(Reuters) – Private credit firms are requiring their borrowers maintain a strong liquidity cushion as the coronavirus pandemic forces middle market companies to wrestle with spiking leverage levels and falling profits.
These investors, also known as alternative lenders, are amending existing deals to put minimum liquidity covenants in credit agreements, provisions that require businesses to have a certain amount of cash on hand, as a way to safeguard their investments, according to several private credit sources.
The covenant measures the amount of money a company needs to run its business and meet its financial obligations. The provision has increased in usage since the onset of the health crisis. Companies, reckoning with dwindling profit margins – often measured as earnings before interest, taxes, depreciation and amortization (Ebtida) – are seeking relief from tests in their credit agreements, noted law firm Ropes & Gray.
As Ebitda falls, leverage can rise, making a borrower more likely to trip covenants, which are provisions to help keep the borrower on the financial straight and narrow.
“A liquidity covenant is a good yardstick for measuring the financial health of a distressed or stressed borrower,” said Gary Creem, a partner at law firm Proskauer. “It provides downside protection for a lender by serving as an early warning sign of further financial trouble while providing a borrower with flexibility to recover from a temporary period of financial difficulty.”
Private credit behemoth Ares Management in April and Teligent agreed to include a minimum liquidity provision in the pharmaceutical company’s borrowing documents. Ares is a lender on a first-lien revolving credit facility and a second-lien loan, according to credit agreement amendments submitted to the Securities and Exchange Commission (SEC).
The Buena, New Jersey-based borrower, which markets US Food and Drug Administration-approved injectable medicines and topical products, must now operate within a liquidity range of US$4m-US$10m. A total net leverage covenant was also eliminated, the SEC filings show. Doing so allows Teligent to focus on cash management.
Getting rid of a leverage covenant gives the borrower a reprieve from concerns about the level of its Ebitda, so the company can focus on other aspects of its financial health. Spokespeople for Ares and Teligent declined to comment.
Exela Technologies is another company that was forced to add minimum liquidity covenants to its borrowings, SEC filings show. In May, the company amended its first-lien credit agreement, initially hammered out in July 2017, to require a minimum liquidity of US$35m, according to an SEC disclosure.
Business development companies (BDC) Garrison Capital and Investcorp Credit Management BDC are lenders to the business process automation company, according to Refinitiv LPC BDC Collateral. Representatives for the firms did not respond to emails requesting comment.
Exela lined up a five-year US$160m accounts receivable (A/R) securitization facility with BDC Sixth Street Specialty Lending in January, Shrikant Sortur, the company’s chief financial officer, said in an email, noting the company also completed a US$40m asset sale in the first half of the year.
The A/R facility requires that Exela have minimum liquidity of US$40m. He said the company has been “almost exclusively focused on liquidity” since November and has plans this year to complete additional asset sales of between US$110m and US$160m.
A spokesperson from Sixth Street declined to comment. ALL ROADS TO ROME
Borrowers can arrive at the minimum liquidity amount in several ways.
The US dollar amount needed is often derived from updated financial models provided to lenders by company management or the borrower’s private equity owner. It can be measured by cash on hand or borrowing availability under the company’s revolver.
Healthcare borrowers have used liquidity covenants where they have been impacted by stay-at-home orders and the cancellation of elective procedures, Creem said. The travel and retail sectors, among other spaces, use liquidity covenants in connection with restructuring procedures.
When lenders have tried to calculate a borrower’s Ebitda, they have used different methodologies, according to Rob Wedinger, a vice president at investment bank Houlihan Lokey.
Some private debt managers are drawing up a “deemed Ebitda,” a proxy for the profit level of the borrower had the coronavirus pandemic not occurred, he said. But others are avoiding that exercise altogether.
“Some people don’t want to spend time and energy to quantify the Ebitda covenant because it will require a revenue adjustment,” Wedinger said. “If you just look at minimum liquidity, you take Ebitda out of the equation. Every conversation has ended up around liquidity.”
The economic realities that a V-shaped recovery is not possible in the back half of 2020 are being realized in Baltimore’s downtown area.
Downtown Baltimore Skyline
The Downtown Partnership of Baltimore (DPOB) published its annual State of the Downtown report on Tuesday and there are new concerns the COVID-19-induced recession from quarantining healthy people for the first time in history will have long-lasting impacts.
“The areas that were impacted, as you can imagine more significantly tourism, restaurants, some of our cultural institutions… and those are the ones that we really have to rally behind now,” DPOB President Shelonda Stokes told WJZ Baltimore.
DPOB conducted two surveys in mid-March, just around the time, Maryland Gov. Larry Hogan initiated virus-related lock downs. Out of 150 respondents, DPOB said strict public health orders heavily impacted at least 94% of the businesses in the downtown district. About 29% of respondents said it would take upwards of three months to recover.
The survey found hospitality and restaurant/food service industries were the most impacted. It said restaurants, hotels, and retail shopping stand to lose billions of dollars. Nevertheless, DPOB claims COVID-19 has directly and indirectly impacted 46,000 jobs.
“We’re at a place that you could see even from the consumer sentiment survey that we’re still fearful. We’re cautiously re-entering, we’ve been comfortable in our homes, we’ve figured out how to work from home and be effective,” Stokes said.
Baltimore City is facing a double whammy – it’s not just the virus that has deterred people from traveling to the Inner Harbor area – but also crime across the city is out of control. On a per-capita basis, the city is one of the most dangerous in the country. Readers may recall our countless articles on the socio-economic implosion of Baltimore, starting years before the pandemic.
“Any level of violent crime in unacceptable,” said Councilman Eric Costello.
DPOB is confident some businesses may not survive the virus-induced economic downturn and urged residents to support local businesses in this time of crisis.
Businesses, and to be specific, small businesses, and the bottom 90% of Americans, have been devastated in the last couple of months.
Days ago, readers may recall we noted a quarter of all personal income in the US now comes from the government – this shows how reliant the population has become on the government, or should we say socialist Trump checks.
Twitter handle Long View pointed out last week that “Retail sales bounced back like a rubber band because of stimulus (Trump checks, PPP, UE bonus). It’s all over in a few weeks & with the new uptick we likely see at least 6 more weeks of contraction with no plug. The real hit starts now.”
Knowing the backdrop of consumers, as to how they’re very reliant on Trump checks for consumption, there can be no V-shaped recovery this year – nevertheless, commercial shopping districts like the one in Baltimore – will remain depressed for the foreseeable future which will result in a period of high unemployment.
All of this comes at the worst possible time for Baltimore as the population crashes to a 100-year low – the tax base is collapsing as folks are quickly exiting the city for the suburbs. Coronavirus has exposed just how fragile the economy, society, and municipalities really are, which suggests the worst of the crisis is ahead.
How are 19.29 million workers receiving unemployment insurance when they tell us 17.75 million are unemployed?
It’s official: “data” released from the Bureau of Labor Statistics has just crossed the streams and has given birth to the Stay Puft marshmallow man jumping the shark. Alas, it also means that jobs “data” is now completely meaningless.
For all the analysis of today’s job report, is it good, is it bad, is this data series too hot, and does it mean that the Fed will soon be forced to hike, we have just one response. None of it matters.
Why? Because a simple sanity check reveals that as of this moment the jobs report no longer makes logical sense.
Consider the continuing jobless claims time series, also also referred to as “insured unemployment”, and represents the number of people who have already filed an initial claim and who have experienced a week of unemployment and then filed a continued claim to claim benefits for that week of unemployment.
By its very definition, insured unemployment is a subset of all Americans who are unemployed. In a Venn diagram, the Continuing Claims circle would fit entirely inside the “Unemployed” circle, which also includes Initial Claims, Continuing Claims, and countless other unemployed Americans who are no longer eligible for any benefits.
Alas, as of this moment, the definitionally smaller circle is bigger than “bigger” one, and as the DOL reported today, there were 19.29 million workers receiving unemployment insurance. And yet, somehow, at the same time the BLS also represented that the total number of unemployed workers is, drumroll, 17.75 million.
If you said this makes no sense, and pointed out that the unemployment insurance number has to be smaller than the total unemployed number, then you are right. And indeed, for 50 years of data, that was precisely the case.
And yes, there is a “forced” explanation to justify how this may actually happen in the current situation where everyone is abusing jobless benefits, but in theory this should not be happening, and we fully expect that in the coming weeks, the already highly politicized BLS will quietly close this gap.
ZeroHedge recently penned a piece on a developing nationwide coin shortage sparked by the virus pandemic. As a result of the shortage, at least one major supermarket chain has removed the ability to pay in cash at self-scan checkout machines.
Meijer Inc., a supermarket chain based in the Midwest, with corporate headquarters in Walker, Michigan, announced last Friday, that self-scan checkout machines at 250 supercenters would only accept credit or debit cards, SNAP and EBT cards, and gift.
“While we understand this effort may be frustrating to some customers,” spokesman Frank Guglielmi told ABC12 News Team. “It’s necessary to manage the impact of the coin shortage on our stores.”
Fed Chair Powell admitted to lawmakers last week that The Fed has been rationing coins as the circulation of coins across the US economy ground to a halt due to the pandemic.
“What’s happened is that with the partial closure of the economy, the flow of coins through the economy … it’s kind of stopped,” Powell told lawmakers.
He said the shortage was due to the mass business closures that prevented people from spending their coins, as well as a lack of places that are open where people can trade coins for paper bills.
“We’ve been aware of it, we’re working with the Mint to increase supply, we’re working with the reserve banks to get the supply to where it needs to be,” Powell said, adding he expected the problem to be temporary.
Americans Googling “coin shortage” started to erupt in the back half of June and has since hit a record high. Mainly people in Midwest states are searching for the search term.
Google search “coin shortage” shows the issue isn’t limited to Meijer stores but is widespread.
Social media users report the shortage is happening at many big-box retailers.
(Chris Martenson) As you may know, I was one of the very first voices publicly reporting on Covid-19, issuing an alert that the virus was a significant pandemic event on Jan 23rd, 2020.
This was long before most media outlets even managed to write their first “It’s just the flu, bro!” article.
Using the same logic and scientific methodology I was trained in as a PhD, I was able to “predict” things well in advance of nearly every official or mainstream news source.
I’m using quotation marks around the word “predict” because it’s not really a prediction when you’re just extrapolating trends that are already underway.
Just as it’s not really a “prediction” to estimate where a thrown pitch will travel, it wasn’t much of a prediction to state that a novel virus with an R-Naught (R0) of well over 3 would be extremely difficult to contain once it arrived in a country. Note that I didn’t say impossible — South Korea, Australia, New Zealand, Thailand, Taiwan and Vietnam all get high marks for containment — but certainly difficult.
The US and the UK proved this in spades, as they’re both led by below-average ‘managers’ rather than leaders.
Leaders make tough decisions based on imperfect information. Managers dither and hedge and only make up their minds after the facts are already in and events well underway. Naturally, the US/UK managers were simply no match for the exponential rate that the Honey Badger Virus (aka Covid-19) spreads at.
I call it the Honey Badger virus because of its incredible ability to evade quarantine, as eagerly and easily as Stoffle, as seen in this short enjoyable video:
Such a determined foe as Covid-19 cannot be reasoned with, halted by decree or – much to the puzzlement of the central banks – resolved by printing more thin-air money.
It simply operates by natural laws and rules. Which, by the way, makes it rather easy to predict.
Much more difficult to predict, though, is when we humans will truly wake up to our true plight and begin making better decisions. And I’m not just talking about the coronavirus here. I’m talking about the dangerous levels of social inequity that the Federal Reserve is responsible for creating, both pre- and post-covid-19.
Given the enormous difficulty in getting whole swaths of the managerial and retail classes to grasp such simple and obvious logic as “Everyone should wear a mask!”, it seems thoroughly unrealistic to expect these same folks to thoughtfully tackle the hazards of runaway monetary and fiscal policy.
But they really need to.
Because the current monetary and fiscal trajectory society is on has been well-trod throughout history. We know where it ends — no place we want to be.
Commerce gets destroyed. Households fail. Government and social order fall apart. Fairness and freedoms are lost as it becomes difficult to distinguish between official policies and overt looting.
Real leaders know this history and would both think and act differently in order to avoid the worst risks. But managers? They just keep operating from the same manual, mindlessly repeating the same steps while hoping for a different result.
The Fed’s Dangerous Gamble
I’ve referred to the Federal Reserve as a bunch of psychopaths engaging in cultural vandalism. This is unfair to both psychopaths and vandals.
After all, the most ambitious of them don’t victimize more than several dozen in their lifetime. Maybe a few hundred, tops.
But the Fed? It’s ruining hundreds of millions of lives and livelihoods — both today and in the future.
Sadly, the Federal Reserve has been doing this — unchecked — for a very long time. Here’s a snippet I wrote for MarketWatch.com 6 years ago. Every word remains as true today as it was then:
The academic name for the Fed’s current policy is financial repression. But a more apt name would be “Throw granny under the bus,” because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities.
The cornerstone element of financial repression is negative real interest rates, of which the Federal Reserve is the prime architect and owner.
From the start of the Fed’s post-crisis intervention through 2013, the total cost of these negative real interest rates was over $750 billion just to savers alone. The loss of income to fixed-income investments (such as bonds held in pensions and money markets) was even larger.
But here’s the rub. That loss of income and purchasing power didn’t just vanish. It was transferred from pocket A to pocket B.
It magically appeared again in record Wall Street banking bonuses, in shrinking government deficits (due to lower than normal interest rates), in rising corporate profits (mainly benefiting the already rich), in record stock buybacks (ditto), and in rising wealth inequality.
More directly, when the Fed buys financial assets with printed money and — by definition — drives up the price of those assets, it cannot then act mystified why the main owners of financial assets have grown wealthier. Doing so simply insults our intelligence.
Federal Reserve Chair Alan Greenspan, then Ben Bernanke, then Janet Yellen, and now Jay Powell have all operated as mere managers (not leaders) choosing predictably safe plays from the Federal Reserve cookbook. It prescribes a gruel-thin routine of actions the main ingredient of which is printing currency out of thin air.
Each Fed Chairman has dutifully cooked up unhealthy dishes seasoned with hefty amounts of social corrosion, structural unfairness, elitism, and without even a whiff of historical context.
With no leadership on display and cheered on by a compliant press unable to formulate a single critical question, the Fed is now too deep into its cookbook to do anything besides see the process out to its inevitable conclusion.
The Fed has long pretended to be mystified by the rising inequality its policies are obviously causing. Jerome Powell recently and (in)famously declared during Q&A after a speech that the Fed “absolutely does not” contribute to inequality. That bold-faced lie is infuriating to those who realize just how socially and culturally unfair and damaging the Fed’s actions really are.
When things become too unfair, people stop participating. If laws are too one-sided and rigged, people stop following them. If new hires receive a higher salary for equivalent work, the veteran employees stop working as hard. If students know that their classmates are cheating and getting good grades, they’ll begin to cheat, too.
It’s just how we’re wired. An aversion to unfairness is in our social DNA.
Peak Prosperity readers know I’m a huge fan of this short video. It explains everything about the rising tide of social rebellion in America (and features cute monkeys, to boot!):
By unfairly accelerating the wealth gap between the top 1% and everyone else, the Fed is playing with fire. Seemingly with the same level of ignorance to the consequences as a chimpanzee with a magnifying glass on a tinder-dry savanna.
Money is our social contract.
When that contract is broken, that’s when things really go south for a nation. Zimbabwe, the Wiemar Republic, Venezuela and Argentina are all past (and some current again, sadly) examples of just how badly the standard of living can plummet when a nation’s money system breaks down.
I cannot predict when all this breaks down as easily as I can predict that it will break down. A balance must always be maintained between money, which is a claim on things, and the things themselves. Too many claims and we get inflation. Too few and we get deflation.
The Fed and the other world central banks have always (always!) erred on the side of “too many claims” in this story. When in doubt, they print more currency.
And that process is now on hyperdrive. The post-Covid economy is in a very bad state, and so the money printing at the heart of the “rescue” efforts by the central banks is the biggest ever in history. By a long shot.
So claims go up and up and up, while the economy shrinks. Leaving us with a LOT more money chasing a LOT less “stuff”.
This also applies to financial assets, like stocks and bonds. Printing makes the markets go higher in price and makes investors increasingly dependent on more money printing to support these prices. Eventually, like the era we’re in now, the Fed must keep injecting liquidity on a permanent basis or else the markets will immediately crash.
So, the money printing just keeps happening.
And as a side benefit, those closest to the Fed get stupendously rich from all that fresh money flooding into the world. These are the same Wall Street firms who hire Fed staffers at the end of their tenure there, thanking them with plush jobs that have little responsibility and huge salary.
But, out in real America, there are hundreds of millions of us angry monkeys watching the Fed stuff grapes into the already full bellies of the elites. Eventually wide-scale pushback against the Fed’s injustice will erupt. Protests will increase in size and become more violent. The police will realize that they’re protecting the wrong people and switch sides. Then things will get really messy.
My strong preference in life is to avoid unnecessary pain and suffering. Why wait for the Fed to ruin everything for us? I’d prefer we get pro-active here to avoid a full-blown crisis. If don’t we’ll be forced to repeat history, whether we want to or not.
Sadly, repeating history and preserving the status quo is exactly what the national managers in the US are intent on doing. Most of the public still thinks of the Fed as the hero in this story instead of the villain it truly is, and so too much of the populace cheers the Fed along. The EU and the UK are more or less in the same boat.
All of which means that, just as I warned people to prepare for the Covid-19 pandemic before it hit with full force, you need to prepare now for the coming Fed-created economic/social crisis.
In Part 2: Into The Light: 8 Steps For Surviving What’s Coming, in attempt to be as informative as possible, I share a tremendous volume of the critical data points I’m currently closely monitoring to determine where we are on the timeline to crisis and what’s most likely to happen next. I then provide my eight recommended steps for protecting your wealth, loved ones, and property through the challenges to come.
As colleges attempt to recover from the pandemic and prepare for future semesters, a New York University professor estimates that the next 5-10 years will see one to two thousand schools going out of business.
Scott Galloway, professor of marketing at the New York University Leonard N. Stern School of Business told Hari Sreenivasan on PBS’ “Amanpour and Co.” that many colleges are likely to suffer to the point of eventual extinction as a result of the coronavirus.
He sets up a selection of tier-two universities as those most likely not to walk away from the shutdown unscathed. During the pandemic, wealthy companies have not struggled to survive. Similarly, he says, “there is no luxury brand like higher education,” and the top names will emerge from coronavirus without difficulty.
“Regardless of enrollments in the fall, with endowments of $4 billion or more, Brown and NYU will be fine,” Galloway wrote in a blog post.
“However, there are hundreds, if not thousands, of universities with a sodium pentathol cocktail of big tuition and small endowments that will begin their death march this fall.”
“You’re gonna see an incredible destruction among companies that have the following factors: a tier-two brand; expensive tuition, and low endowments,” he said on “Amanpour and Co.,” because “there’s going to be demand destruction because more people are gonna take gap years, and you’re going to see increased pressure to lower costs.”
Approximating that a thousand to two thousand of the country’s 4,500 universities could go out of business in the next 5-10 years, Galloway concludes, “what department stores were to retail, tier-two higher tuition universities are about to become to education and that is they are soon going to become the walking dead.”
Another critical issue underlying the financial difficulties families and universities both face is the possibility that the quality of higher education has decreased.
Galloway argues that an education in the U.S. is observably unsatisfactory for the amount that it costs, given that if you “walk into a class, it doesn’t look, smell or feel much different than it did 40 years ago, except tuition’s up 1,400 percent,”he said during an interview with Dr. Sanjay Gupta.
And the pandemic, according to Galloway, has served to expose the quality of higher education.
Retail was hit the worst. The review site has also seen a spike in searches for Black-owned businesses.
Four in 10 retailers listed on Yelp that closed during the pandemic will never reopen. GETTY IMAGES
American states have been slowly reopening their economies in the wake of the coronavirus pandemic, but thousands of businesses are still closed — many of them for good.
As of June 15, 140,000 businesses listed on the Yelp YELP, -3.01% review site remained closed due to the coronavirus pandemic. And of all the business closures since March 1, 41% of them have shuttered permanently, according to Yelp’s latest Local Economic Impact Report.
Los Angeles recorded the largest total number of closures with 11,774 business establishments shuttering, but Las Vegas has had the highest number of closures relative to the number of businesses in the city at 1,921.
Although 20% of the businesses that were closed in April have reopened as states have started relaxing social distancing guidelines, retailers and restaurants remain especially hard-hit. Shopping and retail stores have suffered 27,663 closures, while 23,981 restaurants listed on Yelp are still closed. Beauty (15,348 closures) and fitness (5,589 closures) centers are also among the sectors struggling the most. It’s difficult for these establishments to incorporate the social distancing measures required to reopen in many places.
“By far, retail shopping was hit the hardest,” Justin Norman, Yelp’s vice president of data science, told the Wall Street Journal. “When you look at those two top categories [retail and restaurants], we’re potentially never going to see some of these businesses again.”
Across the country, 41% of businesses on Yelp that closed during the pandemic won’t reopen. YELP
In May, the CEO of the OpenTable restaurant booking service warned that one in four eateries won’t be able to reopen following the coronavirus pandemic, even as David Chang’s Momofuku restaurant group announced that two if its restaurants in Manhattan and Washington, D.C. were among the COVID-19 restaurant casualties. Indeed, total reservations and walk-ins on OpenTable were down 95% on May 14 from that date the year before, and they were down 100% throughout the month of April compared to the same time last year. And the National Restaurant Association estimates that the total shortfall in restaurant and food service sales from March through May has likely surprised $120 billion.
Black-owned businesses have been more devastated by the pandemic than any other demographic group, according to the National Bureau of Economic Research. The number of Black small business owners plummeted from 1.1 million in February to 640,000 in April, or a 41% drop.
In the latest revision to the IMF’s economic outlook published this morning, the fund warns that the world is facing “a crisis like no other”, and now expects global growth to shrink -4.9% in 2020, 1.9% below the April 2020 forecast of -3.0%.
The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, the IMF said, adding that the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4% down from 5.8%, a number which will also be revised lower, with China’s expected 1.0% growth (down from 1.2%) the big wildcard.
As shown in the table below, the IMF has made the following GDP revisions for 2020:
US -8.0%, down from -6.1%
China 1.0%, down from -1.2%
Euro Area -10.2%, down from -7.5%
India: -4.5%, down from +1.9%
Japan -5.8%, down from -5.2%
Canada -8.4%, down from -6.2%
Latin America: -9.4%, down from -5.2%
India suffered the biggest downward GDP revision from the April forecasts, with a 4.5% contraction now expected, compared with a prior projection of a 1.9% expansion. Latin America has been hit by the virus due in part due to less developed health systems; its two biggest economies Brazil and Mexico are now forecast to contract 9.1% and 10.5%, respectively.
“With the relentless spread of the pandemic, prospects of long-lasting negative consequences for livelihoods, job security and inequality have grown more daunting,” the global emergency lender said in its update to the World Economic Outlook. The IMF conceded that as with the April 2020 WEO projections, there is a higher-than-usual degree of uncertainty around this forecast, with the baseline projection resting on key assumptions about the fallout from the pandemic.
In economies with declining infection rates, the slower recovery path in the updated forecast reflects:
persistent social distancing into the second half of 2020;
greater scarring (damage to supply potential) from the larger-than-anticipated hit to activity during the lock down in the first and second quarters of 2020;
a hit to productivity as surviving businesses ramp up necessary workplace safety and hygiene practices.
The fund lowered its expectations for consumption in most economies based on a larger-than-expected disruption to domestic activity, demand shocks from social distancing and an increase in precautionary savings.
For economies struggling to control infection rates, a lengthier lockdown will inflict an additional toll on activity. Moreover, the forecast assumes that financial conditions—which have eased following the release of theApril 2020 WEO—will remain broadly at current levels. Alternative outcomes to those in the baseline are clearly possible, and not just because of how the pandemic is evolving. The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects—as the June 2020 Global Financial Stability Report (GFSR) Update discusses—raising the possibility that financial conditions may tighten more than assumed in the baseline.
Overall, this would leave 2021 GDP some 6.5% percentage points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.
More importantly, the IMF also warned that the rebound in “financial market sentiment appears disconnected from shifts in underlying economic prospects raising the possibility that financial conditions may tighten more than assumed in the baseline.”
Back to the surprisingly gloomy forecast, the IMF said that downside risks remain significant, as “outbreaks could recur in places that appear to have gone past peak infection, requiring the reimposition of at least some containment measures. A more prolonged decline in activity could lead to further scarring, including from wider firm closures, as surviving firms hesitate to hire jobseekers after extended unemployment spells, and as unemployed workers leave the labor force entirely.”
Furthermore, financial conditions may again tighten as in January–March, exposing vulnerabilities among borrowers. “This could tip some economies into debt crises and slow activity further.” Moreover, the sizable policy response following the initial sudden stop in activity may end up being prematurely withdrawn or improperly targeted due to design and implementation challenges, leading to misallocation and the dissolution of productive economic relationships.
The IMF warned of a collapse in global trade volume in goods and services, which is expected to tumble 11.9% in 2020.
Finally, the IMF warned that the pandemic’s impact may significantly increase inequality, with more than 90% of emerging-market and developing economies forecast to show declines in per capita income.
Oddly enough, it had nothing to say about the biggest source of global inequality for the past decade: central banks that have injected over $30 trillion in liquidity in the past ten years, and whose actions assure that the next crash may well be the last.
* * *
Looking ahead, The IMF presents two alternative scenarios: In one, there’s a second virus outbreak in early 2021, with disruptions to domestic economic activity about half the size of those assumed for this year. The scenario assumes emerging markets experience greater damage than advanced economies, given more limited space to support incomes. In that case, output would be 4.9% below the baseline for 2021 and would remain below the baseline in 2022. In the second scenario, with a faster-than-expected recovery, global output would be about a half percentage point better than the baseline this year and 3% above the baseline in 2021.
Surge in debt leads to loss of AAA credit rating in a disturbing blow to Canada’s financial reputation.
As debt continues to surge, Canada has lost their AAA credit rating.
The rating has been downgraded by Fitch Ratings to AA+.
According to Fitch, Canada’s debt is projected to rise from 88.3% of GDP to 115.1% of GDP.
While many countries around the world are adding lots of debt, Canada’s growth before the crisis had already been very weak.
Various measures such as the carbon tax and excessive regulations have severely weakened Canada’s economy, with the energy sector struggling under the boot of government interference. Manufacturing has also been weak, with Canada clearly being seen as an increasingly challenging place to do business.
Additionally, the Liberal government massively increased our debt in good economic times, yet that huge surge of spending didn’t boost the economy.
White House trade adviser Peter Navarro said on Monday the trade deal with China is “over,” and he linked the breakdown in part to Washington’s anger over Beijing’s not sounding the alarm earlier about the coronavirus outbreak.
“It’s over,” Navarro told Fox News in an interview when asked about the trade agreement. He said the “turning point” came when the United States learned about the spreading coronavirus only after a Chinese delegation had left Washington following the signing of the Phase 1 deal on Jan. 15.
“It was at a time when they had already sent hundreds of thousands of people to this country to spread that virus, and it was just minutes after wheels up when that plane took off that we began to hear about this pandemic,” Navarro said.
U.S.-China relations have reached their lowest point in years since the coronavirus pandemic that began in China hit the United States hard. President Donald Trump and his administration repeatedly have accused Beijing of not being transparent about the outbreak.
Trump on Thursday renewed his threat to cut ties with China, a day after his top diplomats held talks with Beijing and his trade representative said he did not consider decoupling the U.S. and Chinese economies a viable option.
Navarro has been one of the most outspoken critics of China among Trump’s senior advisers.
In other news, Catherine Austin Fitts provides a big picture update with Greg Hunter …
Canadian manufacturing sales plunged by 28.5% in April, the last month for which date is available.
The drop was the largest ever recorded in Canadian history.
While economists had predicted a drop of 20.2% due to the economic damage caused by the CCP Virus, many were caught off guard by the immense scale of the decline.
Out of 21 manufacturing industries which are measured, sales fell in all 21 of them. In addition to the value of sales dropping 28.5%, the volume of sales fell 26.0%, which was also the largest drop of all time.
Some of the hardest hit sectors were oil & gas, coal, and the transport equipment industry.
Many have noted that despite promising support ‘within a day’ for the oil and gas sector over a month ago, no such support has been given by the federal government.
Additionally, the government has gone ahead with carbon tax hikes, worsening the burden on consumers and businesses.
Further, the government has allowed China to buy up some decimated Canadian companies, rather than stepping in to protect those companies from the Chinese Communist State.
As the world makes its way through the coronavirus pandemic together, questions are starting to surface about what the post-coronavirus global economy is going to look like.
Among those questions is an obvious one: how many jobs that were lost due to the virus are going to remain permanently lost and, conversely, how many people will recover the jobs they once had?
The answer looks grim. While there is hope that global financial stimulus could help people head back to work once the pandemic runs its course, there is a very real chance of “lasting damage” in many sectors, according to Bloomberg.
Fed chair Jerome Powell predicted last week that there will be “well into the millions of people who don’t get to go back to their old job.” He continued: “In fact, there may not be a job in that industry for them for some time.”
Bloomberg has predicted that 30% of U.S. job losses between February and May were a result of reallocation shock. It suggests a swift labor market recovery, but one that will ultimately level off and leave millions unemployed.
Among those most at risk are jobs in hospitality, retail, leisure, education and health. Brick and mortar retailers are also even further in the crosshairs of online retailers than they were prior to the pandemic. Hilariously, however, Bloomberg economists say the “markets are already pricing in the risk”.
“50% of U.S. job losses come from the combination of lock down and weak demand, 30% from the reallocation shock, and 20% from high unemployment benefits,” Bloomberg found.
A report by the Becker Friedman Institute at the University of Chicago estimated 42% of layoffs that occurred as a result of the pandemic will be permanent.
Nicholas Bloom, professor of economics at Stanford University who worked on the study said: “There’s a massive reallocation shock. The recession hits different sectors differently. Some benefit and some fall.”
Similarly, The Peterson Institute for International Economics said last week that the shock of the virus may necessitate even further government intervention, including wage subsidies. The Organization for Economic Cooperation and Development said last week that those laid off should be afforded government job training, in order to help a shift in industries, if necessary.
Sharan Burrow, General Secretary of the International Trade Union Confederation, concluded: “The pandemic has exposed the fault lines that already existed for working people and the economy. The ‘new normal’ requires a new social contract between governments and their citizens with the backing of the international community.”
(Emily Craine) The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week – even as more businesses reopened and rehired some laid-off employees.
More than 40 million new claims for unemployment benefits have been filed in the past two months ever since the coronavirus started paralyzing the US economy.
It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.
While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then.
Although the total figure for claims in more than 40 million, not all of them are still unemployed. The number of people currently receiving unemployment benefits is 21 million, which is a rough measure of the number of unemployed Americans.
States are gradually restarting their economies by letting some businesses – from gyms, retail shops and restaurants to hair and nail salons – reopen with some restrictions.
As some of these employers, including automakers, have recalled a portion of their laid-off employees, the number of people receiving unemployment benefits has fallen.
The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week. It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.
More than 40 million new claims for unemployment benefits have been filed in the past two months when the coronavirus started paralyzing the US economy
The weekly jobless claims report, the most timely data on the economy’s health, is being watched to assess how quickly the economy rebounds after businesses shuttered in mid-March to control the spread of COVID-19 and almost ground the country to a halt.
The number of claims – stuck at an astonishingly high level even as non-essential businesses are starting to reopen – suggest it could take a while for the economy to dig out of the coronavirus-induced slump despite signs from the housing market and manufacturing that the downturn was close to bottoming.
Economists fear a second wave of private sector layoffs and job cuts by state and local governments whose budgets have been crushed contributed to last week’s unemployment claims.
‘I am concerned that we are seeing a second round of private sector layoffs that, coupled with a rising number of public sector cut backs is driving up the number of people unemployed,’ said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.
‘If that is the case, given the pace of reopening, we could be in for an extended period of extraordinary high unemployment. And that means the recovery will be slower and will take a lot longer.’
The second wave of layoffs could grow bigger with Boeing announcing on Wednesday it was eliminating more than 12,000 US jobs and also disclosing it planned ‘several thousand remaining layoffs’ in the next few months.
Meanwhile, Amazon.com Inc announced on Thursday it has plans to offer permanent jobs to about 70 percent of the workforce it has hired temporarily to meet consumer demand during the pandemic.
The world’s largest online retailer will begin telling 125,000 warehouse employees in June that they can keep their roles longer-term. The remaining 50,000 workers it has brought on will stay on seasonal contracts that last up to 11 months, a company spokeswoman said.
California, Washington, New York and Florida saw the biggest increases in new claims, according to the latest Labor Department report.
In California, where claims increased by 31,764, layoffs were most prominent in the service industry.
Layoffs in insurance, educational services and public administration industries were most common in Washington state where claims rose by 29,288.
The majority of layoffs in New York, which saw its claims increase by 24,543, were felt in the transportation and warehousing, educational services, and information industries.
Florida’s layoffs increased by 2,322 and impacted industries included agriculture, forestry, fishing, and hunting, construction, manufacturing, wholesale trade, retail trade and service industries.
Economists cautioned the 40 million figure does not represent the number of jobs lost due to the pandemic, citing technical difficulties and procedures at state unemployment offices.
The focus, instead, should be on the number of people still receiving unemployment benefits. These so-called continuing claims could shed light on the effectiveness of the government’s Paycheck Protection Program.
The PPP, part of a historic fiscal package worth nearly $3 trillion, offered businesses loans that could be partially forgiven if they were used for employee salaries.
The job cuts reflect an economy that was seized by the worst downturn since the Great Depression after the virus forced the widespread shutdown of businesses.
‘Now is a good time to think how many of those people who lost their jobs are going to get them back, my sense is 25 percent will not and that’s what gives us the double digit unemployment rate well into 2021,’ said Joe Brusuelas, chief economist at RSM in New York.
‘The bankruptcies of small and medium enterprises will result in a much higher rate of permanent layoffs.’
While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then. Pictured above in an unemployment office in Arkansas in April
The economy shrank at an even faster pace than initially estimated in the first three months of this year with economists continuing to expect a far worse outcome in the current April-June quarter.
The Commerce Department reported Thursday that the gross domestic product, the broadest measure of economic health, fell at an annual rate of 5 percent in the first quarter, a bigger decline than the 4.8 percent drop first estimated a month ago.
It was the biggest quarterly decline since an 8.4 percent fall in the fourth quarter of 2008 during the depths of the financial crisis.
Analysts are monitoring incoming economic data to gauge how consumers are responding as many retail establishments gradually reopen.
Jobs won’t return in any significant way as long as Americans remain slow to resume spending at their previous levels.
Data from Chase Bank credit and debit cards shows that consumers have slowly increased their spending since the government distributed stimulus checks in mid-April.
Consumer spending had plunged 40 percent in March compared with a year earlier but has since rebounded to 20 percent below year-ago levels.
Most of that increase has occurred in online shopping, which has recovered to pre-virus levels after having tumbled about 20 percent.
But offline spending, which makes up the vast majority of consumer spending, is still down 35 percent from a year ago, according to Chase, after having plummeted 50 percent at its lowest point.
Is the real estate market on the brink of collapse? The US economy is headed for a recession if not a depression and as a result, real estate prices may drop. But there are no certainties, only probabilities. These are catalysts that could trigger incredible amounts of selling, which would flood the market with additional supply. IF this type of forced selling takes place, prices could collapse.
Will it play out like 2008-2012? Most likely not, but it could rhyme and the net result would be the same, prices plummeting in real terms (adjusted for inflation). If you’re interested in real estate, the housing market or the future of the economy, George Gammon dives deep into the demographic setup that may foreshadow much of tomorrow’s residential real estate market.
Virtually nothing in America’s top-down financial and political realms is actually transparent, accountable, authentic or honest.
Opting out will increasingly be the best (or only) choice for tens of millions of people globally.Opting out means leaving the complicated, costly and now unaffordable / unbearable life you’ve been living for a new way of life that is radically less complex, less costly and less deranging.
Opting out is as diverse as the individuals who choose to opt out. For many people in China, for example, the obvious choice when you’ve lost your job and can no longer afford expensive urban life is to return to your ancestral village, where you’re likely to have grandparents, parents or aunts / uncles with a house and a patch of agricultural land.
Since urbanization has been a feature of American society for generations, this is not an option for most Americans, who are by and large rootless cosmopolitanswho rarely even know their neighbors, as they move around the country out of necessity or ambition.
Just as “capitalism is no longer attractive to capitalists,” (per Wallerstein), urban living has lost its luster in ways few dare even discuss. Urban centers on the Left and Right Coasts have been magnets for jobs and capital, drawing in hundreds of thousands of new residents seeking higher paying employment. This vast influx pushed rents and housing valuations to nosebleed heights, and as a result all the local governments reckoned tax revenues would skyrocket every year like clockwork and all the developers building tens of thousands of over-priced rental units also assumed the trend would continue forever.
Too bad they didn’t read Laozi and learn that The Way of the Tao Is Reversal:whether you call it the Tao or merely reversion to the mean, demanding $3,000 a month for cramped apartments and $1 million for decaying bungalows were extremes that begged for a reversal.
The federal unemployment payments and bailouts make it easier to extend the delusion and denial for a few more months, but eventually the gravity of reality will overpower magical thinking and everyone counting on overvalued assets and overpriced rent, healthcare, childcare, college tuition, etc. remaining at pre-pandemic levels will have to start dealing with deep, permanent declines in sales, employment, income, asset valuations, tax revenues, etc.
The higher the costs and taxes, the greater the sacrifices that will be needed to slash and burn budgets and spending. For high-cost, high-tax urban areas, it’s unlikely the political leadership will be able to force such sacrifices on self-serving insiders and government clerisies. The only real force for evolution / adaptation will be collapse and bankruptcy, which are already baked in as the end-game for every high-cost, high-tax urban region.
Lacking any rooted family place to return to, Americans will have to do what they do best when there’s no other option: re-invent themselves, and in pursuing this, they will re-invent small town and rural living as a by-product of opting out of what’s no longer affordable or bearable.
In my view, the author who best understood the American process of re-invention is Herman Melville. Though famous for his sprawling novel of the sea and whaling, Moby-Dick, my favorite novel of Melville’s is his under-appreciated classic, The Confidence-Man, a book I discussed in Do We Actually Want To Be Conned? All Too Often: Yes (September 3, 2008).
Every con depends on trust, and as trust and confidence are lost, cons become more difficult. Part of the process of re-invention is to find places, people and processes you can trust because they continually demonstrate their authenticity via transparency, accountability, reliability and honesty.
Virtually nothing in America’s top-down financial and political realms is actually transparent, accountable, authentic or honest. Everything in these realms is a simulated, completely self-serving projection intended to fool us–The Big Con.
In re-inventing themselves via opting out, Americans will have to learn to contribute productively to small, localized beach-heads of trust, transparency and accountability that function on the local level in an anti-fragile fashion, meaning that they actually improve and get stronger as the top-down Big Con collapses under the weight of its own lies, frauds and corruption.
The Savior State’s promises to maintain your private status quo regardless of reality are false promises, delusions based on the Big Con that we can create trillions of dollars out of thin air and give them to the top .01%, and this will magically prompt an unsustainable system to keep issuing false signals of stability.
The promises are on permanent back-order, along with trust, transparency and accountability. The choice isn’t whether to opt out or continue hoping delusions and denial will work some sort of magic, but to choose whatever form of opting out works best for you and your household.
Even before the coronavirus pandemic, US malls were in a crisis, with vacancies in January hitting a record high.
However, in the post-corona world, commercial real estate has emerged as one of the most adversely impacted sectors (perhaps because the Fed has so far refused to bail it out), with the number of new delinquencies soaring to a record high in recent weeks.
The gloom facing malls has also helped push the Big Short trade, which was the CMBX Series 6 BBB- tranche (the one with the most exposure to malls), to a fresh all time low last week.
And now, the implosion of the US retail sector has reached the very top, because according to Bloomberg The Mall of America, the largest US shopping center, has missed two months of payments for a $1.4 billion commercial mortgage-backed security, in confirmation that no business is immune to the devastating consequences of the coronavirus.
“The loan is currently due for the April and May payments,” according to a report filed by the trustee of the debt, Wells Fargo & Co., which is also the master servicer for the loan. “Borrower has notified master servicer of Covid-19 related hardships.”
Mall owners reported rock-bottom April rent collections, including about 12% for Tanger Factory Outlet Centers Inc., roughly 20% for Brookfield Property Partners LP and 26% for Macerich. Retailers and their landlords, hurt by competition from online stores before coronavirus-spurred shutdowns made things worse, are struggling to make rent and mortgage payments.
The 5.6 million-square-foot (520,000-square-meter) mall was ordered closed on March 17, and has announced plans to begin reopening on June 1, starting with retailers, followed later by food services and attractions, such as the mega-mall’s aquarium, cinema, miniature golf course and indoor theme park.
“Reopening a building the size of Mall of America is no small task, but we are confident taking the necessary time to reopen will help us create the safest environment possible,” the mall said in a statement on its website.
The Mall of America is owned by members of the Ghermezian family, whose holdings also include the West Edmonton Mall, a 5.3 million-square-foot complex in their Canadian hometown, and American Dream, a 3 million-square-foot mall in East Rutherford, New Jersey.
Just when you thought the world has reached a level of peak absurdity, the Nigerian scheme makes a grand reappearance.
Washington state officials admitted losing “hundreds of millions of dollars” to an international fraud scheme, originating out of Nigeria, that robbed the state’s unemployment insurance system and could mean even longer delays for thousands of jobless workers still waiting for legitimate benefits.
As the Seattle Times reported, Suzi LeVine, commissioner of the state Employment Security Department (ESD), disclosed the staggering losses during a news conference Thursday afternoon. LeVine declined to specify how much money was stolen during the scam, which she said appears to be orchestrated out of Nigeria but she conceded that the amount was “orders of magnitude above” the $1.6 million that ESD reported losing to fraudsters in April.
While LeVine said state and law enforcement officials were working to recover as much of the stolen money as possible, she declined to say how much had been returned so far. She also said the ESD had taken “a number of steps” to prevent new fraudulent claims from being filed or paid but would not specify the steps to avoid alerting criminals.
Thursday’s disclosure helped explain the unusual surge in the number of new jobless claims filed last week in Washington, which as we showed this morningwas the state with the highest weekly increase in claims.
On Wednesday, the state’s monthly employment report for April showed Washington with a seasonally adjusted unemployment rate of 15.4%, up from 5.1% in March. The national unemployment rate for April stood at 14.7%, seasonally adjusted.
For the week ending May 16, the ESD received 138,733 initial claims for unemployment insurance, a 26.8% increase over the prior week and one of the biggest weekly surges since the coronavirus crisis began. That sharp increase came as the number of initial jobless claims nationwide fell 9.2%, to 2.4 million, according to data released earlier in the day by the Labor Department.
Indeed, the surge in claims made Washington the state with the highest percentage of its civilian labor force filing unemployment claims – at 30.8%, according to an analysis by the Tax Foundation, a nonpartisan Washington, D.C., think tank. Nevada, the next-highest state, reported claims from 24.5% of its civilian workforce.
It now appears that many of those claims were fictitious and emanated from some computer in Nigeria.
Nothing paints a better picture of how bad things have gotten for the airline industry – and for its working class – than the fact that United Airlines is barely using over 10% of its flight attendant staff.
The airline said this week it only has work for 3,000 of its 25,000 flight attendants in June and said that job losses could be next if demand doesn’t recover by the time the government ends its payroll aid, according to Reuters.
United still intends to pay its flight attendants until September 30 thanks to $5 billion in aid the airline got from the taxpayer’s purchasing power government. The CARES Act prohibits layoffs or pay cuts before October.
United is just one of many airlines feeling the pain of the coronavirus lock down. Its flight schedule is down by an astonishing 90% and it has – along with other airlines – significantly cut the number of flights it is making on a daily basis. Major airlines are burning about $10 billion in cash per month.
United’s managing director of inflight crew resourcing, Michael Sasse, said: “If you just look at a way in which our network is flying we’d need about 3,000 flight attendants to fly our schedule for June.”
United says they will keep their flying schedule at about 10% of normal until demand starts to tick back up.
United President Scott Kirby said: “But if demand remains significantly diminished on Oct. 1, we simply won’t be able to endure this crisis … without implementing some of the more difficult and painful actions.”
United is burning about $40 million in cash per day and executives have said they want to be up front with employees about potential cuts. The airline has warned that its administrative staff will be about 30% smaller by the time Fall comes around.
Has anyone given credit to the coronavirus for exposing the general folly of our time? We’ve yet to find mention of it. Not even on the web. Here we shall do our part to give proper credit where credit is due…
Numerous stimulus proposals are currently being cooked up in Congress. In an election year, with unemployment going vertical, now’s the time to cash in on populist sentiments. The three leading bills, for example, are the Automatic Boost to Communities (ABC) Act, the Emergency Money for the People Act, and the Monthly Economic Crisis Support Act.
With names like that, what’s not to like? The main ingredient for each proposal is a $2,000 monthly stimulus check. The variance between the three is in duration and eligibility.
The ABC Act, which was introduced by Congresswomen Rashida Tlaib and Pramila Jayapal, is the most ambitious. This act is centered on $2,000 monthly payments to all taxpayers – and their dependents – for a payment period that extends one year after the termination of the declared coronavirus emergency… whenever that may be.
So, if we follow, a family of four stands to receive $8,000 per month for well over a year. Incredible! But that’s not all…
There are no eligibility criteria… save the requirement that nonresident aliens have been in the U.S. since December 19, 2019. Plus, an additional $1,000 monthly payment would continue for 12 months after the end of the initial payment period.
The price tag: Upwards of $10 trillion.
Where to begin…
State Sponsored Destruction
By our estimation, these downward steps have been underway since Neil Armstrong first stepped foot on the moon. However, the assassination of Archduke Franz Ferdinand at the hands of Gavrilo Princip may be a more accurate turning point.
By now it’s obvious to any honest observer that western civilization is circling the toilet bowl. The ABC Act of Tlaib and Jayapal, as an answer to state sponsored destruction of the economy, offers a case in point. The solution, you see, is more of the problem.
By and large, the challenges facing the economy have everything to do with central government. Over the last 40 years, as the Fed and the Treasury colluded to rig the financial system in totality, wealth has become ever more concentrated in fewer and fewer insider hands. The effect over the last decade has been a disparity that’s so magnified few can ignore it.
This trend has been further intensified by our current economic depression. Bitterness and contempt for wealthy insiders is much higher than it was during prior business cycles. Without question, this bitterness and contempt will amp up to a fever pitch over the hot summer months.
Discontent throughout the broad population will take a financial crash and an economic collapse, and transform it into a complete societal breakdown. The effect will be helter-skelter. And the central planners have already failed a test of their making.
When the coronavirus panic attacked financial markets in March the central planners at the Fed made a grave error. Rather than employing small government and sound money solutions – that is, rather than letting over indebted corporate dinosaurs go extinct – the Fed flooded financial markets with liquidity.
These bailouts saved the dinosaurs. But they also transmuted them into zombies. Now, with an economy full of zombies, the 18 month depression will extend for a decade.
Tasting the Forbidden Fruit of Free Money
Yet what the Fed wasn’t banking on was that the plebs were on to their mischief. The 2008-09 bailout of Wall Street via AIG had opened their eyes and minds to what’s possible. So as the Fed went into full big business bailout mode, the plebs started asking…where’s the people’s bailout?
What’s more, the people had a moral case to make. Through no fault of their own, state sponsored destruction, in response to the coronavirus, had eradicated their jobs. Hence, it’s only fair that the people get a bailout too, right?
The CARES Act, which included a $1,200 stimulus check and an additional $600 weekly payment for the unemployed, offered many people their first taste of the forbidden fruit of free money. They took a bite and – wow! – they liked it. And now they want more…
A $1,200 stimulus check was nice, and all. But a $2,000 monthly payment is way better. So why stop there?
When money’s free, the supply’s infinite…ain’t it?
There’s something irresistibly magical and intoxicating about the promise of free money. For it promises life without labor… and life without limits. Moreover, once a nation has taken a bite there’s no going back. Free money, you see, is so delicious that too much is never enough.
Who knows if the ABC Act will pass. But some stimulus bill with monthly checks will. And after that another will follow. And another.
Alas, free money is fake money. The Fed’s balance sheet will swell past $10 trillion, as it supplies credits to the Treasury. The national debt will swell past $40 trillion as it sends out monthly payments of fake money.
“There is a great deal of ruin in a nation,” once remarked Adam Smith.
The coronavirus, to its credit, has clarified the source of the ruin.
Excellent perspective. Maybe we don’t have it that bad? It’s a mess out there now. Hard to discern between what’s a real threat and what is just simple panic and hysteria. For a small amount of perspective at this moment, imagine you were born in 1900.
On your 14th birthday, World War I starts, and later ends on your 18th birthday. 22 million people perish in that war. Later in the year, a Spanish Flu epidemic hits the planet and runs until your 20th birthday. 50 million people die from it in those two years. Yes, 50 million.
On your 29th birthday, the Great Depression begins. Unemployment hits 25%, the World GDP drops 27%. That runs until you are 33. The country nearly collapses along with the world economy.
When you turn 39, World War II starts. You aren’t even over the hill yet. And don’t try to catch your breath. On your 41st birthday, the United States is fully pulled into WWII. Between your 39th and 45th birthday, 75 million people perish in the war.
Smallpox was epidemic until you were in your 40’s, as it killed 300 million people during your lifetime.
At 50, the Korean War starts. 5 million perish. From your birth, until you are 55 you dealt with the fear of Polio epidemics each summer. You experience friends and family contracting polio and being paralyzed and/or die.
At 55 the Vietnam War begins and doesn’t end for 20 years. 4 million people perish in that conflict. During the Cold War, you lived each day with the fear of nuclear annihilation. On your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. Life on our planet, as we know it, almost ended. When you turn 75, the Vietnam War finally ends.
Think of everyone on the planet born in 1900. How did they endure all of that? When you were a kid in 1985 and didn’t think your 85-year-old grandparent understood how hard school was. And how mean that kid in your class was. Yet they survived through everything listed above. Perspective is an amazing art. Refined and enlightening as time goes on. Let’s try and keep things in perspective. Your parents and/or grandparents were called to endure all of the above – you are called to stay home and sit on your couch.
The California State University system, commonly recognized as the largest four-year university system in the country with 23 total campus, will not hold in-person classes through the fall semester for the majority of programs due to the coronavirus pandemic.
Chancellor Timothy White informed a board meeting on Tuesday that “nearly all in-person classes” will be canceled, meaning the current remote learning online format will continue.
And additionally concerning the other major system in the state, the University of California, a new statement this week said “it’s likely none of our campuses will fully re-open in fall,”according to a UC spokesman.
As multiple reports have underscored, this means a total of more than 770,000 students will not return to campus — which will no doubt be a huge blow to school finances, which often relies heavily for daily operations on campus-related fees such as housing, to say nothing of the coming likely massive drop in tuition and other crucial funds.
Considering other public and private colleges and universities in California are now likely to also go on-line only, we’re now talking a whopping one million students expected to stay home.
It further introduces the huge unknown of how many students will choose to forgo paying tuition for what many see as a sub-par online education as opposed to the holistic experience of a college campus. As we described before many especially incoming college freshmen are likely to take a ‘gap year’ as they’re not interested in dropping $50K plus for a semester sitting in their living room.
A California State University statement this week said: “First and foremost is the health, safety and welfare of our students, faculty and staff, and the evolving data surrounding the progression of Covid-19 —current and as forecast throughout the 2020-21 academic year,” according to CNN.
And the University of California announcement said it “will be exploring a mixed approach with some material delivered in classroom and labs settings while other classes will continue to be online.”
#CORONAVIRUS IMPACT: The California State University (CSU) system said it plans to cancel all in-personal classes for the fall and to continue instruction online. https://t.co/FvDQDr0AE0
Apparently the few programs which will be deemed as essential to conduct in-person involve professions like nursing, bio-research, and medical related disciplines, where access to labs, medical equipment, and patient interaction are crucial.
Schools across the nation are already losing tens of millions in campus and summer fees given shutdowns, not to mention sports programs being shuttered, also as the the question of whether in-person instruction will even happen next Fall remains the biggest anxiety-inducing huge unknown, potentially delivering a financial fatal blow to a number of already struggling schools.
Endowment values have plunged along with markets to boot. And then there’s a no doubt a greatly diminished incoming freshman class, and with that severely declining numbers of tuition checks coming in. Already faculty members are being furloughed in some cases, or salaries being cut.
Having crashed in March, April industrial production was expected to crash even harder. Industrial production plunged 11.2% MoM (very modestly better than the 12% drop expected) but still the worst in 101 years…
Manufacturers in the U.S. were among the first to experience the pandemic’s economic drag as producers fell victim to supply-chain disruptions, a severe weakening in exports market and a drop in domestic demand.
Capacity Utilization collapsed to a record low 64.9%
The DOW Jones Industrial Average still has a long way to go to catch down to Industrial Production…
The core problem is the U.S. economy has been fully financialized, and so costs are unaffordable.
(Charles Hugh Smith) To understand the long-term consequences of the pandemic on Main Street and local tax revenues, we need to consider first and second order effects. The immediate consequences of lock downs and changes in consumer behavior are first-order effects: closures of Main Street, job losses, massive Federal Reserve bailouts of the top 0.1%, loan programs for small businesses, stimulus checks to households that earned less than $200,000 last year, and so on.
The second-order effects cannot be bailed out or controlled by central authorities.Second-order effects are the result of consequences have their own consequences.
The first-order effects of the pandemic on Main Street are painfully obvious: small businesses that have barely kept their heads above water as costs have soared have laid off employees as they’ve closed their doors.
The second-order effects are still spooling out: how many businesses will close for good because the owners don’t want to risk losing everything by chancing re-opening? How many will give it the old college try and close a few weeks later as they conclude they can’t survive on 60% of their previous revenues? How many enjoy a brief spurt of business as everyone rushes back, but then reality kicks in and business starts sliding after the initial burst wears off?
How many will be unable to hire back everyone who was laid off?
As for local tax revenues based on local sales taxes, income taxes, business license fees, and property taxes: the first three will fall off a cliff, and if cities and counties respond to the drop in tax revenues by jacking up property taxes, this will only hasten the collapse of businesses that were already hanging on by a thread before the pandemic.
The federal government can bail out local governments this year, but what about next year, and every year after that? The hit to local tax revenues is permanent, as the economy became dependent on debt and financialization pushed costs up.
Amazon and online sellers don’t pay local taxes, except in the locales where their fulfillment centers are located. Yes, online sellers pay state and local sales taxes, but these sales are for goods; most of the small businesses that have supported local tax revenues are services: bars, cafes, restaurants, etc. As these close for good, the likelihood of new businesses taking on the same high costs (rent, fees, labor, overhead, etc.) is near-zero, and anyone foolish enough to try will be bankrupted in short order.
Now that work-at-home has been institutionalized, the private sector no longer needs millions of square feet of office space. As revenues drop and profits vanish, businesses will be seeking to cut costs, and vacating unused office space is the obvious first step.
What’s the value of empty commercial space? If demand is near-zero, the value is also near-zero. Local government will be desperate to raise tax revenues, and they will naturally look at bubble-era valuations on all real estate as a cash cow. But they will find that raising property taxes on money-losing properties will only accelerate the rate of property-owner insolvencies.
At some point valuations will adjust down to reality, and property taxes collected will adjust down accordingly. If municipalities think they can make up the losses by jacking up the taxes paid by the survivors, they will quickly find the ranks of the survivors thinned.
This doesn’t exhaust the second-order effects: once Main Street is half-empty, the attraction of the remaining businesses declines; there’s not enough to attract customers, and the virtuous-circle of sales rising for everyone because the district is lively and attractive reverses: the survivors struggle and give up, further hollowing out the district.
The core problem is the U.S. economy has been fully financialized, and so costs are unaffordable. The commercial property owner overpaid for the buildings with cheap borrowed money, and now the owner must collect nose-bleed high rents or he can’t make the mortgage and property tax payments.
Local governments spend every dime of tax revenues, as their costs are insanely high as well. They cannot survive a 10% decline in tax revenues, much less a 40% drop.
The metaphor I’ve used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up, but the central banks no longer allow any creative destruction of unpayable debt and mis-allocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.
As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.
The only possible output of this suppression is an economy piled high with explosive risk. Eventually Nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.
Gordon Long and I look at two highly correlated second-order effects: the collapse of Main Street and local tax revenues.
“At some point, America’s short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed.”
– Strauss & Howe – The Fourth Turning
(Jim Quinn) I’ve been writing articles about the Fourth Turning for over a decade and nothing has happened since its tumultuous onset in 2008, with the global financial collapse, created by the Federal Reserve and their Wall Street co-conspirator owners, that has not followed along the path described by Strauss and Howe in their 1997 book – The Fourth Turning.
Like molten lava bursting forth from a long dormant (80 years) volcano, the core elements of this Fourth Turning continue to flow along channels of distress, long ago built by bad decisions, corrupt politicians and the greed of bankers. The molten ingredients of this Crisis have been the central drivers since 2008 and this second major eruption is flowing along the same route. The core elements are debt, civic decay, and global disorder, just as Strauss & Howe anticipated over two decades ago.
“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.”
– The Fourth Turning – Strauss & Howe
The initial spark for this Crisis was the massive mortgage fraud perpetrated on the nation by the Wall Street banks and enabled by their drug dealer at the Fed – Ben Bernanke. Once he took his Wall Street payoff, becoming a multi-millionaire after departing the Eccles building and reaping his rewards (aka bribes), Yellen stepped into the breach, shoveling billions into the deep pockets of the ruling elite. QE to infinity for the connected billionaire set and .25% interest on granny’s dwindling retirement nest egg.
Then another spineless academic dweeb took over the reins of money printing for the .1% in 2018. Jerome Powell had the gall to raise rates all the way back to 2.25% and wind the Fed’s balance sheet all the way down to $3.8 trillion from $4.5 trillion, before he was sternly told who he works for. And it’s not you and me. I wonder what threats were made to convince him to fall into line.
The financial engine driving the American economy blew a gasket in September 2019. Overnight repo rates soared to 10%, indicating a major malfunction under the hood, threatening the wealth and safety of our beloved Wall Street bankers and billionaire hedge fund managers, picking up nickels in front of steamrollers. Jerome jumped into action, to save his billionaire owners. The QT was turned off and QE spigot was back on. He ramped the Fed’s balance sheet by over $400 billion in three months, with three 25 basis point cuts going into 2020.
Powell, Mnuchin and their buddies at Goldman, Blackrock, JP Morgan and the rest of the banking cabal looked back at what Bernanke, Paulson, Blankfein, and their cohorts pulled off in 2008/2009 and said hold my beer. The chutzpah of what they have done in two months is breathtaking to behold, as the greatest wealth transfer from the former working class to the champagne and caviar class in the history of mankind has been executed with precision and flawlessness by high tech criminals and their propaganda spewing corporate media compatriots.
This global pandemic is the crisis they couldn’t let go to waste. There is a myriad of theories on where, how, and why this global pandemic began. The accidental release of the virus from a bio-weapons lab in Wuhan appears to be the most likely scenario, with the Chinese authorities covering up the nature and seriousness of the virus and allowing infected citizens to spread it throughout the world. This narrative will likely play into the bloody climax of this Fourth Turning.
What we do know for sure is Trump was convinced by government bureaucrat medical “experts”, using seriously flawed models, that more than 2 million Americans would die unless he quarantined the entire nation. Extrapolating the disastrous NYC results across the entire U.S. and shutting down the entire economy will prove to be one of the most disastrous decisions ever made by a U.S. president.
Instead of addressing a virus only marginally more lethal than the yearly flu in a rational fact-based manner, we allowed ourselves to be snowed by “experts” and authoritarian politicians who originally downplayed the threat, instructed everyone to not use face masks, and purposely put infected patients into nursing homes. Cuomo is hailed as a hero by his brother’s joke of a news network, when he should be scorned as an inept bungler who caused the deaths of thousands.
Democrat politicians declared racism when Trump tried to shut the borders. Instead of protecting the most vulnerable in nursing homes (40% to 50% of all fatalities), closing the borders, encouraging the vulnerable to self- quarantine, encouraging people to wear masks, and letting those under 50 years old continue to work and keep the economy from crashing, we used the Chinese tyrannical method of total lock down.
We let the overbearing reach of government and the egomaniacal authoritarian governors, mayors and Karens lock down an entire nation under the threat of incarceration. They had plenty of room in the prisons because they released pedophiles, rapists, and thieves for fear they might catch the virus. The government hammer saw everyone as a nail. And they have been hammering away for two months, with plans to keep hammering for many months to come.
The corporate fascists have utilized the government-imposed shutdown to implement their plan to increase and consolidate their power, control and wealth. The first order of business was the Fed using the shutdown as its excuse to buy the toxic assets, junk bonds, and junk government treasuries in order to bail out hedge fund managers, Wall Street CEOs and government politicians dishing out $4 trillion of payoffs to constituents with the best lobbyists.
The 32% drop in the stock market in March was unacceptable to Powell and his minions. They vowed to do whatever it took to restore the billions in wealth of the .1%. The bottom 99% be damned. Everyone knows you can’t catch coronavirus at Wal-Mart or Target among hundreds of shoppers, but can catch it alone on the beach or in your local hair salon with three people in the shop.
So, Jerome and Neel decided to slash interest rates by 150 basis points, back to virtually 0%. So much for senior citizens getting 2% in their money market fund; Wall Street needed free money again. They’ve increased their balance sheet by $2.7 trillion in seven weeks, a 65% increase. Shockingly, the stock market has skyrocketed along with the Fed balance sheet, as 33 million non-essential workers have lost their jobs and we enter a 2nd Great Depression.
The Fed pretends to care about wealth inequality even though they are solely responsible for the grand-canyon like divergence between the super-rich and the rest of us. Their vow to pump $6 trillion into the financial system will only benefit the Hamptons crowd. Lance Roberts describes what is happening:
“To no one’s real surprise, the driver of the market is simply “The Fed.” As the Fed engages in “QE,” it increases the “excess reserves” of banks. Since banks are NOT lending to consumers or businesses, that excess liquidity flows into the stock market.”
And there you have it. Bailing out Wall Street and screwing Main Street, again. Everything the Fed has done, or will do, does not benefit the 33 million who have lost their jobs and the millions of small businesses which are purposely being snuffed out by tyrannical government overlords, so the mega-corporations, with their patriotic “we’re in this together” bullshit Madison Avenue identical ad campaigns, will be left with 90% of the economic pie instead of the 75% they had before the plandemic.
Even the worst employment figures since the Great Depression (last Fourth Turning) were spun by the government drones at the BLS to appear far better than they really are. The reported 14.7% unemployment rate is complete and utter bullshit fake news. But the mouthpieces for the oligarchs, the propaganda media outlets, had their spokes models and talking head “experts” report the gibberish as if it were true.
Maybe these faux financial journalists should have examined the 42-page press release and found the BLS purposely fudged the number by 5%:
If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis).
So that means even the massaged and manipulated BLS number is 20%. One look at the data shows how ludicrously low they have manipulated the number. The BLS reported the labor force as 164.5 million in February and now says it is 156.5 million. Poof!!! – 8.3 million people willingly left the workforce because they felt like it – not because they were forced out of the workforce by the same government paying the BLS to spew this fake data.
These people did not leave the workforce, they are unemployed by government mandate. The number of employed people is now back to 1999 levels and headed lower. And as if you didn’t already know, the job losses have been borne mostly by blue collar, retail and restaurant workers (heavily skewed towards women and young people), self-employed, and small businesses.
Wal-Mart, Target, Amazon, Wall Street banks and the rest of the mega-corporations are doing just fine – even better since they don’t have those pesky small businesses eating into their profits. At least the Fed was able to propel the stock market 455 points, back towards all-time highs, as 33 million people wonder where their next meal will come from. Winning!
The plain simple fact is there are 260 million working age Americans and 127 million, or 49% are not working. Of the 133 million who are working, 23 million are part-time workers and 19 million are government workers. In another shocking development, while the number of workers in private industries dropped by 18%, the number of government workers only dropped by 8%. It seems our authoritarian rulers know what is good for us, but don’t feel the need to share the pain equally.
But at least our beloved government heroes have time to stage daily parades with their fire engines and $70,000 police vehicles and do patriotic flyovers to keep the unemployed and mandatory masked plebs entertained. Something has to make up for the lack of the normal bread and circuses of double bacon cheeseburgers and watching overpaid privileged athletes play games. I can’t wait to see more tik-tok dance videos from the hero nurses and doctors overwhelmed with coronavirus patients in their empty hospitals.
If you don’t feel the mood of the country turning towards confrontation and civil chaos, you are either a lackey for the establishment, a government paid drone, or propagandized to such an extent you have chosen to be willfully ignorant of your surroundings. This Fourth Turning seemed somewhat dormant since 2012, but government, corporate, and consumer debt continued to balloon; the divide between left and right grew as the Deep State conducted a coup against a duly elected president; and global disorder accelerated in the Middle East, Europe, Asia and South America.
The core elements of debt, civic decay, and global disorder are now coalescing into a perfect storm of consequences for a nation and world built upon a teetering edifice of unpayable debt, unfulfilled promises, the unbridled greed of a blood thirsty ruling class, and the unbelievable delusions of people who think a world built upon borrowing to consume is sustainable.
The dichotomy between what is happening in the real world and what is happening in the world of the financiers will lead to violent upheaval on a timeline not anticipated by the ruling class. There is a good reason gun stores were overwhelmed with business at the outset of this over-hyped flu pandemic. As Strauss and Howe pointed out twenty three years ago, trust in the government, central bankers, the corporate media, and “experts” is disintegrating rapidly. The anger and disillusionment grows by the day and pockets of resistance are propagating throughout the country.
The un-Constitutional destruction of rights and liberties by overbearing governors, mayors and Federal bureaucrats is pushing desperate citizens towards insurrection. The police who carry out the unlawful orders of their superiors for a paycheck should realize they live among those they are bullying and pushing around. There is blow back coming and they should act accordingly. When people have lost everything they had and any hope for the future, while witnessing the privileged continuing to reap the benefits of a rigged financial system, civil disobedience will increase and blood will begin to be shed. The bubble of abnormalcy will be popped.
It is weirdly fascinating to watch a Fourth Turning unfold, while in the midst of it, and knowing we are entering the phase where people have died in numbers that put this pandemic fatality count to shame during the previous two American Crisis periods. From 1861 to 1865 almost 5% of the male population of the country were killed. That would equate to about 8 million today. From 1939 to 1945 an estimated 65 million people were killed.
The 100,000 or so who will die in 2020 from this virus is just a prelude to the death and destruction to follow. The trigger for the climactic phase of this Fourth Turning is not a virus that will not kill 99.97% of the American population, but the economic consequences of the over-reaction and authoritarian response to the virus. I’ve lost respect for numerous bloggers who desperately try to paint Sweden’s response as disastrous in an effort to support their own narrative of doom.
Sweden’s decision to allow its people and businesses to use reasonable precautions and not lock down their country in the dictatorial Chinese way, has resulted in cases per million being in line with the rest of European countries and lower than the U.S. The louder these bloggers scream, the surer you can be they have been proven wrong.
It is mesmerizing to watch those on the left, along with the Republican “Never Trumpers”, flail about as the Obama/Clinton attempted coup against Trump unravels before their very eyes. The reaction of these people, along with their toadies at CNN, MSNBC and the other left wing media, reveals an unbridgeable chasm between those believing in the rule of law and people who are willing to do anything for power.
The pure hatred from those on the left for Trump and his followers can not be contained. They despise the deplorables in flyover country with such a passion, the spittle foaming on their lips as they describe them as gun toting, uneducated, white racists, is an indication of their fury and hate. What these entitled, suit wearing, botox injected, arrogant idiot yet idiot establishment whores fail to realize is we despise them equally and we’re armed and ready. While psychopaths in suits, worthless politicians, government errand boys and remote working white collar parasites of the establishment continue to get paid, they continue to prohibit the lowly wage earner from making a living. A price will be paid.
Trump is not a nice guy. Grey Champions (Lincoln, FDR) use their power in ways not conducive to making everyone happy. They are leading during a time of crisis and will use any means necessary to win. The coup attempt by Obama, Clinton, Comey, Clapper, Brennan, Mueller, and their minions has failed and now the tables will be turned. Trump, Barr, Grennell and Durham have the power to prosecute some of the most powerful left wing politicians and Deep State operatives on the planet.
How this plays out before November will ignite further civil strife and discontent. People have already begun taking to the streets and as this unnecessary shutdown further impoverishes the masses, things will turn nasty. Government attempting to have neighbors rat on neighbors for not obeying the Nanny State commands will backfire on the rats. Animosities and grudges will sway the actions of many, once the gloves come off.
The majority of rule following sheep believe what they are being told by their elected leaders, non-elected self proclaimed medical “experts” and the feckless shills on their boob tube. They do not see what is coming, just over the horizon. The divergence of opinion on how we should proceed from this point onward is immense, with biases, delusions, and inability to grasp the unintended consequences of the actions taken thus far, driving the narratives. Listening to Trump bloviate about the tremendous economic boom which will occur when we re-open the country is laughable. He sounds like a carnival barker.
He allowed himself to be bamboozled by medical “expert” hacks and their immensely flawed garbage in-garbage out models into destroying our economy, and he may end up paying the price in November as the economy is mired in a 2nd Great Depression. But the Dow should be at 50,000 by then, so he’s got that going for him. Trump thinks you can turn the economy on again and things will be as good as new. He evidently has never read Bastiat or Hazlitt. The broken window fallacy now can be called the broken country fallacy. The financial gurus crow about the fantastic job Powell and Mnuchin have done, based upon what they have seen (31% increase in S&P 500), while that which is unseen has yet to reveal itself.
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
– Henry Hazlitt
The hacks who pass for economists and central bankers don’t practice the art of economics. They are enablers of plunder, as their actions benefit a small group of men who have created a legal system that allows and glorifies this as a way of life. Abnormal, morally ambiguous and in many cases illegal actions taken by those pulling the levers of power will have far reaching consequences unseen by these myopic arrogant water boys for the oligarchy.
The destruction caused by this man-made depression is permanent. The millions of small businesses demolished are not coming back. The unemployment rate will never approach 3.5% again, unless the BLS says 30 million people just left the labor market because they got independently wealthy in the stock market.
The number of corporate and personal bankruptcies will exceed anything seen in history. The mortgage, credit card and auto loan defaults are going to make 2009 look like a cake walk. The fear and panic inflicted by the government upon the psyches of the masses has insured bars, restaurants, airlines, cruises, stadiums, movie theaters and anywhere crowds formerly gathered will draw a fraction of what they did three months ago. This will lead to more bankruptcies.
The remote working arrangements forced upon companies will result in a glut of office space, as companies save money by no longer renting overpriced offices. The coming commercial real estate collapse will be one for the record books. Malls, which were barely staying alive before Covid-19, are done, as major retailers declare bankruptcy on a daily basis. Closed stores no longer employ workers.
People whose jobs are gone, with their meager savings depleted, will not be spending on frivolous gadgets and baubles. They won’t be eating out three times per week. They will just be trying to sustain themselves. A society built upon 70% of its GDP coming from consumption is now doomed. The well oiled mechanism of lending money to people so they can buy shit they can’t afford and paying them just enough to make the minimum payments has malfunctioned.
The state and local governments dependent upon sales taxes, gasoline taxes, income taxes, tolls, and property taxes to pay for their bloated bureaucracies are going to be overwhelmed with massive deficits, as their revenue streams have evaporated. This will bring the government pension crisis to a head years earlier than expected. The normal government action would be to increase taxes on the plebs. The plebs are broke and will not stand for higher taxes. They’ll demand government layoff workers. This will just throw another log on the fire of discontent. The us versus them mindset will grow ever larger until violence breaks out.
The average American suffered economic hardship throughout the 1930s, just as average Americans continued to suffer economic hardship since 2008. But the real economic hardship has just begun. As Americans dealt with privation and poverty in the late 1930s the coming global conflict was brewing. Animosities, prejudices and resentments, exacerbated by economic turmoil, stirred militaristic ambitions of hubristic rulers in Europe and Asia. The parallels with the current international dynamic may not be the same, but they do rhyme. Three months ago, the truly chaotic perilous segment of this Fourth Turning seemed far off in the distance. Now it approaches with the speed of a ballistic missile.
The possibility of global catastrophe is not taken seriously by the vast majority of Americans. Their ignorance of history is appalling and a pathetic indictment of our educational system. It’s been seventy-five years since the last global conflict and most of the people who experienced the horror are dead. We’ve forgotten the past and are condemned to relive it, just as we do every eighty or so years.
The extreme volatility seen in financial markets over the last two months only happens during bear markets. The historical perspective and insight into market valuations of the 30 something Harvard and Wharton MBA traders doesn’t reach past last Tuesday. This bear market bounce, generated on nothing but Fed liquidity and belief in Powell’s infallibility, will give way once again to a waterfall like collapse in the equity markets. This will be the final nail in the coffin of trust in the Fed. If this crackup occurs as the election approaches, the consequences and actions taken will propel the global disorder into a new stratosphere. A storm is brewing.
Do you get the feeling the War on Covid-19 will work out just as well as the War on Drugs and War on Terrorism? Do you get the feeling the models being used to panic the world into obeying and submitting to our authoritarian surveillance state benefactors are as accurate as the climate models that said the ice caps would be gone by now? Do you get the feeling this is about control and power and wealth, and not about your health or well-being?
Do you get the feeling the left wingers and their media propagandists want to keep as much of the country locked down for as long as possible in order to defeat Trump in November? Do you get the feeling these people actually want a second wave to kill as many as possible, just to prove they were right? Do you get the feeling the destruction of our economy is being cheered by those waiting to enact their green new deal and using MMT to keep the plebs sedated and non-violent? I get the feeling this is not going to end well for those initiating this take down of a nation. The existing social order is always swept away during a Fourth Turning.
I see a foggy outline of where this crisis is headed. The debt situation is untenable. The inflationists and deflationists both make strong arguments in favor of their disastrous outcome which will beset the nation. The only thing that matters is we will experience a disastrous outcome in the very near future from this reckless issuance of debt. The civic decay has entered the confrontational stage, with sides taken, weapons at the ready, awaiting the spark which will ignite the dynamite.
Fighting in the streets will be next. Which leaves us with global disorder. The attempted take down of the US oil industry by Russia and Saudi Arabia has ramped up the potential for conflict in the Middle East. But, the proxy wars of the last two decades will give way to real conflict, where the losers really lose. Putin is a wily leader who never shows his cards. He probes at our weaknesses and takes advantage when our arrogant leaders make mistakes.
This leads us to Donald J. Trump and what he does and doesn’t do over the next five months and possibly next four years. He is a proud man with a huge ego, prone to impulsive actions, and war-like in his vengefulness against perceived enemies. And his enemies are many. He has every right to throw the full weight of the law against the high-level members of the attempted coup.
In an election year, a strategy of aggressiveness against his enemies, will play well with his base and possibly distract people from the economic depression. When faced with domestic trouble, politicians have always tried to distract the masses with a foreign threat. I believe Trump is angry he allowed Gates and his vaccine squad at the CDC and WHO to bamboozle him into a national quarantine that destroyed “the best economy evah”. He can’t blame himself, so he has turned his ire towards China.
It is the consensus belief this virus originated in Wuhan, China, either from a bio-lab and/or wet market. The narrative now being spun by the U.S. and German spy agencies is China knew they had a major issue in December and colluded with the WHO to cover-up the danger and transmit-ability of the virus, while allowing its citizens to travel the globe, spreading the virus far and wide for at least a month before admitting they had a problem.
The Chinese brutally locked down Wuhan and have supposedly stopped the virus dead in its tracks. The American MSM has bought this bullshit, just like they believe their economic data. Trump has now openly accused China of causing the economic damage to our country, demanding reparations. This war of words is likely to lead to more economic sanctions and retaliatory actions designed to hurt each other’s already dire economic situation.
Just as economic sanctions against Japan in the 1930s and early 1940s backed them into a corner and convinced their leadership to attack the U.S., pushing China and/or Russia into a corner through the use of economic sanctions designed to hurt them, will provoke a reaction that will lead to war. Impossible says the linear thinkers who can’t conceive of such foolish actions. History teaches otherwise.
Egomaniacal leaders, with terrible domestic issues, overestimating their abilities to comprehend the actions of their foes, and miscalculating the odds of war, will stumble into conflict, resulting in the deaths of millions. Global war in this technologically advanced age will not resemble the wars of eighty or one-hundred and sixty years ago. Civilians will likely bear the brunt of the casualties as attacks on electrical grids, water supplies, and computer systems would paralyze our economy, causing death on a grand scale. Maybe a really deadly virus could be released by our enemies.
As Strauss & Howe warned, history offers no guarantees. Many empires before ours have fallen and counting on Providence to protect us is wishful thinking. Any war could go horribly wrong, with all potential enemies capable of launching a nuclear exchange, ending life as we know it. We have gotten our first taste of tragedy with this pandemic, and the early returns on leadership, courage, fortitude, and common sense have been found wanting.
This does not bode well for the trials and tribulations we will face over the next decade. A failure to meet the challenges ahead with bravery, grit, good judgement, adherence to our Constitutional principles, and a fair amount of luck, could lead to a defeat from which we will never recover. No one knows how and when the climax of this Crisis will play out, but the acceleration towards our rendezvous with destiny is in motion. Strauss & Howe laid out four potential outcomes to this Crisis. It’s time to steel yourself to the possibilities.
This Fourth Turning could mark the end of man. It could be an omnicidal Armageddon, destroying everything, leaving nothing. If mankind ever extinguishes itself, this will probably happen when its dominant civilization triggers a Fourth Turning that ends horribly. For this Fourth Turning to put an end to all this would require an extremely unlikely blend of social disaster, human malevolence, technological perfection and bad luck.
The Fourth Turning could mark the end of modernity. The Western saecular rhythm – which began in the mid-fifteenth century with the Renaissance – could come to an abrupt terminus. The seventh modern saeculum would be the last. This too could come from total war, terrible but not final. There could be a complete collapse of science, culture, politics, and society. Such a dire result would probably happen only when a dominant nation (like today’s America) lets a Fourth Turning ekpyrosis engulf the planet. But this outcome is well within the reach of foreseeable technology and malevolence.
The Fourth Turning could spare modernity but mark the end of our nation. It could close the book on the political constitution, popular culture, and moral standing that the word America has come to signify. The nation has endured for three saecula; Rome lasted twelve, the Soviet Union only one. Fourth Turnings are critical thresholds for national survival. Each of the last three American Crises produced moments of extreme danger: In the Revolution, the very birth of the republic hung by a thread in more than one battle. In the Civil War, the union barely survived a four-year slaughter that in its own time was regarded as the most lethal war in history. In World War II, the nation destroyed an enemy of democracy that for a time was winning; had the enemy won, America might have itself been destroyed. In all likelihood, the next Crisis will present the nation with a threat and a consequence on a similar scale.
Or the Fourth Turning could simply mark the end of the Millennial Saeculum. Mankind, modernity, and America would all persevere. Afterward, there would be a new mood, a new High, and a new saeculum. America would be reborn. But, reborn, it would not be the same.
Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it.
The era of waste, greed, fraud and living on borrowed money is dying, and those who’ve known no other way of living are mourning its passing. Its passing was inevitable, for any society that squanders its resources is unsustainable. Any society that makes private greed the primary motivator and priority is unsustainable. Any society that rewards fraud above all else is unsustainable. Any society which lives on money borrowed from the future and other forms of phantom capital is unsustainable.
We know this in our bones, but we fear the future because we know no other arrangement other than the unsustainable present. And so we hear the faint echo of the cries of alarm filling the streets of ancient Rome when the Bread and Circuses stopped: what do we do now?
When the free bread and entertainments disappeared, people found new arrangements. They left Rome.
The greatest private fortunes in history vanished as Rome unraveled. All the land, the palaces, the gold and all the other treasures were no protection against the collapse of the system that institutionalized corruption as the ultimate protector of concentrated wealth.
The most zealously guarded power of government is the creation of money, for without money the government cannot pay the soldiers, police, courts and administrators needed to enforce its rule. Western Rome created money by controlling silver mines; in the current era, governments create money (currency) out of thin air.
Once the government’s money loses purchasing power, the system collapses. And so in the final stages of Rome’s decline, Imperial orders still flowed to distant legions, but the legions no longer existed; they were only phantom entries on Imperial ledgers.
Our “money” is also nothing but phantom entries on digital ledgers, and so its complete loss of purchasing power is inevitable.
Without “money,” the government can no longer enforce the will of its self-serving elites: orders will still flow in a furious flood to every corner of the land, but the legions to enforce the institutional corruption will be nothing but phantom entries on Imperial ledgers.
Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it. The destruction of the value of central bank-created “money” is already ordained, for there is no limit on human greed and the desire to maintain control, and so governments will create their “money” in ever-increasing amounts until the value has been completely leached from the phantom digital entries.
The outlines of a better world are emerging, an arrangement that prioritizes something more than maximizing private gain and institutionalizing the corruption needed to protect those gains. We will relearn to live within our means, and relearn how to institutionalize opportunity rather than corruption designed to protect elites.
We will come to a new understanding of the teleology of centralized power, that centralized power only knows how to extend its power and so the only possible outcome is collapse.
We will come to understand technology need not serve only monopolies, cartels and the state, that it could serve a sustainable, decentralized economy that does more with less, i.e. a DeGrowth economy.
The Federal Reserve will fail, just as the Roman gods failed to sustain the corrupt and bankrupt Roman elites. A host of decentralized, transparently priced non-state currencies will compete on the open market, just like goods, services and commodities. The Fed’s essential role– serving the few at the expense of the many, under the cover of creating currency out of thin air–will be repudiated by the implosion of the economy as all the Fed’s phantom “wealth” evaporates.
The outlines of a better world are emerging. Do you discern them through the smoke as the last frantic phantoms of an unsustainable system issue orders to reverse the tides of history as they dissipate into thin air?
Anyone that was hoping for a “quick recovery” for the U.S. economy can forget about that right now. Yes, many states are attempting to “reopen”, but in most cases it will be a multi-stage process that takes many months to complete. Meanwhile, fear of COVID-19 is going to keep many Americans from conducting business as usual even after all of the restrictions have been finally lifted. Even now, many of the stores, restaurants and movie theaters that have reopened are seeing very, very few customers. Unfortunately, millions of small businesses are not going to be able to survive in such a depressed economic environment for very long.
In America today, the rules of the game are slanted very heavily in favor of huge corporations and are slanted very heavily against small businesses.
It has been this way for years, but millions of small business owners just kept soldiering on because they wanted to work for themselves and not some corporate behemoth.
But for most small businesses things have never been easy. For most of them, it is usually such a struggle to try to eke out a very meager profit at the end of the month after covering expenses and payroll. But now COVID-19 has come along, and many small businesses haven’t had any revenue for weeks.
The good news is that the lock downs are starting to end, but the bad news is that many small business owners are facing a “new normal” in which their monthly revenues will be down by 30, 40 or 50 percent (or more). All of a sudden many small businesses that were once barely profitable have been transformed into businesses that are bleeding a lot of cash each month, and many of them simply are not going to make it.
It was always obvious that this pandemic would kill a lot of those businesses, but the true scope of the problem wasn’t apparent until now. According to Bloomberg, a survey that was just conducted found that 52 percent of U.S. small business owners “expect to be out of business within six months”…
COVID-19 could shutter most American small businesses.
That’s according to a new survey from the Society for Human Resource Management which found that 52% expect to be out of business within six months. The survey of 375 firms was conducted between April 15-21 and doesn’t account for improved business conditions as some U.S. states reopen this month.
Yes, the big corporate giants dominate our society today, but there are still lots and lots of small businesses out there.
“SHRM has tracked Covid-19’s impact on work, workers, and the workplace for months,” said SHRM Chief Executive Officer Johnny C. Taylor, Jr., “but these might be the most alarming findings to date. Small business is truly the backbone of our economy. So, when half say they’re worried about being wiped out, let’s remember: We’re talking about roughly 14 million businesses.”
Around the country, governors can choose to end the lock downs, but they can’t order customers to go out and spend money.
And considering the fact that more than 30 million Americans have lost their jobs over the last six weeks, a lot of them don’t have money to spend anyway.
But even if everyone was still working, there is a large segment of the population that will simply be afraid to venture into public places as long as this pandemic is going on.
If you doubt this, just consider what we are witnessing in Texas. Reuters sent a reporter to one of the most popular malls in Austin, and what that reporter discovered is quite sobering…
A dozen or so people were strolling about the sprawling open-air shopping center Monday afternoon, with three seated on the patio of a Tex-Mex restaurant. Only one shopper wore a mask, and the loudest noises were from songbirds perched in the live oak trees along the deserted pedestrian thoroughfares.
“I’ve seen one customer today – they didn’t buy anything,” said Taylor Jund, who was keeping watch over an empty Chaser clothing store. “There’s absolutely no one coming around here.”
If even 20 percent of customers stay away for the foreseeable future, that is going to be enough to kill millions of small businesses.
So the truth is that we are facing a major national crisis.
A while back, Congress passed a bill that was supposed to help small businesses survive the lockdowns, but as I mentioned in a previous article it looks like that program has been a massive failure…
According to the CNBC/SurveyMonkey Small Business Survey released Monday, which surveyed 2,200 small business owners across America, while the $660 billion Paycheck Protection Program was instituted to give them a lifeline through the coronavirus and economic shutdown, only 13% of the 45% who applied for the PPP were approved.
We really are caught in a downward spiral now. We desperately need to get Americans back to work so that they can start earning paychecks again, but with so few customers right now, businesses will continue to lay off even more workers in the weeks and months ahead.
Fresh meat prices escalated 8.1% in stores, compared to the same period last year, according to Nielsen data for the week ending April 25.
Experts expect prices to skyrocket in the coming weeks, as meat processing plants across the U.S. are forced to close due to the coronavirus pandemic. Pork and beef prices could increase by as much as 20% compared to 2019, according to a new report from CoBank, a cooperative bank that is part of the Farm Credit System.
Now that the worst jobless print and unemployment rate in US history are in the record books, the next questions are i) what does this mean for the US economy and ii) how long before things revert back to normal.
Addressing the second question first, Morgan Stanley earlier this week laid out three scenarios, a bull, base and bear case. What is notable is that even the bull case sees a full recovery only in 2021. The base case tacks on another year to the recovery while the bear case sees double-digit unemployment into 2022 and onward.
Goldman agrees with Morgan Stanley, and even in its optimistic report that the US has now moved past the bottom (assuming the is no second round of closures in late 2020), the bank expects labor market slack to remain substantial even in late 2021 and entering 2022.
The bottom line here is that contrary to expectations for a quick return to normal, it will take years (if ever) before the unemployment rate recorded in late 2019 is back.
As for the first question, namely what is the economic impact from today’s catastrophic jobs report, here is the answer from Bloomberg’s Economic team:
“The extent of job losses is consistent with Bloomberg Economics’ modeling of a near 40% contraction in real GDP for the quarter. While layoffs were concentrated in sectors such as restaurants, hospitality and leisure, losses occurred in nearly all subcategories.”
As Bloomberg concludes:
“the breadth of job losses is a jarring signal of the massive challenge of restarting vast swaths of the economy – not just a few sectors – and it therefore serves as a stark indication that a ‘V-shaped’ recovery will not be possible.”
Meanwhile, stocks are now higher than they were a year ago, when the unemployment rate was about 3.5%. Thanks Fed.
Today’s jobs report was, as expected and as previously discussed, absolutely horrific, although as Bank of America points out there was one silver lining which Larry Kudlow quickly latched on to: with 72% of jobs lost being reflected as temporary layoffs, workers should be able to be more seamlessly rehired as the economy reopens. However, the longer this pandemic goes on, the more likely that what was temporary becomes permanent, and as ZeroHedge pointed out in a previous post, even baseline cases see unemployment not returning back to normal until 2022 or later.
Offsetting this “good news”, however, there was one especially scary aspect of today’s jobs report that has not gotten enough publicity, namely that as BofA writes, the employment to population ratio plunged to a record low, with only 51.3% of the population working. Inversely, this means that in April, 49% of the US population was not working.
As a reminder, the BLS said that if the workers who were recorded as employed but absent from work due to “other reasons” had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported, meaning that the true unemployment rate as of this moment is 20%
White House economic adviser Kevin Hassett laid the groundwork for shocking the US population for this devastating reality, when he said in a CNN interview that next month’s jobs report “should be around 20%,” adding that the U-6, or the underemployment rate, will probably hit around 25% in the next report.
This means that the employment-to-population ratio is also under counted by about 4-5%, and that as of this moment (we will get the May jobs data in 1 month), the employment to population ratio is below 50%, indicating that for the first time in history, more than half of the US population is unemployed!
Which is great news for stocks: think of all the people who have nothing better to do than buy the fucking dip all day with all that helicopter money the Fed will be showering on them for the coming years.
For context, the largest monthly job loss during the great financial crisis was just 834,700!
Large- and mid-sized companies saw the biggest job-losses…
And the service sector saw the biggest job losses…
If you’re an educator or in “management”, it would appear times remain good…
“Job losses of this scale are unprecedented. The total number of job losses for the month of April alone was more than double the total jobs lost during the Great Recession,” said Ahu Yildirmaz, co-head of the ADP Research Institute.
“Additionally, it is important to note that the report is based on the total number of payroll records for employees who were active on a company’s payroll through the 12th of the month. This is the same time period the Bureau of Labor and Statistics uses for their survey.”
And as we noted previously, far more Americans have lost their jobs in the last month than jobs gained during the last decade since the end of the Great Recession… (22.13 million gained in a decade, 30.3 million lost in 6 weeks)
Worse still, the final numbers will likely be worsened due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31. A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.
As Mises’ Robert Aro noted earlier in the week, the stimulus packages being handed out across this world provide us with an opportunity to document the anti-capitalist process as it unfolds in real time, keeping in mind that when these inflation schemes fail, it will likely be blamed on capitalism.
The combination of increasing the money supply in order to pay people not to produce goods or services has consequences that not a lot of people are talking about.
It flies in the face of the free market and is as nonsensical as a negative interest rate. A loan that is forgivable is unconventional to say the least, because a loan is normally defined as an amount borrowed that is expected to be paid back with interest. When a loan is given on a first-come-first-served basis for the purpose of paying people not to work and is forgivable because it’s guaranteed by the United States government, we shouldn’t call it a loan.
It may be called socialism, maybe interventionism, and some may still prefer the term statism; but one thing is certain when it comes to the Paycheck Protection Program: it’s not capitalism!
Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt, and the CARES Act may have been a serious tipping point.
But, hey, there’s good news… well optimistic headlines as Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August.
Finally, it is notable, we have lost 434 jobs for every confirmed US death from COVID-19 (60,999).
Was it worth it?
You will have only two choices now: do hard things, or submit to Globohomo. What are you doing today to prepare yourself and your people for Hard Tasks?
“For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.” – Richard Feynman – Rogers Commission
“It appears that there are enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life. The estimates range from roughly 1 in 100 to 1 in 100,000. The higher figures come from the working engineers, and the very low figures from management. What are the causes and consequences of this lack of agreement? Since 1 part in 100,000 would imply that one could put a Shuttle up each day for 300 years expecting to lose only one, we could properly ask “What is the cause of management’s fantastic faith in the machinery? … It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.” –Richard Feynman – Rogers Commission
(Jim Quinn) The phrase “Throttle Up” jumped into my consciousness in the last week when Trump and his coronavirus task force of government hacks and bureaucrat lackeys announced the guidelines for re-opening America, as if a formerly $22 trillion economy, tied to a $90 trillion global economy, could be turned off and on like a light switch. Clap off, clap on. It just doesn’t work that way. The arrogance and hubris of people who think they can declare a global shut down for a virus and think they can easily deal with the intended and unintended consequences of doing so, is breathtaking in its outrageous recklessness and egotistical belief in their own infallibility.
This contemptible belief in their own superiority has permeated every fiber of those who rule over us, particularly among captured central bankers, corrupt politicians, bought off scientists, and billionaire oligarchs. It is the same groupthink, purposeful failure to address risks, and willfully ignoring those in the trenches that murdered seven astronauts on January 28, 1986 and has created the 2nd Great Depression of today. “Throttle Up” is going to result in the same outcome as it did in 1986.
Thirty-four years ago, on a cold January morning, Space Shuttle Challenger thundered into a crystal-clear blue Florida sky on its 10th voyage into space. The seven astronauts, including civilian Christa McAuliffe, put their trust in the “experts” from NASA, Thiokol, and Rockwell that the shuttle was safe and launching when the temperature was 30 degrees would not pose any added risks. When Richard Covey in Mission Control informed the crew to “go at throttle up”, they expected what their training told them would happen.
Instead, Space Shuttle Challenger exploded in a horrific display witnessed live on TV by 17% of the American population. School children all over the country were watching in their classrooms because McAuliffe was a school teacher chosen from thousands to go into space. It was a tragedy that shook the nation and led to one of Reagan’s better speeches that night, where he addressed the nation’s school children.
“I want to say something to the schoolchildren of America who were watching the live coverage of the shuttle’s takeoff. I know it is hard to understand, but sometimes painful things like this happen. It’s all part of the process of exploration and discovery. It’s all part of taking a chance and expanding man’s horizons. The future doesn’t belong to the fainthearted; it belongs to the brave. The Challenger crew was pulling us into the future, and we’ll continue to follow them.”
And he ended with this line from the poem ‘High Flight’:
“We will never forget them, nor the last time we saw them, this morning, as they prepared for their journey and waved goodbye and ‘slipped the surly bonds of Earth’ to ‘touch the face of God.’”
Thus, began the politician’s use of death to create heroes when human error, hubris, and recklessness is the true cause of avoidable tragedy and despair. Those seven astronauts were not heroes, they were victims. Just as we are all victims of the incompetency, arrogance, corruption and greed of those who lead our government, financial system, and corporate fascist oligarchy passing for capitalism in this globalist-controlled fraud of a former republic.
Using victims to create false heroes has now been elevated to an art form by politicians, the corporate media and mega-corporations to push whatever agenda supports their narrative. The propaganda machine is their most useful tool, as decades of dumbing down the public through government school indoctrination has created millions of pliable useful idiots who will believe anything presented by “experts” on the boob tube. The fear and panic created by politicians and the media about a virus only marginally more dangerous than the common flu is the perfect representation of this power over reality.
The Space Shuttle Challenger disaster is a perfect analogy for the current debacle being perpetrated on the American people by fecklessly corrupt authoritarian politicians, IYI medical “experts”, and fear mongering fake news media pushing the narrative in whatever direction benefits their bottom line. There is the simple technical reason why the Challenger blew up and then there is the real reason – the truthful explanation. What we must understand from history and experience is, if we don’t accept the narratives pushed by “experts” and think critically based upon facts, the truth will eventually be revealed.
The immediate cause of the explosion was a failure in the O-rings sealing the aft field joint on the right solid rocket booster, causing pressurized hot gases and eventually flame to “blow by” the O-ring and contact the adjacent external tank, causing structural failure. The truth is, decisions made and not made over years sealed the fate of those victims, just as we are facing today with this man-made global catastrophe.
After the shuttle disaster, politicians do what they do best, create a commission to cover-up the true cause and protect the establishment from blame. It was led by William Rogers, a government bureaucrat for decades, along with numerous other people with a vested interest in protecting NASA, the massive defense corporations sucking off the government teat, and the crooked politicians supporting NASA.
There were a couple of members from the trenches, like Sally Ride and Chuck Yeager, but the thorn in the side of the establishment was theoretical physicist and Nobel Prize winner Richard Feynman. Despite being racked by cancer, Feynman reluctantly agreed to join the commission, knowing he was going to be out of his element in the swamp of Washington D.C. The nation’s capital, he told his wife, was “a great big world of mystery to me, with tremendous forces.”
Feynman immediately created problems by thinking outside the box and having the gall to ignore the excuses and lies of high-level managers at NASA, Thiokol and Rockwell, while seeking the opinions of the actual engineers who did the real work. His unwillingness to toe the company line irritated the old guard looking to cover up the truth. During a break in one hearing, Rogers told commission member Neil Armstrong, “Feynman is becoming a pain in the ass.”
The establishment always thinks anyone who questions their authority or expertise is a pain in the ass, at best. Often, they treat anyone with an opposing viewpoint as the enemy, and will undertake any means to shut them up and destroy them. Witness how YouTube and Google are currently memory holing anything questioning the establishment narrative about this virus or Joe Biden’s sexual assault on a young woman as a Senator. Feynman embarrassed the “experts” on national TV when he conducted a simple demonstration of why the shuttle blew up.
“I took this stuff I got out of your [O-ring] seal and I put it in ice water, and I discovered that when you put some pressure on it for a while and then undo it, it doesn’t stretch back. It stays the same dimension. In other words, for a few seconds at least, and more seconds than that, there is no resilience in this particular material when it is at a temperature of 32 degrees. I believe that has some significance for our problem.” – Richard Feynman
The truth is top management at NASA knew the O-rings were defective in 1977 and contained a potentially catastrophic flaw. NASA managers also disregarded warnings from engineers about the dangers of launching posed by the low temperatures of that morning, and failed to adequately report these technical concerns to their superiors. Thiokol engineer Bob Ebeling in October 1985 wrote a memo—titled “Help!” so others would read it—of concerns regarding low temperatures and O-rings.
There were numerous teleconferences on the 27th of January where Ebeling and other engineers argued against the launch due to the freezing temperatures. According to Ebeling, a second conference call was scheduled with only NASA and Thiokol management, excluding the engineers. Thiokol management disregarded its own engineers’ warnings and now recommended the launch proceed as scheduled. Ebeling told his wife that night Challenger would blow up. He was right.
The Commission attempted to let NASA’s culture off the hook with no recommended sanctions against the deeply flawed organization. Feynman could not in good conscience recommend NASA should continue without a suspension of operations and a major overhaul. His fellow commission members were alarmed by Feynman’s dissent. Feynman was so critical of flaws in NASA’s “safety culture” that he threatened to remove his name from the report unless it included his personal observations on the reliability of the shuttle, which appeared as Appendix F.
The quote at the beginning of this article about upper management believing there was only a 1 in 100,000 chance of disaster, when the odds were really 1 in 100 or less, came from Feynman’s dissent in Appendix F. The fools at NASA and on the Commission didn’t understand or willfully ignored Feynman’s first principle:
“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman
The truth stands on its own and is self-evident. Feynman is an example of an actual hero, not an MSM touted hero like Bernanke, Paulson, Geithner, Powell and the dozens of other psychopaths in suits who have been portrayed in the press as brilliant financial minds that saved the world. Real heroes take a singular stand for the truth, when everyone else goes along with mistruths, half-truths, and false narratives of those with a subversive self-serving agenda. The world is inundated in a blizzard of lies, designed to further the plans of those who control the levers of power and wealth.
Lies, backed by an unceasing stream of propaganda and fear, are being used to panic the masses into willingly abandon their freedoms, liberties and rights for the chains of false safety, security, and state control over every aspect of their lives. It is astonishing to watch in real time as a vast swath of America cowers in their homes, as demanded by their authoritarian elected leaders, while their livelihoods and net worth are purposely destroyed to benefit the .1% ruling class.
I see multiple analogies today with the shuttle disaster and the lessons learned and not learned. The leadership of NASA did not learn, as the same disregard for facts and data led to the Space Shuttle Columbia disaster seventeen years later.
Just as the mid-level engineers at Thiokol warned of imminent disaster for years before the tragedy, there have been voices in the wilderness (scorned and ridiculed as conspiracy theorists) warning about the reckless arrogance of the Federal Reserve and their Wall Street owners, as they pumped up the largest financial bubble in world history as their solution for the catastrophe created by their previous monetary disaster in 2008. Just as the hubristic out of touch leadership of NASA murdered fourteen innocent astronauts, the Fed has now twice destroyed millions of lives in the last twelve years.
These self-proclaimed experts have known the financial system was going to explode since the middle of 2019 when they began a series of desperate ruses, behind the curtain of the debt saturated Ponzi scheme, to keep the Wall Street cabal and hedge fund billionaires from facing the consequences of their fraudulent monetary machinations.
The surprise cutting of interest rates and emergency repo operations every night as we entered 2020 covered up the imminent disaster, as the mindless Harvard and Wharton MBAs programmed their high frequency trading computers to buy, buy, buy. Best economy ever. Greatest in the history of the world. Stock market at all-time highs. Then the China flu arrived, just in time. A quick 30% plunge in the stock market was all the Fed needed to rescue their true constituents – Wall Street and billionaire hedge funds – with $6 trillion, under the guise of saving the financial system for the little people.
If you want to figure out who benefits from a man-made crisis, just follow the money. The Federal government has committed at least $3 trillion of your grandchildren’s money to the crisis thus far, with the Federal Reserve announcing another $6 trillion of monetary support. That’s $9 trillion, or $70,000 per household. The average household size is 2.5. If we assume each household got their $1,200 Covid-19 rebate (actually just giving them back the taxes they already pay), that’s $3,000 per household.
A critical thinking individual might wonder who got the other $67,000 of stimulus, or 95.7% of the money allocated to “save America”. It certainly hasn’t made its way to small business owners who are going out of business faster than burning gas through a defective O-ring. If only $400 billion is making its way into the pockets of formerly working Americans, where did the other $8.6 trillion go?
It went directly into the pockets of Wall Street bankers, hedge fund managers, and the biggest corporations on the planet. The Fed has used this faux crisis to further enrich and bailout the richest men on the planet, while again dropping interest rates to zero and throwing grandma under the bus again. Let her eat cat food, declares Jerome Powell, champion and hero of downtrodden bankers. He’ll be “earning” $25 million a year from Wall Street as his payoff, the minute he saunters out of the Eccles Building in a couple years.
As unemployment approaches 20%, GDP plunges by 30%, food banks are running out of food, citizens remain locked in their homes under threat of arrest, and human misery approaches 1930 Great Depression levels, the Fed has managed to buy enough toxic debt and artificially rig the stock market, to engineer a 27% surge from its March lows. We should all applaud the brilliance of Powell and his fellow sycophants, as they have saved the asses of the .1%, for now.
The fate of this country was sealed well before this overblown hyped coronavirus appeared, to accelerate our demise. The warnings about too much debt, rigged financial markets, unrestrained politicians running trillion dollar deficits, silicon valley giants conspiring with the Deep State to turn the country into a surveillance state, a military industrial complex creating conflict around the globe, and a state media propaganda machine providing false information to the masses, were dismissed by those who could have acted.
The deficit is now expected to hit $3.7 trillion in 2020, pushing the national debt to $27 trillion. This country is 231 years old and 85% of our debt has been taken on in the last 23 years. The Fed’s balance sheet was $800 billion in 2008. It will shortly surpass $10 trillion, just a mere 1,250% increase in 12 years. Do you understand the analogy with the Space Shuttle Challenger yet?
We’ve left the launchpad at the same rate and angle as the Fed balance sheet. Those in charge assure us they have everything under control, but the coronavirus will prove to be our frozen O-ring. It has been decades of mismanagement, corruption, bad decisions, horrible leadership, delusional thinking, herd mentality, and an inability to summon the courage to deal with critical problems before they blew our country into a million smoking pieces of debris.
Average Americans are trapped in the crew cabin relying on Trump, Powell, Mnuchin, and a myriad of other “experts” to safely launch the American economy back into space. Trump has convened a re-opening task force consisting of dozens of CEOs from the biggest mega-corporations on earth. I know because I watched him read their names for fifteen minutes during one of his daily mind-numbing press conferences. If you had any doubt about who your leaders work for, that list tells you all you need to know. No one from your local steak shop, butcher or candlestick maker are represented on this task force. It reminded me of the list of prominent people chosen for the Rogers Commission.
The belief by those in charge that things can just go on as if nothing has happened are as delusional as the NASA administrators who were willfully blind to the truth of an impending disaster. The actions taken by the political and financial arms of the Deep State have guaranteed this malfunction will prove fatal for our country. The only question is how many seconds we have before our throttle up moment. I tend to be a pessimist, so I am leaning towards an explosion before the November election. The forthcoming financial catastrophic detonation will set off a chain of events considered impossible just a few short months ago.
The core elements of this Fourth Turning (debt, civic decay, global disorder) are going to juxtapose and connect, accelerating into a chain reaction of chaos, civil uprising, global war, mass casualties, the fall of empires, and ultimately the destruction of the existing social order (aka Deep State). Hopefully, heroes of Feynman’s stature will arise to help rebuild our country based upon common sense, truthfulness, factual assessment of our situation, and honoring the essential principles of our Constitution. Reality must take precedence over delusions, propaganda, and lies for us to regain our nation. Are we capable of learning the lessons from this major malfunction?
“Flight controllers here looking very carefully at the situation. Obviously, a major malfunction.” – Steve Nesbitt – NASA Mission Control
The Paycheck Protection Program offers an alluring loan of up to $10M tax free. If you comply, you don’t even have to pay it back. What’s more, there is no forgiveness of debt income when your loan is forgiven, something that is standard fare if you are relieved of paying back debt. However, IRS Notice 2020-32 confirms you can’t claim tax deductions, even for the wages, rent, etc. that are normally fully deductible. The CARES Act provisions for small business include the Paycheck Protection Program, which calls for up to $10 million in forgivable loans to cover employee payroll, and immediate tax credits that are designed to do the same thing. After the IRS notice, it now appears that Congress could reverse IRS denial of tax deductions.
Since the PPP came out, it has been roiled in controversy, with the SBA and banks offering a less than seamless roll out, and a true run on the bank that depleted all the money very fast. Congress eventually came to the rescue by authorizing more money, but that seems likely not to last very long either. And the FAQs and other pieces of guidance have been fast and furious. So has speculation about various points. There have been debates about the tax deduction point, with some people saying you could still deduct the wages, since the CARES Act did not seem to say otherwise. But under traditional tax principles, it seemed too good to be true that you could get the free money, not pay discharge of debt income, and still deduct the payments of wages and rent made with the free money. The IRS notice confirms that.
The Paycheck Protection Program allows loans of up to $10 million at 1% interest to employers with fewer than 500 workers to cover two months of payroll and overhead. If you keep your workers and do not cut their wages, the government will forgive most or all of the loan and even repay the bank that actually made you the loan. The loan amounts will be forgiven as long as: (1) The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and (2) Employee and compensation levels are maintained. Payroll costs are capped at $100,000 for each employee. SBA lenders have details, though there has been controversy and hiccups in rolling out the program.
Your loan forgiveness will be reduced if you decrease your full-time employee headcount. Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
You also have to specifically request loan forgiveness. You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
Texas factory activity declined further in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, pushed further negative from -35.3 to -55.3, suggesting the contraction in output has steepened since last month.
Other measures of manufacturing activity also point to a sharper decline in April. The new orders index dropped 26 points to -67.0, its lowest reading since the survey began in 2004. Similarly, the growth rate of orders index fell to -62.2. The capacity utilization and shipments indexes fell to -54.5 and -56.6, respectively. The capital expenditures index declined 20 points to -54.3. Each of these April readings represents a historical low.
Perceptions of broader business conditions remained very pessimistic in April. The general business activity index inched down from -70.0 to -73.7, pushing to a new historical low. The company outlook index remained near an all-time low but inched up from -65.6 to -62.6. The index measuring uncertainty regarding companies’ outlooks retreated slightly to 54.4, a reading still indicative of sharply increased uncertainty.
Labor market measures indicate further employment declines and shorter workweeks this month. The employment index held steady at -21.2. Three percent of firms noted net hiring, while 24 percent noted net layoffs. The hours worked index dropped 18 points to -40.2, signaling a notably reduced workweek length. emphasis added
The last of the regional Fed surveys for April will be released tomorrow (Richmond Fed).
VIRGINIA — (CHINESE OWNED) Smithfield Foods, Inc. announced today that its Sioux Falls, SD facility will remain closed until further notice. The plant is one of the largest pork processing facilities in the U.S., representing four to five percent of U.S. pork production. It supplies nearly 130 million servings of food per week, or about 18 million servings per day, and employs 3,700 people. More than 550 independent family farmers supply the plant.
“The closure of this facility, combined with a growing list of other protein plants that have shuttered across our industry, is pushing our country perilously close to the edge in terms of our meat supply. It is impossible to keep our grocery stores stocked if our plants are not running. These facility closures will also have severe, perhaps disastrous, repercussions for many in the supply chain, first and foremost our nation’s livestock farmers. These farmers have nowhere to send their animals,” said Kenneth M. Sullivan, president and chief executive officer, for Smithfield.
“Unfortunately, COVID-19 cases are now ubiquitous across our country. The virus is afflicting communities everywhere. The agriculture and food sectors have not been immune. Numerous plants across the country have COVID-19 positive employees. We have continued to run our facilities for one reason: to sustain our nation’s food supply during this pandemic. We believe it is our obligation to help feed the country, now more than ever. We have a stark choice as a nation: we are either going to produce food or not, even in the face of COVID-19,” he concluded.
In preparation for a full shutdown, some activity will occur at the plant on Tuesday to process product in inventory, consisting of millions of servings of protein. Smithfield will resume operations in Sioux Falls once further direction is received from local, state and federal officials. The company will continue to compensate its employees for the next two weeks and hopes to keep them from joining the ranks of the tens of millions of unemployed Americans across the country.
“We are looking at the machine that feeds society shutting down under controlled demolition”
Dr. Fauci, lead member of the Trump Administration’s White House Coronavirus Task Force
After all this is over, questions are going to be asked on whether a different course could have been taken.
This is the only pandemic in which we locked down the American economy. 16 million jobs have been lost and will continue to grow. Could we have done better? I think we could’ve.
Gateway Pundit reports while the US shuts down all commerce for weeks and destroys the economy, other countries like Sweden and Brazil are doing the opposite and allowing the China coronavirus to run its course.
Data indicates there no material differences in fatalities between the three countries leading the casual observer to question why is the US killing its economy?
The US continues to prevent nearly all commerce from occurring to combat the China coronavirus. Many other countries are following suit. But some countries like Sweden and Brazil are keeping their countries open for business.
Data shows that the fatalities related to the coronavirus in these countries are very similar to those in the US.
While each of these essays offers a different perspective, let’s focus on the last two: Ugo Bardi’s essay on Hyperspecialization and the technological responses described in the MIT Technology Review essay.
As readers of the blog know, I’ve been differentiating between first-order and second-order effects: First order effects: every action has a consequence. Second order effects: every consequence has its own consequences.
We can think of these as direct (first order) and indirect (second order) effects.
The MIT Technology Review article focuses on direct effects, i.e. how to deploy technology to identify people with the virus, track their recent movements and who they might have exposed to the disease, tech-driven regulations that would limit the movements of infected (such as we see in China now), etc.
Bardi’s first-hand account from Northern Italy touches on an indirect effect:the profoundly negative impact of a hyperspecialized economy that is suddenly disrupted. In this case, the specialization is tourism, but there are other examples, many driven by hyper-globalization.
Specialization has long been central to capitalism’s relentless drive to increase efficiencies and thus profits, and globalization has pushed specialization to extremes globally dominant corporations can arbitrage currencies, wages, political corruption and lax environmental standards in ways that localized competitors cannot.
The net result is increasing reliance on one globally competitive industry for jobs, tax revenues, etc.–in essence, the modern-day equivalent of a monoculture plantation or single-industry factory town.
When the plantation or factory closes, there’s no economically diverse ecosystem to pick up the slack.
If tourism doesn’t rebound very quickly, all the local economies that became hyperspecialized to serve global tourism (enabled by low-cost airfares and credit cards) will be gutted.
The second order effect of the pandemic will be the wrenching transformation of these local economies into a much broader economic ecosystem that will have to be moated from globalized competition. For example, grapes flown in from locales 3,000 miles away will be banned or heavily taxed so local grapes can compete.
A great many inefficiencies have been sustained by hidebound, self-serving institutions and cartels which have moated their industries from competition.These include higher education, healthcare, the defense sector and the recent crop of Big Tech monopolies (Facebook, Google, et al.).
A number of people have already noted that remote online classes have become the norm out of necessity, and this has revealed the incredible inefficiency of maintaining enormously costly campuses and bureaucracies for coursework that can be completed anywhere.
While the large research universities need students to physically be present to operate the machinery of experiments and research, the vast majority of undergraduate coursework does not require physical presence. In many lab settings, whatever physical presence is required could be drastically compressed in time or shifted to remote control of lab tools.
The same transition will occur in Corporate America as managers accept that there are few absolutely essential reasons to demand workers squander huge amounts of time and money transporting themselves to centralized workplaces.
The trend to remote work is not new, but it is now being accelerated past the point that hidebound managers will be able to demand a return to the inefficiencies of the former status quo.
This shift to decentralized, networked remote work will have a devastating impact on the commercial office sector. A very large percentage of the already-excessive supply of office space will be surplus, and it won’t be cheap or easy to transform offices into residential living spaces.
(An entire floor of office space might have one set of bathrooms and a single utility kitchen; every living unit will of course require its own bathroom and kitchen.)
The financial fragilities and vulnerabilities that are now becoming apparent are not limited to hyperspecialization and globalized monoculture economies. The cost structure of most small enterprises was burdensome even in the best of times: rent, utilities, fees, taxes, regulatory compliance, insurance, labor overhead and so on are now crushingly costly, and once revenues decline by even modest amounts, the small businesses are no longer viable.
Costs such as rent, healthcare insurance, local fees and taxes are notoriously “sticky,” meaning the default setting is to ratchet ever higher. These costs don’t drop unless there is a full-blown crisis such as mass bankruptcies of commercial landlords and cities.
Thus we can anticipate a culling of all the marginal, struggling small businesses in the pandemic recession, and a weak or non-existent emergence of new businesses in the future to replace those lost, as revenues will remain weak while costs will only increase.
Few observers are pondering the psychological changes that the pandemic have unleashed. To take an obvious example, consumers will no longer be able to maintain confidence in their incomes or the market value of their labor and assets. This uncertainty will naturally encourage savings rather than frivolous spending and debt, and this change will depress consumption.
Status quo policies such as lowering interest rates will not change this psychological shift in the tides.
Lowering interest rates to zero won’t mean credit cards, auto loans and mortgages will be interest free, and lower rates won’t change the reality that incomes and asset prices may decline or remain uncertain for years to come.
The world has changed, and the only things we know with certainty are 1) a return to the pre-pandemic status quo is not possible and 2) this is a positive development.
Put another way: eras end. No matter how glorious or inglorious they may have been, eras end and a new era begins. Welcome to 2020.
(Pepe Escobar) You don’t need to read Michel Foucault’s work on biopolitics to understand that neoliberalism – in deep crisis since at least 2008 – is a control/governing technique in which surveillance capitalism is deeply embedded.
But now, with the world-system collapsing at breathtaking speed, neoliberalism is at a loss to deal with the next stage of dystopia, ever present in our hyper-connected angst: global mass unemployment.
Henry Kissinger, anointed oracle/gatekeeper of the ruling class, is predictably scared. He claims that, “sustaining the public trust is crucial to social solidarity.” He’s convinced the Hegemon should “safeguard the principles of the liberal world order.” Otherwise, “failure could set the world on fire.”
That’s so quaint. Public trust is dead across the spectrum. The liberal world “order” is now social Darwinist chaos. Just wait for the fire to rage.
The numbers are staggering. The Japan-based Asian Development Bank (ADB), in its annual economic report, may not have been exactly original. But it did note that the impact of the “worst pandemic in a century” will be as high as $4.1 trillion, or 4.8 percent of global GDP.
This an underestimation, as “supply disruptions, interrupted remittances, possible social and financial crises, and long-term effects on health care and education are excluded from the analysis.”
We cannot even start to imagine the cataclysmic social consequences of the crash. Entire sub-sectors of the global economy may not be recomposed at all.
The International Labor Organization (ILO) forecasts global unemployment at a conservative, additonal 24.7 million people – especially in aviation, tourism and hospitality.
According to the ILO, income losses for workers may range from $860 billion to an astonishing $3.4 trillion. “Working poverty” will be the new normal – especially across the Global South.
“Working poor,” in ILO terminology, means employed people living in households with a per capita income below the poverty line of $2 a day. As many as an additional 35 million people worldwide will become working poor in 2020.
Switching to feasible perspectives for global trade, it’s enlightening to examine that this report about how the economy may rebound is centered on the notorious hyperactive merchants and traders of Yiwu in eastern China – the world’s busiest small-commodity, business hub.
Their experience spells out a long and difficult recovery. As the rest of the world is in a coma, Lu Ting, chief China economist at Nomura in Hong Kong stresses that China faces a 30 percent decline in external demand at least until next Fall.
Neoliberalism in Reverse?
In the next stage, the strategic competition between the U.S. and China will be no-holds-barred, as emerging narratives of China’s new, multifaceted global role – on trade, technology, cyberspace, climate change – will set in, even more far-reaching than the New Silk Roads. That will also be the case in global public health policies. Get ready for an accelerated Hybrid War between the “Chinese virus” narrative and theHealth Silk Road.
The latest report by the China Institute of International Studies would be quite helpful for the West — hubris permitting — to understand how Beijing adopted key measures putting the health and safety of the general population first.
Now, as the Chinese economy slowly picks up, hordes of fund managers from across Asia are tracking everything from trips on the metro to noodle consumption to preview what kind of economy may emerge post-lock down.
In contrast, across the West, the prevailing doom and gloom elicited a priceless editorial from TheFinancial Times. Like James Brown in the 1980s Blues Brothers pop epic, the City of London seems to have seen the light, or at least giving the impression it really means it. Neoliberalism in reverse. New social contract. “Secure” labor markets. Redistribution.
Cynics won’t be fooled. The cryogenic state of the global economy spells out a vicious Great Depression 2.0 and an unemployment tsunami. The plebs eventually reaching for the pitchforks and the AR-15s en masse is now a distinct possibility. Might as well start throwing a few breadcrumbs to the beggars’ banquet.
That may apply to European latitudes. But the American story is in a class by itself.
Mural, Seattle, February 2017. (Mitchell Haindfield, Flickr)
For decades, we were led to believe that the world-system put in place after WWII provided the U.S. with unrivaled structural power. Now, all that’s left is structural fragility, grotesque inequalities, unplayable Himalayas of debt, and a rolling crisis.
No one is fooled anymore by the Fed’s magic quantitative easing powers, or the acronym salad – TALF, ESF, SPV – built into the Fed/U.S. Treasury exclusive obsession with big banks, corporations and the Goddess of the Market, to the detriment of the average American.
It was only a few months ago that a serious discussion evolved around the $2.5 quadrillion derivatives market imploding and collapsing the global economy, based on the price of oil skyrocketing, in case the Strait of Hormuz – for whatever reason – was shut down.
Now it’s about Great Depression 2.0: the whole system crashing as a result of the shutdown of the global economy. The questions are absolutely legitimate: is the political and social cataclysm of the global economic crisis arguably a larger catastrophe than Covid-19 itself? And will it provide an opportunity to end neoliberalism and usher in a more equitable system, or something even worse?
‘Transparent’ Black Rock
Wall Street, of course, lives in an alternative universe. In a nutshell, Wall Street turned the Fed into a hedge fund. The Fed is going to own at least two thirds of all U.S. Treasury bills in the market before the end of 2020.
The U.S. Treasury will be buying every security and loan in sight while the Fed will be the banker – financing the whole scheme.
So essentially this is a Fed/Treasury merger. A behemoth dispensing loads of helicopter money.
And the winner is Black Rock—the biggest money manager on the planet, with tentacles everywhere, managing the assets of over 170 pension funds, banks, foundations, insurance companies, in fact a great deal of the money in private equity and hedge funds. Black Rock — promising to be fully “transparent” — will buy these securities and manage those dodgy SPVs on behalf of the Treasury.
Black Rock, founded in 1988 by Larry Fink, may not be as big as Vanguard, but it’s the top investor in Goldman Sachs, along with Vanguard and State Street, and with $6.5 trillion in assets, bigger than Goldman Sachs, JP Morgan and Deutsche Bank combined.
Now, Black Rock is the new operating system (OS) of the Fed and the Treasury. The world’s biggest shadow bank – and no, it’s not Chinese.
Compared to this high-stakes game, mini-scandals such as the one around Georgia Senator Kelly Loffler are peanuts. Loffler allegedly profited from inside information on Covid-19 by the CDC to make a stock market killing. Loffler is married to Jeffrey Sprecher – who happens to be the chairman of the NYSE, installed by Goldman Sachs.
While corporate media followed this story like headless chickens, post-Covid-19 plans, in Pentagon parlance, “move forward” by stealth.
The price? A meager $1,200 check per person for a month. Anyone knows that, based on median salary income, a typical American family would need $12,000 to survive for two months. Treasury Secretary Steven Mnuchin, in an act of supreme effrontry, allows them a mere 10 percent of that. So American taxpayers will be left with a tsunami of debt while selected Wall Street players grab the whole loot, part of an unparalleled transfer of wealth upwards, complete with bankruptcies en masse of small and medium businesses.
Fink’s letter to his shareholdersalmost gives the game away: “I believe we are on the edge of a fundamental reshaping of finance.”
And right on cue, he forecasted that, “in the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
He was referring, then, to climate change. Now that refers to Covid-19.
Implant Our Nano chip, Or Else?
The game ahead for the elites, taking advantage of the crisis, might well contain these four elements:
a social credit system,
a digital currency,
and a Universal Basic Income (UBI).
This is what used to be called, according to the decades-old, time-tested CIA playbook, a “conspiracy theory.” Well, it might actually happen.
West Virginia National Guard members reporting to a Charleston nursing home to assist with Covid-19 testing. April 6, 2020. (U.S. Army National Guard, Edwin L. Wriston)
A social credit system is something that China set up already in 2014. Before the end of 2020, every Chinese citizen will be assigned his/her own credit score – a de facto “dynamic profile”, elaborated with extensive use of AI and the internet of things (IoT), including ubiquitous facial recognition technology. This implies, of course, 24/7 surveillance, complete with Blade Runner-style roving robotic birds.
The U.S., the U.K., France, Germany, Canada, Russia and India may not be far behind. Germany, for instance, is tweaking its universal credit rating system, SCHUFA. France has an ID app very similar to the Chinese model, verified by facial recognition.
Mandatory vaccination is Bill Gates’s dream, working in conjunction with the WHO, the World Economic Forum (WEF) and Big Pharma. He wants “billions of doses” to be enforced over the Global South. And it could be a cover to everyone getting a digital implant.
“Eventually what we’ll have to have is certificates of who’s a recovered person, who’s a vaccinated person…Because you don’t want people moving around the world where you’ll have some countries that won’t have it under control, sadly. You don’t want to completely block off the ability for people to go there and come back and move around.”
Then comes the last sentence which was erased from the official TED video. This was noted by Rosemary Frei, who has a master on molecular biology and is an independent investigative journalist in Canada. Gates says: “So eventually there will be this digital immunity proof that will help facilitate the global reopening up.”
This “digital immunity proof” is crucial to keep in mind, something that could be misused by the state for nefarious purposes.
The three top candidates to produce a coronavirus vaccine are American biotech firm Moderna, as well as Germans CureVac and BioNTech.
Digital cash might then become an offspring of blockchain. Not only the U.S., but China and Russia are also interested in a national crypto-currency. A global currency – of course controlled by central bankers – may soon be adopted in the form of a basket of currencies, and would circulate virtually. Endless permutations of the toxic cocktail of IoT, blockchain technology and the social credit system could loom ahead.
Already Spain has announced that it is introducing UBI, and wants it to be permanent. It’s a form insurance for the elite against social uprisings, especially if millions of jobs never come back.
So the key working hypothesis is that Covid-19 could be used as cover for the usual suspects to bring in a new digital financial system and a mandatory vaccine with a “digital identity” nano chip with dissent not tolerated: what Slavoj Zizek calls the “erotic dream” of every totalitarian government.
Yet underneath it all, amid so much anxiety, a pent-up rage seems to be gathering strength, to eventually explode in unforeseeable ways. As much as the system may be changing at breakneck speed, there’s no guarantee even the 0.1 percent will be safe.
As some misguided liberals complain about fruits “left rotting on the trees” because Trump’s immigration crackdown has left no undocumented migrants to pick the vegetables (a demonstrably false assumption), the Associated Press has offered an explanation for this phenomenon that also illustrates how disruptions in the businesses like the hospitality and food-service industry work their way through the supply chain, ultimately sticking farmers in the American Farm Belt with fields of vegetables that they can’t sell, or even donate as local food pantries are now full-up with donations from restaurants.
The AP started its story in Palmetto, Fla. a city in Manatee County on the Gulf Coast, where a farmer had dumped piles of zucchini and other fresh vegetables to rot.
As the AP reported, thousands of acres of fruits and vegetables grown in Florida are being plowed over or left to rot because farmers who had grown the crops to sell to restaurants or other hospitality-industry buyers like theme parks and schools have been left on the hook for the crops.
As the economy shuts down across the country, injecting what the Fed described as massive levels of uncertainty, farmers in the state are now begging Ag Secretary Sonny Purdue to get some of that farm bailout money. Without some kind of industry-specific bailout, these farmers might go out of business.
The problem – in a nutshell – is that these farmers have longstanding sales relationships, but suddenly, those customers have disappeared. And many other companies in the US that are still buying produce already have contracts with foreign suppliers.
It would be great if Trump could come in with agricultural tariffs that would effectively cut off foreign competition, but such a move would likely be widely panned by the establishment, who would sooner watch every small farmer commit hari-kari than see continued pullback in globalization and more limits on free trade.
“We gave 400,000 pounds of tomatoes to our local food banks,” DiMare said. “A million more pounds will have to be donated if we can get the food banks to take it.”
Farmers are scrambling to sell to grocery stores, but it’s not easy. Large chains already have contracts with farmers who grow for retail — many from outside the U.S.
“We can’t even give our product away, and we’re allowing imports to come in here,” DiMare said.
He said 80 percent of the tomatoes grown in Florida are meant for now-shuttered restaurants and theme parks.
And the problem isn’t unique to farmers in Florida. Other states are having similar issues. Agricultural officials said leafy greens grown in California have no buyers, and dairy farmers in states like Vermont have been hit especially hard. Dairy farmers in VT and Wisconsin told the AP they’ve had to dump surplus loads of milk.
An association for farmers in Florida asked the administration if their veggies could be donated to food-stamp or other federal welfare programs, but reportedly, they never heard back.
“The tail end of the winter vegetable season in Yuma, Arizona, was devastating for farmers who rely on food service buyers,” said Cory Lunde, spokesman for Western Growers, a group representing family farmers in California, Arizona, Colorado and New Mexico. “And now, as the production shifts back to Salinas, California, there are many farmers who have crops in the ground that will be left unharvested,” particularly leafy greens.
He said a spike in demand for produce at the beginning of the outbreak has now subsided.
“People are staying home and not visiting the grocery stores as often,” Lunde said. “So the dominoes are continuing to fall.”
Some farmers have experimented with selling crops directly to customers, with one Florida farmer in Palmetto selling boxes of roma tomatoes for just $5 a box, an amazing bargain in a time of tremendous need. But the sales are well short of what he needs and likely won’t do more than put a dent in his losses. But at least it’s something.
“This is a catastrophe,” said tomato grower Tony DiMare, who owns farms in south Florida and the Tampa Bay area. “We haven’t even started to calculate it. It’s going to be in the millions of dollars. Losses mount every day.”
Florida leads the US in harvesting tomatoes, green beans and cabbage. Can you imagine what life would be like if tomatoes and tomato sauce prices soared because all of these medium-sized and small farmers around the country have gone out of business? Or if you walked into the grocery store a year from now and there simply weren’t any tomatoes.
It could happen much more easily than you might believe – that is, if not enough is done.
2020 is shaping up to be nothing short of a complete and total meltdown for the U.S. auto industry.
The industry was already barely holding on by a thread before the coronavirus pandemic started, with China leading the rest of the globe’s auto industries into recession over the last 18 months. Now, in a post-coronavirus world, automakers in the U.S. are expecting nothing less than full collapse.
And the things that were barely holding the industry up to start 2020, namely low rates and modest consumer confidence, don’t matter. Businesses are closed, would-be buyers are strapped for cash and the country’s economy has simply been turned off. The industry’s annualized selling rate could slow to 11.9 million in March, according to Edmunds.
Jessica Caldwell, executive director of insights for market researcher Edmunds, told Bloomberg: “The whole world is turned upside down right now.”
The coronavirus lock downs across the nation will also put a damper on April, which is traditionally a good month for auto sales. Ford is all but shutting down and names like Fiat and GM are expected to release extremely weak numbers later this week.
Morgan Stanley analyst Adam Jonas put it simply: “There are basically no U.S. auto sales right now. Investors have fully embraced the reality that the U.S. auto industry may be shut down for one or two full months. We’re now being asked to run scenarios of six-month or nine-month shutdowns.”
The President’s extension of his social distancing guidelines to the end of April will also act as a headwind for the industry. Factory shutdowns that started in March will now head toward their second month of no production, as the U.S. consumer, for the most part, remains stuck at home.
Jeff Schuster, senior vice president of forecasting for research LMC Automotive commented: “We just don’t know when and how this ends, and that’s the biggest problem right now. All of this uncertainty creates a lot of angst and that has been spreading really like a wildfire through the industry.”
ISM manufacturing index shows biggest drop in orders since 2009
Most manufacturers are suffering, but not all of them. Those that make foodstuffs and safety equipment are holding up better than others. Getty Images
The numbers: American manufacturers began to feel the brunt of the coronavirus pandemic toward the end of March as new orders and employment fell to the lowest level since the end of the 2007-2009 Great Recession, a new survey of executives showed.
Economists surveyed by MarketWatch had forecast the index to drop to 44%, but the survey was completed before widespread sections of the U.S. economy were shuttered.
The index is all but certain to sink next month, though a few industries are likely to hold up surprisingly well because of an increase in demand for products such as toilet paper, sanitizer and other consumer goods in short supply.
What happened: New orders for manufactured goods slumped in March. The ISM’s new-orders index fell 7.6 points to 42.2% — the lowest level since the end of the 2007-2009 Great Recession.
“COVID-19 has caused a 30% reduction in productivity in our factory,” said an executive at machinery manufacturer.
Production and employment also declined, with employment also sliding to an 11-year low.
The ISM index is compiled from a survey of executives who order raw materials and other supplies for their companies. The gauge tends to rise or fall in tandem with the health of the economy.
Big picture: Efforts to contain the coronavirus epidemic by shutting down large parts of the economy are slamming virtually every company, including manufacturers. Some have had to close, others can’t get necessary supplies and others have are seeing a big slump in demand.
A few manufacturers such as those that produce food, medicine, safety equipment and home supplies are faring better, in some cases even seeing an increase in sales.
“We are experiencing a record number of orders due to COVID-19,” said a senior executive at a company that makes food and beverages.
But they are few and far between. The news is only going to get worse in the short run.
What they are saying? “The headline looks not too terrible, but the details are far worse. The new orders and employment indexes both fell to their lowest levels since 2009,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Market reaction: The Dow Jones Industrial Average DJIA, -4.44% and S&P 500 SPX, -4.41% fell in Wednesday trades as investors remain nervous about the COVID-19 illness. The 10-year Treasury yield TMUBMUSD10Y, 0.581% slipped again to 0.60%.
(USA.watchdog) Bo Polny: “In the last interview, I gave you a time point, and I am going to give it to you again. This time point is incredible, and it is a Biblical calculation.
I am waiting to see what happens at this time point because it is supposed to be a truly epic time point, and that time point is April 21, 2020.
It’s a time point where the world changes, one system comes to an end or something really obvious happens. So, coming into the month of May, we have this new time point or this new era.”
Polny says all his work is based on Biblical cycles. He goes through the last 7,000 years with a powerful PowerPoint presentation that culminates with the Second Coming of Jesus Christ and predicts a time window for his return in the not-so-distant future. Polny also says his charts say the bottom is going to be ugly for the so-called long term investors. Polny says, “What it points to is a market drop that keeps falling. The potential target is 5,000 to 5,050 range for the DOW, and the time point for this comes at the end of the year 2022.”
Polny also says the U.S. dollar has topped and is going lower. Bo says, “I looked at a chart recently, and the dollar has a double top. It has not made new highs in a long time. It has just been sitting there. A lot of times with market events, you see the dollar move down with the stock market. (The dollar was down big time on Friday 3/27/2020. It lost more the 1% on a day the DOW lost more than 900 points.) So, that is unusual. The dollar moved with the stock market, and gold did not go anywhere. Gold was steady.”
Bo says, “The people in control of this system will try to stop the fall, and they will fail. For that reason, point E (15,000 on the DOW) is coming. . . . They will try to stop it, and they will fail. Look what’s happening. What we have seen in March was a crash. . . . We have not seen is a plunge. The plunge comes in April.”
There is lots more in this hour long interview, including a free 30 page PowerPoint presentation on the 7,000 year cycle that started in the days of Adam and Eve. Join Greg Hunter of USAWatchdog.com as he goes One-on-One with analyst Bo Polny of Gold 2020Forecast.com.
“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:
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.”
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.
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.
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.
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.
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
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.
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.
… 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.
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.
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.
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.
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.
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.
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.
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.
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.”