Moeller, said at a recent conference that P&G used 387 suppliers across China, shipping more than 9,000 materials, according to CIPS.org.
Moeller said: “Each of these suppliers faces their own challenges in resuming operations.”
And it’s not just everyday consumer goods that are going to feel the impact of the virus.
Smartphones and cars are so far among the consumer products that have been hardest hit from the virus. In fact, according to TrendForce, “forecasts for product shipments from China for the first quarter of 2020 had been slashed, by 16% for smartwatches (to 12.1m units), 12.3% for notebooks (30.7m units) and 10.4% for smartphones (275m units). Cars have dropped 8.1% (19.3m units).”
Their report states: “The outbreak has made a relatively high impact on the smartphone industry because the smartphone supply chain is highly labor-intensive. Although automakers can compensate for material shortage through overseas factories, the process of capacity expansion and shipping of goods is still expected to create gaps in the overall manufacturing process.”
A separate coronavirus analysis by Mintec says that “Chinese demand for copper (it has hitherto been responsible for consuming half the world’s output), will fall by 500,000 tonnes this year, and falls in demand have already impacted prices. From December to January the price of copper fell 9.6%.”
The report notes: “Millions of people have been affected by the travel lock down in Hubei province, the centre of the outbreak. This has been responsible for a glut of jet fuel and diesel on global markets at a time when petroleum supplies were already abundant.”
Other products that have been negatively affected so far include pork, which is up 11% this month, chicken, garlic and dried ginger.
Product supply chain issues could eventually compound hysteria at supermarkets if coronavirus becomes widespread in western countries. Northern Italy, which has seen a small outbreak of coronavirus cases over the last 48 hours, is already experiencing long lines and sold out store shelves.
The impact of Covid-19 on supply chains has been tremendous. Uncertainty across the global economy is building as China remains in economic paralysis. The luxury fashion industry is suffering its most significant “shock” since the 2008 financial crisis, reported the Financial Times.
Our angle in this piece is to asses which luxury brand companies are most exposed/dependent on China. Many of these firms have complex operations in the country, from manufacturing facilities to brick and mortar stores to e-commerce platforms. Chinese consumers accounted for 40% of $303 billion spent on luxury goods globally last year.
The virus outbreak has also disrupted complex supply chains for mid-market apparel brands, like Under Armour, Adidas, and Puma, warning about collapsing demand and factory shutdown woes.
LVMH, Kering, and Richemont are luxury brands that are some of the least exposed to China because their manufacturing facilities are outside the country.
Kering, the owner of Gucci, warned earlier this month that the virus outbreak in China could damage sales in the first quarter.
A Moody’s report this week showed US-listed luxury brands, Coach and Kate Spade owner Tapestry, have increased their market exposure to China in recent years to gain access to a robust market, allowing their revenues to increase far faster than industry norms. That strategy today is likely to have backfired.
Fashion brands from Hennes & Mauritz, Next of the UK, and Tory Burch, have built factories in China to take advantage of inexpensive silk, fabrics, and cotton, along with lower labor costs, are now experiencing supply chain disruptions that could lead to product shortages in the months ahead.
The National Chamber for Italian Fashion warned earlier this week that the virus impact in China would lead to a $108 million drop in Italian exports in the first quarter because Chinese demand has fallen. If consumption remains depressed, then luxury exports to China could drop by a whopping $250 million in 1H20.
A top executive at Shanghai’s luxury shopping mall Plaza 66 said the mall had been deserted this month. Stores such as Cartier and Tiffany’s have been shuttered.
“We are now, brand by brand, reallocating that inventory to other regions in the world so that we are not too heavy in stock in China,” Kering chief executive François-Henri Pinault said last week. The move suggests the environment in China remains dire and to persist well into March.
Jefferies Group noted this week that Burberry Group is the most exposed luxury brand to China.
The crisis developing in the global luxury retail market is the first demand shock since that last financial crisis more than a decade ago. Brands that have manufacturing and retail exposure to China will be damaged the most.
UBS analyst Olivia Townsend said luxury brands she spoke with said factories are to remain shut for all of February may lead to product shortages.
The demand crisis comes as the global apparel industry rolls over suggests that world stocks could be headed for a correction.
Wells Fargo has agreed to pay $3 billion to settle U.S. investigations into more than a decade of widespread consumer abuses under a deal that lets the scandal-ridden bank avoid criminal charges.
The deal resolves civil and criminal investigations. It includes a so-called deferred prosecution agreement, where the Justice Department files, but doesn’t immediately pursue, criminal charges. It will eventually dismiss them if the bank satisfies the government’s requirements, including its continued cooperation with further government investigations, over the next three years.
The accord also resolves a complaint by the Securities and Exchange Commission.
“Our settlement with Wells Fargo, and the $3 billion criminal monetary penalty imposed on the bank, go far beyond ‘the cost of doing business,’” U.S. Attorney Andrew Murray for the Western District of North Carolina said in a statement.
“They are appropriate given the staggering size, scope and duration of Wells Fargo’s illicit conduct.”
All of which means – nobody goes to jail!
While today’s settlement shuts the door on a major portion of the bank’s legal problems related to the fake accounts, a scandal that has claimed two CEOs; it’s hardly the end of the bank’s legal woes. The firm remains under a growth cap imposed by the Federal Reserve. Last month the Office of the Comptroller of the Currency announced civil charges against eight former senior executives, some of whom settled. And probes into other suspected misconduct in other businesses are continuing.
(Birch Gold Group) Thanks to the Federal Reserve, the idea that you can go into a store and anonymously purchase something with cash might soon be obsolete.
Corporatocracy Fedcoin: ‘in private banks we trust’
Why? Because they’re developing something called Fedcoin, which would be based on blockchain technology.
The digital and decentralized ledger that records all transactions. Every time someone buys digital coins on a decentralized exchange, sells coins, transfers coins, or buys a good or service with virtual coins, a ledger records that transaction, often in an encrypted fashion, to protect it from cybercriminals. These transactions are also recorded and processed without a third-party provider, which is usually a bank.
Right now, Bitcoin is a popular form of cryptocurrency that operates using blockchain technology. Like the description above, Bitcoin is decentralized, its transactions are anonymous, and no central bank is involved.
But the irony is, the blockchain tech behind the Fed’s idea isn’t likely to be used the way Bitcoin uses it. Not even close.
Originally, the “Fedcoin” idea appeared to be a security enhancement to a century-old system used for clearing checks and cash transactions called Fedwire. According to NASDAQ in 2017:
This technology will bring Fedwire into the 21st Century. Tentatively called Fedcoin, this Federal Reserve cryptocurrency could replace the dollar as we know it.
The idea didn’t seem to move very much three years ago, but now the idea of a central bank-controlled “Fedcoin” seems like it could be moving closer to reality, according to a Reuters reportfrom February 5.
According to the report, “Dozens of central banks globally are also doing such work,” including China.
Of course, there is risk, according to Federal Reserve Governor Lael Brainard. For example, there is the potential for a country-wide run on banks if panic ensued while the Fed “flipped a switch” and made Fedcoin the primary currency for the United States.
But blogger Robert Wenzel warns the risks of the Federal Reserve issuing its own cyber currency may run even deeper than that.
“This is not good.”
Lawmakers try to package and sell whatever ideas they come up with, no matter how intrusive or ineffective they might be.
According to Brainard, Fedcoin has the potential to provide “greater value at a lower cost” for monetary transactions. Sounds reasonable, if taken at face value.
But no matter how the Fed may try to “sell” the idea of utilizing Fedcoin in the future, Wenzel’s warning is pretty clear:
A Federal Reserve created digital coin could be one of the most dangerous steps ever taken by a government agency. It would put in the hands of the government the potential to create a digital currency with the ability to track all transactions in an economy—and prohibit transactions for any reason. In terms of future individual freedom, this would be a nightmare.
If you use cash at a grocery store, no one will know who you are or what you bought unless it was caught on video or you use a reward card. In the rare instance a store accepts Bitcoin, the same would be true.
But if you were to use a centrally-controlled digital currency like Fedcoin, who knows what the Fed will decide to track now or in the future? Or what meddling they could come up with to deny your transaction?
If the Federal Reserve wanted to outlaw cash, and your only choice was to use Fedcoin to make purchases, then your financial life would be tracked under their watchful eye.
“Not good” indeed.
Protect your retirement by maintaining your financial freedom
Who knows if the Federal Reserve will move closer to making cash a thing of the past? Perhaps Fedcoin will add to the number of ways the Fed can meddle with your retirement?
Until that gets sorted out, you can consider other options to protect your retirement with a tangible asset that can’t be converted into digital form.
Precious metals like gold and silver continue to hold value, and have for thousands of years. And because they are physical assets, you can’t be tracked as you could if Fedcoin moves from being a bad idea to reality.
In the last few weeks, ZeroHedge provided many articles on the evidence of creaking global supply chains fast emergingin China and spreading outwards. Anyone in supply chain management, monitoring the flow of goods and services from China, has to be worried about which regions will be impacted the most (even if the stock market couldn’t care less).
Deutsche Bank’s senior European economist Clemente Delucia and economist Michael Kirker published a note on Thursday titled “The impact of the coronavirus: A supply-chain analysis” identifying the effect of contagion on the rest of the world, mainly focusing on demand and spillover effects into other countries.
The economists constructed a ‘dependency indicator,’ to figure out just how much a country depends on China for the supply of particular imported inputs. It was noted that the more a country depends on China, the more challenging it could be for businesses to find alternative sourcing during a period of supply chain disruptions.
The biggest takeaway from the report is that, surprisingly, the European Union is less directly exposed to a China supply-chain shock than the US, Canada, Japan, and all the major Asian countries (i.e., India, South Korea, Indonesia, Malaysia, Vietnam).
It was determined that in the first wave of supply chain disruptions that “euro-area countries are somewhat less directly dependent on China for intermediate inputs than other major economies in the rest of the world.”
“The euro-area countries have, in general, a dependence indicator below the benchmark. This suggests that euro-area countries have a below-average direct dependence on Chinese imports of intermediate inputs (Figure 2).”
But since China is highly integrated into the global economy, and a supply chain shock would be felt across the world. The second round of disruptions would result in lower world trade growth that would eventually filter back into the European economy.
The US, Japan, Canada, and all the major Asian countries would feel an immediate supply chain shock from China.
Here’s a chart that maps out lower dependency and higher dependency countries to disruption from China.
To summarize, the European Union might escape disruptions from China supply chain shocks in the first round, but ultimately will be affected as global growth would sag. As for the US and Japan, Canada, and all the major Asian countries, well, the disruption will be almost immediate and severe with limited opportunities for companies to find alternative sourcing.
“First of all, our analysis does not take into account non-linearity in the production process. In other words, it does not capture consequences from a stop in production for particular product. It might indicate that given the dependence is smaller, Europe could find it somewhat easier substitute a Chinese product with another. But there is no guarantee this will be the case.”
“Secondly, while our results indicates that the direct impact from supply issues in China could be smaller for the euro area than for other regions in the world, the euro area could be hard-hit by second-round effects. With their higher direct exposure to China, production in other major economies could slow down as a result of disruptions in the supply chain. This not only could cause a shortage in demand for euro-area exports, but it could also impact on the euro-area’s import of intermediate inputs from these other countries (second-round effects). In other words, China has become a relevant player in the world supply chain and production/demand problems in China are spread worldwide through direct and indirect channels.“
News flow this week has indeed suggested the virus is spreading outwards, from East to West, and could get a lot worse ex-China into the weekend.
The mistake of the World Health Organization (WHO), governments, and global trade organizations to minimize the economic impact (protect stock markets) of the virus was to allow flights, businesses, and trade to remain open with China. This allowed the virus to start spreading across China’s Belt and Road Initiative (BRI).
Enjoy a riveting weekly news wrap up with Greg Hunter…
In this recession 2020 video YOU are going to discover 5 reasons (NO ONE IS TALKING ABOUT) the next recession will be far worse than the 2008/2009 recession. The Fed has created so much mal investment, by keeping interest rates artificially low, we now have the EVERYTHING BUBBLE. Stocks are in a bubble, bonds are in a bubble, housing is in a bubble and the 2020 recession (which the data suggests is highly probable) will be the pin that pricks them all.
We’ve had recessions in the US every 6-8 years throughout our history, and we’re currently 10 years into an expansion which makes the US due for a recession in 2020. While not all recessions are devastating, because the debt bubbles are so much bigger now than in 2009, the next recession has the potential to be the worst by far.
Banks around the world are supposed to benefit the most from central banks inflating assets, and hyperinflating stock markets, but over the past few years, central banks have instead caused some of the biggest bank job cuts in half a decade.
HSBC, Europe’s largest bank and troubled lender, although not nearly as troubled as Deutsche Bank, said it would cut upwards of 35,000 jobs, shed $100 billion in assets, and take a massive $7.3 billion hit to goodwill as part of a major overhaul under Chairman Mark Tucker, the company said in a press release on Tuesday morning.
This comes months after HSBC’s interim CEO Noel Quinn unveiled plans to “remodel” large parts of the bank. The restructuring of the London-based bank is being led by Quinn, who replaced John Flint in August on an interim basis. Quinn is vying for the permanent role of CEO, which the bank said will be decided this year.
Europe’s biggest bank by assets is expected to focus more on Asia and the Middle East, while it winds down operations in Europe and the US; HSBC derives at least 50% of its revenue in Asia. The bank said net profit plunged 53% to $5.97 billion last year, due to the $7.3BN goodwill hit and also thanks to the record low interest rates and NIRP unleashed by central banks.
Tucker said the bank faces substantial challenges in the UK, Hong Kong, and mainland China. He also issued a warning over the Covid-19 outbreak in China and quickly spreading across Asia to Europe, indicating that the virus could impact the bank’s performance this year.
Quinn confirmed the bank would cut 15% of its workforce over the next two-three years. This is on top of the 10,000 jobs it axed in Oct.
“The totality of this program is that our headcount is likely to go from 235,000 to closer to 200,000 over the next three years,” Quinn told Reuters. adding that “HSBC will be “exiting businesses where necessary.”
“Around 30% of our capital is currently allocated to businesses that are delivering returns below their cost of equity, largely in global banking and markets in Europe and the U.S.,” he noted.
In its long-struggling U.S. arm, Quinn said HSBC will cut assets in investment banking and markets by almost half, and shut around 70 of its 229 branches. As of September, HSBC was the U.S.’s 14th largest commercial bank according to Federal Reserve data, with around $181 billion assets. Mr. Quinn said he had considered putting the unit up for sale but decided against it because the U.S. is a crucial part of the bank’s global network.
HSBC shares slid 6% on the restructuring news on Tuesday morning:
The benefits of the restructuring will be evident largely from 2023 onward, said Citigroup analyst Ronit Ghose, who recommended investors sell HSBC shares.
While stocks are hitting fresh all time highs, bringing joy and spreading the “wealth effect” across America, clients of the Fidelity brokerage are having a rather shitty day because due to a glitch, or perhaps a hack, countless accounts are currently showing a zero balance, or simply removing accounts altogether.
While we assume this pesky “glitch” will be resolved promptly, we should point out that if the market were to ever again suffer a down day and should investors wish to sell some/all of their holdings, this would be a convenient way to quickly and efficiently prevent that from ever happening.
@Fidelity Is there currently a problem with your website? When I log in I am not seeing any of my accounts.
@Fidelity Your site seems to be having issues, all my accounts and positions are no longer showing up for some reason, they were fine about 20 mins ago, although I was having issues with being logged out when trying to open new positions.
Which Supply Chains Are Most At Risk: The Answer In One Chart
Now that Apple has broken the seal and made it abundantly clear that China’s economic collapse which could push its Q1 GDP negative according to Goldman as the second largest world economy grinds to a halt (as described here last week)…
… will have an adverse impact on countless supply-chains, which in today’s “just in time” delivery environment, are absolutely critical for keeping the global economy running smoothly (for a quick reminder of what happens when JIT supply chains stop functioning read our article from 2012 “”Trade-Off”: A Study In Global Systemic Collapse“), attention on Wall Street has turned to which other US sectors stand to be adversely impacted should the coronavirus pandemic not be contained on short notice and China’s economy crisis transforms into a supply shock.
Conveniently, Goldman Sachs just did this analysis.
New evidence from Bloomberg reveals cracking global supply chains are fast emerging at major Chinese ports with thousands of containers of frozen meat piling up with nowhere to go.
The Covid19 outbreak will remain a dominant issue for 1Q as supply chain shocks are being felt by multinationals on either side of the hemisphere.
Sources told Bloomberg that containers of frozen pork, chicken, and beef (mostly from South America, Europe, and the US) are piling up at Tianjin, Shanghai, and Ningbo ports because of the lack of truck drivers and many transportation networks remain closed.
Seaports in China are quickly running out of room to house the containers and cannot provide enough electricity points to keep existing containers cold. This has forced many vessels to be rerouted to other destinations.
We’ve already noted that Bloomberg’s Stephen Stapczynski recorded footage of an oil tanker parking lot off the Singapore coast last week as refiners in China cut runs as crude consumption has collapsed by more than 4 million barrels per day.
It’s clear that a logistical nightmare is unfolding as two-thirds of the Chinese economy has effectively shut down much of its production capacity, producing a massive “demand shock.”
The impact on the global economy is already dragging down world trade and could force the World Trade Organization (WTO) to slash economic growth forecasts for the year.
The Chinese economy constitutes about 20% of global GDP, and supply chain disruptions across China could cause a cascading effect that could tilt the world into recession.
But it’s not just frozen meats piling up at Chinese ports or a crude glut developing. There’s a high risk that product shortages to Western countries could be 60-90 days out.
Alibaba Group’s CEO Daniel Zhang warned last week that the supply chain disruption, or “shock,” is a “black swan event” for the global economy.
It’s not only Chinese tourists, business travelers, and property buyers who’re not showing up, but also travelers from all over the world who’ve gotten second thoughts about sitting on a plane.
Wyndham Closes 1,000 Hotels, Hilton 150, Best Western 65% In China, Fiat Chrysler Halts Production!
Literally, everything is shutting down. I can’t even fit everything into the title. First, The world’s largest Hotel company by properties announced they will be temporarily closing 1,000 Hotels in China. This amounts to over 70% of their hotels and the CEO said the Hotels that remain open are running under 75% Guest capacity. They expect a huge financial impact. Hilton hotels also announced they will be closing 150 hotels in China along with Best Western. We then move to the recent data compiled by Goldman detailing the true weight of the industrial production halt. Steel demand is Crashing, Construction Steal demand has collapse 88%. Fiat Chrysler warned that they would need to halt production at one of their plants outside of China due to parts shortages and The plant has come to a halt as the problem is not resolved. The company said it is in the process of attaining the product from another source. Last but not least Carnival Corp has warned of a significant financial impact in their upcoming earnings report and they pulled their full-year 2020 forward guidance due to changes.
Bloomberg focuses on how an industrial shutdown of China’s economy has already had a profound effect on India’s economy and could get worse.
Pankaj R. Patel, chairman of Zydus Cadila, said prices of medicine in India have exponentially jumped in the last several weeks, thanks to much of the medicine is sourced from China.
The Indian pharmaceutical industry is experiencing massive disruptions that could face shortages starting in April if supplies aren’t replenished in the next couple weeks, Patel warned.
Manufacturers in China have idled plants, and at least two-thirds of the economy is halted. Some factories came online last week with promises of full production by the end of the month, but for most factories, their resumption will likely be delayed. This will undoubtedly lead to medicine shortages in India in the coming months ahead.
A new theme is developing from all this mayhem – that is the reorganization of complex supply chains out of China to a more localized approach to avoid severing. But in the meantime, these complex supply chains in India and across the world will experience massive disruption caused by the shutdown. All of this points to ugly end of globalization:
Pankaj Mahindroo, chairman of the India Cellular and Electronics Association (ICEA), said the wrecking of supply chains in China could soon have a devastating impact on India’s smartphone production.
Mahindroo represents companies including Foxconn, Apple Inc., Micromax Informatics Ltd., and Salcomp India, warned the “impact is already visible… If things don’t improve soon, production will have to be stopped.”
Already, the production of iPhones and Airpods has been reduced in China because of factory shutdowns.
The closure of Foxconn plants in India would be absolutely devastating for Apple.
Apple produces iPhone XR in India. If the production of affordable smartphones is halted or reduced, the Californian based company could see full-year earnings guidance slashed.
Mohnidroo said if things don’t improve in the next couple of weeks, smartphone factories in India could start running out of “critical components like printed circuit boards, camera modules, semiconductors, resistors, and capacitors.”
A spokesperson for Xiaomi Corp.’s India unit said alternative sourcing attempts are underway to mitigate any supply chain disruption from China.
Former Indian Finance Minister Yashwant Sinha warnedseveral months ago that the country is in a “very deep crisis,” witnessing “death of demand,” and the government is “befooling people” with its economic distortionsof how growth is around the corner.
Supply chain disruptions are moving from East to West. It’s only a matter of time before production lines are halted in the US because sourcing of Chinese parts is offline. The disruptions of supply chains is the shock that could tilt the global economy into recession.
It’s certainly plausible that the global economy is in the early stages of grinding to a halt. Already, we’ve noted that two-thirds of China’s economy is offline, with major industrial hubs idle and 400 million people quarantined.
The next phase of the supply chain chaos is to spread to regions that are overly reliant on Chinese parts for assembly, such as a Fiat Chrysler Automobiles NV plant in Serbia.
Bloomberg reports Friday morning that the plant is expected to halt operations of its assembly line because of the lack of parts from China as the Covid-19 outbreak worsens.
Turin, Italy-based automaker’s Kragujevac factory in Serbia, which assembles the Fiat 500L, has to bring its production line to a halt due to lack of audio-system and other electric parts sourced from China.
Four of the automaker’s suppliers have been impacted by China’s decision to shut down much of its industrial sector as part of a quarantine that’s expected to take a massive chunk out of GDP growth in the first half.
Fiat Chrysler CEO Mike Manley said four of the company’s suppliers in China had already been affected by the outbreak, including one “critical” maker of parts putting European production at risk.
The evolution of the supply chain disruption emanating from China is spreading outwards and to the West.
Wall Street is blind as a bat, or maybe their hope the Federal Reserve will keep pumping liquidity into the market will numb the pain of one of the most significant shocks expected to hit the global economy in the near term. This is mostly due to the world’s most complex supply chains, which as of late January, have been severed and will start affecting assembly plants in Europe.
The disruption could spread to the US, where many assembly plants source parts from China.
What’s about to hit the global economy was beautifully outlined by former Morgan Stanley Asia chairman Stephen Roach warned several weeks ago that the global economy could already be in a period of vulnerability, where an exogenous shock, such as the Covid-19, could be the trigger for the next worldwide recession.
Mohamed El-Erian, the chief economic adviser to the insurance company Allianz, recently said the economic damage caused by virus outbreak would play out this year.
El-Erian said the economic shock to China and surrounding manufacturing hubs is happening at a time when the global economy is slowing, and interest rates among central banks are near zero, indicating their ammo to fight the downturn is limited.
Freeport-McMoRan CEO Richard Adkerson said in an interview last month that the virus outbreak in China is a “real black swan event” for the global economy.
Alibaba Group’s CEO Daniel Zhang said this week that the virus outbreak in China is developing into a “black swan event” that could have severe consequences for China and the global economy.
When the world’s most complex supply chains break, so does the global economy. It’s only a matter of time before disruption is seen in the US.
President Trump vowed to make “Coal Great Again” and restore the industrial heartland. But it seems as Trump’s many campaign promises to coal miners have been broken, as there’s hardly a peep from the administration about the imploding industry.
Take, for instance, a new report from A.P. News, that details how Twin Ports of Duluth-Superior, recorded its lowest coal cargo volumes in three decades during the 2019 shipping season.
Greg Nemet, a public affairs professor at the University of Wisconsin-Madison, said coal shipments in the port have plunged as the demand for renewable energy has soared in recent years.
“It’s really a competition between coal, natural gas, and renewables. It’s cheaper to make electricity with natural gas and with solar,” Nemet said. “Coal really can’t compete with either of those.”
A.P. said 8 million tons of coal moved through the Twin Ports, the lowest volume since 1985.
U.S. coal production has plunged from 1.2 billion tons in 2008 to 597 million last year. Despite Trump’s promises to revive the industry, production continues to decline.
Trump was silent last year after a significant bankruptcy wave devastated the industry.
Deteriorating coal industry fundamentals and escalating environmental, social and governance concerns, led to the recent bankruptcy of Peabody, the world’s largest coal producer.
Trump routinely pumped the coal industry, calling it “indestructible” and telling everyone on social media that “coal is back.” Here he is in 2017 famously telling people that “We are going to put our coal miners back to work.”
And to make matters worse for miners, the Trump administration isn’t about saving the industry:
“Coal as a percentage of U.S. electricity generation is declining and will probably continue to decline for some time,” Sec. Dan Brouillette told the Atlantic Council. “The effort that we’re undertaking is not to subsidize the industry and preserve their status, if you will, as a large electricity generator. It is simply to make the product cleaner and to look for alternative uses for this product.”
The hopes of a coal rebound were all for election purposes. The industry is imploding, as it’s clear that, according to Trump, the stock market is more important than the real economy.
In our ongoing attempts to glean some objective insight into what is actually happening “on the ground” in the notoriously opaque China, whose economy has been hammered by the Coronavirus epidemic, yesterday ZeroHedge showed several “alternative” economicindicators such as real-time measurements of air pollution (a proxy for industrial output), daily coal consumption (a proxy for electricity usage and manufacturing) and traffic congestion levels (a proxy for commerce and mobility), before concluding that China’s economy appears to have ground to a halt.
That conclusion was cemented after looking at some other real-time charts which suggest that there is a very high probability that China’s GDP in Q1 will not only flatline, but crater deep in the red for one simple reason: there is no economic activity taking place whatsoever.
We start with China’s infrastructure and fixed asset investment, which until recently accounted for the bulk of Chinese GDP. As Goldman writes in an overnight report, in the Feb 7-13 week, steel apparent demand is down a whopping 40%, but that’s only because flat steel is down “only” 12% Y/Y as some car plants have ordered their employee to return to work (likely against their will as the epidemic still rages).
However, it is the far more important – for China’s GDP – construction steel sector where apparent demand has literally hit the bottom of the chart, down an unprecedented 88% Y/Y or as Goldman puts it, “construction steel demand is approaching zero.”
But wait, there’s more.
Courtesy of Capital Economics, which has compiled a handy breakdown of real-time China indicators, we can see the full extent of just how pervasive the crash in China’s economy has been, starting with familiar indicator, the average road congestion across 100 Chinese cities, which has collapsed into the New Year and has since failed to rebound.
Parallel to this, daily passenger traffic has also flat lined since the New Year and has yet to post an even modest rebound.
And the biggest shocker: a total collapse in passenger traffic (measured in person-km y/y % change), largely due to the quarantine that has been imposed on hundreds of millions of Chinese citizens.
And while we already noted the plunge in coal consumption in power plants as Chinese electricity use has cratered…
… what is perhaps most striking, is the devastation facing the Chinese real estate sector where property sales across 30 major cities have basically frozen.
Finally, and most ominously perhaps, as the economy craters and internal supply chains fray, prices for everyday staples such as food are soaring as China faces not only economic collapse, but also surging prices for critical goods, such as food as shown in the wholesale food price index chart below…
… which in a nation of 1.4 billion is a catastrophic mix.
As the coronavirus pandemic spreads further without containment, and as the charts above continue to flat line, so will China’s economy, which means that not only is Goldman’s draconian view of what happens to Q1 GDP likely optimistic as China now faces an outright plunge in Q1 GDP…
… but any the expectation for a V-shaped recovery in Q2 and onward will vaporize faster than a vial of ultra-biohazardaous viruses in a Wuhan virology lab.
Nearly a quarter of all subprime auto loans are 90+ days delinquent. Why?
Auto loan and lease balances have surged to a new record of $1.33 trillion. Delinquencies of auto loans to borrowers with prime credit rates hover near historic lows. But subprime loans (borrowers with a credit score below 620) are exploding at a breath-taking rate, and they’re driving up the overall delinquency rates to Financial Crisis levels. Yet, these are the good times, and there is no employment crisis where millions of people have lost their jobs.
All combined, prime and subprime auto-loan delinquencies that are 90 days or more past due – “serious” delinquencies – in the fourth quarter 2019, surged by 15.5% from a year ago to a breath-taking historic high of $66 billion, according to data from the New York Fed released today:
Loan delinquencies are a flow. Fresh delinquencies that hit lenders go into the 30-day basket, then a month later into the 60-day basket, and then into the 90-day basket, and as they move from one stage to the next, more delinquencies come in behind them. When the delinquency cannot be cured, lenders hire a company to repossess the vehicle. Finding the vehicle is generally a breeze with modern technology. The vehicle is then sold at auction, a fluid and routine process.
These delinquent loans hit the lenders’ balance sheet and income statement in stages. In the end, the combined loss for the lender is the amount of the loan balance plus expenses minus the amount obtained at auction. On new vehicles that were financed with a loan-to-value ratio of 120% or perhaps higher, losses can easily reach 40% or more of the loan balance. On a 10-year old vehicle, losses are much smaller.
As these delinquent loans make their way through the system and are written off and disappear from the balance sheet, lenders are making new loans to risky customers, and a portion of those loans will become delinquent in the future. This creates that flow of delinquent loans. But that flow has turned into a torrent.
Seriously delinquent auto loans jumped to 4.94% of the $1.33 trillion in total loans and leases outstanding, above where the delinquency rate had been in Q3 2010 as the auto industry was collapsing, with GM and Chrysler already in bankruptcy, and with the worst unemployment crisis since the Great Depression approaching its peak. But this time, there is no unemployment crisis; these are the good times:
About 22% of the $1.33 trillion in auto loans outstanding are subprime, so about $293 billion are subprime. Of them, $68 billion are 90+ days delinquent. This means that about 23% of all subprime auto loans are seriously delinquent. Nearly a quarter!
Subprime auto loans are often packaged into asset-backed securities (ABS) and shuffled off to institutional investors, such as pension funds. These securities have tranches ranging from low-rated or not-rated tranches that take the first loss to double-A or triple-A rated tranches that are protected by the lower rated tranches and generally don’t take losses unless a major fiasco is happening. Yields vary: the riskiest tranches that take the first lost offer the highest yields and the highest risk; the highest-rated tranches offer the lowest yields.
These subprime auto-loan ABS are now experiencing record delinquency rates. Delinquency rates are highly seasonal, as the chart below shows. In January, the subprime 60+ day delinquency rate for the auto-loan ABS rated by Fitch rose to 5.83%, according to Fitch Ratings, the highest rate for any January ever, the third highest rate for any month, and far higher than any delinquency rate during the Financial Crisis:
But prime auto loans (blue line in the chart) are experiencing historically low delinquency rates.
Why are subprime delinquencies surging like this?
It’s not the economy. That will come later when the employment cycle turns and people lose their jobs. And those delinquencies due to job losses will be on top of what we’re seeing now.
It’s how aggressive the subprime lending industry has gotten, and how they’ve been able to securitize these loans and selling the ABS into heavy demand from investors who have gotten beaten up by negative-interest-rate and low-interest-rate policies of central banks. These investors have been madly chasing yield. And their demand for subprime-auto-loan ABS has fueled the subprime lending business.
Subprime is a very profitable business because interest rates range from high to usurious, and customers with this credit rating know that they have few options and don’t negotiate. Often, they might not do the math of what they can realistically afford to pay every month; and why should they if the dealer puts them in a vehicle, and all they have to do is sign the dotted line?
So profit margins for dealers, lenders, and Wall Street are lusciously and enticingly fat.
Subprime lending is a legitimate business. In the corporate world, the equivalent is high-yield bonds (junk bonds) and leveraged loans. Netflix and Tesla belong in that category. The captive lenders, such as Ford Motor Credit, GM Financial, Toyota Financial Services, etc., or credit unions, take some risks with subprime rated customers but generally don’t go overboard.
The most aggressive in this sector are lenders that specialize in subprime lending. These lenders include Santander Consumer USA, Credit Acceptance Corporation, and many smaller private-equity backed subprime lenders specializing in auto loans. Some sell vehicles, originate the loans, and either sell the loans to banks or securitize the loans into ABS.
And they eat some of the losses as they retain some of the lower-rated tranches of the ABS. Some banks are exposed to these smaller lenders via their credit lines. The remaining losses are spread around the world via securitizations. This isn’t going to take down the banking system though a few smaller specialized lenders have already collapsed.
But demand for subprime auto loan ABS remains high. And as long as there is demand from investors for the ABS, there will be supply, and losses will continue to get scattered around until a decline in investor demand imposes some discipline.
Ending the limited quarantine and falsely proclaiming China safe for visitors and business travelers will only re-introduce the virus to workplaces and infect foreigners.
(Charles Hugh Smith) China faces an inescapably fatal dilemma: to save its economy from collapse, China’s leadership must end the quarantines soon and declare China “safe for travel and open for business” to the rest of the world.
But since 5+ million people left Wuhan to go home for New Years, dispersing throughout China, the virus has likely spread to small cities, towns and remote villages with few if any coronavirus test kits and few medical facilities to administer the tests multiple times to confirm the diagnosis. (It can take multiple tests to confirm the diagnosis, as the first test can be positive and the second test negative.)
As a result, Chinese authorities cannot possibly know how many people already have the virus in small-town / rural China or how many asymptomatic carriers caught the virus from people who left Wuhan. They also cannot possibly know how many people with symptoms are avoiding the official dragnet by hiding at home.
No data doesn’t mean no virus.
If the virus has already been dispersed throughout China by asymptomatic carriers who left Wuhan without realizing they were infected with the pathogen, then regardless of whatever official assurances may be announced in the coming days/weeks, it won’t be safe for foreigners to travel in China nor will it be safe for Chinese workers to return to factories, markets, etc.
But if China doesn’t “open for business” with unrestricted travel soon, its economy will suffer calamitous declines as fragile mountains of debt and leverage collapse and supply chain disruptions push global corporations to find permanent alternatives elsewhere.
Here’s the fatal dilemma: maintaining the quarantine long enough to truly contain it (which requires extending it to the entire country) will be fatal to China’s economy.
But ending the limited quarantine and falsely proclaiming China safe for visitors and business travelers will only re-introduce the virus to workplaces and infect foreigners who will return home as asymptomatic carriers, spreading the virus in their home nations.
Falsely declaring China safe will endanger everyone credulous enough to believe Chinese officials, and destroy whatever thin shreds of credibility China may yet have in the global economy and community. That will set off chains of causality that will destroy China’s economy just as surely as a three-month nationwide quarantine.
Who will be foolish enough to believe anything Chinese officials proclaim after foreigners who accepted the false assurances of safety return home with the coronavirus?
Air freight takes 12 to 24 hours, add another few hours for packaging, handling and last-mile delivery and that leaves 6+ days for the virus to spread to anyone who touches goods handled by an symptomatic carrier. Maybe the odds of catching the virus via surfaces are low, but maybe not. No one knows, including anyone rash enough to claim that the risk is negligible.
Household debt surged by more than $600 billion in 2019, marking the biggest annual increase since just before the financial crisis, according to the New York Federal Reserve.
Total household debt balances rose by $601 billion last year, topping $14 trillion for the first time, according to a new report by the Fed branch. The last time the growth was that large was 2007, when household debt rose by just over $1 trillion.
Fed economists said on the Liberty Street Economics blog that the growth was driven mainly by a large increase in mortgage debt balances, which increased $433 billion and was also the largest gain since 2007.
Housing debt now accounts for $9.95 billion of the total balance. Balances for auto loans and credit cards both increased by $57 billion for the year, according to the Fed.
The economists said in the blog post that credit cards have again surpassed student loans as the most common form of initial credit history among young borrowers, following several years after the crisis when student loans were higher.
“The data also show that transitions into delinquency among credit card borrowers have steadily risen since 2016, notably among younger borrowers,” Wilbert Van Der Klaauw, senior vice president at the New York Fed, said in a statement.
However, even as the total amount of household debt has risen, the level of household debt service as a percentage of disposable personal income is at all-time lows going back to 1980.
The new report showed that credit standards tightening for some forms of debt even as the overall balance increased. The median credit score for newly originating borrowers for mortgages and auto loans increased slightly in the fourth quarter, according to the Fed.
Mortgage originations were $752 billion in the fourth quarter, the highest quarterly increase since 2005, but this was mostly due to an increase refinancing activity, the Fed said in a press release.
Bloombergcited a new report via China Merchants Securities (CMSC) that said new apartment sales crashed 90% in the first week of February over the same period last year. Sales of existing homes in 8 cities plunged 91% over the same period.
Wuhan, Hubei, China Sunrise
“The sector is bracing for a worse impact than the 2003 SARS pandemic,” said Bai Yanjun, an analyst at property-consulting firm China Index Holdings Ltd. “In 2003, the home market was on a cyclical rise. Now, it’s already reeling from an adjustment.”
Long before the coronavirus outbreak, China’s housing market has been on shaky grounds amid declining demand, stricter mortgage requirements, and price discounts.
The latest shock: two-thirds of China’s economy has come to a standstill, could generate enough pessimism to pop the country’s massive housing bubble.
The CPC failed to stimulate the economy last year, with credit impulse not turning up as expected. The virus outbreak has allowed the CPC to scapegoat the slowdown and the inevitable crash.
Real estate transactions have been forbidden in many cities. This means fire sales could be seen once selling restrictions end.
E-House China Enterprise Holdings Ltd.’s research institute said four units per day were being sold in Beijing last week, and this is down from several hundred per day during the same period in the previous year.
China International Capital Corp. analyst Eric Zhang said demand could pick back up in April, assuming the virus outbreak is under control.
The downturn in China’s property market could get a lot worse, and without proper liquidity from the central bank, once selling restrictions end, it could trigger a liquidity gap where housing prices face a deep correction.
But remember, the CPC can now blame the virus for a housing market crash or a downturn in the economy.
The pain for active investors who have under performed the broader market for over a decade, has claimed its first notable casualty for 2020: according to the WSJ, the flagship real-estate fund of Swiss banking giant UBS has been hit with about $7 billion in redemption requests following a lengthy period of under performance. As a result, UBS has stepped up efforts to stem the bleeding at its $20 billion Trumbull Property Fund flagship real-estate fund amid concerns over its retail holdings, “as some investors move away from more conservative, lower-return funds.”
The UBS woes follow two months after M&G, a London-listed asset manager, said it has been unable to sell properties fast enough, particularly given its concentration on the retail sector, to meet the demands of investors who wanted to cash out. The investor “run” led the fund to suspend any redemption requests in its £2.5 billion ($3.2 billion) Property Portfolio in early December 2019.
While UBS hasn’t followed in M&G’s footsteps yet and gated investors, the Swiss bank has offered to reduce fees for investors who stay in the fund and to charge no management fee for new investments, according to an analyst presentation to the City of Cambridge. Mass., Retirement System. The bank also recently replaced some in the fund’s top leadership, including Matthew Lynch, the head of U.S. real estate, the WSJ reports.
A mall owned by the Trumbull Property Trust
Alas, once a fund faces a rise in redemption requests – and this becomes mainstream knowledge – the redemptions cascade and capital outflows can be hard to stop. If a fund manager doesn’t have enough cash to meet the requests, it has to sell properties. That often takes time, causing a backlog and increasing pressure on the fund to sell; what usually happens next is a “gate” barring investors from withdrawing funds.
“When there is a redemption queue investors often feel they have to get in line so they aren’t the last ones left to turn off the lights,” said Nori Lietz, a senior lecturer of business administration and faculty member at Harvard Business School.
And as in the case of numerous funds discussed previously, analysts believe that is the case with Trumbull, where the withdrawal backlog in June was little more than a third of where it is today, according to a report by consulting firm RVK for the Ohio Bureau of Workers’ Compensation. In one of the more recent redemptions, the board of the Kansas Public Employees Retirement System last month voted to ask for some of its money back from Trumbull.
Some background: started in 1978, Trumbull is one of the oldest and largest real-estate funds. It is known as a core fund, a type that focuses on less risky properties and pursues lower but steadier returns than riskier opportunity funds that aim for annual returns around the midteens. Unlike riskier private-equity style funds, which have stricter rules about investors pulling out money before the end of the fund’s life, most big core funds have open-ended withdrawals and no expiration date.
Trumbull and other core funds performed well after the financial crisis, when investors flocked to safer, more predictable strategies after a number of high-performing but riskier real-estate funds blew up in 2008 and 2009.
In fact, as late as June 2015, Trumbull had a $1.2 billion backlog of funds looking to invest, and no backlog of investors looking to get out, according to a report by consulting firm RVK for the Ohio Bureau of Workers’ Compensation. Core funds “just had incredible market tailwinds,” said Christy Fields, a managing principal at consulting firm Meketa Investment Group, Inc.
But over the past year, real returns have fallen back to their historical average, and now funds which as recently as 5 years ago had a wait list for investors, are suddenly hurting. And while J.P. Morgan’s Strategic Property Fund and other funds are experiencing outflows, Trumbull has been the hardest hit. It has performed worse than the core-fund benchmark index for 11 of the past 12 quarters, according to a December performance review by the City of Burlington, Vt., Employees Retirement System.
Between June 2018 and June 2019, the fund had a negative net return of 0.63% compared with a positive return of 5.46% for the NCREIF NFI-ODCE index, according to the RVK report for the Ohio Bureau of Workers’ Compensation.
To bolster the fund, UBS brought in Joe Azelby, a former professional football player with the Buffalo Bills and veteran of JPMorgan’s asset-management division and Apollo Global Management. He took over UBS Asset Management’s real-estate operations in March.
Meketa’s Ms. Fields said some core funds were losing investors in part because of their exposure to the struggling retail sector.
But the biggest culprit for the fund’s woes: Amazon, which has put countless bricks and mortar retailers out of business, and converted many of America’s malls into ghost towns. Trumbull owns across the U.S., many of them acquired when the outlook for the retail sector looked less dire, property records show. The mall sector is struggling with store closures as online retail expands its market share. These properties still account for nearly 20% of Trumbull’s assets, slightly above the industry average.
One of its largest malls, the Galleria Dallas, is expected to lose one of its department stores, Belk, in late March, according to the company. The fund plans to redevelop some malls in a bid to make them more profitable and sell others, according to a person familiar with the matter. At the CambridgeSide mall in Cambridge, Mass., UBS plans to convert some retail space into offices.
Soon the only food that will be affordable in China, is coronabat stew.
With over 400 million people across dozens of Chinese cities living in lock down as a result of the Coronavirus pandemic, crippling global supply chains and grinding China’s economy to a halt, it is easy to forget that China has been battling another major viral epidemic for the past two years: namely the African Swing Fever virus, aka “pig ebola” which killed off over half of China’s pig population in the past year, sending pork prices soaring, and unleashing a tidal wave of inflation.
Well, earlier today, the world got a stark reminder of this when China reported that in January, its CPI jumped by whopping 5.4% Y/Y, the highest print in nine years…
… driven by a surge in pork prices, which reversed a rare drop in December when the slid by 5.6%, rising 8.5% in just ont month, and a record 116% compared to a year ago.
This unprecedented surge in pork CPI meant that China’s food CPI rose a record 20.6% in January, also the highest on record, as China’s population, now ordered to live under self-imposed quarantine, suddenly finds it can no longer afford to buy food.
Needless to say, this is suddenly a major problem for China, whose central bank has in the past two weeks unleashed an unprecedented liquidity tsunami, including the biggest ever reverse repo injection…
… in hopes of stabilizing the stock market. Well, oops, because some of this liquidity now appears to be making its way into the broader economy, and is making already scarce food (aside from bat stew of course) even more un-affordable, and the already depressed and dejected Chinese population even more hungry, and angry.
There was one silver lining in today’s data: after spending half a year in deflation, China’s Production Prices, a proxy for industrial profits and overall price leverage, finally printed in the positive, rising 0.1% Y/Y, and better than the expected 0.0%
So far so good, however, with China’s economy now on indefinite lock down, expect the correlation shown in the chart above to break any moment now, with industrial profits crashing as a result of the coronavirus putting countless Chinese factories on lock down at least until the coronavirus is contained. When that happens is anyone’s guess, but one thing is certain: at the rate food prices are exploding, soon the only food China’s population will be able to afford will be the experimental bats used by the Wuhan Institute of Virology, one of which may or may not have been accidentally sold to the local fish market last December triggering what is now the worst viral pandemic in decades.
Just as concerning, if only for Beijing, is that if the surge in food prices isn’t “contained” very soon the arms of the PBOC will be tied and any hopes that China will reflate its economy – and the world – to offset the economic crunch resulting from the coronavirus, will be weaponized and vaporize right through the HVAC, just like any number of manmade viruses currently being developed in Wuhan, as pretty soon China’s population – starving and quarantined – will have no choice but take matters into its own hands.
While the big names in eating out – McDonald’s, Popeye’s, Chick-Fil-A and Olive Garden, to name a few – are all working diligently to get customers through the door at a time when the American eater is staying home more, lesser known restaurants are bearing the brunt of not being able to find new customers.
Names like Bar Louie and American Blue Ribbon Holdings, which owns Village Inn and Bakers Square, both filed for bankruptcy earlier this week, according to Bloomberg. Both cited lower foot traffic in the U.S. as the reason for their downfall.
Michael Halen a senior restaurant analyst at Bloomberg, said: “The business is just over-built, especially casual dining and full-service dining. There are too many restaurants.”
American Blue Ribbon also said that competition, rising labor costs and unprofitable restaurants were all reasons for facilitating its bankruptcy. The company owns and operates 97 restaurants after closing 33 stores prior to filing Chapter 11.
The company’s majority owner, Cannae Holdings, Inc., has agreed to provide a $20 million loan to maintain the company during bankruptcy. Cannae generates about 30% of its revenue from various restaurant companies it is invested in and has said that American Blue Ribbon will focus on strategic options in bankruptcy.
Bar Louie has been opening new locations over the last few years which has grown its top line, but the increase in debt necessary to open new stores has suffocated the company.
Chief Restructuring Officer Howard Meitiner said: “This inconsistent brand experience, coupled with increased competition and the general decline in customer traffic visiting traditional shopping locations and malls, resulted in less traffic at the company’s locations proximate to shopping locations and malls.”
Bar Louie has 110 locations, 38 of which have “seen their sales and profits decline at an accelerating pace” since the company began a strategic review in 2018. Those locations expected a staggering same store sales drop of 10.9% in 2019 and were closed prior to the company filing for bankruptcy. Lenders are providing a loan of as much as $22 million to keep the company operating during the proceedings.
Other restaurant names like The Krystal Co., Houlihan’s Restaurants Inc., Kona Grill Inc. and Perkins & Marie Callender’s all filed for bankruptcy last year as well.
Halen concluded: “We need to see a correction in the restaurant industry. We’ve seen a lot in the last few months, and I think this is just the beginning. Once the economy softens, you’ll see this getting worse.”
After slumping into year-end, Regional Fed surveys have (surprisingly) exploded higher this month with Richmond and Philly surveys spiking almost by the most on record.
Today’s Chicago PMI was expected to follow suit – though less excitedly – with a modest gain but instead it missed massively, plunging to its lowest since Dec 2015 – printing 42.9 vs 48.9 expectations.
This was the biggest miss of expectations since Dec 2015…
None of the underlying components rose in December:
Business barometer fell at a faster pace, signaling contraction
Prices paid rose at a slower pace, signaling expansion
New orders fell at a faster pace, signaling contraction
Employment fell at a faster pace, signaling contraction
Inventories fell at a faster pace, signaling contraction
Supplier deliveries rose at a slower pace, signaling expansion
Production fell at a faster pace, signaling contraction
Order backlogs fell at a faster pace, signaling contraction
Having tumbled by the most in 39 years last year, Chicago PMI has no been in contraction (sub-50) for 7 months in a row – something it has not done outside of recession… ever.
As a reminder Dec 2015 was the last time China’s economy was in free fall.
Fair Isaac, the company behind FICO credit scores, announced the rollout of a new scoring method that will dramatically shift credit scores for millions of Americans in either direction.
In a nutshell – ‘FICO Score 10 Suite’ is supposedly better at identifying potential deadbeats from those who can pay, and claims to be able to reduce defaults by as much as 10% among new credit cards, and nine percent on new auto loans.
Around 40 million people with already ‘high’ scores (above 680) are likely to see their credit rise, while those with scores at or below 600 could see a dramatic drop.
According to Fair Isaac, around 110 million people will see their scores swing an average of 20 points in either direction.
“Consumers that have been managing their credit well … paying bills on time, keeping their balances in check are likely going to see a gain in score,” said Dave Shellenberger, VP of product management scores.
The changes come as consumers are accumulating record levels of debt that has worried some economists but has shown no sign of slowing amid a strong economy. Consumers are putting more on their credit cards and taking out more personal loans. Personal loan balances over $30,000 have jumped 15 percent in the past five years, Experian recentlyfound. –Washington Post
That said, according to WalletHub, delinquency rates are in much better shape than they were a decade ago, with 6% of consumers late on a payment in 2019 vs. around 15% in 2009. Meanwhile, the average FICO score went from bottoming out at 686 in October of 2009 to an average of 706 in September of 2019.
As we noted in October, FICO has been talking about recalculating credit scores for some time now. According to the Wall Street Journal, anyone with “at least several hundred dollars” in their bank account and who don’t overdraw are also likely to see their scores rise. Specifically, anybody with an average balance of $400 in their bank accounts without an overdraft history over the last three months would likely get a boost.
And with non-revolving debt such as student and auto loans recently rising by $14.9 billion, identifying potential deadbeats is more important than ever.
Case-Shiller home price gains have re-accelerated over the last 3 months and analysts expected another acceleration in November (the latest data set) and were right as the 20-City Composite surge 2.55% YoY (better than the +2.40% YoY expectation).
This is the biggest YoY rise since Feb 2019…
Home prices climbed 0.5% from the previous month – also topping forecasts – matching the October increase for the best back-to-back gains since early 2018.
All 20 cities in the index showed year-over-year home-price gains, led by Phoenix; Charlotte, North Carolina; and Tampa, Florida.
After dropping YoY in September and October, the mecca of all things socially just and tech-savvy – San Francisco – saw prices adjust higher and back into the green YoY…
Finally, a broader national index of home prices was up 3.5% from a year earlier, the most since April.
World trade in 2019 expanded at its weakest year since 2009. Significant macroeconomic headwinds started to slow the global economy in late 2017, several quarters before the trade war began. We’ve covered the main shipping lanes from the U.S. to China and China to the U.S., along with other routes from Europe to China and China to other Asian countries, but new trade data has shown international cargo on the U.S. Great Lakes also plunged last year.
Cargo hauled across the Atlantic Ocean through the St. Lawrence Seaway to Great Lakes ports plunged 7% Y/Y last year, reported The Times of Northwest Indiana.
Trade officials attributed the steep decline in cargo volumes on the trade war, high waters that made some regions impassible, and adverse weather conditions that weighed on grain exports.
“The challenges of the 2019 shipping season underline the critical importance of protecting the future integrity of the Great Lakes-St. Lawrence waterway as a reliable and efficient trade and transportation corridor for the United States and Canada,” said Bruce Burrows, president of the Chamber of Marine Commerce.
“High water levels are negatively impacting residents and businesses, including the marine shipping sector that transports cargo through the St. Lawrence Seaway, and we need to work together with the International Joint Commission and governments to conduct a proper study into water levels and their causes, and to develop a resiliency plan that can address stakeholder needs into the future.”
Burrows said the Great Lakes-Seaway transportation system supports more than 238,000 jobs and $35 billion in economic activity for North American economies.
Canada and U.S.’ annual growth rate has rapidly slowed since 1H18 — as a manufacturing recession continues to deepen. With no signs of abating in early 2020 – international cargo volumes across the Great Lakes could see persistent weakness in the coming quarters.
As for world trade, the expectation of a V-shape recovery in 2020 could be more of fantasy as global equities have already priced-in a massive rebound. The world has likely entered a U-shape recovery as low-growth becomes the new normal.
Nearly four years after Wells Fargo’s reputation was terminally crushed by the humiliating fake accounts fraud scandal, the punishment for Warren Buffett’s favorite bank and its (mostly former) employees is still being doled out, and moments ago the Office of the Comptroller of the Currency announced $59 million in civil charges and settlements with eight former Wells Fargo senior executives on Thursday, including the payment of a $17.5 million fine by John Stumpf, the bank’s former CEO, who also agreed to a lifetime industry ban. Carrie Tolstedt, who led Wells Fargo’s community bank for a decade, faces a penalty of as much as $25 million.
“The actions announced by the OCC today reinforce the agency’s expectations that management and employees of national banks and federal savings associations provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations,” Joseph Otting, who heads the OCC, said in a statement.
Wells Fargo unleashed unprecedented public and political ire in 2016 after its was revealed that bank employees opened millions of fake accounts to meet sales goals. That and a slew of retail-banking issues that subsequently came to light have led to regulatory fallout that’s in many cases unprecedented for a major bank, including a growth cap from the Federal Reserve. It also led to a historic Congressional grilling of the bank’s then CEO, John Stumpf, who resigned shortly after.
Regulatory actions against Wells Fargo have also included billions of dollars in fines and legal costs, and an order giving the OCC the right to remove some of the bank’s leaders. The Department of Justice and the Securities and Exchange Commission also have been investigating the lender’s issues.
Why did it take 4 years for some individual justice to finally emerge? Simple: regulatory capture – as Bloomberg adds, the OCC drew scrutiny of its own as the firm’s main regulator throughout the scandals, prompting an internal review at the agency.
The OCC and the Fed have both cited a wide-ranging pattern of abuses and lapses at Wells Fargo, yet despite the universal condemnation, the bank’s biggest shareholder, Warren Buffett, has refused to dispose of his stake.
Approximately half of the luxury-condo units that have come onto the market in the past five years remain unsold.
In Manhattan, the homeless shelters are full, and the luxury skyscrapers are vacant.
Such is the tale of two cities within America’s largest metro. Even as80,000 peoplesleep in New York City’s shelters or on its streets, Manhattan residents have watched skinny condominium skyscrapers rise across the island. These colossal stalagmites initially transformed not only the city’s skyline but also the real-estate market for new homes. From 2011 to 2019, the average price of a newly listed condo in New York soared from $1.15 million to $3.77 million.
But the bust is upon us. Today, nearly half of the Manhattan luxury-condo units that have come onto the market in the past five years are still unsold, according toThe New York Times.
What happened? While real estate might seem like the world’s most local industry, these luxury condos weren’t exclusively built for locals. They were also made for foreigners with tens of millions of dollars to spare. Developers bet huge on foreign plutocrats—Russian oligarchs, Chinese moguls, Saudi royalty—looking to buy second (or seventh) homes.
But the Chinese economy slowed, while declining oil prices dampened the demand for pieds-à-terre among Russian and Middle Eastern zillionaires. It didn’t help that the Treasury Department cracked downon attempts to launder money through fancy real estate. Despitepressure from nervous lenders, developers have been reluctant to slash prices too suddenly or dramatically, lest the market suddenly clear and they leave millions on the table.
The confluence of cosmopolitan capital and terrible timing has done the impossible: It’s created a vacancy problem in a city where thousands of people are desperate to find places to live.
From any rational perspective, what New York needs isn’t glistening three-bedroom units, but more simple one- and two-bedroom apartments for New York’s manysingles, roommates, and small families. Mayor Bill De Blasio made affordable housing a centerpiece of his administration. But progress here has been stalled by onerous zoning regulations,limited federal subsidies, construction delays, andblocked pro-tenant bills.
In the past decade, New York City real-estate prices have gone from merely obscene to downright macabre. From 2010 to 2019, the average sale price of homes doubled in many Brooklyn neighborhoods, including Prospect Heights and Williamsburg, according to the Times. Buyers there could consider themselves lucky: In Cobble Hill, the typical sales price tripled to $2.5 million in nine years.
This is not normal. And for middle-class families, particularly for the immigrants who give New York City so much of its dynamism, it has made living in Manhattan or gentrified Brooklyn practically impossible. No wonder, then, that the New York City area is losing about300 residents every day. It adds up to what Michael Greenberg, writing forThe New York Review of Books, called a new shameful form of housing discrimination—“bluelining.”
We speak nowadays with contrition of redlining, the mid-twentieth-century practice by banks of starving black neighborhoods of mortgages, home improvement loans, and investment of almost any sort. We may soon look with equal shame on what might come to be known as bluelining: the transfiguration of those same neighborhoods with a deluge of investment aimed at a wealthier class.
New York’s example is extreme—the squeezed middle class, shrink-wrapped into tiny bedrooms, beneath a canopy of empty sky palaces. But Manhattan reflects America’s national housing market, in at least three ways.
First, the typical new American single-family home has become surprisingly luxurious, if not quite so swank as Manhattan’s glassy spires. Newly built houses in the U.S. areamong the largest in the world, and their size-per-resident has nearly doubled in the past 50 years. And the bathrooms have multiplied. In the early ’70s, 40 percent of new single-family houses had 1.5 bathrooms or fewer; today, just4 percent do. The mansions of the ’70s would be the typical new homes of the 2020s.
Second, as the new houses have become more luxurious, homeownership itself has become a luxury. Young adults today areone-third less likely to own a home at this point in their lives than previous generations. Among young black Americans, homeownership has fallen toits lowest rate in more than 60 years.
Third, and most important, the most expensive housing markets, such as San Francisco and Los Angeles, haven’t built nearly enough homes for the middle class. As urban living has become too expensive for workers, many of them have either stayed away from the richest, densest cities or moved to the south and west, where land is cheaper. This is a huge loss, not only for individual workers, but also for these metros, because denser citiesoffer better matches between companies and workers, and thus are richer and more productive overall. Instead of growing as they grow richer, New York City, Los Angeles, and the Bay Area are all shrinking.
In 2010, one might have thought that the defining housing story of the century would be the real-estate bubble that plunged the U.S. economy into a recession. But the past decade has been defined by the juxtaposition of rampant luxury-home building with the cratering of middle-class-home construction. The future might restore a measure of sanity, both to New York’s housing crisis and America’s. But for now, the nation is bluelining itself to death.
One family’s crusade to break from the unbearable bondage of royalty is finally over, or in other words, Megxit is a done deal.
Prince Harry and Meghan Markle, also known as the Duke and Duchess of Sussex, will no longer use the titles His and Her Royal Highness “as they are no longer working members of the Royal Family” Buckingham Palace announced Saturday, as part of an agreement that lets them build a life away from intense media scrutiny as members of the royal family.
“Following many months of conversations and more recent discussions, I am pleased that together we have found a constructive and supportive way forward for my grandson and his family,” Queen Elizabeth II said in a statement.
“Harry, Meghan and Archie will always be much loved members of my family,” she said. ” I recognize the challenges they have experienced as a result of intense scrutiny over the last two years and support their wish for a more independent life.”
As disclosed in the agreement, Harry and Meghan “understand that they are required to step back from Royal duties, including official military appointments. They will no longer receive public funds for Royal duties.”
They also shared their wish to repay Sovereign Grant expenditure for the refurbishment of Frogmore Cottage, which will remain their UK family home.
Frogmore House, a modest wedding gift from the Queen to Harry and Meghan
With Brexit no longer dominating the British press, the announcement that the couple wished to step back from the royal family had thrown Britain’s monarchy into turmoil and dominated the headlines. Even though Harry has only a remote prospect of becoming king – he’s sixth in line, behind his father, brother, nephews and niece – there was outrage that, with his wife, he wanted to become financially independent and “carve out” a “progressive new role.”
Still, as the following chartsummarizing the net worth of UK’s royalty shows the former “Duke and Duchess” should be just fine.
According to Statista, Prince William and Prince Harry have similar incomes and net worth, and reportedly earn $6.6 million annually from the Sovereign Grant, which they split, and each have an estimated net worth that ranges around $40 million. Prince Harry’s income could fluctuate once his title is renounced. Rumors claimed Markle, who had a net worth of about $5 million before marrying Harry thanks to her acting career, was already inking up a deal with Disney to do voiceovers for future projects, though the money will reportedly go to charity.
In a separate statement, earlier this week the queen discussed the wishes of Harry and Meghan, a former actress, with her immediate family. The queen at the time described the talks as “very constructive.”
The Queen said the recent discussions led to a “supportive way forward for my grandson and his family.” She said she was “particularly proud of how Meghan has so quickly become one of the family.”
It now appears that it took Meghan even less time to leave the family.
Several months after WeWork’s failed IPO — resulting in a bailout from SoftBank, the international money-losing office-sharing company leased just four new sites for a combined 184,00 sq. Ft. of space in 4Q19, marking a 93% plunge from its quarterly average rate of 2.54 million sq. Ft. over the last four quarters, according to data from real estate firm CBRE shared with CNBC.
The abrupt slowdown in leasing activity comes as the WeWork’s valuation imploded last August after it shelved its IPO and ran out of cash a month later, forcing its largest investor, SoftBank, to conduct an emergency bailout to rescue the company.
With a questionable business model and no plans on turning a profit, WeWork’s valuation plunged from $47 billion in late 2018 to $8 to $10 billion by 4Q19.
In 4Q19, WeWork had to cut costs, lay off workers, and scale back operations across the world to avoid going bankrupt. In return, the company lost the top spot in the flexible office leasing space to Regus, which in 4Q19, increased lease footprint by 11% to 284,916 sq. Ft.
CBRE showed that industrywide, there was a significant pullback in office space leasing, mainly due to WeWork’s implosion.
Data shows office sharing operators declined to 1 million sq. Ft. in 4Q19 from 4 million sq. ft. in 3Q19.
Manhattan was the top city for office sharing space, even though new space leased dropped 82% to 187,078 sq. Ft., on average, the prior four quarters. Activity in Chicago, Boston, and Los Angeles also saw notable declines over the period.
“We had seen this coming right after the IPO news,” said Julie Whelan, senior director of research at CBRE, who warned it could be a bumpy ride for WeWork and other office space sharing companies in 2020.
SANTA ROSA (KPIX) — A controversial plan to solve the homeless crisis has people fired up in Sonoma County where officials plan to spend millions of dollars to buy three properties that would be used to house the homeless.
All three properties have one thing in common. They’re big and have multiple units, but many of those units are currently occupied by tenants.
“I’m sure the tenants have been asked to leave,” said Allen Thomas. He lives near one of the three properties, 811 Davis Street in Santa Rosa.
Neighbors said it’s counterproductive to evict renters to house the homeless.
“It’s just insanity,” said Karen Sanders, who also lives in Santa Rosa.
Sonoma County leaders plan to buy two properties in Santa Rosa and one in Cotati. They’ll spend roughly one million dollars for each property. One county worker said they’re already in contract to buy the property on Davis Street.
“Million dollar homes; million dollar homes for these transients living on the trail,” said Sanders.
The county wants to get the homeless out of an encampment on the Joe Rodota Trail. Many neighbors of those three properties worry the new neighbors will bring along crime and other quality of life issues.
“I’m not NIMBY, but we’ve done enough,” said Sher Ennis, a neighbor who lives near the Davis street property.
She said she was attacked in her home by a man from a re-entry housing program years ago. She worries about her safety.
“We don’t know. Are we getting dangerous criminals? Are we getting felons? Or are we getting people who are simply down on their luck,” said Ennis.
Another neighbor supports the county’s plan.
“I don’t think that it makes [the neighborhood] any less safe, no,” said Andrew Atkinson.
He said the county has to act now.
“It’s going to take more than this, I think, to solve the problem. But I’m glad to see they’re trying,” said Atkinson.
Many upset neighbors voiced their concerns at a community meeting Friday night in Santa Rosa. County leaders will talk about the plan to buy the houses and other solutions to house the homeless.
The leader of all this insanity is Telsa, the biggest money-losing company on Wall Street, has soared 120% since the Fed launched ‘Not QE.’
Tesla investors are convinced that fundamentals are driving the stock higher, but that might not be the case, as central bank liquidity has been pouring into anything with a CUSIP.
The company has lost money over the last 12 months, and to be fair, Elon Musk reported one quarter that turned a profit, but overall – Tesla is a black hole. Its market capitalization is larger than Ford and General Motors put together. When you listen to Tesla investors, near-term profitability isn’t important because if it were, the stock would be much lower.
The Wall Street Journal notes that in the past 12 months, 40% of all US-listed companies were losing money, the highest level since the late 1990s – or a period also referred to as the Dot Com bubble.
Jay Ritter, a finance professor at the University of Florida, provided The Journal with a chart that shows the percentage of money-losing IPOs hit 81% in 2018, the same level that was also seen in 2000.
The Journal notes that 42% of health-care companies lost money, mostly because of speculative biotech. About 17% of technology companies also fail to turn a profit.
A more traditional company that has been losing money is GE. Its shares have plunged 60% in the last 42 months as a slowing economy, and insurmountable debts have forced a balance sheet recession that has doomed the company.
Data from S&P Global Market Intelligence shows for small companies, losing money is part of the job. About 33% of the 100 biggest companies reported losses over the last 12 months.
Among the smallest 80% of companies, there has been a notable rise in money-losing operations in the last three years.
“The proportion of these loss-making companies rose after each of the last two recessions and didn’t come down again afterward. The story should be familiar by now: Many small companies are being dominated by the biggest corporates, squeezing them out of markets and crushing their ability to invest for growth,” The Journal noted.
Well, what do you know: It looks like money really can buy happiness.
For years, the conventional wisdom in American culture has been that the rich have their own set of issues that are under appreciated by the rest of the population. This was perhaps best summed up by rapper Biggie Smalls in his hit song “Mo’ Money, Mo’ Problems.”
But despite cultural taboos about high-paying, high-pressure jobs leading to substance abuse, divorce and familial ruin, one recent study found that the highest-earning Americans actually reported feeling both happier and more fulfilled on a day-to-day basis.
Here’s more on the study from The Washington Post: Adults in the top 1% of U.S. household income (i.e. those who earn at least $500,000 a year) have “dramatically different life experiences” than everyone else, according to a survey sponsored by NPR, the Robert Wood Johnson Foundation, and the Harvard T.H. Chan School of Public Health.
A full 90% of the 1% say they are “completely” or “very” satisfied with their lives in general. That compares with two-thirds of middle-income households – those earning $35,000 to $99,000 a year – and 44% of low-income households – ie those in the $35,000 a year or less bracket.
Even more impressive: The share of 1%-ers expressing “dissatisfaction” with their lives is statistically zero.
AsWaPoexplains, because the top 1% of US earners represents such a small subset of people, it’s typically difficult to gain insight into their thoughts and feelings via polling.
Previous studies showed that money makes a big difference in an individual’s level of happiness, but that the effect starts to weaken once an individual starts earning a little bit more than $75,000.
But apparently, as this latest study shows, although the rich might not be much happier on a day-to-day basis, individuals earning more than $500,000 a year are typically much more content with their lives.
Inside the top 1%, for example, some 97% say that they’ve already obtained the “American Dream”, as the respondent defines it, or are actively working toward it. Among low-income adults, by comparison, some 4 in 10 believe the American Dream is completely out of their reach.
Individual US taxpayers are half as likely to get audited than they were in 2010, according to the Wall Street Journal, which notes that IRS tax enforcement has fallen to the lowest level in at least four decades.
In FY 2019, the agency audited just 0.45% of all personal income-tax returns, down from 0.59% in 2018 – marking eight straight years of declining reviews. In a Monday report, the IRS said that in 2010, 1.1% of tax returns were audited. The report did not provide details on audits by income category, or how much revenue has been recovered from the enforcement (or lack thereof).
According to the Journal, years of budget cuts and a heavier workload are to blame for the steady erosion of audit – which, experts say, is depriving the Treasury of billions of dollars while budget deficits rise.
The IRS budget is about 20% below the 2010 peak in inflation-adjusted dollars, according to the Congressional Budget Office. During that time, Congress has given the agency more responsibility, including the implementation of the 2010 health care law and the 2017 tax law.
In Monday’s report, the IRS said the agency had lost almost 30,000 full-time positions since fiscal 2010, in areas including enforcement and criminal investigation. It now has about 78,000 workers and has been hiring over the past year. But the agency also projects that up to 31% of remaining workers will retire within the next five years. –Wall Street Journal
“The audit rate reported for 2019 was less than half of what it was in 2010, underscoring the depleted state of the IRS enforcement function, which urgently needs to be rebuilt,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a progressive group in Washington.
Investing in enforcement and tightening rules could generate about $1 trillion over a decade, according to Harvard University economist Lawrence Summers, who served as Treasury secretary in the Clinton administration, and University of Pennsylvania professor Natasha Sarin. The government estimates that each additional dollar spent on tax enforcement could yield more than $4 in revenue, and Democratic presidential candidates have made increasing IRS funding part of their agenda. –Wall Street Journal
Cuts to the IRS budget began after Republicans won a majority in the House of Representatives in 2010, and was further reduced after the Obama administration’s IRS targeting scandal in which the agency admitted in 2013 that it had given improper scrutiny to conservative nonprofit groups.
According to Trump-appointed IRS commissioner Charles Rettig, the administration has been trying to find new ways of remaining aggressive for tax-dodgers by using data analytics.
“Our compliance employees have a commitment to fraud awareness as we continue our enforcement efforts in the offshore and other more traditional compliance-challenged arenas,” writes Rettig in Monday’s report. “We want to maintain a visible, robust enforcement presence as we continue to explore innovative strategies and techniques in support of our mission.”
New York Fed and academic researchers found that U.S. consumers and companies have borne the brunt of the president’s trade war.
WASHINGTON — American businesses and consumers, not China, are bearing the financial brunt of President Trump’s trade war, new data shows, undermining the president’s assertion that the United States is “taxing the hell out of China.”
“U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers,” Mary Amiti, an economist at the Federal Reserve Bank of New York, wrote in a National Bureau of Economic Research working paper. The other authors of the paper were David E. Weinstein of Columbia University and Stephen J. Redding of Princeton.
Examining the fallout of tariffs in data through October, the authors found that Americans had continued paying for the levies — which increased substantially over the course of the year. Their paper, which is an update on previous research, found that “approximately 100 percent” of import taxes fell on American buyers.
The findings are the latest evidence that voters and American businesses are paying the cost of Mr. Trump’s penchant for using tariffs to try to rewrite the terms of trade in favor of the United States.
Manufacturing is slumping, a fact economists attribute at least partly to uncertainty stemming from the trade spats, and business investment has suffered as corporate executives wait to see how — or if — the tensions will end.
The United States and China have reached a trade truce and are expected to sign an initial deal this month, but tariffs on $360 billion worth of Chinese goods will remain in place. The levies, which are as high as 25 percent, have forced some multinational businesses to move their operations out of China, sending operations to countries like Vietnam and Mexico.
Mr. Trump and his supporters say that the United States had no choice but to resort to tough tactics to try to force China to abandon unfair economic behaviors, like infringing on American intellectual property and providing state subsidies to Chinese firms. And Mr. Trump has continued to incorrectly assert that China — not American companies and consumers — is paying the cost of the tariffs.
Tariffs may have worked as a negotiating chip to get China to the table, but recent academic research shows that leverage has come at a steep price for some American businesses and consumers.
The authors of the latest study used customs data to trace the fallout, examining import values before and after the tariffs. The research showed that the tariffs had little impact on China.
“We’re just not seeing foreigners bearing the cost, which to me is very surprising,” Professor Weinstein said in an interview.
They also found a delayed impact from the tariffs, with the decline in some imports roughly doubling on average in the second year of the levies.
That is because “it takes some time for firms to reorganize their supply chains so that they can avoid the tariffs,” the authors write.
Reaction to the tariffs has varied across business sectors, however. In the steel industry, for example, companies that export to the United States have dropped their prices — suggesting that other countries are in fact paying “close to half” of the cost of tariffs, according to the paper.
Because China is only the 10th-largest steel supplier to the United States, though, exporters in the European Union, Japan and South Korea are most likely bearing much of that cost. And as foreign prices drop, domestic steel production has barely budged, which bodes poorly for hiring in the United States steel industry, the authors note.
“The steel industry isn’t getting that much protection, as a result,” Professor Weinstein said.
In previous research, the authors found that by December 2018, import tariffs were costing United States consumers and importing businesses $3.2 billion per month in added taxes and another $1.4 billion per month in efficiency losses. They did not update those numbers in the latest study.
Their analysis joins a growing body of research examining the effects of the escalating tariffs Mr. Trump has imposed since the beginning of 2018.
A study released in late December by two economists at the Fed, Aaron Flaaen and Justin Pierce, found that any positive effects that tariffs offered American companies in terms of protection from Chinese imports were outweighed by their costs. Those costs include the higher prices companies must pay to import components from China, and the retaliatory tariffs China placed on the United States in response, the economists said.
Another study, published in October by researchers at Harvard University, the University of Chicago and the Federal Reserve Bank of Boston, also found that almost all of the cost of the tariffs was being passed on from businesses in China to American importers.
The October study found that the situation was not the same for the tariffs that China has placed on American goods in retaliation. The researchers found that American businesses had less success passing on the costs of those tariffs to Chinese importers, most likely because of the types of goods being sold.
Many of the products that the United States sells to China are undifferentiated commodities, like agricultural goods, but China sends many specialized consumer goods like silk embroidery, laptops and smartphones to the United States. China can easily swap Brazilian soybeans for American ones, but the types of goods that China sends to the United States are harder for American businesses to substitute, the researchers said.
Ms. Amiti’s colleagues at the New York Fed have traced the costs of tariffs in other research. Their study similarly found that import prices on goods coming from China had remained largely unchanged as tariffs rolled out, and argued that already-narrow profit margins — ones that leave no room for cutting — and a dearth of competitors could be among the factors insulating Chinese exporters.
Over the past week, when looking at the details of the Fed’s ongoing QE4, we showed out (here and here) that the New York Fed was now actively purchasing T-Bills that had been issued just days earlier by the US Treasury. As a reminder, the Fed is prohibited from directly purchasing Treasurys at auction, as that is considered “monetization” and directly funding the US deficit, not to mention is tantamount to “Helicopter Money” and is frowned upon by Congress and established economists. However, insert a brief, 3-days interval between issuance and purchase… and suddenly nobody minds. As we summarized:
“for those saying the US may soon unleash helicopter money, and/or MMT, we have some ‘news’: helicopter money is already here, and the Fed is now actively monetizing debt the Treasury sold just days earlier using Dealers as a conduit… a “conduit” which is generously rewarded by the Fed’s market desk with its marked up purchase price. In other words, the Fed is already conducting Helicopter Money (and MMT) in all but name. As shown above, the Fed monetized T-Bills that were issued just three days earlier – and just because it is circumventing the one hurdle that prevents it from directly purchasing securities sold outright by the Treasury, the Fed is providing the Dealers that made this legal debt circle-jerk possible with millions in profits, even as the outcome is identical if merely offset by a few days”
So, predictably, fast forward to today when the Fed conducted its latest T-Bill POMO in which, as has been the case since early October, the NY Fed’s market desk purchased the maximum allowed in Bills, some $7.5 billion, out of $25.3 billion in submissions. What was more notable were the actual CUSIPs that were accepted by the Fed for purchase. And here, once again, we find just one particular issue that stuck out: TY5 (due Dec 31, 2020) which was the most active CUSIP, with $4.136BN purchased by the Fed, and TU3 (due Dec 3, 2020) of which $905MM was accepted.
Why is the highlighted CUSIP notable? Because as we just showed on Friday, the Fed – together with the Primary Dealers – appears to have developed a knack for monetizing, pardon, purchasing in the open market, bonds that were just issued. And sure enough, TY5 was sold just one week ago, on Monday, Dec 30, with the issue settling on Jan 2, just days before today’s POMO, and Dealers taking down $17.8 billion of the total issue…
… and just a few days later turning around and flipping the Bill back to the Fed in exchange for an unknown markup. Incidentally, today the Fed also purchased $615MM of CUSIP UB3 (which we profiled last Friday), which was also sold on Dec 30, and which the Fed purchased $5.245BN of last Friday, bringing the total purchases of this just issued T-Bill to nearly $6 billion in just three business days.
… confirming once again that the Fed is now in the business of purchasing any and all Bills that have been sold most recently by the Treasury, which is – for all intents and purposes – debt monetization.
As we have consistently shown over the past week, these are not isolated incidents as a clear pattern has emerged – the Fed is now monetizing debt that was issued just days or weeks earlier, and it was allowed to do this just because the debt was held – however briefly – by Dealers, who are effectively inert entities mandated to bid for debt for which there is no buyside demand, it is not considered direct monetization of Treasurys. Of course, in reality monetization is precisely what it is, although since the definition of the Fed directly funding the US deficit is negated by one small temporal footnote, it’s enough for Powell to swear before Congress that he is not monetizing the debt.
Oh, and incidentally the fact that Dealers immediately flip their purchases back to the Fed is also another reason why NOT QE is precisely QE4, because the whole point of either exercise is not to reduce duration as the Fed claims, but to inject liquidity into the system, and whether the Fed does that by flipping coupons or Bills, the result is one and the same.
Luxury assets of the ultra-wealthy, if that were expensive wine, fancy diamonds, and rare antique cars all had a down year as the stock market ramped to new highs, reportedThe Wall Street Journal.
In the last decade, luxury assets performed exceptionally well as central bankers handed out free money to the elite class to hoard assets of their liking. And naturally, these people, with exceptional taste, bought things that the common man has only seen on television.
Now, these luxury assets are under performing – have been during the past several years – and is a symptom of late-cycle distress.
“The froth has gone out of the market. People have realized you can’t just buy stuff and expect the value to go up,” said Andrew Shirley, a partner at Knight Frank and editor of the group’s Wealth Report.
The Journal blames the under performance on the global slowdown and the lack of Asian demand. Chinese buyers account for 33% of global luxury goods sales.
“There is a lot of uncertainty in Chinese markets and the riots in Hong Kong didn’t make it easy for people to come spend money in Hong Kong either,” said Eden Rachminov, chairman of the board at the Fancy Color Research Foundation.
Colored diamonds in 2019 lost about 1% in the first three quarters.
Fine wine was also another losing asset through Nov., lost 3.6%, according to the Liv-ex 1000 index.
And the biggest loser on the year were classic cars, lost 5.6%, according to Historic Automobile Group International’s (HAGI) Top Index.
HAGI founder Dietrich Hatlapa said the classic car market has been cooling following a massive rise in price after the 2008-09 financial crisis. He said classic car prices saw double-digit gains after the recession, rallying 50% Y/Y through 2013. “We are at the tail-end of a big bull market,” Hatlapa warned.
What’s becoming evident is that ‘Not QE’ and other monetary gimmicks deployed by central banks are failing to raise asset prices of some luxury goods in 2019. Perhaps the world is stumbling into a period where tool kits of central banks are becoming less responsive to stimulate asset price inflation, and if that is the case, then everyone will figure out that prices of luxury goods have been hyper inflated over the last decade with nothing but hot air.
“I’m seeing at least 32,000 on the Dow,” says Navarro
White House National Trade Council Director Peter Navarro sees the Dow a lot higher in 2020
‘I’m looking forward to a great 2020. I mean, forecast-wise, I’m seeing closer to 3% real GDP growth than 2%. I’m seeing at least 32,000 on the Dow.’
(by Mark Decambre / MarketWatch) President Donald Trump’s trade adviser Peter Navarro is calling for a roughly 13% gain by the Dow Jones Industrial Average DJIA, +0.27% in 2020, and on Monday described a long-awaited “Phase 1” trade deal as “in the bank.”
Speaking on CNBC on Tuesday, Navarro forecast another period of buoyancy for equity benchmarks and the U.S. economy, with a prediction that diminishing tensions between China and the U.S. over international trade policy will give way to another powerful uptrend for stocks. (Check out a clip of Navarro’s comments below):
Navarro’s comments made on the last trading session of 2019, came before President Donald Trump tweeted that a partial Sino-American trade resolution was set to be signed on Jan. 15. The president also said that he planned to travel to Beijing to start negotiations on the second phase of negotiations thereafter.
I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!
Softening tensions over import tariffs between Beijing and Washington have at least partly helped to lift U.S. stocks to their biggest annual gains in years. The Dow looked set to close out a banner year with a two-session skid but has advanced 21.8% this year to trade at around 28,410, picking up more than 5,000 points during the calendar year. Navarro’s forecast, atypical of a government trade negotiator, of a further 13% rise in the Dow to 32,000 in 2020 from currently levels would represent the equivalent of about a 3,600-point gain.
Broadly speaking, stock indexes have enjoyed a bumper year, notably in the past few months of 2019, with reports of an imminent detente on trade.
The S&P 500 SPX, +0.29% has climbed 28.4%, putting it on pace for its biggest gain since 2013 and the Nasdaq Composite Index COMP, +0.30% has gained about 35%, not far from its stellar 1997 return, when it jumped more than 38%.
This year’s gains followed a fall of 4.2% in the S&P 500 index on a total-return basis in 2018, though, so in aggregate there has been just a 12% compounded return over the last 2 years, Datatrek’s Nicholas Colas noted. That is not far off the average 50-year S&P return of 11.1%.
President Trump and his administration have been fixated on the performance of the stock market because they see it as a potential calling card for a second term in the White House after the 2020 elections.
Indeed, this isn’t the first time Navarro has made a forecast about the Dow.
At that point, about five months ago, he said that the 30,000 level for the Dow was achievable if Congress approved the U.S.-Mexico-Canada Agreement and the Federal Reserve lowered interest rates.
At its peak this year, the blue-chip index wasn’t that far off 30,000. The intraday peak for the Dow was 28,701, hit on Dec. 27, about 1,300 short of Navarro’s forecast. The Dow began trade in July, when Navarro made his earlier comments, at 26,720 and has climbed more than 6% thus far.
To be sure, investors harbor major concerns heading into next year that markets may not have room for further gains, particularly as investors worry that the China-U.S. trade pact may not yield substantive changes.
Trader’s Choice Gregory Mannarino describes how Navarro’s forecast is based upon far more debt and war in store for Americans …
There was a period of about two months when some of the more confused, Fed sycophantic elements, would parrot everything Powell would say regarding the recently launched $60 billion in monthly purchases of T-Bills, and which according to this rather vocal, if always wrong, sub-segment of financial experts, did not constitute QE. Perhaps one can’t really blame them: after all, unable to think for themselves, they merely repeated what Powell said, namely that
“growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis. Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy. In no sense, is this QE.“
As it turned out, it was QE from the perspective of the market, which saw the Fed boosting its balance sheet by $60BN per month, and together with another $20BN or so in TSY and MBS maturity reinvestments, as well as tens of billions in overnight and term repos, and soared roughly around the time the Fed announced “not QE.”
And so, as the Fed’s balance sheet exploded by over $400 billion in under four months, a rate of balance sheet expansion that surpassed QE1, QE2 and Qe3…
… stocks blasted off higher roughly at the same time as the Fed’s QE returned, and are now up every single week since the start of the Fed’s QE4 announcement when the Fed’s balance sheet rose, and are down just one week since then: the week when the Fed’s balance sheet shrank.
The result of this unprecedented correlation between the market’s response to the Fed’s actions – and the Fed’s growing balance sheet – has meant that it gradually became impossible to deny that what the Fed is doing is no longer QE. It started with Bank of America in mid-November (as described in “One Bank Finally Admits The Fed’s “NOT QE” Is Indeed QE… And Could Lead To Financial Collapse“), and then after several other banks also joined in, and even Fed fanboy David Zervos admitted on CNBC that the Fed is indeed doing QE, the tipping point finally arrived, and it was no longer blasphemy (or tinfoil hat conspiracy theory) to call out the naked emperor, and overnight none other than Deutsche Bank joined the “truther” chorus, when in a report by the bank’s chief economist Torsten Slok, he writes what we pointed out several weeks back, namely that
“since QE4 started in October, a 1% increase in the Fed balance sheet has been associated with a 1% increase in the S&P500, see chart below.”
Not that DB has absolutely no qualms about calling what the Fed is doing QE4 for the simple reason that… it is QE4.
The chart in question, which is effectively the same as the one we created above, shows the weekly change in the Fed’s balance sheet and the S&P500 as a scatterplot, and concludes that all it takes to push the S&P higher by 1% is to grow the Fed’s balance sheet by 1%.
And just to underscore this point, the strategist points out that such a finding is “consistent with this new working paper, which finds that QE boosts stock markets even when controlling for improving macro fundamentals.” Which, of course, is hardly rocket science – after all when you inject hundreds of billions into the market in months, and this money can’t enter the economy, it will enter the market. The result: the S&P trading at an all time high in a year in which corporate profits actually decreased and the entire rise in the stock market was due to multiple expansion.
Following the headline decline for Conference Board Consumer Confidence in November, analysts are expecting an exuberant bounce in December as every asset class rose majestically (despite retail sales slowing).
But, despite record high stocks, the headline consumer confidence data disappointed, printing 126.5 (down from the upwardly revised 126.8) and well below the hopeful 128.5 expected.
While the Present Situation picked up modestly, the Future Outlook weakened:
Present situation confidence rose to 170.0 vs 166.6 last month
Consumer confidence expectations fell to 97.4 vs 100.3 last month
Combining for the 4th monthly headline drop in the last 5…
Interestingly, this is the 4th straight month of YoY declines in confidence…
And expectations for stock market gains also faded…
Isn’t the whole point of The Fed to pump enthusiasm up “by whatever means”?
The Dallas Fed conducts recurring surveys of over 900 business executives in manufacturing, services, energy, and AG lending across Texas and the broader Eleventh Federal Reserve District. The information collected is a valuable component of regional economic analysis.
Against expectations of a rebound to 0.0, The Dallas Fed Manufacturing Outlook survey disappointed in December, sliding from -1.3 to -3.2 – in contraction for the 3rd straight month…
The Dallas Fed survey has been in contraction for 7 months this year…
Under the hood was just as unimpressive with New Orders Growth rate contracting and Finished goods contracting along with the six-month outlook dropping further.
Dallas joins, Philadelphia, Kansas, Chicago, and Richmond in their regional weakness in December…
(ZeroHedge) At the same time that dipshits future Nobel Prize winners at the Fed like Neel Kashkari are walking around pondering why the inequality gap continues to widen in the United States, monetary policy has catalyzed another year of surging wealth for the richest in the country while keeping its boot on the neck of the poorest.
In fact, asBloomberg notes, the wealth of the 500 richest people surged 25% in 2019. And the riches are coming in atypical fashion.
Among those are social media giants like Kylie Jenner, who became the youngest self-made billionaire this year after her cosmetic company signed an exclusive partnership with Ulta Beauty. She sold a 51% stake in her company for $600 million.
Similarly, the Korean family who helped popularize the Washington Nationals’ rally cry, “Baby Shark, doo-doo doo-doo doo-doo”, is now worth about $125 million.
Another great example is Willis Johnson, who made his $1.9 billion fortune by building a network of junkyards to sell damaged cars.
All of these are examples of just how much money made its way to the richest over the last 12 months. The Bloomberg Billionaires Index added $1.2 trillion, now placing their collective net worth at $5.9 trillion.
Only 52 people on the ranking saw their fortunes decline during the year. Jeff Bezos, for example, lost $9 billion – but only due to his divorce.
The 172 American billionaires on the Bloomberg ranking added $500 billion, with Facebook Inc.’s Mark Zuckerberg up $27.3 billion and Microsoft Corp. co-founder Bill Gates rose $22.7 billion.
Representation from China continued to grow, with the nation’s contingent rising to 54, second only to the U.S. He Xiangjian, founder of China’s biggest air-conditioner exporter, was the standout performer as his wealth surged 79% to $23.3 billion.
Russia’s richest added $51 billion, a collective increase of 21%, as emerging-market assets from currencies to stocks and bonds rebounded in 2019 after posting big losses a year earlier.
Newly minted billionaires included Anthony von Mandl, the man behind “White Claw” hard seltzer and Hong Kong’s Lo family, who are in the business of producing soy milk.
With the market hitting new highs every day and President Trump’s relentless pressure on the Fed to keep rates low, the gap will likely continue to widen heading into 2020 – a year politicians will undoubtedly spend bickering about proposed solutions to the problem, all the while failing to understand that the alarm is coming from the inside, right before their eyes.
The gains are an obvious continued indicator of flawed monetary policy that everybody – except those at the Fed (and Steve Liesman) seems to understand.
As a result, currently, the 0.1% control the biggest share of the pie in the U.S. than at any time since 1929.
Wells Fargo, Citigroup, PNC Financial Service Group, and CIT Group accumulated hundreds of thousands of commodity hauling railcars in North America over the last decade. These banks believed railcars carrying coal, grain, and other commodities were going to be highly profitable but have recently turned out to be amajor headacheas many cars are now in storage because of new regulations and demand woes brought on by fluctuating commodity markets.
David Nahass, president of Railroad Financial Corp., which provides advisory services to railroad firms, toldThe Wall Street Journalthat “the industry is suffering, there are no two ways about it. Lease rates are down, and there’s not a source of hope about when it will start to improve.”
The Journal, citing the Association of American Railroads (AAR), said about 400,000 railcars currently sit in storage with no use at all, and many are bank-owned.
CIT estimated railcar lease rates fell 10% to 15% in 2019 over the prior year. GATX Corp., a nonbank lessor, said specific car lease rates crashed 20% in 3Q Y/Y as an industrial recession worsened.
Wells Fargo is the largest railcar lessor in the US, with 175,000 total cars under management. The Journal provided no details on how many railcars from the bank were sitting idle.
The railroad crisis has hit certain types of railcars the hardest. For instance, coal shipments have plunged since 2011, which diminished the demand for coal hopper cars.
“It’s the worst market I’ve seen in my 30-plus years in the industry,” railcar appraiser Patrick Mazzanti told the Journal.
Mazzanti said new regulations have also been the reasoning behind many oil cars sitting idle, as these cars must be retrofitted with modern technology to meet new federal requirements.
Rail-leasing units at major banks are a tiny fraction of their overall balance sheets and won’t make or break the banks.
DETROIT –General Motors, Ford Motorand other automakers in the past year cut thousands of jobs and shuttered factories as industry vehicle sales slow and fears of an economic slowdown pick up.
American flags fly near a General Motors Co. 2019 Chevrolet Camaro displayed at a car dealership in Tinley Park, Illinois, U.S., on Monday, Sept. 30, 2019. Auto sales in the U.S. probably took a big step back in September, setting the stage for hefty incentive spending by car makers struggling to clear old models from dealers’ inventory. Daniel Acker | Bloomberg | Getty Images
(CNBC) No one is forecasting an industry downturn comparable to when vehicle sales dropped below 11 million in the U.S. in 2009. However, domestic sales next year are forecast to drop for a second consecutive year in 2020 to below 17 million vehicles. Global vehicle sales also are expected tofall by about 3.1 million in 2019– the steepest year-over-year decline since the financial crisis a decade ago.
Automakers took lessons learned from the Great Recession, which led to the government-backed bankruptcies of GMand then-Chrysler in 2009, to proactively restructure operations this year amid robust profits and healthy, yet slowing, vehicle sales.
“The industry was ill prepared for the crash in 2009 and the people who are in charge of the companies were around then,” said Michelle Krebs, executive analyst at Cox Automotive. “They remember it like it was yesterday. They are not going to make the same mistakes.”
“They’re doing this at a time when the economy and the car market are good but starting to slip,” Krebs said. “The pie is shrinking, and they’re setting themselves up for that as well as this new future … Everybody is in the same boat on this in a way we’ve never seen before.”
GM and Ford
Both GM and Ford this year cut thousands of jobs and closed or announced plans to close roughly a dozen factories globally, including four in the U.S.
“We are taking proactive steps to improve our core business performance, capitalize on future mobility opportunities, improve our downturn protection, and create shareholder value,” GM CEO Mary Barra said when announcing significant restructuring actions in November 2018, many of which occurred in 2019.
GM’s announcement includedreducing its headcount by 14,000 peopleand closing seven plants globally, including five in North America (one of which will be retooled and reopen) and two elsewhere. It came weeks after Barra said the company was continuing to position itself to “outperform in a downturn.”
The Detroit automaker expects the cost-cutting initiatives to save the companyup to $6 billion annually.
Ford took similar actions for its business to remain “vital and vibrant business through all cycles,” as Ford CEO Jim Hackett described it in May.
Since starting to lead Ford in 2017, Hackett has executed a number of global cost-savings measures as part of an $11 billion restructuring plan through the early-2020s, including significant cuts to its workforce and operations in 2019.
The sides last week signed a binding merger agreement to create the world’s fourth-largest automaker by volume. The 50-50 all-share merger fulfills former CEO Sergio Marchionne’s vision of creating a global automaker with the resources to successfully compete in the ever-changing auto industry.
Marchionne, who unexpectedly died in July 2018,called for industry consolidationin a presentation called “Confessions of a Capital Junkie” in 2015. He believed only a handful of the world’s largest automakers would survive and have the capital to compete as automakers push for autonomous and all-electric vehicles.
Fiat Chrysler CEO Mike Manley and PSA CEO Carlos Tavares, who will lead the unnamed combined company, last week stressed that the merger is occurring at the right time, as both companies report healthy profits.
The $50-billion merged company is expected to achieve cost savings of 3.7 billion euros (US $4.1 billion) a year without closing factories.
Volkswagen’s Audi luxury brand also announced plans in Novemberto cut up to 9,500 jobs,or 10.6% of its total staff by 2025, saving 6 billion euros ($6.61 billion).
Nissan Motor unveiled its biggest restructuring plan in a decade in July. The company announcedplans to cut 12,500 jobs globallyby March 2023, slash production capacity and ax about 10% of its product line.
In May,Reuters reportedVolkswagen workers backed a restructuring of the world’s largest carmaker after CEO Herbert Diess pledged to spend 1 billion euros ($1.1 billion) on a new battery cell production plant near its headquarters.
The numbers: Orders for durable goods sank 2% in November, the U.S. government said Monday. This is the biggest decline since May.
Refrigerators on display at a Best Buy store.
Economists had expected a strong 1% rebound in durable-goods orders in November as a result of the end of the General MotorsGM, -0.33%strike. But orders were dragged down by a major decline in defense aircraft combined with a small drop stemming from Boeing’s BA, -0.76% woes with the 737 MAX airplane design.
Orders in October were lowered to a 0.2% gain from the prior estimate of an 0.5% increase.
What happened: Orders for defense aircraft and parts plummeted 72.7% in November. Stripping out defense goods, orders were up 0.8%.
Orders for total transportation equipment fell 5.9% in November. Orders for cars and parts rose 1.9%. That is weak compared with the roughly 3% gain economists expected from the end of the GM strike. Excluding transportation, orders were flat.
Orders for core capital goods were a bright spot, posting a second straight monthly gain, although that move was a small 0.1% increase.
Orders for primary metals fell 0.3%. Orders for computers rose 0.2% in November.
So what happens if we are still seeing numbers like this DGO release come March? Should the Fed cut again?
Six deals topped $100 million in 2019, despite a general slowdown across the U.S. luxury real-estate market. Here is a look at the top-10 home sales
Cartwell sold for $150 million in December – Jim Bartsch
In 2019, a small group of enormous real estate deals, while bearing little relationship to the overall market, had an outsize impact on the national conversation about wealth inequality and the rapidly expanding billionaire class.
A boom in ultrahigh priced deals in Palm Beach this year, including the $111 million sale of an oceanfront estate, raised questions about the number of wealthy New Yorkers fleeing to Florida in response to a 2017 change in federal tax law. A string of $100 million-plus deals completed in Los Angeles put the spotlight on high-end real estate on the West Coast.
Hedge-fund manager Ken Griffin’s roughly $238 million purchase of a New York penthouse, which set a price record for the nation, bolstered the arguments of legislators who support additional property taxes for the super rich.
These megadeals don’t necessarily speak to a broad surge in real estate values. In general, the U.S. luxury real-estate market faced a slowdown in 2019, thanks to oversupply in certain markets, tax changes and a general decline in foreign purchasers.
Read on for a closer look at the top 10 deals of the year, a record six of which topped $100 million, according to research by The Wall Street Journal and appraiser Jonathan Miller. Mr. Miller said he believes the previous record was three $100 million-plus deals, achieved in both 2014 and 2016.
1. 220 Central Park South, New York
Price: Roughly $238 million
Early in 2019, hedge-fund executive Ken Griffin closed on a roughly $238 million apartment. Emily Assiran for The Wall Street Journal
Mr. Griffin’s purchase of the roughly 24,000-square-foot Billionaires’ Row apartment “came to personify the issue of income inequality for many people,” said luxury agent Jason Haber of Warburg Realty of the deal. “Ken Griffin closed right when the legislature began their session. It was like throwing meat to the wolves.”
Soon after, the New York legislature expanded the so-called “mansion tax,” designed to target buyers of properties priced at $2 million or more, and increased property transfer taxes. The deal also helped reignite discussions around a pied-à-terre tax, which would tax multimillion-dollar second homes as a funding source for the city’s beleaguered subway system.
“It served as Exhibit A for why we should look at the possibility,” said Sen. Brad Hoylman, who sponsored the pied-à-terre tax bill.
The purchase was one of a string of record-breaking acquisitions by the billionaire in recent years In 2017, the Citadel founder bought several floors of a Chicago condominium for a record $58.75 million. He also bought a London home for about $122 million, and a piece of land in Florida for $99.1 million (see below).
To some extent, Mr. Griffin’s spending spree has made him a central figure in the debate about wealth inequality in New York. “Anyone who can afford to pay for a $238 million apartment can afford to pay a little more off the top to make the city a better place for everyone,” Sen. Hoylman said. Mr. Griffin has rarely spoken publicly on the issue. At an event this year hosted by Bloomberg News, Mr. Griffin criticized presidential hopeful Sen. Elizabeth Warren, saying he wished she spent more energy on education, rather than attacking “those of us who have been successful.”
The recently completed tower has quickly become New York’s new “it” building. Other buyers include musician Sting and hedge-fund executive Dan Och (see below).
Buyer’s agents: Tal Alexander and Oren Alexander of Douglas Elliman
Seller’s agent: Deborah Kern of the Corcoran Group
A view of Chartwell, which was purchased by Lachlan Murdoch. Jim Bartsch
2. Chartwell, Los Angeles
Price: $150 Million
Lachlan Murdoch, co-chairman of News Corp., which owns Dow Jones & Co., publisher of The Wall Street Journal, paid about $150 million for this Bel-Air estate in December, setting a record for the Los Angeles area, according to people familiar with the deal. Observers said it was the second-priciest sale ever recorded in the country for a single-family home.
Lachlan Murdoch. David Paul Morris/Bloomberg
While the price-tag was huge, the property was the latest in a line of homes to sell for a major discount to their original asking prices, marking the culmination of years of aggressive or arguably aspirational pricing for luxury homes across the country. The roughly 25,000-square-foot mansion came on the market in 2017 for $350 million, making it the most expensive listing in the nation at the time.
Designed by Sumner Spaulding around 1930, the property was owned by onetime Univision Chairman A. Jerrold Perenchio. It came with a Wallace Neff-designed five-bedroom guesthouse, a 75-foot pool, a tennis court and a car showroom with space for 40 vehicles. Mr. Murdoch didn’t respond to requests for comment.
Seller’s agents: Drew Fenton, Jeff Hyland and Gary Gold of Hilton & Hyland; Joyce Rey, Jade Mills and Alexandra Allen of Coldwell Banker Global Luxury; and Drew Gitlin and Susan Gitlin of Berkshire Hathaway HomeServices California Properties.
Buyer’s agent: Drew Fenton of Hilton & Hyland.
Spelling Manor in Holmby Hills sold for nearly $120 million. Jim Bartsch
3. Spelling Manor, Los Angeles
Price: $119.75 million
British Formula One heiress Petra Ecclestone sold Spelling Manor, a sprawling estate built for the late television producer Aaron Spelling, this past summer for $119.75 million, records show. The buyer hailed from Saudi Arabia, according to people familiar with the deal.
Petra Ecclestone. Jeff Spicer/Getty Images
The Holmby Hills property, designed in the style of a French château, is about 56,000 square feet, making it one of the largest private homes in the country. After Ms. Ecclestone bought it from Mr. Spelling’s widow, Candy Spelling, in 2011, she brought in more than 500 workers to do a three-month, multimillion-dollar renovation. The property has a two-lane bowling alley, a wine cellar, a beauty salon, a gym, tanning rooms and a tennis court.
The property is one of several significant Los Angeles area homes to have traded to buyers from the Middle East this year. In May, a Saudi buyer snapped up two neighboring Bel-Air properties for $52 million, The Wall Street Journal reported.
Seller’s agents: Kurt Rappaport and Daniel Dill of Westside Estate Agency; Jade Mills of Coldwell Banker Global Luxury and David Parnes and James Harris of the Agency.
Buyer’s agents: Jeff Hyland and Rick Hilton of Hilton & Hyland.
Read about the next seven featured properties by clicking on the article credit below…