Saturday, April 18, 2020

Weekly Commentary: Crazy, Dangerous Things

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The nineties were a fascinating time for top-down macro analysis. The decade began with a severe banking crisis, the inevitable consequence of the late-eighties Bubble. The economy was in deep recession. The Greenspan Fed slashed rates and manipulated the yield curve, surreptitiously recapitalizing the banking system while nurturing non-bank Credit creation (securitizations, derivatives, hedge funds, the repo market and “Wall Street finance”). This wave of financial innovation came at a critical juncture, helping to finance massive Current Account Deficits, speculative excess and U.S. deindustrialization.

Throughout the decade, I was a devoted reader of the great German economist Kurt Richebacher’s monthly “The Richebacher Letter.” I became enamored with facets of the Austrian School of Economics – certainly its focus on Credit and economic structure. Dr. Richebacher was critical of the Fed’s interest-rate manipulation, U.S. over-consumption, persistent Current Account Deficits, and the dearth of productive capital investment (i.e. deindustrialization). Richebacher’s analysis resonates more today than ever.

Crazy, Dangerous Things have taken root in policy circles. Traditional norms are being tossed on the compost heap. Deficits don’t matter; the size of central bank balance sheets doesn’t matter; what central banks purchase doesn’t matter; money doesn’t matter. When I contemplate how we could have sunk to such a place, my thoughts return to Dallas Fed president Robert McTeer’s post-“tech” Bubble comment in 2001… “If we all go join hands and buy an SUV, everything will be all right.” The following year Dr. Bernanke, with his government printing press and “helicopter money,” joined the Federal Open Market Committee.

Was the “Roaring Twenties” the “golden age of capitalism” or a historic Bubble? Was the Great Depression chiefly an inevitable consequence of boom-time financial and economic excess and deep structural impairment – as “Austrian” analysis holds? Or, instead, was the catastrophic downturn the consequence of policy negligence (tight monetary policy and then failure to aggressively expand the money supply after the 1929 crash) – as Bernanke and Milton Friedman analysis professes?

This should have been the crucial debate almost two decades ago. I would say it is the monumental debate of our times – except for the fact that there’s no debate. We’ve reached the point where even the craziest monetary ideas have been readily adopted. I would much prefer not to sound like some wacko extremist. But as a student of financial history, I group Dr. Bernanke in with the infamous monetary charlatans. He is, however, a monetary saint comparatively to today’s MMT crowd.

There are many frightening aspects to the pandemic. From a health perspective, there is terrible death and illness – yet clear justification for intermediate-term optimism. We’ll eventually have effective testing, vaccines and treatments for this dreadful virus. Meanwhile, social, political and geopolitical ramifications evoke anything but optimism.

The pandemic arrived at a critical juncture in history. A multi-decade global experiment in unfettered Credit, monetary management, economic structure, and “globalization” was demonstrating heightened late-phase instability. Relations between nations were turning more antagonistic, as growth in the global “pie” stagnated. Nationalism and strongman leadership have been on a steep rise – in a backdrop of heightened insecurity, uncertainty and instability. In particular, hostilities were unfolding between the world’s superpower and the aspiring superpower – both led by strikingly forceful presidents. China’s historic financial and economic Bubbles were faltering, raising the odds that Beijing would target foreigners (the U.S. in particular) as the source of national woe. In the U.S., a deeply divided nation was turning even more so, with widening wealth inequalities feeding frustration and distrust.

Even before COVID-19, central banks and their “money” creating operations were considered fundamental to the solution for myriad problems at home and abroad. With stocks at inflated record highs and boom-time unemployment near 60-year lows, the Fed nonetheless slashed rates and restarted QE. Despite ongoing double-digit Credit growth, the People’s Bank of China (PBOC) cut rates and pursued aggressive monetary injections. Not many weeks after the ECB ended a historic ($2.6 TN) QE operation, it abruptly restarted the printing press. Money supply in the U.S., China and elsewhere surged parabolically. I’ve referred to 2019 as a “Monetary Fiasco,” though it proved merely a warmup.

Federal Reserve Assets were up $288 billion last week to a record $6.638 TN, with a six-week gain of $2.126 TN. M2 money supply expanded $78 billion, with a six-week gain of $1.236 TN. Fed Assets were up $2.436 TN (62%) over the past year, with M2 up $2.221 TN (15.3%).

April 17 – Bloomberg (Christopher Condon and Matthew Boesler): “Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. central bank is too focused on limiting damage to financial markets and the U.S. economy to be concerned that its actions will encourage excessive risk-taking by investors. ‘Yes, we are moving into unprecedented territory, but remember we’re trying to lend to firms that through no fault of their own were impacted by the virus,’ Mester said… Before the crisis, the Fed had warned about the high level of indebtedness at U.S. companies. Critics have said that in buying so-called junk debt the Fed will only encourage future risky lending. ‘I don’t think we can be that concerned about those kinds of moral hazards,’ Mester said. ‘This is a hugely and negatively impactful shock, and we have to do all we can to make sure we’re not doing permanent damage to the underlying fundamentals of the economy.”

It's terrible. The U.S. has lost 22 million jobs in three weeks, in one of the steepest downturns on record. No one wants to see such hardship, and we all would prefer to limit “permanent damage to the underlying fundamentals of the economy.” But how can we completely turn our backs to permanent damage to “money,” as well as trust in our central bank, markets and finance more generally? If we need crazy fiscal deficits to temporarily support the unemployed, small business, and state and local governments, so be it. But today’s unending tarmac of “C 130 Hercules money” droppers is fraught with extreme risk.

U.S. Continuing Claims for Unemployment almost doubled from the initial subprime eruption in June 2007 to the heart of the crisis in late-2008. The unemployment rate jumped from 4.5% to 6.5% prior to the Fed unleashing an (at the time) unprecedented Trillion plus QE stimulus program. It was an appalling hardship for millions of workers through no fault of their own. Yet thousands of uneconomic businesses that proliferated during the “easy money” mortgage finance Bubble period needed to be shuttered. It’s tempting to invoke “the downside of Capitalism” or the unfortunate reality of the business cycle. But it’s not that simple, and it certainly wouldn’t be fair to Capitalism. The Fed orchestrated a false boom, and Bubble collapse was unavoidable. From an “Austrian” perspective, a massive Monetary Inflation saw “money,” Credit and real resources poorly allocated, asset Bubbles proliferate, and deep financial and economic structural impairment propagate.

April 12 – Financial Times (Jonathan Tepper): “We have never seen countrywide lockdowns to prevent the spread of a virus. It is right that governments compensate citizens for quarantines that prevent them from working and central banks prevent a short-term liquidity crisis from becoming a crisis of solvency. But the response must not be a cover to bail out bust borrowers and out-of-pocket speculators. Yet last week we witnessed unprecedented moves by the US Federal Reserve to buy low-rated bonds and even exchange traded funds of junk debt. Markets reacted with glee at being rescued yet again. One strategist on Wall Street even called it a ‘gift from the Easter bunny’. Former Treasury secretary Timothy Geithner once described Walter Bagehot’s Lombard Street as ‘the bible of central banking.’ According to that 1873 book, central bankers are supposed to avert panic by lending early and without limit to solvent companies, against good collateral, and at a penalty rate. However, when it came to the crunch in 2008 Mr Geithner consciously disregarded that sacred text. He and then Fed chairman Ben Bernanke lent freely to possibly insolvent groups at zero rates. Those actions encouraged moral hazard on a grand scale. Instead of promoting prudence, central bankers since then have continuously spiked the punchbowl.”

The harsh reality is that over the past decade the Fed and central bankers have inflated a historic global Bubble. The world now faces an unavoidable precarious adjustment, where policy responses to collapsing Bubbles carry the high risk of destroying trust in money, finance and policymaking. The Fed and Treasury have opened Pandora’s Box. There are no rules – or a tested framework for how to proceed.

April 16 – Reuters (Howard Schneider): “U.S. small businesses may need as much as $500 billion a month to fully ensure their survival through the widespread closures and disruptions slamming their revenue during the coronavirus crisis, Atlanta Federal Reserve bank President Raphael Bostic said… That ‘baseline’ figure derived from staff analysis, he said, would be a starting point for discussions about how to expand a $350 billion small business lending program that was exhausted in about two weeks. ‘Using that as a benchmark might give us some guidance. ... It would not be good to lose them,’ Bostic said…”

April 11 – Bloomberg (Naomi Nix): “U.S. governors are urging Congress to give states $500 billion in ‘stabilization funding’ to meet budget shortfalls resulting from their efforts to stem the spread of coronavirus. Maryland’s Larry Hogan and New York’s Andrew Cuomo said… the stay-at-home orders most states have implemented were necessary to protect the public but hurt states’ economies. Hogan, a Republican, and Cuomo, a Democrat, are chairman and vice-chair, respectively, of the National Governors Association. ‘To stabilize state budgets and to make sure states have the resources to battle the virus and provide the services the American people rely on, Congress must provide immediate fiscal assistance directly to all states,’ the pair said.”

In a rally for the history books, the S&P500 gained 15.5% in two weeks. The Nasdaq Composite rose 17.7% over this period, and the small cap Russell 2000 16.9%. The Nasdaq100’s 17.3% rise pushed this index positive for the year.

How is it possible for stocks to mount such a rally in the face of a looming global economic depression? No Conundrum. Early in the mortgage finance Bubble period, I would write “liquidity loves inflation!” Throw “money” into an unsound system and it will instinctively gravitate to areas demonstrating robust inflationary biases. These days stocks fit the bill. Equities markets are bolstered by the deeply entrenched view that the Fed will do whatever it takes to sustain inflated prices, along with a market structure (i.e. ETFs, derivatives, 401k plans and pension contributions, hedge funds, algorithmic trading, stock buybacks, etc.) that promotes trend-following flows.

This dangerous dynamic has turned perilous. The acute stress associated with the bursting Bubble ensures the Fed will be injecting additional Trillions over the coming months, with markets confident the liquidity spigot will remain wide open for as far as eyes can see. Witnessing U.S. equities divorced from underlying economic fundamentals in not that unusual - yet never to the degree of largely dismissing an unfolding global depression.

COVID-19 is the catalyst for the bursting of history’s greatest global Bubble. And no amount of fiscal and monetary stimulus will immunize the U.S. economy from the unfolding economic downturn. After a decade of historic excess, global economies face unprecedented fragility. Importantly, officials internationally lack the flexibility enjoyed by policymakers from the world’s reserve currency government.

Here in the U.S., a unique dynamic sees massive monetary inflation chiefly funneled into U.S. securities markets, bypassing most of the population and much of the economy. This powerful dynamic attracts international flows, including trade deficit-associated international dollar balances, in the process underpinning the dollar in the face of incredible monetary inflation and Current Account Deficits.

The South African rand dropped 4.5% this week, followed by a 3.3% decline for the Turkish lira, 2.4% for the Brazilian real, 1.7% for the Chilean peso, 1.6% for the Mexican peso, 1.6% for the Czech koruna and 1.4% for the Malaysian ringgit. When emerging market central banks move to orchestrate monetary stimulus, disparate Inflationary Dynamics ensure the flow of this newly created “money” contrast markedly to that of the U.S. Wealthy individuals and financial institutions sell local currencies to purchase dollars, yen and euros, while weakened currencies trigger inflationary pressures in the real economy.

“Roach Motels” was the EM moniker back in the nineties. International finance would flow freely into EM booms, only to be eventually trapped by collapsing currencies, illiquidity and capital controls - come the arrival of the bust. A historic EM bust is now unfolding. The IMF, World Bank and other international institutions will be lending like crazy, yet the sources for the Trillions required to reflate EM Bubbles are anything but obvious.

April 17 – Wall Street Journal (Jonathan Cheng): “Since the Cultural Revolution ended in the mid-1970s, China’s economy, fueled by market reforms, has notched up more than four decades of unbroken gains, enlarging the domestic economy by roughly a hundredfold and transforming the world. That winning streak is over. China on Friday reported a 6.8% year-over-year contraction in its economy for the first three months of the year—the first quarterly decline in gross domestic product since official record-keeping began in 1992 and likely the first since Mao Zedong’s death in 1976… The fall was even steeper compared with the previous quarter: a 9.8% pullback as the coronavirus that first emerged in the central Chinese city of Wuhan spread across the country and around the world, delivering an economic blow unprecedented in modern times. ‘The scale and breadth of China’s economic contraction are staggering,’ said Eswar Prasad, an economics professor at Cornell University and the former head of the International Monetary Fund’s China division. ‘There is little prospect of China driving a revival of global growth.’”

The Chinese economy contracted at a 9.8% rate during Q1. Auto sales were down 48% in March, with Q1 air passenger traffic slumping 54%. Home sales are said to have recovered only to about 40% of pre-virus levels. A Friday morning Bloomberg headline: “China Suffers Historic Economic Slump with Hard Recovery Ahead.” And from the Associated Press: “China Opening Up But Consumers Stay Home.”

China has changed profoundly since their last economic downturn. I question how quickly Chinese consumers recover sufficient optimism to borrow and spend at pre-COVID levels. There is some pent-up demand along with inventories to replenish. Yet a very bearish case can be made for the maladjusted Chinese economy. Faltering confidence and a bursting housing Bubble would ravage domestic demand. Meanwhile, already struggling with overcapacity, China’s massive export sector faces the grim prospect of a global depression and collapsing EM demand. Such prospects should have the global community fearing Chinese financial system and currency fragilities. The renminbi was under modest pressure again this week.

Europe has its own acute fragilities. Italian yields jumped 20 bps this week to 1.79%, with spreads to German bunds widening 33 bps. Yield spreads widened 47 bps in Greece, 19 bps in Portugal and 16 bps in Spain. And this is in the face of ECB bond buying.  Stocks were down 3.2% in Italy and 2.8% in Spain this week.

April 16 – UK Telegraph (Ambrose Evans-Pritchard): “The eurozone’s emergency plan to fight Covid-19 has unravelled within days. Italy’s prime minister has rejected the central element of the €540bn package as a ‘trap’. No Italian leader in the current febrile mood could accept it and survive for long… ‘The deal is an admission of European inadequacy,’ said professor Adam Tooze, of Columbia University. The plan eschews joint debt issuance and amounts to extra debt foisted on states already at the outer boundaries of debt sustainability, pushing them further into a ‘bad equilibrium’. Jean-Paul Fitoussi, of Science Po in Paris, says the package amounts to ‘collective suicide’… ‘If there is no real mutualisation of debt, we will either slide further underwater, or take the inevitable politically incorrect step and say, ‘Enough is enough, let’s get out’,’ he said. Above all, it misjudges the simmering anger in Italy… If each state remains responsible for its own pandemic debt issuance, the effect is to turn a symmetric health shock into an asymmetric economic shock for different EMU states, further widening the gap and pushing Club Med to the brink. UniCredit says Italy’s public debt will jump by 33 percentage points to 167% of GDP this year with Portugal rising to 146%, and Greece 219%. The ball is now back in Germany’s court.”

At the end of the day, I don’t expect the Germans and Italians to share a common currency. I have expected the hardship that would accompany the piercing of the global Bubble to again place European monetary integration at risk. At its current trajectory, Italy is moving quickly to an unmanageable debt situation. And it is difficult for me to envisage the Germans and Dutch agreeing to mutual European debt issuance.

The euro traded at an almost three-year low 1.08 vs the dollar in February, spiked to a high of 1.15 on March 9th, then reversed sharply to 1.06 on March 23rd, back to 1.12 by the end of March, and closed down 0.6% this week at 1.0875. A euro breaking lower on heightened concerns for Italian/periphery debt and euro zone integration would add fuel to the dollar’s upside dislocation. With king dollar already benefiting from the U.S.’s competitive advantage in fiscal and monetary stimulus, an additional push from euro weakness would place added pressure on faltering EM currencies – including the renminbi.

WTI crude this week sank 20% ($4.49) to an 18-year low $18.27 – despite much vaunted OPEC+ supply cuts. But it’s not only sinking crude prices confirming unfolding global economic depression. Having rallied only marginally off March panic lows, this week’s 2.2% drop pushed the Bloomberg Commodities Index to a 23.3% y-t-d decline.

And while the U.S. equities rally continued, other indicators were less than bullish. Investment-grade and high-yield CDS prices moved higher this week (partially reversing the previous week’s major decline). Latin-American sovereign CDS jumped markedly higher. Mexico CDS surged 45 to 270 bps, up from 72 bps in late-February and not far below the 293 bps March 23rd closing high. Brazil CDS jumped 35 to 291 bps, and Colombia CDS rose 30 to 247 bps. Turkey CDS surged 89 to 649 bps, South Africa 31 to 408 bps, and Russia 15 to 178 bps.

Markets this week provided confirmation of ongoing global instabilities – with crude and commodities, in the euro zone’s periphery and EM, as well as with dismal Chinese data. Global COVID-19 data similarly don’t inspire confidence. From my vantage point – eyeing key vulnerabilities globally – it is as if the U.S. stock market has become a sideshow oddity. I hope all the optimism surrounding opening the economy is justified. I just look at the daily new infections and death data – and the national infection maps – and am skeptical we’ll attain a semblance of normalcy anytime soon. And with a deeply divided country becoming only more so – and COVID-19 turning increasingly political – it’s destined to be a disturbingly strange election year.

COVID-19 is, as well, becoming a major geopolitical issue – in alarming fashion.

April 17 – Fox News (Bret Baier, Gillian Turner, and Adam Shaw): “The U.S. is conducting a full-scale investigation into whether the novel coronavirus, which went on to morph into a global pandemic that has brought the global economy to its knees, escaped from a lab in Wuhan, China, Fox News has learned. Intelligence operatives are said to be gathering information about the laboratory and the initial outbreak of the virus. Intelligence analysts are piecing together a timeline of what the government knew and ‘creating an accurate picture of what happened,’ the sources said. Once that investigation is complete -- something that is expected to happen in the near-term -- the findings will be presented to the Trump administration. At that point White House policymakers and President Trump will use the findings to determine how to hold the country accountable for the pandemic.”

For the Week:

The S&P500 advanced 3.0% (down 11.0% y-t-d), and the Dow gained 2.2% (down 15.1%). The Utilities slipped 0.4% (down 5.0%). The Banks sank 7.0% (down 38.2%), and the Broker/Dealers dropped 2.4% (down 20.2%). The Transports were unchanged (down 24.5%). The S&P 400 Midcaps dipped 1.6% (down 24.3%), and the small cap Russell 2000 declined 1.4% (down 26.3%). The Nasdaq100 surged 7.2% (up 1.1%). The Semiconductors jumped 6.5% (down 7.8%). The Biotechs spiked 9.5% (down 2.3%). While bullion declined $14, the HUI gold index jumped 5.0% (up 1.0%).

Three-month Treasury bill rates ended the week at 0.085%. Two-year government yields slipped two bps to 0.205% (down 136bps y-t-d). Five-year T-note yields declined four bps to 0.36% (down 133bps). Ten-year Treasury yields fell eight bps to 0.64% (down 127bps). Long bond yields dropped eight bps to 1.26% (down 113bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 1.80% (down 91bps).

Greek 10-year yields surged 34 bps to 2.11% (up 68bps y-t-d). Ten-year Portuguese yields gained six bps to 0.97% (up 52bps). Italian 10-year yields jumped 20 bps to 1.79% (up 38bps). Spain's 10-year yields increased three bps to 0.82% (up 35bps). German bund yields dropped 13 bps to negative 0.47% (down 29bps). French yields fell eight bps to 0.03% (down 9bps). The French to German 10-year bond spread widened five to 50 bps. U.K. 10-year gilt yields were little changed at 0.30% (down 52bps). U.K.'s FTSE equities index declined 1.0% (down 23.3%).

Japan's Nikkei Equities Index rose 2.0% (down 15.9% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.03% (up 4bps y-t-d). France's CAC40 slipped 0.2% (down 24.7%). The German DAX equities index increased 0.6% (down 19.8%). Spain's IBEX 35 equities index dropped 2.8% (down 28.0%). Italy's FTSE MIB index sank 3.2% (down 27.4%). EM equities were mixed. Brazil's Bovespa index gained 1.7% (down 31.7%), and Mexico's Bolsa increased 0.5% (down 20.2%). South Korea's Kospi index rose 2.9% (down 12.9%). India's Sensex equities index gained 1.4% (down 23.4%). China's Shanghai Exchange advanced 1.5% (down 6.9%). Turkey's Borsa Istanbul National 100 index rose 1.8% (down 14.2%). Russia's MICEX equities index sank 5.3% (down 16.8%).

Investment-grade bond funds saw inflows of $5.184 billion, and junk bond funds posted inflows of $7.663 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 3.31% (down 86bps y-o-y). Fifteen-year rates rose three bps to 2.80% (down 82bps). Five-year hybrid ARM rates fell six bps to 3.34% (down 44bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 17 bps to 3.69% (down 65bps).

Federal Reserve Credit last week surged $228bn to a record $6.196 TN, with a 32-week gain of $2.474 TN. Over the past year, Fed Credit expanded $2.300 TN, or 59%. Fed Credit inflated $3.385 Trillion, or 120%, over the past 388 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.0 billion last week to $3.318 TN. "Custody holdings" were down $149bn, or 4.3%, y-o-y.

M2 (narrow) "money" supply expanded another $77.8bn last week to a record $16.732 TN, with an unprecedented six-week gain of $1.236 TN. "Narrow money" surged $2.221 TN, or 15.3%, over the past year. For the week, Currency increased $4.4bn. Total Checkable Deposits surged $74.5bn, while Savings Deposits fell $14.5bn. Small Time Deposits were little changed. Retail Money Funds gained $13.0bn.

Total money market fund assets jumped $49.1bn to a record $4.522 TN. Total money funds jumped $1.479 TN y-o-y, or 48.6%.

Total Commercial Paper sank $40.2bn to $1.059 TN. CP was down $22.5bn, or 2.1% year-over-year.

Currency Watch:

For the week, the U.S. dollar index added 0.2% to 99.711 (up 3.3% y-t-d). For the week on the upside, the Japanese yen increased 0.9%, the British pound 0.4%, and the Australian dollar 0.3%. For the week on the downside, the South African rand declined 4.5%, the Brazilian real 2.4%, the Mexican peso 1.6%, the Norwegian krone 1.2%, the South Korean won 0.8%, the Singapore dollar 0.7%, the New Zealand dollar 0.7%, the euro 0.6%, the Swedish krona 0.4% and the Canadian dollar 0.3%. The Chinese renminbi declined 0.53% versus the dollar this week (down 1.56% y-t-d).

Commodities Watch:

April 15 – Wall Street Journal (David Hodari and Ryan Dezember): “Global oil demand is expected to fall by a record 9.3 million barrels a day this year as government-implemented lockdowns keep the economy at a near standstill, the International Energy Agency said… In its closely observed monthly oil-market report, the IEA projected that demand for crude would drop in April by 29 million barrels a day to levels not seen in a quarter of a century. That would equate to roughly 29% of the world’s 100-million-barrel daily oil-demand figure from 2019.”

April 13 – Wall Street Journal (Ryan Dezember and Vipal Monga): “President Trump promised the U.S. would curtail oil output in a pact with major producers over the weekend. There isn’t much for him to do: The dismal economics and strained physics of the oil market are causing U.S. producers to shut down themselves. Canceled orders were mounting amid the sharp drop in fuel demand when Texland Petroleum LP decided to shut in each of its 1,211 oil wells and cease production by May. ‘We’ve never done this before,’ said Jim Wilkes, president of the 7,000-barrel-a-day Fort Worth, Texas, firm, which has weathered oil busts since 1973. ‘We’ve always been able to sell the oil, even at a crappy price.’ Despite the agreement between Mr. Trump, Saudi Arabia and Russia aimed at buoying prices, West Texas Intermediate, the main U.S. price gauge, closed Monday 1.5% lower at $22.41 a barrel.”

April 15 – Wall Street Journal (Russell Gold, Benoit Faucon and Rebecca Elliott): “No one expected 2020 would unleash a world-wide oil-production cut led by the U.S., Saudi Arabia and Russia. But since the new coronavirus hit, the world’s thirst for oil has vanished, creating an unprecedented crisis for one of the planet’s most powerful industries… There is too much gasoline and jet fuel on the market, so refineries that turn crude into fuel are slowing oil purchases. Oil-storage facilities from Asia to Africa and the American Southwest are filling up. Producers have begun to shut in wells whose oil has nowhere to go. The result is a breakdown of parts of the supply chain that delivers one of the world’s most important commodities. ‘The global oil industry is experiencing a shock like no other in its history,’ said Fatih Birol, executive director of the International Energy Agency.”

The Bloomberg Commodities Index dropped 2.2% (down 23.2% y-t-d). Spot Gold dipped 0.8% to $1,683 (up 10.8%). Silver sank 4.7% to $15.485 (down 13.6%). WTI crude sank $4.29 to $18.27 (down 70%). Gasoline recovered 5.3% (down 58%), and Natural Gas gained 1.7% (down 20%). Copper rallied 4.3% (down 16%). Wheat sank 4.3% (down 4%). Corn dropped 2.2% (down 15%).

Coronavirus Watch:

April 13 – Reuters (Maria Caspani and Jessica Resnick-Ault): “Ten U.S. governors on the east and west coasts banded together on Monday in two regional pacts to coordinate gradual economic reopenings as the coronavirus crisis finally appeared to be ebbing. Announcements from the New York-led group of Northeastern governors, and a similar compact formed by California, Oregon and Washington state, came as President Donald Trump declared any decision on restarting the U.S. economy was up to him. New York Governor Andrew Cuomo said he was teaming up with five counterparts in adjacent New Jersey, Connecticut, Delaware, Pennsylvania and Rhode Island to devise the best strategies for easing stay-at-home orders imposed last month to curb coronavirus transmissions.”

April 13 – CNBC (William Feuer and Berkeley Lovelace Jr.): “World Health Organization officials said… not all people who recover from the coronavirus have the antibodies to fight a second infection, raising concern that patients may not develop immunity after surviving Covid-19. ‘With regards to recovery and then reinfection, I believe we do not have the answers to that. That is an unknown,’ Dr. Mike Ryan, executive director of WHO’s emergencies program, said…”

April 16 – New York Times (Neil Irwin): “When big convulsive economic events happen, the implications tend to take years to play out, and spiral in unpredictable directions. Who would have thought that a crisis that began with mortgage defaults in American suburbs in 2007 would lead to a fiscal crisis in Greece in 2010? Or that a stock market crash in New York in 1929 would contribute to the rise of fascists in Europe in the 1930s? The world economy is an infinitely complicated web of interconnections. We each have a series of direct economic relationships we can see: the stores we buy from, the employer that pays our salary, the bank that makes us a home loan. But once you get two or three levels out, it’s really impossible to know with any confidence how those connections work. And that, in turn, shows what is unnerving about the economic calamity accompanying the spread of the novel coronavirus.”

April 12 – Reuters (Henry Nicholls and Hannah Mackay): “British Prime Minister Boris Johnson left hospital on Sunday and thanked staff for saving his life from COVID-19, but his government was forced to defend its response to the coronavirus outbreak as the national death toll passed 10,000.”

April 13 – Bloomberg (Isis Almeida and Michael Hirtzer): “On Sunday, one of America’s largest pork slaughterhouses shut down after more than 200 workers tested positive for the coronavirus. A day later, a massive beef-processing plant in Colorado announced it’s winding down operations. In Canada at least five meat plants have halted operations since the end of March. And most companies haven’t said exactly when they’ll reopen. To be clear: Nobody is saying North America is running out of meat yet. In fact, refrigerated inventories remain robust… and most plants remain open. But the virus… is spreading -- and the prospect of prolonged shutdowns has the boss of Smithfield, the world’s top pork producer, warning America is ‘perilously close’ to a shortfall.”

April 14 – New York Times (Michael Corkery and David Yaffe-Bellany): “The nation’s food supply chain is showing signs of strain, as increasing numbers of workers are falling ill with the coronavirus in meat processing plants, warehouses and grocery stores. The spread of the virus through the food and grocery industry is expected to cause disruptions in production and distribution of certain products like pork, industry executives, labor unions and analysts have warned in recent days. The issues follow nearly a month of stockpiling of food and other essentials by panicked shoppers that have tested supply networks as never before. Industry leaders and observers acknowledge the shortages could increase, but they insist it is more of an inconvenience than a major problem.”

Market Instability Watch:

April 15 – Wall Street Journal (Avantika Chilkoti): “Emerging markets have rushed to tap a flood of easy money from investors in recent years. That is likely to put bondholders at the forefront of negotiations in coming weeks as debt-laden governments seek relief. Asset-management firms, hedge funds and other private bondholders hold almost 36% of external public-sector debt in emerging markets on average, according to a Wall Street Journal analysis of 2018 data from Fitch Ratings, the World Bank and Haver Analytics. That was up from about 18% a decade earlier and was mirrored by a sharp drop in the share of borrowing from rich nations and multilateral organizations like the World Bank… ‘We will see some nasty defaults with very low recovery rates in most cases,’ said Jean-Charles Sambor, head of emerging-market fixed income at BNP Paribas Asset Management. ‘It’s going to be a pretty painful process, and it’s going to involve a mix of hedge funds and ‘real money’ investors who have diverging interests.’”

April 15 – Reuters (Davide Barbuscia, Marwa Rashad and Andrea Shalal): “Finance officials from the Group of 20 major economies agreed… to suspend debt service payments for the world’s poorest countries through the end of the year, a move quickly matched by a group of hundreds of private creditors. The actions to freeze both principal repayments and interest payments will free up more than $20 billion for the countries to spend on improving their health systems and fighting the coronavirus pandemic, Saudi Finance Minister Mohammed al-Jadaan told reporters…”

April 15 – Bloomberg (Adam Tempkin): “All kinds of markets took a drubbing in mid-March as the depth of the economic disruption caused by the pandemic sank in. But what happened in U.S. securitized debt stood out, as the asset class was pummeled by margin calls that forced selling in residential- and commercial-mortgage bonds, collateralized loan obligations and even securities backed by some types of auto loans. New issuance in these markets seized up and stayed frozen for weeks even as other areas of the bond markets, like corporate bonds, roared back to life in response to U.S. Federal Reserve intervention. As the dust has settled, it’s become clear that hedge funds and banks had combined to create far more leverage in structured-credit markets than anyone knew was there. After years of record low rates, some investors -- particularly hedge funds, structured credit funds and mortgage REITs -- sought to increase their returns by buying securitized debt via so-called repurchase, or repo, agreements with banks, who were their counterparties… Mortgage REITs, who often bought securitized debt at 7x leverage via repo lines, and some hedge funds, may be the biggest victims of repo unwinds.”

April 16 – Bloomberg (Katherine Greifeld): “The Federal Reserve’s backstop for corporate debt slammed by the coronavirus has spawned another dislocation in fixed-income exchange-traded funds. The two biggest junk-bond ETFs traded almost 5% above the prices of the assets they held at the end of last week, the biggest premiums in more than a decade. That comes after investors piled into the securities following the Fed’s announcement that it will buy corporate bonds recently cut to junk and certain high-yield ETFs to keep credit flowing.”

April 14 – Bloomberg (Joe Light): “The nascent market for private U.S. mortgages is teetering on the brink of collapse as the coronavirus crisis imperils years of work to lessen the government’s role in home lending. Several firms that issue mortgage bonds without federal guarantees have laid off most of their staffs and stopped doing business as the economy grinds to a halt. And the once-burgeoning market for securities that shift risk from government-backed agencies to private investors has also stalled, with some traders saying they’ve had trouble even getting prices.”

Global Bubble Watch:

April 15 – CNBC (Fred Imbert): “The global economic downturn has been so severe that already half of the world has asked the International Monetary Fund for a bailout, the organization’s chief said… ‘This is an emergency like no other. It is not because of bad governors or mistakes,’ Kristalina Georgieva told CNBC’s Sara Eisen… ‘For that reason, we are providing funding very quickly.’ ‘We are asking for one thing only: Please pay your doctors and nurses, make sure that your health [care] systems are functioning, and that vulnerable people and first responders are protected,’ Georgieva said.”

April 15 – Financial Times (Chris Giles): “The increase in borrowing by governments around the world as a result of the coronavirus pandemic will be ‘massive’, the IMF said…, forecasting that population lockdowns and economic contractions would push budget deficits to well above peak levels during the financial crisis. Globally, net public debt will rise from 69.4% of national income last year to 85.3% in 2020…, raising concerns about the willingness of the private sector to finance governments with chequered records in servicing their borrowings. In its first attempt to quantify the scale of the damage caused to public finances by coronavirus, the fund provisionally forecast that global public deficits will climb by 6.2 percentage points this year to reach 9.9% of national income, topping levels seen in 2008-9.”

April 14 – Financial Times (Chris Giles, Delphine Strauss and George Parker): “The coronavirus crisis will exact the biggest toll on the global economy since the 1930s Great Depression and potentially hit Britain harder than the Spanish flu epidemic and first world war, according to warnings from the IMF and the UK’s fiscal watchdog. The fund’s sobering estimates expect the pandemic to leave lasting economic scars, with the economies of most countries emerging 5% smaller than planned, even after a sharp recovery in 2021. It said the output loss would ‘dwarf’ the global financial crisis 12 years ago. The global contraction this year will be so bad that only a handful of people in the world will have experienced a similar event in their adult lifetimes. The IMF had to look back 90 years to the 1930s Great Depression to find a deeper recession.”

April 14 – Financial Times (Darren Dodd): “The loss in global economic output caused by the coronavirus pandemic will ‘dwarf’ that of the 2008 financial crisis, the IMF warned…, forecasting the worst contraction since the Great Depression of the 1930s. Most economies will shrink by 5%, even after a potential sharp recovery in 2021, the fund said. World output will decline by 3% this year, more than six percentage points down from the IMF growth forecast of 3.3% made in late January. Public finances will be shredded, unemployment will rise sharply and in 90% of the IMF’s 189 member countries incomes per person will fall.”

April 14 – CNBC (Jeff Cox): “The global economic hit from the coronavirus crisis will likely be four times worse than the financial crisis and the U.S. will see its highest unemployment rate since World War II, according to a Goldman Sachs forecast. With most of the world’s developing economies on a near total shutdown to try to stop the coronavirus spread, Goldman sees a second-quarter GDP decline of 11% from a year ago and 35% from the previous quarter on an annualized basis. In the U.S., the headline unemployment rate should hit 15% ‘and even this understates the severity of the situation’ as many workers will be sidelined and not looking for jobs… That will accompany a GDP decline in the U.S. of 11% from a year ago and 34% on a quarterly basis, both numbers also considerably worse than anything seen during the financial crisis in 2008.”

April 12 – Bloomberg (Fabiola Moura): “Gross domestic product in the Latin America and Caribbean region, excluding Venezuela, is expected to shrink 4.6% in 2020, according to the World Bank. The dramatic drop in demand from China and G7 countries due to the Covid-19 pandemic is affecting commodity exporters in South America and exporters of manufactured goods and services in Central America and the Caribbean. A collapse in tourism is also severely impacting some countries in the Caribbean.”

April 14 – Reuters (David Milliken and Kylie MacLellan): “Britain’s economy could shrink by 13% this year due to the government’s coronavirus shutdown, its deepest recession in three centuries, and public borrowing is set to surge to a post-World War Two high, the country’s budget forecasters said. In the April-June period alone, economic output could plunge by 35%, with the unemployment rate more than doubling to 10%... But the outlook for Britain’s public finances is stark. The OBR said the hit to tax revenues and the government’s huge spending plans meant the budget deficit could hit 273 billion pounds ($342bn) in the 2020/21 tax year — five times its previous estimate. That would be equivalent to 14% of gross domestic product, higher than the 10% level hit after the global financial crisis that began in 2007.”

April 15 – CNBC (Emma Newburger): “Greenland’s ice sheet experienced record melting last year that was driven by hotter temperatures and more frequent atmospheric circulation patterns triggered by climate change, scientists have confirmed. The stark findings show that researchers could also be underestimating future melting by about half, as most models that project future ice loss do not account for impacts from changing atmospheric circulation patterns, according to the study led by Marco Tedesco, a researcher at Columbia University’s Lamont-Doherty Earth Observatory. Greenland’s ice sheet experienced the largest outright drop in ‘surface mass’ — or how much mass is lost due to melting compared to mass gained from snowfall — since record-keeping began in 1948…”

Trump Administration Watch:

April 13 – Reuters (David Lawder): “A steep economic downturn and massive coronavirus rescue spending will nearly quadruple the fiscal 2020 U.S. budget deficit to a record $3.8 trillion, a staggering 18.7% of U.S. economic output, a Washington-based watchdog group said… Releasing new budget estimates based on spending mandated by law, the Committee for a Responsible Federal Budget (CRFB) also projected that the fiscal 2021 deficit would reach $2.1 trillion in 2021, and average $1.3 trillion through 2025 as the economy recovers from damage caused by coronavirus-related shutdowns.”

April 13 – Roll Call (David Lerman): “Just a few months ago, fiscal hawks bemoaned the return of trillion-dollar deficits. What a difference a pandemic makes. Independent forecasters now expect this year’s budget deficit to nearly quadruple the pre-coronavirus estimate, reaching nearly $4 trillion. That amount of red ink in a single fiscal year would dwarf the deficit peak of $1.4 trillion during the Great Recession and, as a share of the economy, approach levels not seen since World War II… Goldman Sachs estimated last week that the deficit would widen to $3.6 trillion, amounting to 17.7% of gross domestic product. By contrast, the deficit never reached 10% of GDP during the Great Recession of 2007-09… And that estimate doesn’t account for any future bills that Congress may take up. Goldman Sachs said additional legislation is likely, amounting to perhaps $500 billion.”

April 13 – Financial Times (Doina Chiacu): “President Donald Trump said on Monday it was his decision when to reopen the U.S. economy, not that of state governors, but legal experts disagree and governors are going their own way… ‘It is the decision of the President, and for many good reasons. With that being said, the Administration and I are working closely with the Governors, and this will continue. A decision by me, in conjunction with the Governors and input from others, will be made shortly!’ Trump wrote on Twitter.”

April 15 – Wall Street Journal (Michael C. Bender and Andrew Restuccia): “Banking and financial services executives told President Trump that his administration needed to dramatically increase the availability of coronavirus testing before the public would be confident enough to return to work, eat at restaurants or shop in retail establishments, according to people familiar with the matter. The push for more testing came in the first of four Wednesday phone calls that Mr. Trump held with business executives on his newly formed task force to reopen the economy.”

April 15 – Washington Post (Andrew Van Dam): “In late February, the Trump administration said it planned to spend $2.5 billion to fight the coronavirus. A month and a half later, President Trump signed off on spending almost a thousand times as much — $2.35 trillion. And that amount doesn’t include the Federal Reserve’s efforts, which are harder to measure but seem likely to blow past the $4 trillion mark… All told, the U.S. government has committed more than $6 trillion to arrest the economic downturn from the pandemic.”

April 16 – CNBC (Thomas Franck and Kate Rogers): “The Small Business Administration’s rescue loan program hit its $349 billion limit on Thursday and is now out of money as the nation’s top Republicans and Democrats struggle to agree on how to restore its funds. The SBA website reads that it is ‘unable to accept new applications for the Paycheck Protection Program based on available appropriations funding. Similarly, we are unable to enroll new PPP lenders at this time.’”

April 16 – Wall Street Journal (Andrew Ackerman): “Treasury Secretary Steven Mnuchin is under growing pressure from industry officials and members of Congress to ease strains on mortgage companies as millions of borrowers skip their monthly payments amid the coronavirus outbreak. The Treasury secretary is a key figure because he must agree to let the Federal Reserve set up a program to backstop the companies. Industry officials believe the central bank supports such a plan, while Treasury officials are seen as more lukewarm. Mr. Mnuchin has been hearing from housing-market veterans who know the Treasury secretary from his days on Wall Street, including his tenure running the mortgage-trading desk at Goldman Sachs Group Inc…”

April 15 – Bloomberg (Saleha Mohsin): “Treasury Secretary Steven Mnuchin has forged a crisis partnership with Federal Reserve Chairman Jerome Powell, giving the central bank a bigger role in U.S. fiscal policy and blurring the lines between the agencies as they unleash $4.5 trillion in stimulus to combat the coronavirus. Mnuchin and Fed Chairman Jerome Powell work together on the coronavirus rescue ‘round the clock,’ according to the Treasury secretary. Already, the 106-year-old central bank is lending directly to main street businesses for the first time since the Great Depression. Some analysts and former government officials see an erosion of the Fed’s traditional independence from politicians in the White House and Congress, as well as a central bank straying from monetary policy -- the supply of dollars – into tax-and-spend fiscal policy.”

April 14 – Bloomberg (Katherine Burton and Joshua Fineman): “Free money. That’s the enticing prospect hedge funds and other trading firms are pondering after realizing they too might be able to participate in a historic U.S. stimulus package to keep small businesses alive… Since early April, law firms have hosted Webinars and sent out alerts, and accounting firms have reached out to clients, all with the goal of explaining how they might be able to tap into the Paycheck Protection Program. The $349 billion package administered by the Small Business Administration provides loans to cover payroll, rent and utilities for up to eight weeks. The loans can convert to grants if recipients retain or rehire their workers. Some hedge funds already have applied, filling out forms to show they have fewer than 500 employees and certifying the ‘current economic uncertainty makes this loan request necessary to support the ongoing operations.’”

April 15 – Bloomberg (Jennifer A Dlouhy and Sheela Tobben): “The Trump administration is considering paying U.S. oil producers to leave crude in the ground to help alleviate a glut that has caused prices to plummet and pushed some drillers into bankruptcy. The Energy Department has drafted a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves by effectively making that untapped crude part of the U.S. government’s emergency stockpile, said senior administration officials…”

Federal Reserve Watch:

April 15 – New York Times (Matt Phillips): “The United States has responded to the economic havoc wrought by the coronavirus with the biggest relief package in its history: $2 trillion. It essentially replaces a few months of American economic activity with a flood of government money — every penny of it borrowed. And where is all that cash coming from? Mostly out of thin air. The traditional view of economic theory holds that governments and central banks have distinct responsibilities. A government sets fiscal policy — spending the money it raises through taxes and borrowing — to run a country. And a central bank uses various levers of monetary policy — like buying and selling government securities to change the amount of money in circulation — to ensure the smooth operation of the country’s economy. But the relief package, called the CARES Act, will require the government to vastly expand its debt at the same time that the Federal Reserve has signaled its willingness to buy an essentially unlimited amount of government debt. With those twin moves, the United States has effectively undone decades of conventional wisdom, embedding into policy ideas that were once relegated to the fringes of economics.”

April 14 – New York Post (Charles Gasparino): “Judging by the performance of the stock market, the economic recovery from the pandemic lockdown should be swift and dramatic, a so-called V-shaped recovery. If only it were true. The stock market’s recent gains don’t tell the full story of the absolute mess the US economy finds itself in… Rather, the gains in equity prices are more of an indication of the uneven stimulus methods employed by the feds. These measures will almost certainly benefit Wall Street and market speculation — even as their impact on Main Street will be slow to come. Wall Street executives and analysts predict a tale of two economies: Wall Street traders will make money, while Main Street businesses face economic conditions not seen since the Great Depression.”

April 13 – Financial Times (Colby Smith and Patrick Temple-West): “The Federal Reserve is facing sharp criticism over its plan to provide emergency funding to states and large cities but not smaller localities and organisations that might be facing tougher fights against coronavirus or steeper declines in income. Municipal bond issuers and their advisers said the unprecedented and potentially politically fraught decision amounts to a short-term measure that may not be enough to tackle a fast-moving financial crisis for state and local governments in the US. On Thursday the central bank said it would purchase up to $500bn of short-term debt directly from US states, counties with at least 2m residents and cities with a population of at least 1m, with borrowers having to pay back the money within two years. The Fed’s action cleaved in two the $4tn municipal bond market, where governments and public organisations raise funds. Just 16 counties and 10 cities are eligible for the direct purchases, according to data from Bank of America.”

April 13 – Wall Street Journal (Michael S. Derby): “Citing improved money-market conditions, the Federal Reserve Bank of New York said… it will soon ease back on operations designed to add short-term liquidity to financial markets. The bank… laid out a modified schedule of its repurchase-agreement operations, or repos. These interventions take in Treasurys, mortgages and agency securities from eligible banks and broker-dealers in exchange for de facto loans of cash.”

U.S. Bubble Watch:

April 14 – Bloomberg (Amanda Albright and Craig Torres): “The Federal Reserve’s decision to extend loans only to the most-populous local governments may have a stark, if unintended consequence: excluding some of the cities and counties with the biggest share of black residents. Only cities with more than 1 million residents – and counties with more than 2 million -- will be able to take out loans from the central bank to cover short-term deficits as the coronavirus shutdown decimates their tax revenues. As a result, according to a report… by the Brookings Institution, none of the 35 cities with the biggest share of black residents will qualify. That includes Baltimore, Atlanta and Detroit, a formerly bankrupt city that’s been dealing with a major outbreak of Covid-19. Brookings analysts Aaron Klein and Camille Busette said the minimum population requirements ‘unintentionally deepen what are becoming disturbing and obvious racial disparities of COVID-19.’”

April 15 – New York Post (Mark Moore): “Thousands of protesters on foot and in vehicles converged… on Michigan’s capital to rally against Gov. Gretchen Whitmer’s stay-at-home orders in the state. ‘Operation Gridlock,’ organized by the Michigan Conservative Coalition, created a huge bumper-to-bumper traffic jam around the Michigan Capitol Building in Lansing… Meshawn Maddock, an organizer for the group, said the demonstrators include Republicans, Democrats and independents. ‘Quarantine is when you restrict movement of sick people. Tyranny is when you restrict the movement of healthy people,’ Maddock told Fox News. ‘Every person has learned a harsh lesson about social distancing. We don’t need a nanny state to tell people how to be careful.’”

April 15 – New York Times (Mary Williams Walsh): “The ballooning costs of the coronavirus pandemic have put an unexpected strain on the finances of states, which are hurriedly diverting funds from elsewhere to fight the outbreak even as the economic shutdown squeezes their main source of revenue — taxes. States provide most of America’s public health, education and policing services, and a lot of its highways, mass transit systems and waterworks. Now, sales taxes — the biggest source of revenue for most states — have fallen off a cliff… Personal income taxes, usually states’ second-biggest revenue source, started falling in March, when millions lost their paychecks and tax withholdings stopped. April usually brings a big slug of income-tax money, but this year the filing deadlines have been postponed until July. ‘This is going to be horrific for state and local finances,’ said Donald J. Boyd, the head of Boyd Research, an economics and fiscal consulting firm, whose clients include states and the federal government.”

April 11 – Reuters (Elizabeth Dilts Marshall): “JPMorgan…, the country’s largest lender by assets, is raising borrowing standards this week for most new home loans as the bank moves to mitigate lending risk stemming from the novel coronavirus disruption. …Customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value. The change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market…”

April 14 – Wall Street Journal (David Benoit): “JPMorgan…, bracing for a severe recession, set aside another $6.8 billion to cover potential losses on loans to consumers and companies struggling to stay afloat during the coronavirus shutdown. The nation’s biggest bank said… profit fell by nearly 70% in the first quarter… It warned that it may set aside even more of its profits to cover loan losses if its second-quarter forecasts—including an unemployment rate of 20%—prove to be accurate.”

April 15 – Reuters (Anirban Sen, Elizabeth Dilts and Matt Scuffham): “Goldman Sachs Group Inc’s quarterly profit nearly halved, as it set aside more money to cover for corporate loans expected to go bust in the coming months and booked heavy losses on its debt and equity investments… The bank’s net earnings applicable to common shareholders fell to $1.12 billion in the first quarter ended March 31 from $2.18 billion a year earlier.”

April 15 – Associated Press (Ken Sweet): “The major banks in the U.S. are anticipating a flood of loan defaults as households and business customers take a big financial hit from the coronavirus pandemic. JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Goldman Sachs raised the funds set aside for bad loans by nearly $20 billion combined in the first quarter, earnings reports released over the past two days show. And Wall Street expects that figure may go even higher next quarter, a possibility bank executives acknowledged on earnings conference calls.”

April 16 – CNBC (Jeff Cox): “Protection measures against the coronavirus continued to tear through the employment ranks, with 5.245 million more Americans filing first-time claims for unemployment insurance last week… That brings the crisis total to just over 22 million, nearly wiping out all the job gains since the Great Recession.”

April 15 – CNBC (Diana Olick): “A crucial indicator of homebuilder sentiment just suffered its biggest monthly drop in the index’s 35-year history… Builder confidence in the market for single-family homes plunged 42 points to a reading of 30 in April, the lowest point since June 2012, according to the latest National Association of Homebuilders/Wells Fargo Housing Market Index… Of the index’s three components, current sales conditions dropped 43 points to 36, sales expectations in the next six months fell 39 points to 36, and buyer traffic decreased 43 points to 13.”

April 14 – Reuters (Lucia Mutikani): “U.S. retail sales suffered a record drop in March and output at factories declined by the most since 1946… Retail sales plunged 8.7% last month, the biggest decline since the government started tracking the series in 1992…”

April 15 – Reuters (Lucia Mutikani): “U.S. manufacturing output dropped by the most in just over 74 years in March as the novel coronavirus pandemic fractured supply chains, suggesting business investment contracted further in the first quarter. The Federal Reserve said on Wednesday manufacturing production plummeted 6.3% last month, the biggest decrease since February 1946.”

April 16 – Bloomberg (David Wethe): “No one is feeling the pain of an oil collapse more than the shale producers. Except, perhaps, their suppliers. Take Stacy Locke, chief executive officer for Pioneer Energy Services Corp. Locke says he had no choice but to abandon drilling in the Bakken shale basin after roughly 20 years there as plunging oil prices slashed activity, and a major customer in the region -- Whiting Petroleum Corp. -- went bankrupt. The end result of a tough year for oil: Pioneer will lose the last 6 rigs it has in the Bakken, with each one ending jobs for 20 or so workers. Since the start of 2019, the oilfield services sector has lost almost 50,000 jobs, or about 13% of its workforce. Meanwhile, the falloff in fracking… is forecast to face its worst year ever with at least half of all work expected to be ended by July 1, according to Citigroup Inc.”

April 16 – Associated Press: “U.S. home-building activity collapsed in March as the coronavirus spread, with housing starts tumbling 22.3% from a month ago. …Groundbreakings occurred last month at a seasonally adjusted annual rate of 1.2 million units, down from a 1.56 million pace in February. Construction of single-family houses fell 17.5%, while apartment and condo starts were off 32.1% from a month ago. The drop in housing starts was the worst monthly decline since the 1980s, when new home construction plunged 26.42% in March 1984.”

April 15 – MarketWatch (Greg Robb): “The New York Federal Reserve’s Empire State business conditions index plummeted a record 57 points to -78.2 in April, the regional Fed bank said Wednesday. That’s the lowest reading on record. Economists had expected a much smaller decline to -35…”

April 15 – Financial Times (Amin Rajan): “During a CNBC interview last month, Governor Phil Murphy said New Jersey’s retirement system ‘like . . . pension plans across the country, have been hit hard sideways’ and would need time to ‘stabilise’. He was speaking after the asset value of his state’s retirement system had fallen by more than 13% since the beginning of its fiscal year in July 2019. Back then, its assets could cover only 40% of what it owed to its current and future retirees. The perilous state of pension finances in general was underscored in August 2019 by the Pension Benefit Guaranty Corporation, which insures the US retirement systems against insolvency. Even in the midst of the longest bull market in history, it warned that its own Multiemployer Insurance Program was heading for insolvency by 2025, affecting 10m members.”

April 12 – Financial Times (Hudson Lockett, Thomas Hale and Henny Sender): “Luckin Coffee’s implosion has shattered the faith of some international investors when it comes to Chinese companies listed on the world’s biggest stock exchange. The New York-traded shares of the coffee chain… have tumbled more than 80% since it was revealed that an internal investigation found hundreds of millions of dollars of its sales last year were ‘fabricated’. Trading in the stock is currently frozen. The debacle has turned the spotlight back on the accounting risks faced by investors in US-listed Chinese companies, and provided further ammunition for Washington’s China hawks.”

Fixed-Income Bubble Watch:

April 13 – Financial Times (Robert Armstrong and Billy Nauman): “Next month, millions of Americans will skip their mortgage payments. Those who have lost their jobs because of the Covid-19 crisis do so without penalty, under the bailout law passed last month. This throws a lifeline to struggling Americans… But the payments are not forgiven. They will be made up later, most likely by extending the term of the loans. They cannot be forgotten, either — not even temporarily. So who will replace the missing money? In the US, most mortgages are not a simple agreement between one borrower and one lender. Instead, millions of borrowers are linked to thousands of bondholders by a complicated financial machine. That the machine will keep cranking out regular payments to the bondholders is implicitly guaranteed by the US government.”

April 11 – Bloomberg (Olivia Raimonde): “The $1.2 trillion U.S. junk-bond market has staged a marked recovery in recent days. But pull back the curtain and it’s clear not all borrowers are reaping the benefits equally. For many of the riskiest credits, the situation remains as dire as ever, leaving them with little chance to access the financing they desperately need… Risk premiums on bonds rated CCC remain near the widest since 2009 relative to securities a few notches higher in the B and BB buckets. The Federal Reserve’s announcement… that it will start buying debt recently downgraded to the highest junk tier could ultimately exacerbate the divergence, according to analysts… The growing disparity between speculative-grade issuers may signal that a wave of restructurings among the most leveraged companies is largely unavoidable…”

April 16 – Bloomberg (Sally Bakewell and Lisa Lee): “Wall Street banks are lending billions of dollars to desperate companies these days, like hotelier Marriott International and concert producer Live Nation Entertainment. Now, a host of those companies are turning around and asking the banks to waive or loosen financial markers that help ensure the debt will be paid back. And for the most part, the banks, from JPMorgan… to Wells Fargo…, are obliging them because they would otherwise risk triggering a wave of defaults that would swell their loan losses from the pandemic and eat into their capital.”

April 13 – Bloomberg (Kelsey Butler and Heather Perlberg): “Renowned as risk-takers, they raised cash by selling stock, multiplied the haul with borrowed money, then used it to lend to some of the country’s most indebted companies. If all went well, they would profit handsomely. But right now, the strategy is going badly for many business development companies -- key players in the $812 billion private credit market. Analysts and ratings companies are sounding alarms as a number of the firms -- often just called BDCs -- rush to shore up their finances or throw lifelines to their borrowers. One of the largest, Golub Capital BDC Inc., is among those raising funds at a time that may significantly dilute existing shareholders. And while the Federal Reserve and government announced programs to prop up struggling companies, BDCs may not benefit much. Many companies they finance, owned in part by private equity firms, don’t qualify under current rules.”

April 14 – Wall Street Journal (Esther Fung): “Mall and shopping-center owners are compiling a blacklist of large, usually financially stable tenants that haven’t paid their April rent. Big companies that have failed to pay all or some of this month’s rent include the fitness chain Equinox Holdings Inc., Dick’s Sporting Goods Inc. and discount fashion retailer Burlington Stores Inc. Petco Animal Supplies Inc., French luxury conglomerate LVMH Mo√ęt Hennessy Louis Vuitton SE, lingerie maker Victoria’s Secret and office-supply chain Staples Inc. also fall into this category… Many landlords said they are willing to work with smaller local businesses that have limited cash and have experienced collapsing revenue with customers sheltering in place. But some property owners are taking a more confrontational approach with larger delinquent tenants that landlords believe have cash or access to capital but have failed to pay their rent anyway.”

April 14 – Reuters (Pushkala Aripaka): “Frontier Communications Corp has filed for bankruptcy protection in the United States, the high-speed internet company said…, as it restructures finances to cut down its borrowings by more than $10 billion.”

April 13 – Financial Times (Joe Rennison and Eric Platt): “US companies hard hit by the coronavirus raised more than $2bn in debt on Monday, as investors showed a renewed willingness to lend to junk-rated issuers following steps taken by the Federal Reserve last week to prop up the market. Cinema operator Cinemark, which has closed more than 300 theatres across North America, and cut-price retailer Burlington Coat Factory were among those securing financing, according to people with knowledge of the deals.”

China Watch:

April 12 – Financial Times (Naoki Matsuda): “Shopping malls and stores in China have quickly reopened as the government promotes a return to business as usual, only to see consumers stay home and keep their purse strings tight or shop online. Customer traffic is ‘less than half of usual levels’ said a worker at a Walmart store in a Shanghai suburb late last month. Shelves in the vegetable and meat departments were well stocked, but few shoppers passed through the aisles during the normally busy late-afternoon hours. Even with its online delivery service, ‘sales are not growing at all’, the worker said.”

April 15 – Reuters (Roxanne Liu): “China’s new home prices in March grew at their slowest annual pace since June 2018, but a pick-up in momentum could point to a tentative recovery... Home prices in March grew 5.3%, also the 10th consecutive month of weaker growth… ‘Property sales offices across the country opened in March, but sales remained slugglish,’ said Zhang Dawei, …analyst with property agency Centaline, who estimates they recovered to 40% of pre-virus levels after a plunge in February.”

April 11 – Associated Press (Joe McDonald): “China’s auto sales sank 48.4% in March from a year ago as the economy reeled from the coronavirus…, adding to strains for the struggling industry in its biggest global market. Sales of SUVs, sedans and minivans totaled just over 1 million… Total vehicle sales, including trucks and buses, declined 43.3% to 1.4 million. The decline was an improvement over February’s record-setting 81.7% sales plunge…”

April 15 – Bloomberg: “Air-passenger traffic slumped 54% in China in the first three months of 2020 as the coronavirus outbreak and related travel restrictions decimated demand. China’s aviation industry lost 39.8 billion yuan ($5.6bn) in the first quarter…”

April 13 – CNBC (Huileng Tan): “China reported that its dollar-denominated exports and imports both fell from a year ago in March, but they were better than what economists had expected. China’s exports fell 6.6% in March from a year ago, while imports slipped 0.9% in the same month… Economists polled by Reuters had expected exports from China to fall 14% in March from a year ago, while imports were projected to fall 9.5%... The country’s March trade surplus was $19.9 billion…”

April 15 – Financial Times (Hudson Lockett): “China’s central bank has cut one of its most important lending rates to a record low as Beijing seeks cushion the hit to the economy from the coronavirus pandemic. The move by the People’s Bank of China will inject RMB100bn ($14.2bn) into the country’s financial system… The central bank cut the one-year medium-term lending rate to by 0.2 percentage points to 2.95% — its lowest level since it was introduced in 2014.”

April 14 – Bloomberg: “China’s $3 trillion trust industry, a key alternative source of funds for weaker companies, risks sending shock waves through the nation’s financial system with defaults among its investment products predicted to double this year under the strains of the coronavirus outbreak. The once fast-growing pocket of shadow banking in China has 5.4 trillion yuan ($766bn) in trust offerings coming due this year, high-yield products backed by loans that are sold to banks, institutional investors and wealthy individuals. About 300 of these products will go into default compared with last year’s record of 118, estimated Xu Zijun, a Beijing-based senior analyst at Reality Finance Research. A hint of the wider danger came last month when Anxin Trust Co., a particularly aggressive shadow lender, said the government had been involved in its rescue plan to avoid triggering ‘systemic financial risks.’”

Central Bank Watch:

April 15 – Financial Times (Sam Fleming and Martin Arnold): “The European Central Bank’s decision to buy almost €900bn of extra bonds this year has kept sovereign yields under control and helped stave off a rerun of the 2010-2012 eurozone debt crisis. But as new IMF forecasts… showed, the coronavirus crisis is propelling government debt in the single currency area towards 100% of gross domestic product. Central bankers and economists warned that debt burdens could still stifle the growth prospects of a range of fiscally weaker member states, straining the economic cohesion of the eurozone.”

Europe Watch:

April 15 – Financial Times (Tommy Stubbington): “Italian government bonds are coming under increasing pressure despite the European Central Bank’s huge asset-purchase programme, as investors worry about the enormous debt load Italy and other eurozone members are taking on to combat the coronavirus crisis. A sell-off in Italy’s government debt extended to a second day on Wednesday, pushing the country’s 10-year yield to a four-week high of more than 1.8%. Bonds issued by Greece, Portugal and Spain also weakened. The gap between Italian and German yields… widened to more than 2.2 percentage points, reversing more than half of the narrowing seen since the announcement of the ECB’s €750bn Pandemic Emergency Purchase Programme on March 18.”

April 17 – Associated Press: “European car sales tanked last month amid strict lockdown measures to contain the coronavirus that shut down dealerships for at least half of March and dried up consumer spending. The European carmaker’s association, ACEA, said… new car registrations ‘recorded a dramatic drop’ of 55% to 567,308 units. The drop is worse even than during the 2008-9 global financial crisis... The steepest losses during that financial crisis occurred in January 2009, when sales fell 27%.”

EM Watch:

April 13 – Reuters (Abraham Gonzalez): “Mexico’s economy will shrink 7.6% in 2020, more than double a previous forecast, and its ‘policy response to the coronavirus is among the weakest anywhere in the world,’ according to UBS. The Swiss bank’s revised forecast, from a 3.5% decline predicted earlier for Latin America’s No. 2 economy, would mark a bigger annual nosedive for Mexico than anything seen during the 1980s debt crisis, the so-called Tequila crisis in 1995, or the 2007-2009 global financial crisis.”

April 15 – Reuters (Stefanie Eschenbacher): “Fitch… downgraded Mexico’s sovereign rating to one notch above speculative grade on fears that the economic shock caused by the novel coronavirus will cause a ‘severe recession’ in Latin America’s second-largest economy this year.”

April 11 – Reuters (Marcela Ayres): “Brazil’s 2020 deficit is approaching 500 billion reais ($96bn), or 7% of gross domestic product, even before a state aid proposal of up to 222 billion reais to tackle the coronavirus is factored in, the economy ministry said on Saturday. In 2019, the deficit was 61 billion reais, or 0.9% of GDP…”

April 15 – Reuters (Carolina Mandl and Marcela Ayres): “Brazil’s Economy Ministry is talking with banks about providing bailouts to sectors such as airlines, automakers, power companies and large retailers to help them survive the coronavirus crisis… Reuters reported earlier on Wednesday that Brazil’s biggest lenders - such as Banco Bradesco, Itau Unibanco Holding SA, Banco Santander Brasil and Banco do Brasil SA - have discussed with the country’s central bank and development bank BNDES how and which financial instruments could be used to rescue embattled companies.”

April 16 – Financial Times (Bryan Harris and Andres Schipani): “Jair Bolsonaro… fired his health minister following a feud between the two men over the Brazilian president’s vocal opposition to social distancing measures aimed at curbing the spread of coronavirus. The dismissal of Luiz Henrique Mandetta — whose professional competence drew comparisons with Anthony Fauci… — immediately sparked protests, with self-isolated Brazilians banging pots outside their windows.”

April 14 – Bloomberg (Cristiane Lucchesi and Felipe Marques): “Brazil’s credit-fund industry is reeling from record withdrawals that are forcing bond sales into a market with few buyers, distorting prices and corporate borrowing costs. Investors piling into cash in response to the coronavirus crisis took 9.6 billion reais ($1.86bn) out of such funds in March, on top of 1.5 billion reais in February… The withdrawals amount to about 12% of the independent credit-fund industry’s total outstanding assets.”

April 12 – Reuters (Ezgi Erkoyun): “Turkey’s banking watchdog said… it was slashing the limit for banks’ foreign-exchange swap, forward and option transactions with foreign entities to 1% of a bank’s equity, from 10% previously. In a statement, the BDDK watchdog said it made the amendment to support measures taken to protect financial stability and manage risks raised by the global coronavirus outbreak.”

April 12 – Financial Times (Benedict Mander and Colby Smith): “Argentina is heading for its ninth sovereign debt default, analysts have warned, with increasingly frustrated investors set to reject the government’s debt restructuring offer due this month. Last week, the centre-left government delayed payments on $10bn of local-law debt, a move seen by many as a signal of what is to come. After missing a self-imposed deadline of March 31 to reach a deal on $83bn of external debt owed to private investors, officials said last week that talks would continue until at least the end of this week.”

April 15 – Bloomberg (Cagan Koc and Abeer Abu Omar): “A debt pile-up across the Middle East and Central Asia will tie down resources available to fight the global coronavirus pandemic and pose an added challenge as an estimated $35 billion in the region’s external sovereign liabilities mature this year, according to the International Monetary Fund.”

April 11 – Financial Times (Neil Munshi and David Pilling): “In a sign of just how severely Nigeria’s economy has been affected by the coronavirus pandemic and the oil price crash, Africa’s biggest crude producer this week warned of an imminent recession, requested $7bn in emergency funding and ditched a costly oil subsidy scheme. Although the country of 200m people had recorded a relatively modest 254 cases of coronavirus by Wednesday, with just six deaths, Zainab Ahmed, the finance minister, warned that Nigeria would fall into its second recession in five years if drastic action were not taken to cushion the economic blow.”

Leveraged Speculation Watch:

April 16 – Bloomberg (Nishant Kumar and Bei Hu): “Some of the hedge fund industry’s biggest names made history in March -- for all the wrong reasons. Firms run by Ray Dalio, Michael Hintze, Adam Levinson and others suffered their worst-ever losses last month, with some funds down as much as 40% as the coronavirus pandemic battered global markets. Overall, three out of four hedge funds lost money, according to preliminary data… That kind of performance by some of the world’s most prominent firms undermines the rationale for hedge funds, which in theory are supposed to make money when other investment strategies backfire during downturns and periods of volatility. The poor showing might also lead investors to question why they’re paying hedge funds some of the highest fees in the money management industry.”

April 14 – Bloomberg (David Ramli): “In December, Singapore’s Quantedge Capital Pte was celebrating one of its best-ever years. Now, it’s just rounded off its worst month in history, showing how quickly the coronavirus has upended hedge funds. …The fund, which in 2019 grew by 70.5% to hit assets under management of over $2 billion, said early estimates showed it lost 28.8% in March.”

April 13 – Wall Street Journal (Juliet Chung and Gregory Zuckerman): “Anthony Scaramucci’s SkyBridge Capital LLC was hit by heavy losses in March from a big bet on debt investments and now is considering possible steps after some of its hedge-fund managers prevented SkyBridge and other clients from withdrawing their money. …SkyBridge invests billions of dollars in hedge funds for wealthy clients. The firm lost 22.5% in March in its flagship fund… For the year, the fund is down 21.9% through March. Some of those hedge funds have blocked SkyBridge and other investors from withdrawing money as they grapple with redemption pressures or less liquid markets.”

April 13 – Wall Street Journal (Phred Dvorak and Rolfe Winkler): “SoftBank Group Corp. is on track for its worst annual performance in its 39-year history as the tech conglomerate said it expected to lose nearly $17 billion in its Vision Fund for the fiscal year just ended. The investment loss means the $100 billion fund, the world’s biggest tech investment vehicle, is likely down since its launch three years ago. That would erase the billions of dollars in gains that the fund touted after investments like Uber… and WeWork soared.”

April 15 – Bloomberg (Alfred Cang, Joyce Koh, and Chanyaporn Chanjaroen): “HSBC Holdings Plc along with a clutch of other banks have a combined exposure of at least $3 billion to Singapore’s Hin Leong Trading (Pte.) Ltd., and are in talks with the privately-held oil trader over shoring up its finances… A group of about 10 lenders including HSBC, Singapore’s three largest banks, Standard Chartered Plc and Deutsche Bank AG held a virtual meeting with the oil trader and its advisers on Tuesday…”

Geopolitical Watch:

April 15 – Bloomberg: “China criticized U.S. President Donald Trump’s move to temporarily halt funding to the World Health Organization and pledged to support the global health body. Trump… said he ordered the move against the WHO because it took China’s claims about the coronavirus ‘at face value’ and failed to share information about the pandemic as it spread. China has ‘serious concerns’ about the decision and called on the U.S. to fulfill its responsibilities, foreign ministry spokesperson Zhao Lijian said… ‘This U.S. decision will weaken the WHO’s capabilities and undermine international cooperation,’ Zhao said…”

April 15 – Reuters (Steve Holland and David Brunnstrom): “U.S. President Donald Trump said… his government is trying to determine whether the coronavirus emanated from a lab in Wuhan, China, and Secretary of State Mike Pompeo said Beijing ‘needs to come clean’ on what they know… Fox News reported… that the virus originated in a Wuhan laboratory not as a bioweapon, but as part of China’s effort to demonstrate that its efforts to identify and combat viruses are equal to or greater than the capabilities of the United States.”

April 16 – Wall Street Journal (Kate O’Keeffe, Liza Lin and Eva Xiao): “New Chinese export restrictions have left American companies’ U.S.-bound face masks, test kits and other medical equipment urgently needed to fight the coronavirus stranded, according to businesses and U.S. diplomatic memos. Large quantities of critical protective gear and other medical goods are sitting in warehouses across China unable to receive necessary official clearances, said some suppliers and brokers.”

April 16 – Financial Times (James Politi): “Steven Mnuchin has defended the Trump administration’s opposition to a bid to provide IMF liquidity to emerging markets that are facing capital outflows, saying it would mostly benefit wealthier nations that did not need the support. The plan to issue new reserve assets by the IMF has emerged as a primary source of tension between the US and other nations as the Fund and the World Bank try to co-ordinate a global response to the crisis facing developing economies. Washington has backed other measures including a debt relief package that was adopted this week by the G20, including China; a short-term liquidity line for emerging countries that has been approved by the IMF board; and an expansion of the Fund’s emergency financing capacity to directly help struggling countries.”

April 15 – Reuters (Jonathan Landay): “China may have secretly set off low-level underground nuclear test explosions despite claiming to observe an international pact banning such blasts, the U.S. State Department said… that could fuel U.S.-Chinese tensions. The finding… may worsen ties already strained by U.S. charges that the global COVID-19 pandemic resulted from Beijing’s mishandling of a 2019 outbreak of the coronavirus in the city of Wuhan.”