Friday, May 1, 2020

Weekly Commentary: Going Nuclear

In a CBB from a decade or so ago, I noted that at the commencement of WWII President Roosevelt marshaled an agreement from the major warring parties to avoid the bombing of civilian targets. It was not long, however, before civilians living near military installations were considered unfortunate collateral damage. And so began the incremental abandonment of the principle of safeguarding innocent noncombatants. By the end of the war, there were no limits – nothing too outrageous or deplorable: population centers, viewed strategically as even more valuable than military targets, were under unrelenting brutal bombardment. Hiroshima and Nagasaki suffered nuclear devastation.

“Money printing” and fiscal borrowing/spending viewed as unconscionable prior to 2008 are these days easily justified. The “nuclear option” is readily accepted as a mainstream policy response. A Wall Street economist appearing on Bloomberg even posited the current crisis is worse than World War II.

To challenge monetary and fiscal stimulus is almost tantamount to being unAmerican. After all, tens of millions of American citizens are hurting – millions of small businesses are near the breaking point. They are deserving of support in these circumstances. Yet I don’t want to lose focus on analyzing and chronicling ongoing catastrophic policy failure. COVID-19 greatly muddies the analytical waters.

Federal Reserve Credit jumped another $146bn last week to $6.598 TN, pushing the eight-week gain to a staggering $2.453 TN. M2 “money supply” rose $365bn, with an eight-week rise of $1.727 TN. Institutional Money Fund Assets (not included in M2) rose another $76bn, boosting the eight-week expansion to $921bn.

The Fed this week expanded its new “main street” lending facility, raising limits to include companies with up to 15,000 employees and $5.0 billion in revenues. Our central bank, as well, broadened terms for its state and local government financing vehicle to include counties as small as 500,000 (down from 2 million) and cities of 250,000 (reduced from 1 million).

From the WSJ (Nick Timiraos and Jon Hilsenrath): “The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back.” The article quoted Chairman Powell: “None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.”

There has traditionally been an unwritten agreement – an understanding borne from historical hardship – that central banks would never resort to flagrant monetary inflation. Risk to “innocent civilians” would be much too great. “Open letters” challenged the Fed’s foray into QE, including one from 2010 signed by a group of leading economists: “We believe the Federal Reserve's large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.”

QE was to be a temporary crisis-management tool, employed in response to "the worst financial crisis since the Great Depression.” The initial Trillion from late-2008 was to be reversed, returning the Fed’s balance sheet back near the pre-crisis $1.0 Trillion level. Somehow, QE was employed in 2019, with stocks at record highs and unemployment at 60-year lows. Last year’s monetary fiasco foreshadowed Going Nuclear in 2020 – a couple Trillion in a couple months. At this point, it’s gone so far beyond anything thought possible with “helicopter money” or even MMT stimulus. Don’t hold your breath awaiting “open letters” of protest. A Fed balance sheet briskly on its way to $10 TN seems just fine to most.

The Fed cut rates to zero (0-0.25%) in December 2008. The FOMC then waited a full seven years for a single little “baby step” 25 bps increase. Nine years from the slashing to zero, rates were still only 1.25% (to 1.5%), before peaking at a paltry 2.25% (to 2.50%) with the Powell Fed’s final 25 bps increase in December 2018. Going into the 2008 crisis at less than $900 billion, the Fed’s balance sheet was still at $3.7 TN as of August 2019 (down from peak $4.5TN).

The Fed’s failure to retreat from aggressive monetary stimulus (aka “removing the punch bowl”) was a critical policy blunder that promoted destructive financial and economic excess. And in an unamusing Groundhogs Day dynamic, we are to believe that the current crisis will be resolved by only more egregious volumes of Fed liquidity and “loose money”. As master of the obvious, I will state categorically: “It’s not going to work.”

A question from Bloomberg’s Steve Matthews during Chairman Powell’s post-meeting press conference: “Do you worry that this recession is going to fall hardest on those workers who’ve struggled and just got job gains in the last year or two, and that it may take years from now before there are opportunities for them again?”

Chairman Powell: “…We were in a place, only two months ago, we were well into, beginning the second half of the 11th year is where we were. And every reason to think that it was ongoing. We were hearing from minority, low and moderate income in minority communities that this was the best labor market they’d seen in their lifetime. All the data supported that as well. And it is heartbreaking, frankly, to see that all threatened now. All the more need for our urgent response and, also, that of Congress, which has been urgent and large, and to do what we can to avoid longer run damage to the economy which is what I mentioned earlier. This is an exogenous event that, you know, it happened to us. It wasn't because there was something wrong with the economy. And I think it is important that we do everything we can to avoid that longer-run damage and try to get back to where we were because I do very much have that concern.”

My comment: I understand the Fed’s attention to “community outreach” and its PR focus on minorities and low-income workers. Yet not even Trillions of lip service will change the reality that the Fed’s securities market policy focus promotes inequality and divisiveness. At its roots, QE is a mechanism of wealth redistribution. Moreover, zero rates transfer wealth from savers to borrowers and speculators.

There are myriad costs associated with central banks nullifying the business cycle. The toll the unfolding crisis will inflict upon minority and low-income families will be horrendous. Federal Reserve policies of unrelenting monetary stimulus and market intervention ensure an especially problematic downturn. The business cycle is absolutely essential to the functioning of capitalistic systems. Policymaker intolerance for even mild market and economic corrections promotes cumulative excess and distortions that will culminate in extraordinarily deep and painful busts. I viewed chair Yellen’s employment focus as convenient justification and rationalization for delays to the start of policy “normalization.” Boom and bust dynamics do no favors for minorities and the working class. Monetary and financial stability should have been the Fed’s top priority. QE, low rates and market backstops reinforce instability and latent fragility.

The Associated Press’s Chris Rugaber: “You did talk about potential loss of skills over time. So, are you worried about structural changes in job markets that would keep unemployment high and, therefore, potentially beyond the ability of the Fed to do anything about, which was something that was debated, as you know, after the last recession?”

Powell: “So, in terms of the labor market, the risk of damage to people’s skills and their careers and their lives is a function of time to some extent. So, the longer one is unemployed, the harder it gets, I think, and we’ve probably all seen this in our lives, the harder it is to get back into the workforce and get back to where you were, if you ever do get back to where you were. So… longer and deeper downturns have had, have left more of a mark, generally, in that dimension with the labor force. And so, that’s why, as I mentioned, that’s why the urgency in doing what we can to prevent that longer-run damage.”

My comment: Central banks have for way too long encouraged the notion of deflation as the principal risk. I have argued Bubbles were instead the overarching systemic risk. Central bankers (along with Wall Street) have asserted that aggressive monetary stimulus has been necessary to counter deflationary forces. But if Bubbles were indeed the prevailing risk, this added stimulus would undoubtedly promote only greater maladjustment, systemic risk and fragility. After already contributing to inequality and divisiveness, monetary policymaking now places trust in the institution of the Federal Reserve in jeopardy. Flawed doctrine and a string of recurring missteps have ensured the worst of possible outcomes: a deep and prolonged downturn within a backdrop of heightened social and political instability.

Politico’s Victoria Guida: “…More broadly, you mentioned earlier this year that the federal debt was on an unsustainable path. And I was just wondering, for Republicans that are starting to get worried about how much fiscal spending they’re having to do in this crisis, you know, whether that should be a concern for them?

Powell: “In terms of fiscal concern…, for many years, I've been, before the Fed, I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time which just means that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible. The time will come, again, and reasonably soon, I think, where we can think about a long-term way to get our fiscal house in order. And we absolutely need to do that. But this is not the time to be, in my personal view, this is not the time to let that concern, which is a very serious concern, but to let that get in the way of us winning this battle…”

My comment: We’re in the endgame. There will be no turning back on either massive monetary or fiscal stimulus. Not surprisingly, Congress is already contemplating an additional Trillion dollars of spending. The floodgates have been flung wide-open, and at this point it will prove troublesome to ration stimulus. Meanwhile, deeply maladjusted market and economic structure will dictate unrelenting stimulus measures.

I would add that last year’s reckless Trillion dollar federal deficit was the upshot of years of experimental monetary policy. There was but one mechanism with the power to inhibit Washington profligacy: market discipline (i.e. higher Treasury yields). But market discipline was one of the great sacrifices to the Gods of QE and New Age monetary management. Stating that the Fed has been complicit in Washington running massive deficits (even throughout a market and economic boom period) is not strong enough.

Bloomberg’s Michael McKee: “And I know you said that this isn’t the time to worry about moral hazard, but do you worry, with the size of stimulus that you and the Congress are putting into the economy, there could be financial stability problems if this goes along?”

Powell: “In terms of the markets…, our concern is that they be working. We’re not focused on the level of asset prices in particular, it’s just markets are trying to price in something that is so uncertain as to be unknowable which is the path of this virus globally and its effect on the economy. And that’s very, very hard to do. That’s why you see volatility the way it’s been, market reacting to things with a lot of volatility. But… what we’re trying to assure really, is that the market is working. The market is assessing risks, lenders are lending, borrowers are borrowing, asset prices are moving in response to events. That is really important for everybody, including… the most vulnerable among us because, if markets stop working and credit stops flowing, then you see, that’s when you see… very sharp negative, even more negative economic outcomes. So, I think our measures have supported market function pretty well. We’re going to stay very careful, carefully monitoring that. But I think it’s been good to see markets working again, particularly the flow of credit in the economy has been a positive thing as businesses have been able to build up their liquidity buffers.”

My comment: It is the nature of contemporary Bubble markets that they are only “working” when they’re inflating. We witnessed again in March how quickly selling turns disorderly – how abruptly markets turn illiquid and dislocate. There were, after all, only nine trading sessions between February 19th all-time market highs and the Fed’s March 3rd emergency rate cut.

The Fed has for years nurtured the perception the Federal Reserve was ready to backstop the markets in the event of incipient instability. The Fed “put” became deeply embedded in the pricing of various asset markets – certainly including stocks, corporate Credit, Treasuries, structured finance and derivatives. But this financial structure turns unsupportable the moment markets begin questioning the capacity of central banks to sustain inflated prices.

We observed the “trapped” Fed dynamic in action: Market Bubbles had inflated to unparalleled extremes. When collapse began in earnest, unprecedented liquidity injections and interventions were required to reverse the panic. But this liquidity was then available to fuel disorderly markets on the upside, setting the stage for only more instability going forward. Fed officials are surely delighted their measures are proving instrumental in what will be record debt sales (Treasuries and corporates). But do today’s market yields make any sense heading into a major economic downturn with unprecedented debt and deficits? The Fed can claim it doesn’t focus on the level of asset prices, but the reality is the Fed is trapped in policies meant to sustain highly elevated asset markets.

Listening to Bloomberg Television Wednesday ahead of Chairman Powell's press conference, I sat in disbelief at what I was hearing: one of our nation’s leading economists speaking utter nonsense. There is a long list of individuals that will have some explaining to do when this all blows up.

Bloomberg’s Tom Keene: “In the field of economics, there are people that are always excellent at mathematics and then there’s the truly excellent. I spoke with Randall Kroszner of Chicago and the Booth School earlier today – he’s one of those people. And another one is Narayana Kocherlakota, of course, the President of the Minneapolis Fed and now at the University of Rochester. He has been extremely aggressive about a Fed that needs a different and better dynamic… You have said that this Fed must be more aggressive. What is the next step for Chairman Powell?”

Kocherlakota: “I think that the Fed should really contemplate going negative with interest rates. I think that would send a powerful message about their willingness to be supportive of their price stability and employment mandates. Obviously, there’s a limited amount of room that you can go negative, because eventually banks and others will substitute into cash. But I think there is some room to go negative – 25, 50 bps below zero – and that makes all your other tools more effective – the forward guidance we’re going to see at some point down the road, asset purchases and yield curve control – all that becomes more effective if you can go further below zero.”

Bloomberg’s Scarlet Fu: “We’ve seen Europe, we’ve seen Japan go further below zero and it really hasn’t done what they wanted. In Japan’s case, the country then moved to yield curve control. We know the Federal Reserve has telegraphed yield curve control as an option, what’s the risk from the Fed just moving to targeting yields now and skipping over going to negative interest rates?”

Kocherlakota: “The risk, Scarlet, is you’re not doing enough. I think the Fed statement is exactly right. The ongoing public health crisis will weigh heavily on economic activity in the near-term – and poses considerable risk to the outlook over the medium-term… You want to throw every tool you got available at that. I’m not saying I’m opposed to yield curve control – I’m absolutely not. But I think going negative with interest rates is going to make that tool even more powerful – more effective than simply rolling it out on its own.”

Keene: “One of the great themes here… and this goes to the late Marvin Goodfriend of Carnegie Mellon, is the amount of negative interest rates. Ken Rogoff at Harvard also addressed it in his glorious book, ‘The Curse of Cash’. OK, so we tweak it a quarter point, a little bit here, a little bit here. Really, do we need to experiment with a boldness that forces the banking system into new actions?”

Kocherlakota: “One of the roles of economists like myself that are in academia, you mentioned Ken and Marvin who lead the way on this, is to really try to push us into a much better place. I really believe that fifty years from now people are going to look back – economists are going to look back – at the existence of cash much like we look back at the gold standard. We look back at the gold standard as a period which really hamstrung monetary policy and created huge amounts of unemployment as a result during the Great Depression. People are going to look back at the existence of cash and the zero lower bound – the inability to go much below zero with interest rates – in the same way, hamstringing the ability of central banks to provide sufficient support to the economy – and thereby creating excessive unemployment and robbing people of their jobs.”

Fu: “…You were out front in suggesting that the Federal Reserve cut interest rates before they actually did between meetings, I just wonder with this idea of negative interest rates are you in communication with anyone on the FOMC? Is there any slice of the members of the FOMC open to the idea of negative interest rates in any meaningful proportion?”

Kocherlakota: “I’m certainly not in communication with the FOMC, except hopefully they’re watching right now. What I learned during my time as a policymaker is that – I was a hawk for a while and then I became a dove. But I could never be dovish enough. There’s always this force within you as an economist that’s pushing you toward being a hawk – to be concerned about inflation or concerns about putting too much accommodation out there – too much monetary policy out there. What I learned at my time at the Fed was never to be concerned about that. So right now, I think the Fed is concerned about going negative. They feel that somehow that’s going to cause risk to the banking system or somehow be too much in terms of monetary policy. My own view is, and I hope I’m wrong on this, but I think they’ll learn as we have a slow recovery from where we are that they’ll have to do more. I think negative will come up… Down the road I think it will come up because I think they’ll need it.”

“The Fed must be more aggressive”? You gotta be kidding. And why such an ardent proponent of negative rates when there is little if any evidence from Europe or Japan that they are constructive? The “existence of cash” and the “zero lower bound” are the problem – similar to the gold standard? All nonsense. Our nation desperately needs some talented young, independent-minded economists to take the initiative to reform our deeply flawed economic doctrine. This week’s CBB was too heavy on quotes and light on analysis. But there was just a lot that needed to be documented.

For the Week:

The S&P500 slipped 0.2% (down 12.4% y-t-d), and the Dow dipped 0.2% (down 16.9%). The Utilities sank 4.2% (down 12.7%). The Banks rallied 2.8% (down 37.4%), and the Broker/Dealers surged 5.2% (down 18.6%). The Transports increased 0.6% (down 25.3%). The S&P 400 Midcaps rallied 2.6% (down 22.9%), and the small cap Russell 2000 rose 2.2% (down 24.5%). The Nasdaq100 lost 0.8% (down 0.2%). The Semiconductors fell 3.4% (down 11.1%). The Biotechs sank 5.5% (down 0.9%). With bullion down $29, the HUI gold index declined 1.9% (up 12.5%).

Three-month Treasury bill rates ended the week at 0.0975%. Two-year government yields declined four bps to 0.19% (down 138bps y-t-d). Five-year T-note yields slipped two bps to 0.35% (down 134bps). Ten-year Treasury yields added a basis point to 0.61% (down 130bps). Long bond yields jumped eight bps to 1.25% (down 114bps). Benchmark Fannie Mae MBS yields sank 20 bps to 1.56% (down 115bps).

Greek 10-year yields fell 15 bps to 2.14% (up 71bps y-t-d). Ten-year Portuguese yields sank 27 bps to 0.82% (up 38bps). Italian 10-year yields declined eight bps to 1.73% (up 35bps). Spain's 10-year yields fell 23 bps to 0.72% (up 26bps). German bund yields dropped 11 bps to negative 0.59% (down 40bps). French yields fell 11 bps to negative 0.11% (down 23bps). The French to German 10-year bond spread narrowed two to 48 bps. U.K. 10-year gilt yields declined four bps to 0.25% (down 57bps). U.K.'s FTSE equities index increased 0.2% (down 23.6%).

Japan's Nikkei Equities Index gained 1.9% (down 17.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.02% (down 1bp y-t-d). France's CAC40 jumped 4.1% (down 23.5%). The German DAX equities index surged 5.1% (down 18.0%). Spain's IBEX 35 equities index rallied 4.7% (down 27.5%). Italy's FTSE MIB index rose 4.9% (down 24.7%). EM equities were higher. Brazil's Bovespa index recovered 6.9% (down 30.4%), and Mexico's Bolsa jumped 5.4% (down 16.3%). South Korea's Kospi index gained 3.1% (down 11.4%). India's Sensex equities index surged 7.6% (down 18.3%). China's Shanghai Exchange increased 1.8% (down 6.2%). Turkey's Borsa Istanbul National 100 index rallied 2.4% (down 11.6%). Russia's MICEX equities index jumped 3.5% (down 13.0%).

Investment-grade bond funds saw inflows of $2.253 billion, and junk bond funds posted inflows of $743 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 3.23% (down 91bps y-o-y). Fifteen-year rates fell nine bps to 2.77% (down 83bps). Five-year hybrid ARM rates sank 14 bps to 3.14% (down 54bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.64% (down 58bps).

Federal Reserve Credit last week jumped $146.4bn to a record $6.598 TN, with a 34-week gain of $2.876 TN. Over the past year, Fed Credit expanded $2.726 TN, or 70%. Fed Credit inflated $3.787 Trillion, or 135%, over the past 390 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $17.2 billion last week to $3.337 TN. "Custody holdings" were down $124bn, or 3.6%, y-o-y.

M2 (narrow) "money" supply surged $365bn last week to a record $17.235 TN, with an unprecedented eight-week gain of $1.727 TN. "Narrow money" surged $2.718 TN, or 18.7%, over the past year. For the week, Currency increased $12.8bn. Total Checkable Deposits expanded $213bn, and Savings Deposits jumped $213bn. Small Time Deposits slipped $1.4bn. Retail Money Funds gained $18.5bn.

Total money market fund assets rose $82.2bn to a record $4.734 TN. Total money funds jumped $1.662 TN y-o-y, or 54%.

Total Commercial Paper jumped $24.5bn to $1.093 TN. CP was up $29bn, or 2.7% year-over-year.

Currency Watch:

April 29 – Wall Street Journal (Caitlin Ostroff and Avantika Chilkoti): “Emerging-market countries last month depleted their foreign-exchange reserves at the fastest pace since the global financial crisis to contain a plunge in their currencies, leaving some nations vulnerable to further shocks. Twelve of the largest developing countries, including Brazil and Russia, reduced their combined reserves by at least $143.5 billion in March in the biggest drawdown since October 2008… That has left Turkey with its lowest foreign-exchange balance since November 2006. For Egypt, March marked the biggest monthly drain on its reserves on record. Those countries dipped into their coffers to combat a precipitous slide in their currencies after the coronavirus pandemic brought the global economy to a jarring near-halt in March.”

For the week, the U.S. dollar index declined 1.3% to 99.079 (up 2.7% y-t-d). For the week on the upside, the Norwegian krone increased 3.2%, the Swedish krona 2.0%, the Brazilian real 1.7%, the Mexican peso 1.6%, the euro 1.5%, the South Korean won 1.4%, the Swiss franc 1.2%, the British pound 1.1%, the New Zealand dollar 0.8%, the Australian dollar 0.7%, the Singapore dollar 0.6%, the Japanese yen 0.6% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.26% versus the dollar this week (down 1.42% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 0.8% (down 24.9% y-t-d). Spot Gold retreated 1.7% to $1,700 (up 12.0%). Silver fell 3.3% to $14.938 (down 16.6%). WTI crude rallied $2.84 to $19.78 (down 68%). Gasoline recovered 15.9% (down 55%), and Natural Gas jumped 8.2% (down 14%). Copper declined 1.0% (down 17%). Wheat dropped 2.6% (down 8%). Corn fell 1.4% (down 18%).

Coronavirus Watch:

April 27 – Reuters (Cate Cadell): “Global confirmed coronavirus cases surpassed 3 million on Monday, as the United States neared 1 million cases… It comes as many countries are taking steps to ease lockdown measures that have brought the world to a standstill over the past eight weeks.”

April 27 – Bloomberg: “Chinese scientists say the novel coronavirus will not be eradicated, adding to a growing consensus around the world that the pathogen will likely return in waves like the flu. It’s unlikely the new virus will disappear the way its close cousin SARS did 17 years ago, as it infects some people without causing obvious symptoms like fever. This group of so-called asymptomatic carriers makes it hard to fully contain transmission as they can spread the virus undetected, a group of Chinese viral and medical researchers told reporters… ‘This is very likely to be an epidemic that co-exists with humans for a long time, becomes seasonal and is sustained within human bodies,’ said Jin Qi, director of the Institute of Pathogen Biology at China’s top medial research institute, the Chinese Academy of Medical Sciences.”

April 26 – Bloomberg (Michael Hirtzer and Tatiana Freitas): “Plant shutdowns are leaving the U.S. dangerously close to meat shortages as coronavirus outbreaks spread to suppliers across the nation and the Americas. Almost a third of U.S. pork capacity is down, the first big poultry plants closed on Friday and experts are warning that domestic shortages are just weeks away. Brazil, the world’s No. 1 shipper of chicken and beef, saw its first major closure… Key operations are also down in Canada, the latest being a British Columbia poultry plant. While hundreds of plants in the Americas are still running, the staggering acceleration of supply disruptions is now raising questions over global shortfalls. Taken together, the U.S., Brazil and Canada account for about 65% of world meat trade. ‘It’s absolutely unprecedented,’ said Brett Stuart, president of… Global AgriTrends. ‘It’s a lose-lose situation where we have producers at the risk of losing everything and consumers at the risk of paying higher prices. Restaurants in a week could be out of fresh ground beef.’”

April 27 – UK Guardian (Cate Cadell): “Tyson Foods, one of America’s largest meat producers, has warned ‘the food supply chain is breaking’ amid the coronavirus crisis. In a full-page ad on Sunday with the New York Times, the Washington Post and the Arkansas Democrat-Gazette, the… company cautioned ‘there will be limited supply of products’ until it can reopen closed facilities. ‘As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain,’ John Tyson, Tyson’s board chairman, wrote.”

April 25 – Reuters (Stephanie Nebehay): “The World Health Organization (WHO) said… there was currently ‘no evidence’ that people who have recovered from COVID-19 and have antibodies are protected from a second coronavirus infection. In a scientific brief, the United Nations agency warned governments against issuing ‘immunity passports’ or ‘risk-free certificates’ to people who have been infected as their accuracy could not be guaranteed.”

Market Instability Watch:

May 1 – Bloomberg (Sarah Ponczek and Michael P. Regan): “The U.S. Treasury is auctioning a dizzying amount of bonds to pay for the government’s economic relief efforts. Will the market be able to digest this mountain of supply? Wells Fargo Securities macro strategist Zachary Griffiths joins the “What Goes Up” podcast… “When you’re talking about $1.9 trillion of issuance of any type of security in a single quarter, you have to ask ‘is there a market for it?’ And when we think about what’s happened recently with T-bill issuance, which has already been north of a trillion over the past month alone, we look at where demand comes from…’”

May 1 – Bloomberg (Jack Pitcher and David Caleb Mutua): “Blue-chip U.S. companies are borrowing money at a record pace to make up for their plunging sales. That process is making corporate bonds riskier for investors. Boeing Co., the plane maker, sold $25 billion of bonds on Thursday, the largest offering of the year. Coca-Cola Co. issued $6.5 billion of notes this week. Offerings like these made April the busiest month on record for investment-grade corporate bond sales, totaling more than $300 billion…”

April 29 – Bloomberg (Justina Lee): “Devotees of a quant strategy famed for netting billions in 2008 are wading back into U.S. stocks, raising the prospect of fresh leveraged cash buoying the market. With the S&P 500 up 28% from its March trough and volatility fading, systematic trend followers are turning bullish on the U.S. benchmark, according to Nomura Holdings Inc. Typical models tracked by commodity trading advisers -- a regulatory term for the $300 billion world of futures speculators -- are flashing buy signals as U.S. stocks enjoy a rapid rebound a month after their sharpest correction in history.”

April 27 – Bloomberg (Alex Longley, Javier Blas, and Catherine Ngai): “The United States Oil Fund LP again roiled oil markets as it unexpectedly starting selling all of its holdings of the most active West Texas Intermediate futures contract, triggering a massive swing in the price relationship between the June and July contracts… The fund said it’s moving its money to contracts spread between July 2020 and June 2021 due to new limits imposed upon it by regulators and its broker. As the U.S. Oil Fund sold its June position, the contract plunged more than 25%, significantly widening the June-July spread, which has become a target for speculators.”

April 29 – Bloomberg (James Crombie): “Credit markets have rallied strongly this month, despite an economic slump which slashes earnings even as companies take on more debt. Central banks saying they’d buy corporate bonds helped crush credit spreads, but they can’t resolve fundamental underlying issues. ‘The gap between markets and economic data has never been larger,’ Matt King, global head of credit strategy at Citigroup Inc., wrote… High-grade debt markets are on track for the best total return since 2008. Meanwhile, bond issuance is at a record high, just as the U.S. economic expansion ends with the deepest recession in eight decades. According to Citi analysis, European credit spreads are tighter than what a plunge in the regional Purchasing Managers’ Index would imply. U.S. equities are also out of whack with U.S. economic data, the analysis shows.”

April 30 – Bloomberg (Claire Ballentine): “After suffering unprecedented dislocations, junk-bond ETFs are back to winning over investors. High-yield exchange-traded funds are on track for their best month of inflows since 2015, attracting $5.2 billion…”

Global Bubble Watch:

April 29 – Financial Times (Craig Stirling, Steven T. Dennis and Catherine Bosley): “The coronavirus crisis is thrusting governments on both sides of the Atlantic into a fiscal emergency along with the medical one, as the European Union and the U.S. grapple with how to assist their hardest-hit members without being dragged down by them. In Europe, indebted Italy is in need, and in the U.S., it’s big states like New York and Illinois. The geography and political systems may differ, but the problem is the same. Both economies boast central powers that want to avoid getting on the hook for the debts of the under performers. Republicans in Washington grumble about taking on Illinois’ problems, while Berlin fears Rome’s. In the end, the ‘haves’ will likely succumb to assisting the ‘have nots.’”

April 30 – Bloomberg (Nicholas Comfort and Marion Halftermeyer): “The world’s biggest banks have set aside $78.8 billion so far this quarter for an expected increase in bad loans as lockdowns to combat the spread of the coronavirus raise the specter of large-scale corporate defaults. U.S. banks were among the most aggressive, with nine of the biggest earmarking $32.5 billion. Europe lagged behind, with 13 of its largest banks that have reported results so far putting away $17.9 billion. Lloyds Banking Group… said it set aside about $1.8 billion and France’s Societe Generale SA warned its provisions could reach more than $5 billion this year in the worst case.”

April 28 – CNBC (Elliot Smith): “Moody’s has downgraded its outlook for banking systems in South Africa, Nigeria and Morocco amid concerns over the fallout from the coronavirus pandemic and tumbling oil prices. The ratings agency downgraded them from stable to negative, and said it expects the coronavirus to cause banks’ asset quality to deteriorate, put pressure on profitability, and also hit economic growth in each country.”

April 27 – Reuters (Cheng Leng and Emily Chow): “The Chinese regulator has asked commercial banks to halt new sales of a wide range of wealth management products that might lead to unlimited losses for investors, two sources told Reuters.”

April 27 – Financial Times (Don Weinland, David Sheppard and Thomas Hale): “China’s biggest bank by assets has suspended new retail investments in products linked to oil and other commodities, as pressure mounts on banks to protect small investors following heavy losses linked to recent swings in US crude prices. Industrial and Commercial Bank of China (ICBC) said… it was halting all new investments in commodity-linked products due to the recent price volatility, warning investors that they risked big losses from products that have gained in popularity across Asia. The move from ICBC suggests that the Chinese financial industry is keen to damp demand for products that many punters had assumed would be a sure-fire hit…”

April 27 – Bloomberg: “Industrial & Commercial Bank of China Ltd., the nation’s largest lender, suspended sales of more products that allowed retail investors to speculate on swings in commodities after many were burnt by the unprecedented crash in crude oil. The lender will temporarily halt opening of new positions in products linked to crude oil, natural gas, and soybeans for individuals…”

April 28 – Wall Street Journal (Nathaniel Taplin): “Treasure hunting is a perilous undertaking—particularly when the gold is black. Bank of China, one of China’s largest banks, has found itself in the crosshairs of domestic netizens in recent days thanks to a retail investment product named Crude Oil Treasure. The oil-linked product has… left investors sitting on losses of about 9 billion yuan ($1.3bn) after an expiring U.S. oil-futures contract plummeted into negative territory on April 20. Retail investors found themselves not only without their principal but also on the hook for millions more of additional liabilities as the product, which requires 100% margin, plumbed heretofore untested depths.”

April 29 – Financial Times (Baldev Bhinder): “‘Where did it all go wrong?’ It’s a question some of the world’s biggest trade finance banks will be asking themselves after the collapse of Hin Leong Trading. Coming on top of the crisis at Agritrade International, the sector has about $5bn of exposure to two ailing commodity traders, both based in Singapore. While there is temptation to look at the downfall of Hin Leong in particular as an oil specific issue — a punt on prices to go up when in fact they crashed — commodities lawyers like myself will tell you that misses the deeper issues in trade financing exposed by this crisis. Faced with shrinking arbitrage opportunities in the physical market, modern day trading is a highly leveraged activity — a race for liquidity through financing by any means, banks, alternate lenders, hedge funds, family offices, crowdfunding — you name it. What is funded are some fascinating trade structures as documents are passed forwards, backwards and sometimes in circles — all in pursuit of credit and liquidity.”

April 27 – Bloomberg (Denise Wee): “Risky bond investments that wealthy Asians often made with borrowed money are coming back to haunt them after the credit market’s crash. Before the coronavirus pandemic roiled global financial markets this year, those investors piled into so-called fixed maturity funds in a hunt for stable yields. Barclays estimated last month that there’s more than $10 billion of such products outstanding in Asia. The problem: many of the funds bought loads of high-yield bonds that have since tanked, and their investors frequently borrowed heavily to pay for them. The funds had lost about 15 to 20% of their value as of March…”

Trump Administration Watch:

April 30 – Reuters (Humeyra Pamuk, Matt Spetalnick, Jeff Mason, David Brunnstrom, Andrea Shalal and Tim Ahmann): “U.S. President Donald Trump said… his hard-fought trade deal with China was now of secondary importance to the coronavirus pandemic and he threatened new tariffs on Beijing, as his administration crafted retaliatory measures over the outbreak. Trump’s sharpened rhetoric against China reflected his growing frustration with Beijing over the pandemic… Two U.S. officials… said a range of options against China were under discussion, but cautioned that efforts were in the early stages. Recommendations have not yet reached the level of Trump’s top national security team or the president, one official told Reuters.”

April 30 – Reuters (Jeff Mason): “U.S. President Donald Trump said… he was confident the coronavirus may have originated in a Chinese virology lab, but declined to describe the evidence, ratcheting up tensions with Beijing over the origins of the deadly outbreak. Trump did not mince words at a White House event on Thursday, when asked if he had seen evidence that gave him a ‘high degree of confidence’ the virus came from the Wuhan Institute of Virology. ‘Yes, yes I have,’ he said, declining to give specifics. ‘I can’t tell you that. I’m not allowed to tell you that.’”

April 30 – Bloomberg (Jenny Leonard): “President Donald Trump is exploring blocking a government retirement fund from investing in Chinese equities considered a national security risk, a person familiar with the internal deliberations said. The Thrift Savings Plan -- the federal government’s retirement savings fund -- is scheduled to transfer roughly $50 billion of its international fund to mirror an MSCI All Country World Index, which captures emerging markets, including China.”

April 30 – Reuters (David Morgan): “U.S. state and local governments could need close to $1 trillion in aid over several years to cope with the aftermath of the coronavirus pandemic, House Speaker Nancy Pelosi said… as lawmakers began plotting more coronavirus relief legislation. But the Democrat’s proposal drew an immediate negative reaction from an influential member of the Republican-run Senate, John Cornyn, who called it ‘outrageous.’”

April 29 – Reuters (Heather Timmons): “U.S. Treasury Secretary Steven Mnuchin said… he is ready to invest more capital in new or expanded Federal Reserve coronavirus rescue lending programs but is not considering more aid to struggling airlines at the moment. Mnuchin told reporters during a video news briefing that he was deliberately holding in reserve some $259 billion from the $2.2 trillion coronavirus rescue legislation passed in late March. The Treasury will not use the unallocated money for direct loans to companies, nor to provide aid to specific industries, such as oil and gas producers, Mnuchin said. Instead, it would provide capital that would be leveraged through broad-based Fed lending programs.”

April 27 – Reuters (Tim Ahmann, Doina Chiacu, Susan Heavey and Mohammed Zargham): “U.S. President Donald Trump… slammed U.S. cities and states seeking billions more dollars in federal aid to offset huge losses from the coronavirus outbreak as members of Congress spar over the next round of potential economic relief… ‘Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?’ Trump wrote on Twitter.”

April 29 – Reuters (Steve Holland): “President Donald Trump said… he believes China’s handling of the coronavirus is proof that Beijing ‘will do anything they can’ to make him lose his re-election bid in November. In an interview…, Trump talked tough on China and said he was looking at different options in terms of consequences for Beijing over the virus. ‘I can do a lot,’ he said. Trump has been heaping blame on China for a global pandemic that has killed at least 60,000 people in the United States…, and thrown the U.S. economy into a deep recession, putting in jeopardy his hopes for another four-year term.”

April 30 – Wall Street Journal (Nathaniel Taplin): “Covid-19 has disrupted trade flows and economies all over the world. No surprise, then, that it is disrupting hopes for better trade relations between the U.S. and China, too. The ‘phase one’ Sino-American trade deal based on big-dollar purchase commitments by the Chinese—rather than major changes in Chinese industrial, tariff or currency policies—was always a dubious proposition, even in normal times. Huge increases in Chinese purchases risked simply shifting trade flows around and pushing up prices of U.S. products, rather than creating net new demand for American goods. Now, the new coronavirus has shown how difficult executing such an ambitious expansion of managed trade will likely be in a world of fragile global logistics networks and fast-moving epidemics.”

Federal Reserve Watch:

April 27 – Wall Street Journal (Nick Timiraos and Jon Hilsenrath): “The Federal Reserve is redefining central banking. By lending widely to businesses, states and cities in its effort to insulate the U.S. economy from the coronavirus pandemic, it is breaking century-old taboos about who gets money from the central bank in a crisis, on what terms, and what risks it will take about getting that money back. And with large-scale purchases of U.S. Treasury securities, the Federal Reserve is stretching the boundaries for what a central bank will do to finance soaring federal debt—actions that move it deeper into political decisions it usually tries to avoid. Fed leaders don’t like doing any of this. They believe they have no better alternative. ‘None of us has the luxury of choosing our challenges; fate and history provide them for us,’ Fed Chairman Jerome Powell said in a speech… ‘Our job is to meet the tests we are presented.’”

April 29 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell delivered an uncharacteristically blunt call… for Congress and the White House to spend more money to prevent deeper economic damage from the coronavirus pandemic. Congress and President Trump have provided more than $2.6 trillion in several economic assistance measures over the last two months, and Mr. Powell lauded those efforts as appropriate. ‘Will there be a need to do more though? I think the answer to that will be yes,’ he said… Mr. Powell said policy makers should focus their efforts on protecting workers, businesses and households from ‘avoidable insolvency.’ Those policies, he added, ‘will come with a hefty price tag, but we would come out of this eventually with a stronger economy.’”

April 29 – Financial Times (James Politi and Colby Smith): “Jay Powell sent an unmistakable message to investors and the public…: hopes for a quick economic rebound in the second half of the year risked being an illusion and the Federal Reserve was gearing up for a long fight against the effects of the coronavirus pandemic. The Fed chairman’s dire assessment was first reflected in the statement, released after a two-day meeting of US monetary policymakers, which cited ‘considerable risks to the economic outlook over the medium term’. But Mr Powell piled on further during the virtual press conference…, laying out exactly what Fed officials meant by that. Looking out over the ‘next year or so’, there was still huge uncertainty over whether the virus itself could be defeated, there was the risk of ‘damage to the productive capacity of the economy’, there was a ‘very negative’ global dimension to the problem, and consumers would be cautious as they started spending again. ‘The chances are that it won’t go right back to where we were,’ he said.”

April 30 – Financial Times (James Politi, Colby Smith and Robert Armstrong): “The Federal Reserve will allow larger and riskier US borrowers to access a new $600bn lending plan designed to deliver a financial lifeline to medium-sized main street businesses during the coronavirus pandemic. The US central bank’s expansion of the eligibility criteria for the facility follows criticism from Wall Street that the original terms unveiled in early April were too restrictive. The Fed said businesses with up to 15,000 employees or with annual revenue of up to $5bn were now eligible for the programme… Initially, the Fed said the plan would apply to businesses with no more than 10,000 employees or with revenues of $2.5bn or less. The central bank also lowered the minimum loan for two of its schemes, from $1m to $500,000, which could allow smaller borrowers to access the funds as well.”

April 27 – Wall Street Journal (Nick Timiraos): “The Federal Reserve said… it would broaden the number of local governments from which it will buy debt through a forthcoming lending program. The Fed will allow one borrower for each county of at least 500,000 people and city of at least 250,000, down from earlier cutoffs of 2 million and 1 million, respectively. The central bank will also purchase debt with maturities of up to three years, instead of any earlier cap of two years. The Fed will lend up to $500 billion through the facility, and the Treasury Department has provided $35 billion to cover any losses.”

U.S. Bubble Watch:

April 29 – New York Times (Ben Casselman): “The coronavirus pandemic officially snapped the United States’ economic growth streak in the first three months of the year… U.S. gross domestic product, the broadest measure of goods and services produced in the economy, fell at a 4.8% annual rate in the first quarter of the year… That is the first decline since 2014, and the worst quarterly contraction since 2008… There is much worse to come. Widespread layoffs and business closings didn’t hit until late March in most of the country. Economists expect figures from the current quarter, which will capture the shutdown’s impact more fully, to show that G.D.P. contracted at an annual rate of 30% or more, a scale not seen since the Great Depression.”

April 30 – Associated Press (Christopher Rugaber): “More than 3.8 million laid-off workers applied for unemployment benefits last week as the U.S. economy slid further into a crisis that is becoming the most devastating since the 1930s. Roughly 30.3 million people have now filed for jobless aid in the six weeks… It adds up to more than one in six American workers. With more employers cutting payrolls to save money, economists have forecast that the unemployment rate for April could go as high as 20%. That would be the highest rate since it reached 25% during the Great Depression.”

April 30 – Financial Times (Martin Z. Braun): “The record number of Americans drawing unemployment benefits over the past six weeks is rapidly draining the cash set aside by the biggest U.S. states, leaving them poised to borrow billions from the federal government. The strain is likely to grow with more than 30 million workers, or nearly one fifth of the labor force, relying on unemployment checks with vast segments of the economy shut down. The unprecedented scale of the payouts are depleting the state governments’ unemployment trust funds, nearly half of which had less set aside than needed to contend with a recession. In the first two weeks of April alone, New York drew $1 billion from its account, or more than 40% of the total… California’s balance has dropped by more than $2 billion since March 16… Texas, which had about $1.3 billion left to pay benefits in mid-April, has submitted a loan request to the U.S. Labor Department, as have Illinois, Connecticut and Massachusetts.”

April 30 – Bloomberg (Reade Pickert): “U.S. personal spending plummeted in March by the most on record as widespread shutdowns and job losses from the Covid-19 pandemic wreaked havoc on the economy’s main engine -- consumers. Household outlays, which account for about two-thirds of the economy, plunged 7.5% from the prior month, the sharpest drop in… records back to 1959… The median estimate in a Bloomberg survey… called for a 5.1% slump. Incomes declined 2%.”

April 28 – CNBC (Diana Olick): “Home prices were not only gaining in February, the gains were increasing steadily. Nationally, prices were 4.2% higher annually for the month, up from a 3.9% gain in January, according to the S&P CoreLogic Case-Shiller Home Price Indices… Prices in February were fueled by strong homebuyer demand, tight supply and near record-low mortgage rates. While rates are still low, and supply is even lower, demand has fallen dramatically due to Covid-19 and the economic shutdown.”

April 29 – CNBC (Diana Olick): “Evidence is mounting that homebuyers may be coming back to the market, after demand plummeted in the past month due to the coronavirus. Mortgage applications to buy a home rose last week, but refinance demand fell, causing total application volume to decline by 3.3% for the week… Mortgage demand from homebuyers jumped 12%, signaling a potential turn in buyer confidence. Volume was still 20% lower than the same week one year ago.”

April 27 – Reuters (Lindsay Dunsmuir): “About 3.5 million mortgage borrowers have had their payments paused or reduced as the novel coronavirus outbreak in the United States continues to throw millions out of work, a survey from the Mortgage Bankers Association showed… The share of mortgage loans in forbearance rose to 6.99% from 5.95% from April 13-19… The number of new requests for relief fell relative to the prior week but were still 100 times greater than in early March, MBA said. Ginnie Mae loans grew the most from the prior week, up 1.47%, and they also had the highest percentage of loans in forbearance by investor type, at 9.73% of loans. For FHA and VA borrowers, the share of loans in forbearance stood at roughly 10%.”

April 30 – Reuters (Imani Moise): “Wells Fargo…, the largest U.S. mortgage lender, said… it will temporarily stop accepting applications for home equity loans given the economic uncertainty fueled by the COVID-19 pandemic. The suspension will stay in place until bank executives have better sense into what the economic recovery will look like, bank spokesman Tom Goyda said…”

April 28 – Wall Street Journal (Paul Vigna): “General Motors Co. suspended its dividend earlier this week, part of a raft of moves to keep the company afloat in the midst of the coronavirus pandemic. It is far from alone. More companies have suspended or canceled their dividends so far this year than in the previous 10 years combined… Through Tuesday, 83 U.S. companies and public investment funds, like real-estate investment trusts, have suspended or canceled their dividends, the highest number in data going back to 2001, according to S&P Global Market Intelligence. In the previous 10 years, 55 companies eliminated their dividends…”

April 28 – Bloomberg (Davide Scigliuzzo, Craig Torres, and Lisa Lee): “Long before the coronavirus pandemic would bring business to a standstill all across America, Surgery Partners Inc., a sprawling network of outpatient clinics, already had its share of financial problems… Surgery Partners’s majority owner, the buyout firm Bain Capital, had loaded so much debt onto the company’s books that when it went to the market last year to refinance maturing bonds, investors demanded a 10% interest rate… The debt was rated CCC -- eight levels below investment grade. Even a moderate downturn, it was understood, was going to raise existential questions about the company. So by late March, with the economic effects of the outbreak in full force, frantic investors braced for default, pushing the price of those bonds below 55 cents on the dollar. But then the Federal Reserve did something it had never done before. It pledged to buy risky corporate debt as part of its emergency financing package for the economy. The move was so aggressive and sparked a rally that was so powerful and broad-based that today those bonds are all the way back up near par value, and Surgery Partners was able to raise another $120 million from loan investors…”

April 28 – Wall Street Journal (Tripp Mickle and Preetika Rana): “For years, Cheryl Dopp considered the ding on her phone from a new Airbnb Inc. booking to be the sound of what she called ‘magical money.’ A property she rented out in Jersey City, N.J., on Airbnb could gross more than $8,000 a month, she said, double what long-term tenants would pay. Now, Ms. Dopp associates the dings with cancellations and financial misery. The 54-year-old information-technology contractor said she had about $10,000 in bookings evaporate overnight in March. She has $22,000 in monthly expenses for a largely Airbnb portfolio, she said, that included another Jersey City home and a house in Miami. In her mind, the promise of more rental income offset the growing debt, she said. ‘I made a bargain with the devil.’”

May 1 – Bloomberg (Elizabeth Dexheimer): “Fannie Mae’s first-quarter net income fell 81% to $461 million after it set aside billions of dollars to cover potential credit losses from the coronavirus crisis. The mortgage giant booked $2.7 billion in credit expenses, triggered by a huge increase in its allowance for loan losses as a result of the economic disruption caused by the pandemic, according to a Friday statement. Fannie said eventual losses from the virus outbreak could be $4.1 billion. Fannie added that about 7% of the single-family home mortgages it guarantees were in forbearance as of April 30.”

April 30 – Bloomberg (Elizabeth Dexheimer): “Freddie Mac’s first-quarter net income plunged 88% to $173 million due to higher expected credit losses on loans amid the coronavirus pandemic. The mortgage giant booked $1.1 billion of credit-related expenses in the quarter ended March 31… Freddie said the earnings decline was also driven by losses on single-family home loans, which took a major hit from the virus. The results are a stark turnaround from the first quarter of 2019, when… Freddie reported net income of $1.41 billion.”

April 29 – Bloomberg (Elizabeth Dexheimer): “Fannie Mae and Freddie Mac face strong headwinds from the mayhem coronavirus has spread through the mortgage market, complicating the Trump administration’s plans to free them from U.S. control anytime soon. The companies… might have to set aside huge amounts of money to cover the risk of souring home loans. They may also take a hit from the pain being inflicted on nonbank mortgage servicers as millions of borrowers delay making their monthly loan payments. Meanwhile, the outlook for the U.S. housing market -- the engine that powers Fannie and Freddie’s profits -- looks bleak… ‘This crisis is dashing hopes for a quick exit from conservatorship,’ said Jaret Seiberg, an analyst at Cowen & Co. ‘If there’s not a lot of clarity on their losses or capital it’s hard to envision the market providing the $100 billion of fresh capital they would need to raise down the road.’”

April 26 – Reuters (Susan Heavey): “New York City needs a $7.4 billion in federal aid to offset economic losses from the coronavirus, Mayor Bill de Blasio said…, urging President Donald Trump to push his fellow Republicans in the U.S. Senate to back more relief funding for states and cities. ‘The federal government must make us whole for us to be able to be in a position to restart,’ De Blasio, a Democrat, said…”

April 27 – Reuters (Kevin Stankiewicz): “Gov. Phil Murphy said… New Jersey could be headed toward an ‘Armageddon’ scenario, with an inability to fund public schools and police, if it doesn’t receive more federal assistance due to the coronavirus pandemic. Murphy, a Democrat, said… New Jersey’s revenues ‘have fallen off a table’ due to the coronavirus. ‘Our costs are going up serving folks who have lost their jobs, small businesses that have been crushed, folks who are in the health-care system, et cetera,’ he said.”

April 27 – Associated Press (Michael Liedtke and Barbara Ortutay): “Demand for digital advertising is shriveling after a decade of explosive growth amid the pandemic-fueled downturn. That could complicate things for Google and Facebook, who for the first time may have to contend with revenues that are actually shrinking. With consumers mostly at home and unemployment soaring, advertisers are slashing promotional spending — in some cases, all the way to zero. For Google and Facebook, who together account for 70% of the U.S. market for digital ads, that so far has translated into tighter restraints on spending without the layoffs, pay cuts and furloughs that publishers and other industries have already imposed.”

April 26 – Wall Street Journal (Gerald F. Seib and John McCormick): “History shows that big national shocks have a way of changing the role of government in lasting ways—and any shock as big as the coronavirus pandemic inevitably will alter political life and philosophies in America… Much of today’s new government activism will recede over time along with the virus. Yet conversations with a broad cross-section of political figures suggest there is little reason to expect a return to what had been the status quo on federal spending, or the prevailing attitude toward the proper role of government. ‘The era of Ronald Reagan, that said basically the government is the enemy, is over,’ said Rahm Emanuel, a moderate Democrat who served as mayor of Chicago, a member of Congress and President Obama’s first White House chief of staff.”

Fixed-Income Bubble Watch:

April 29 – CNBC (Lauren Thomas): “First, the department store closes. Then, the apparel shops try to scoot out of deals. This is a one-two punch that could trigger a wave of malls shutting for good over the next 12 months. More than 50% of the department stores anchoring America’s malls are going to close permanently by the end of next year, a new report by Green Street Advisors predicts. There are about 1,000 malls still open in the U.S. And roughly 60% of those have department store retailers, such as Macy’s, as anchor tenants, the commercial real estate services firm said.”

April 28 – Wall Street Journal (Sam Goldfarb): “A rally in corporate debt is enabling riskier companies to raise much-needed cash while fueling debate over whether investors have grown overly optimistic about the economy. From April 13 through Friday, companies… issued a combined $28 billion of speculative-grade bonds, the fourth-largest two-week total on record… The surge in issuance follows an even bigger boom in new sales of investment-grade bonds, as businesses of all stripes try to stock up on funds to weather a period in which many can expect little to no incoming cash flow.”

April 27 – Wall Street Journal (Gunjan Banerji and Julia-Ambra Verlaine): “Investors are snapping up complex securities linked to some of the markets deemed most vulnerable to the coronavirus-driven economic slump, a sign that the yearslong reach for yield has survived the market shock. Faced with withering share prices and falling yields on safe government bonds, portfolio managers are seeking out returns in an array of strategies that in some instances take them into esoteric corners of the financial markets. One popular spot is the market for asset-backed securities, typically bonds whose payments to investors are generated by the cash flows collected from a large pool of car loans, property leases or other agreements. Despite worries about a recession ahead and falling consumer spending, demand for bonds backed by U.S. auto loans has outstripped supply in recent days…”

April 29 – Wall Street Journal (Telis Demos): “In consumer lending right now, auto loans are the squeaky wheels. Auto borrowers have been big beneficiaries of lenders’ forbearance so far. At large banks and lenders, the median amount of lending in forbearance reported after the first quarter stood at 7.5% for auto loans, compared with 3.6% for credit cards, according to figures compiled by Autonomous Research.”

April 27 – Bloomberg (Martin Z Braun): “New York City’s bondholders have downgraded the city, even if rating companies haven’t. Yields on the city’s bonds are rising to compensate for the risks posed by the pandemic lockdown that could destroy an estimated 475,000 jobs this year and cost the government $7.4 billion in lost tax revenue. That has left New York’s general-obligation debt trading at a level akin to A- rated securities, three steps below its current grade from S&P Global Ratings…”

China Watch:

April 28 – Bloomberg (Anjani Trivedi): “As China recovers from Covid-19, all eyes are on its banks’ bad loans. The reality is far worse than it looks. China’s largest lenders reported quarterly earnings this month… The stock of non-performing loans rose for all of them — some more than others — but total loans went up, too. As a proportion, NPLs were basically flat. Breakdowns on types of souring loans were sparse, leaving investors with few clues about the real state of things. A closer look at their existing loan books, however, suggests there’s more pain ahead. A third of Chinese bank lending goes to personal loans without any collateral, credit cards, private companies and small or medium-size enterprises. These borrowers comprise 77% of non-performing loans. They also tend to be the weakest in a crisis, and stand to lose most in the Covid-19 aftermath. As exports and global demand wane, private manufacturers will see their earnings washed out.”

April 26 – Bloomberg (Anjani Trivedi): “Banks are being bailed out in China, raising alarm. How they’re being rescued is even scarier. Acknowledging the growing balance sheet problems among small and medium lenders, China’s banking and insurance regulator says it’s working on a reform plan and will become more vigilant about shareholders. That’s all good until you see what’s happening in reality: The state is effectively replacing precarious, often private, shareholders with financially weaker state-backed ones… That rarely instills confidence, even in good times… In the latest string of rescues, Beijing is stepping in to back Hong Kong-listed Bank of Gansu Co., which in addition to deteriorating finances has also found itself on the hook for overdue debts of one of its shareholders… As part of a plan…, state-backed equity holders will raise their stakes to own almost half of the bank, up from around 28%. The largest, a highway operator, is expected to pay around 1.5 billion yuan ($212 million) to subscribe to 40% of the new shares, raising its stake to 18.3%. It’s an odd choice of rescuer. Gansu Provincial Highway Aviation Tourism Investment Group Co.’s balance sheet is already stretched. Its operating cash flow is insufficient to cover expenses and interest payments, according to S&P…”

April 28 – Bloomberg: “As dividends are slashed around the world, the $42 billion in promised payouts by China’s biggest banks have a powerful defender -- the Communist Party. Industrial & Commercial Bank of China Ltd. and its three biggest peers are returning more than 30% of their 2019 earnings to shareholders, implying an average dividend yield of more than 6%. That’s nearly double what’s offered by their competitors in the U.S. But with the banks facing trillions of yuan of potential credit losses from the impact of the coronavirus, there’s a growing debate on whether China’s mega lenders should maintain payouts to keep investors, especially their government owners, happy at the cost of their own deteriorating capital strength. ‘Maintaining a high dividend payout is part of Chinese banks’ social responsibilities, especially now when the fiscal budget is tight,’ said Nicholas Zhu, an analyst at Moody’s… in Beijing.”

April 28 – Bloomberg: “China is trying to build its way out of the coronavirus slump. Economists expect local governments across the country to issue as much as 4 trillion yuan ($565bn) in so-called special bonds this year, roughly twice last year’s total. The proceeds are to be spent on the same type of things that China splurged on following the global financial crisis more than a decade ago -- roads, airports, and railways.”

April 30 – Reuters (Lusha Zhang and Se Young Lee): “China’s services activity expanded at a faster pace in April, but business is expected to take some time to fully recover due to the lingering impact from the coronavirus crisis at home and globally. The official non-manufacturing Purchasing Managers’ Index (PMI) rose to 53.2, from 52.3 in March…”

April 30 – Financial Times (Martin Arnold): “China has received a wave of applications for debt relief from crisis-hit countries included in the ‘Belt and Road Initiative’ as coronavirus strains the world’s biggest development programme. Chinese policy advisers and bankers told the Financial Times that Beijing was considering a number of responses, including the suspension of interest payments on loans from the country’s financial institutions. But they also warned against expectations that China would forgive debts outright. ‘We understand a lot of countries are looking to renegotiate loan terms,’ said a researcher at the China Development Bank, a Chinese ‘policy bank’ that — along with the Export-Import Bank of China — spearheads hundreds of billions of dollars in lending to BRI projects around the world.”

Central Bank Watch:

April 30 – Financial Times (Martin Arnold): “The European Central Bank has expanded its loans to banks at ultra-low rates after data published earlier on Thursday showed the eurozone’s economy shrank by the fastest rate on record in the first quarter. In a move to bolster the European banking system’s access to funds and to avoid a drying up of credit, the ECB said it would lend money to banks at rates as low as minus 1% through a planned programme and also launched a separate round of fresh lending. The ECB’s governing council said it was ‘fully prepared’ to increase the size of its recently launched €750bn pandemic emergency purchase programme and to ‘adjust its composition, by as much as necessary and for as long as needed’.”

April 27 – Reuters (Leika Kihara, Tetsushi Kajimoto, Daniel Leussink and Kaori Kaneko): “The Bank of Japan… ramped up risky asset purchases and pledged to buy unlimited amounts of government bonds to combat the economic fallout from the coronavirus epidemic. At the rate review, the central bank pledged to accelerate purchases of corporate bonds and commercial paper until the combined balance of its holdings reaches 20 trillion yen ($186bn). It also pledged to aggressively buy government bonds to keep the yield curve low in a stable manner.”

April 27 – Financial Times (Leo Lewis): “The Bank of Japan’s efforts to ensure liquidity for businesses and suppress yields in the corporate debt market could soon leave it owning almost half the country’s outstanding commercial paper and about one-sixth of its corporate bonds. Under the BoJ’s plans…, the central bank will increase its existing holdings of commercial paper and corporate bonds from around ¥5tn ($46bn) to as much as ¥20tn. The move is designed to complement easing policies that have seen the central bank build its holdings of Japanese government bonds (JGBs) to about 50% of the entire market. It forms part of a controversial 10-year programme in which the BoJ has accumulated a roughly ¥30tn stash of equities through buying exchange traded funds.”

Europe Watch:

April 28 – Bloomberg (Stephen Spratt, John Ainger, and John Follain): “Just when investors thought they were safe holding Italian bonds, Fitch Ratings took the country to the precipice of losing its investment grade rating. In a surprise move, Fitch downgraded the euro area’s third-largest economy by a notch to BBB-, just one level above junk… It’s ratcheting up the pressure on Italy’s political leaders to make sure fiscal deficits don’t get too far out of hand, and on the European Union to provide greater support… It could’ve been worse for Italy. In its decision statement, Fitch hinted that it was close to a bigger downgrade, or at least a lowering of the country’s outlook, before Italy provided additional information to assuage the agency’s concerns. ‘That resulted in a rating action that is different than the original rating committee outcome,’ it said.”

April 28 – Reuters (Gavin Jones): “Fitch’s downgrade of Italy does not take proper account of the important economic decisions taken by the European Union and the European Central Bank, the Italian economy minister said. Fitch cut Italy’s credit rating to ‘BBB-‘ on Tuesday, saying the downgrade reflects the significant impact of the coronavirus pandemic on the country’s economy.”

April 30 – Bloomberg (Alessandro Speciale and Alessandra Migliaccio): “Italy’s economy fell into a deep recession even before suffering the full effect of a drastic economic lockdown. The euro area’s third-largest economy shrank 4.7% in the first quarter, the biggest drop since the series started in 1995. The contraction, bigger than the 3.8% slump in the currency union as a whole, compares with a 5.4% forecast by economists.”

April 29 – Bloomberg (Birgit Jennen): “Germany expects the impact of the coronavirus to plunge the economy into its worst recession since the nation began its recovery in the aftermath of World War II… Gross domestic product is forecast to shrink by 6.3% in 2020, more than even during the financial crisis a decade ago, according to Economy Ministry projections… The low point of the recession -- the worst since at least 1950 -- is expected in the second quarter, before a gradual recovery and growth of 5.2% next year.”

April 28 – Financial Times (Jim Brunsden and Martin Arnold): “Brussels has offered banks temporary capital relief that it said could boost lending by up to €450bn this year, arguing the economic damage wrought by the coronavirus crisis justified a ‘targeted’ easing of regulations introduced after the 2008 financial crash. The announcement came as the results of a European Central Bank survey of 144 lenders… showed that demand for loans from European businesses has surged since the coronavirus pandemic started, while banks have moderately tightened their lending criteria. The European Commission said the bank rule changes would improve the transmission of central bank monetary policy and allow the economy to reap the full benefit of government schemes to keep credit flowing.”

Brazil Watch:

April 28 – Associated Press (David Biller, Marcelo de Sousa and Adam Geller): “Brazil is emerging as potentially the next big hot spot for the coronavirus amid President Jair Bolsonaro’s insistence that it is just a ‘little flu’ and that there is no need for the sharp restrictions that have slowed the infection’s spread in Europe and the U.S.”

April 28 – Financial Times (Editorial Board): “All but one of Brazil’s presidents since the return of democracy in 1985 have ended their careers ignominiously. Two were impeached, two tarnished by corruption allegations, one jailed and another triggered a financial crisis in a subsequent role. Only Fernando Henrique Cardoso, a centrist who governed from 1995-2002, has his reputation intact. After forcing out the respected justice minister Sérgio Moro last Friday, Jair Bolsonaro now appears hell-bent on joining his predecessors in the presidential hall of horrors. Mr Moro was the second key minister to go in eight days; Mr Bolsonaro had fired the popular health minister the previous week for resisting presidential efforts to play down the coronavirus pandemic.”

April 27 – Reuters (Anthony Boadle): “Brazilians are split on impeaching President Jair Bolsonaro despite a majority believing accusations by the former justice minister that Bolsonaro tried to interfere with the federal police’s work for political gain, a poll conducted on Monday showed. Pollster Datafolha found that 48% oppose impeaching Bolsonaro while 45% of those surveyed want to see him impeached…”

April 27 – Reuters (Jamie McGeever): “The outlook for Brazil’s economy continues to deteriorate…, as economists at global bank Citi slashed its 2020 forecast and predicted ‘the worst annual contraction ever’ this year. Citing more widespread and lasting damage from the COVID-19 crisis than previously thought, Citi’s economists said gross domestic product in Latin America’s largest economy will shrink 4.5% this year, versus an earlier forecast of a 1.7% decline. That would be deeper than the 4.25% contraction in 1981, the biggest annual fall in output going back to at least 1962…”

April 27 – Reuters (Jamie McGeever): “Consumer and business confidence in Brazil fell to the lowest on record in April as the coronavirus crisis gripped Latin America’s largest economy…, with the outlook suggesting no sign of improvement in the coming months. The monthly surveys, carried out by the Getulio Vargas Foundation (FGV), showed record low confidence and optimism across the board, including intentions to buy consumer durable goods and the outlook for household finances.”

April 28 – Financial Times (Felipe Marques and Cristiane Lucchesi): “Faced with a surge in margin calls, Brazil’s wealthiest individuals doubled the volume of credit taken from private banks as the coronavirus pandemic crushes the value of their existing collateral. Itau Unibanco Holding SA, the nation’s biggest wealth manager, and XP Inc. saw a spike in stand-by letters of credit for their rich clients in recent weeks, using investment funds or other assets as collateral as a way to generate cash. In Itau’s case, volume more than doubled from a year earlier, according to Luiz Severiano, head of private banking. ‘In a sharp and deep market crisis you need to be quick in helping your leveraged clients in search of liquidity,’ Severiano said…”

EM Watch:

April 28 – Bloomberg (Nasreen Seria and Ben Holland): “To fight the coronavirus, developing economies from Colombia to Indonesia are turning to a playbook that’s become familiar in the rich world since 2008: central banks are buying government debt. Since February, some 13 emerging-market central banks have started snapping up bonds or said they are considering doing so… It’s a policy that carries a whole extra layer of risk in countries where currencies are fragile and capital has a history of fleeing. While the central banks are trying to stabilize turbulent financial markets, their actions are also providing support for bigger fiscal deficits, with public spending everywhere getting ramped up to shield people and businesses from the pandemic’s fallout. Some, like Bank Indonesia, are buying sovereign debt directly -- taking a step further even than most developed-economy peers. The danger for emerging markets, which often rely on short-term foreign capital, is that they’ll end up scaring it away -- and reviving inflation -- by flooding the system with newly created cash.”

April 28 – Financial Times (Constantine Courcoulas and Cagan Koc): “Turkey’s defense of the lira sent central bank net international reserves to the lowest level since last May even after it borrowed a record amount of foreign exchange from local lenders. To bulk up its stockpile during the intervention, the central bank has been borrowing from local lenders and booking the liabilities from these transactions off its balance sheet. Since December, the total stock of currency swaps with a maturity of up to a year increased by $11.4 billion to $29.6 billion through the end of March… Since then, it borrowed around $3 billion more from banks through mid-April… Yet Turkey’s hard-currency buffers dropped by $15.2 billion from the start of the year to $25.9 billion through April 17, which brings net reserves stripped of these liabilities to lenders deeper below zero.”

April 30 – Financial Times (Laura Pitel, Eva Szalay and Adam Samson): “The Turkish lira looks like it has been fairly steady in recent days, but behind the scenes a battle is raging to hold it up against the US dollar. Like many emerging-market currencies, the lira has crumbled under the strain of coronavirus and the large interest-rate cuts that policymakers have launched to support the economy. But for more than a week, every time the dollar has threatened to break above 7 to the lira — a level last seen in the country’s 2018 currency crisis — it has been pushed back down again under a wave of dollar selling. ‘It’s actually quite interesting seeing someone trying to give two fingers to economic or financial logic,’ said one foreign fund manager… ‘They’re really digging themselves quite a decent hole.’”

April 26 – Bloomberg (Divya Patil, Bijou George, and Anurag Joshi): “India’s credit markets were jolted late last week when a major money manager halted withdrawals from mutual funds, adding to a worrying string of superlatives that have been piling up since well before the coronavirus pandemic. Franklin Templeton’s decision to wind up $4.1 billion of Indian debt funds was the biggest-ever forced closure of funds in the country. It immediately sent corporate borrowing costs soaring, with the spread on one benchmark index rising to a seven-year high. Fresh on its heels, the local venture of France’s AXA SA said it had marked down the value of some of its bond holdings.”

April 30 – Reuters (David Morgan): “Mexican state oil company Pemex, hammered by a collapse in crude prices and a sharp depreciation of the Mexican peso, …posted a multibillion-dollar quarterly loss… Losses during the first quarter of 2020 totaled $23.6 billion (562.13bn peso), likely the company’s biggest ever quarterly loss as the COVID-19 pandemic cratered demand for crude oil globally.”

May 1 – Reuters (Devbrat Saha): “Moody's… cut Saudi Arabia's outlook to ‘negative’ from ‘stable’ on Friday, citing higher fiscal risks for the Gulf nation due to the crash in oil prices, and uncertainty about the Saudi government's ability to offset the oil revenue losses and stabilize its debt in the medium term. However, the ratings agency affirmed sovereign credit rating at ‘A1’, citing Saudi Arabia government’s ‘still relatively robust, albeit deteriorating’ balance sheet, moderate debt level and substantial fiscal and external liquidity buffers.”

April 29 – Financial Times (Simeon Kerr): “Saudi Arabia central bank’s foreign assets fell last month by the most in 20 years as the kingdom battled to manage the effects of plunging oil prices and the economic fallout from the coronavirus pandemic. The Saudi Arabian Monetary Authority’s net foreign assets dropped by 100bn riyals ($27bn) in March to SAR465bn, the lowest levels since 2011 and the fastest decline in two decades…”

April 29 – Bloomberg (Fathiya Dahrul): “Indonesian banks are looking to the government for additional stimulus measures to cope with a growing pile up of bad loans, as the coronavirus pandemic batters the economy. The country’s lenders are poised to add at least 556.6 trillion rupiah ($36bn) of non-performing loans this year amid the unprecedented headwinds from the Covid-19 pandemic, according to PT Bank UOB Indonesia. That will push their soured debt ratio above 5%, from 2.8% at the end of January, the bank estimates.”

April 29 – Bloomberg (Dana Khraiche): “Lebanese central bank Governor Riad Salameh said the country’s peg against the dollar remains viable to protect purchasing power that’s eroded with a plummeting local currency as he pushed back against criticism for his handling of the crisis gripping the economy. ‘A stable pound is a political decision,’ said Salameh, who’s been at the helm of the central bank since 1993. ‘We at the central bank are convinced of it because we know. And now you see the movement at the exchange bureaus and how it impacts the purchasing power of the Lebanese.’”

Leveraged Speculation Watch:

May 1 – Bloomberg (Heather Perlberg, Tom Metcalf, and Sabrina Willmer): “A turning point has arrived for the private equity industry, whose velvet-rope deals and outsized returns defined the past decade’s era of ultra-wealth on Wall Street. The jolt of the coronavirus pandemic, which halted most economic life in the U.S., has sent shockwaves through the industry, which in recent years infiltrated virtually every corner of the business world from real estate to hospitals, newspapers and restaurants. Amid the chaos, the reverberations are just beginning. On Friday, Apollo Global Management Inc., one of the sector’s giants, said that as of March 31 it was facing the prospect of returning nearly $1 billion of profits to its investors. While executives later said April’s market gains have made that less likely, the announcement pointed to the potential pain to come.”

Geopolitical Watch:

April 29 – Bloomberg (Josh Wingrove): “China poses a threat to the world by hiding information about the origin of the coronavirus that it allowed to spread to other countries, U.S. Secretary of State Mike Pompeo said. President Donald Trump’s top diplomat… ratcheted up the accusations between the U.S. and China over the virus. White House adviser Jared Kushner… also said… the president has ordered an investigation into the origins of the virus and will hold those responsible accountable for its spread. ‘The Chinese Communist Party now has a responsibility to tell the world how this pandemic got out of China and all across the world, causing such global economic devastation,’ Pompeo told Fox News…, where he repeatedly criticized China’s government. ‘America needs to hold them accountable.’”

April 30 – NBC News (Adela Suliman): “China's military has said it ‘expelled’ a U.S. navy vessel from the hotly contested waters of the South China Sea this week. It said the ‘USS Barry’ had illegally entered China's Xisha territorial waters… China’s Southern Theater army command ‘organized sea and air forces to track, monitor, verify, and identify the U.S. ships throughout the journey, and warned and expelled them,’ said Chinese military spokesperson Li Huamin… ‘The provocative actions of the United States seriously violated relevant international law norms, seriously violated China's sovereignty and security interests, artificially increased regional security risks, and were prone to cause unexpected incidents,’ he said.”

April 28 – Bloomberg: “China’s foreign ministry denounced White House trade adviser Peter Navarro as a ‘liar,’ in the latest volley between the two sides over the coronavirus outbreak. Foreign Ministry spokesman Geng Shuang… repeated its past rejection of Navarro’s claims that the Chinese side had held back supplies of vital personal protective equipment amid the Covid-19 pandemic. ‘Navarro has been a consistent liar with no credibility,’ Geng told a regular news briefing…”

April 30 – Reuters (Timothy Gardner, Steve Holland, Dmitry Zhdannikov and Rania El Gamal): “As the United States pressed Saudi Arabia to end its oil price war with Russia, President Donald Trump gave Saudi leaders an ultimatum. In an April 2 phone call, Trump told Saudi Crown Prince Mohammed bin Salman that unless the Organization of the Petroleum Exporting Countries (OPEC) started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the kingdom… The threat to upend a 75-year strategic alliance… was central to the U.S. pressure campaign that led to a landmark global deal to slash oil supply as demand collapsed in the coronavirus pandemic - scoring a diplomatic victory for the White House.”

April 26 – Financial Times (Andrew England): “When the Covid-19 pandemic swept across the Middle East and north Africa, it succeeded where regimes in Algeria, Iraq and Lebanon had failed — it brought an abrupt halt to months of mass anti-government demonstrations. But this is likely to only prove a hiatus as coronavirus exacerbates the economic and social pressures that have fuelled public anger with the region’s regimes, which lack credibility in the eyes of many. Most states in the Middle East and north Africa, with restless, youthful populations and rampant unemployment, lack the financial resources to mimic wealthy nations and provide large-scale rescue packages to support businesses and protect jobs.”

April 28 – Reuters (Walid Saleh): “Protests against growing economic hardship erupted in Tripoli and spread to other Lebanese cities…, with banks set ablaze and violence boiling over into a second night. One demonstrator was killed in riots overnight…, as a collapse in the currency, soaring inflation and spiralling unemployment convulse Lebanon, a country in deep financial crisis since October. A shutdown to fight the new coronavirus has made matters worse for the economy.”

Friday Evening Links

[Reuters] Wall Street tumbles as renewed tariff threat adds to uncertainties

[Reuters] Americans begin to surface from isolation as states ease clamp-downs

[Reuters] Trump says tariffs on China 'certainly an option'

[Reuters] Coronavirus live updates: California could be ‘days’ away from easing restrictions, NBA postpones draft lottery

[Reuters] Moody's cuts Saudi Arabia's outlook to "negative" from "stable"

[Reuters] After rumours about health, North Korea state media report Kim Jong Un appearance

[Bloomberg] The Great Shale Shut-In Has Begun, Making Good on Trump’s Pledge

[Bloomberg] Private Equity Poised to Face a Reckoning After Gilded Decade

[Bloomberg] A $1.9 Trillion Quarter for Bond Buyers to Digest

[Bloomberg] Deluge of Debt Is Making Corporate America Riskier for Investors

[WSJ] Apollo Is Latest Private-Equity Firm Hammered by Coronavirus Rout

[FT] Markets are out of step with economic reality