Friday, May 8, 2020

Weekly Commentary: Schumpeter's Business Cycle Analysis

The work of the great economist Joseph Schumpeter (1883-1950) has always resonated. When I ponder analytical frameworks pertinent to these extraordinary times, none are more germane than Schumpeter’s Business Cycle Analysis. Best known for “creative destruction,” Schumpeter’s seminal work materialized after experiencing the spectacular “Roaring Twenties” boom collapse into the Great Depression.

Contrary to Milton Friedman and Ben Bernanke, Schumpeter didn’t view the twenties as the “golden age of Capitalism.” Depression was a consequence of egregious boom-time excess rather than the result of the Fed’s post-crash failure to print sufficient money. Schumpeter possessed a deep understanding of Credit; he keenly appreciated the roles entrepreneurship and risk-taking played during booms. Schumpeter also understood Capitalism’s vulnerabilities.

Whenever a new production function has been set up successfully and the trade beholds the new thing done and its major problems solved, it becomes much easier for other people to do the same thing and even to improve upon it. In fact, they are driven to copying it if they can, and some people will do so forthwith. It should be observed that it becomes easier not only to do the same thing, but also to do similar things in similar lines… This seems to offer perfectly simple and realistic interpretations of two outstanding facts of observation: First, that innovations do not remain isolated events, and are not evenly distributed in time, but that on the contrary they tend to cluster, to come about in bunches, simply because first some, and then most, firms follow in the wake of successful innovation; second, that innovations are not at any time distributed over the whole economic system at random, but tend to concentrate in certain sectors and their surroundings.” Joseph A. Schumpeter, Business Cycles, 1939

The American debt situation and the American bank epidemics… are in a class by themselves. Given the way in which both firms and households had run into debt during the twenties, the accumulated load… was instrumental in precipitating depression. In particular, it set into motion a vicious spiral within which everybody’s efforts to reduce that loan for a time, only availed to increase it. There is thus no objection to the debt-deflation theory of the American crisis, provided it does not mean more than this. The element it stresses is part of the mechanism of any serious depression. But increase of total indebtedness at the rate at which it had occurred in this country is neither a normal element of the mechanisms of Kondratieff downgrades nor in itself an ‘understandable’ incident, like speculative excesses and the debts induced by these. It must be attributed to the humor of the times, to cheap money policies, and to the practices of concerns eager to push their sales; and it enters the class of understandable incidents only if we include specifically American conditions among our data. Similarly, bank failures are of course very regular occurrences in the course of any major crisis and invariably an important cause of secondary phenomena…Those epidemics cannot, however, be considered as wholly explained by the ordinary mechanism of crises or by the mechanism plus the fact of excessive indebtedness all round or even by all that plus the stock exchange crash. The American epidemics become fully understandable only if account be taken of the weaknesses peculiar to the American banking structure…” Joseph A. Schumpeter, Business Cycles, 1939

We live in extraordinary, unprecedented times. The timing of the COVID-19 pandemic – on the heels of an unparalleled period of synchronized global economic growth; a record-setting U.S. economic expansion; and worldwide financial and asset price booms – ensures far-reaching financial, economic, social, political and geopolitical ramifications. COVID Strikes Mercilessly at Peak Fragility.

Fragilities have been mounting across economic and financial systems – at home and abroad. The pandemic is pushing many over the edge. Not only are central banks and governments fighting the immediate effects of the coronavirus, they are these days in epic battle against Business Cycle Dynamics. In particular, bursting Bubbles have central banks more determined than ever to do “whatever it takes” to fulfill their so-called “price stability” mandate.

There were deflation worries following the 1987 stock market crash. Deflationary risks were key to the Greenspan Fed’s aggressive early-nineties stimulus measures (and championing of “Wall Street finance”). Global deflation fears were acute during the 1997 bursting of the “Asian Tiger Bubbles” and even more so the next year with the Russia/LTCM collapse. Dr. Bernanke joined the Fed in 2002 after the “tech” Bubble collapse, as the Fed formulated a major push against the scourge of deflation. After the bursting of the mortgage finance Bubble, global bazookas were mobilized for an all-out assault against deflationary forces.

Of late, a nuclear arsenal has supplanted the impotent bazookas. I’m convinced policymakers are “fighting the last war” with perilously misguided armaments. The Schumpeterian framework supports my case.

The past 25 years accomplished the greatest period of innovation and technological advancement since the “Roaring Twenties.” Concurrently, the world experienced an unparalleled period of financial innovation – specifically a historic shift from traditional bank lending to a system dominated by market-based finance and central bank intervention. Real economy innovation fueled finance, and financial excess stoked entrepreneurship and risk-taking. In combination, innovation in both real economies and finance fueled historic changes in financial and economic structure.

The Federal Reserve has essentially employed highly accommodative monetary policy for the past thirty years. After beginning the nineties at about 450, the Nasdaq Composite traded this past February to an all-time high 9,838 (closing Friday at 9,121). Except for a few fleeting periods of instability, free-flowing finance has supported (“cluster” upon historic “cluster” of) innovation. The Credit expansion has been unrelenting, with Non-Financial Debt surging from $10.5 TN to begin the nineties to today’s $55 TN.

Central bankers are these days keener than ever to fixate on their inflation mandate and targets. That inflation dynamics have evolved profoundly over recent decades is apparently not worthy of discussion. The impetus is to stimulate more aggressively than ever.

Schumpeterian “clusters” – explosive innovation and adoption of new technologies - have altered the nature of contemporary output, economic structure and inflation dynamics. Incredible expansion of technology hardware, software, digitized output and related services fundamentally altered the economy’s structural capacity to readily expand the supply of output. What started with the low-cost personal computers mushroomed with the adoption of the Internet. The past decade's unprecedented monetary stimulus and booming markets saw frenzied multiplication of innovation “clusters” (i.e. Internet-based products, “cloud”-related services, “Internet of things,” robotics, biotech and pharmaceuticals, alternative energy, the “sharing economy,” autonomous vehicles, and so on).

Technological innovation and adoption help explain why aggressive monetary stimulus and system-wide “loose money” have not been associated with higher consumer price inflation. A veritable endless supply of “tech” output readily absorbs any additional purchasing power making its way into the real economy.

Meanwhile, mounting Credit and speculative excess primarily fueled inflation in asset prices and Bubbles. Moreover, this combination of booming finance and asset markets provided major impetus to U.S. economic structural mutation. Deindustrialization took root, with American manufacturing suffering at the hands of cheaper imports. Meanwhile, booming financial markets and surging household wealth propelled a structural shift to a services-based economy. A confluence of U.S. financial innovation and excess, policy experimentation, economic restructuring and resulting massive Current Account Deficits propelled “globalization” – and, with it, systemic Global Bubble Dynamics. In the process, inflation dynamics were fundamentally and momentously transformed.

If things seem too good to be true, they probably are. There are critical issues associated with current inflation, financial, economic and policy structures. The COVID-19 pandemic is illuminating many.

Let’s start with inflation. With global Bubbles bursting, there will be associated downward pressures on some price levels (i.e. energy and commodities). Demand will wane for many products and services. Yet broken supply chains are pushing some prices higher. Meanwhile, the world is afflicted with unprecedented debt burdens.

Central bankers are fully committed to doing “whatever it takes” to drive aggregate consumer inflation up to target. The nature of inflation has evolved profoundly, yet central banks adhere to the doctrine of a general price level that they can manipulate higher through monetary stimulus. This capacity for policy measures to inflate THE general price level is fundamental to the view that consequences of Credit excess and market Bubbles can be readily mitigated. And this gets to the heart of this dangerous flaw in contemporary economic doctrine: that boomtime Credit and financial excess can, for the most part, be disregarded. Asset inflation and Bubbles are to be ignored (promoted?), focusing instead on preparation for aggressive faltering-Bubble reflationary measures.

In reality, deflation is a symptom – a consequence. The problem is excessive debt, speculative leverage, asset market Bubbles and deep economic structural maladjustment. Importantly, there is today no general price level to manipulate higher to inflate out of debt and structural problems. Aggressive reflationary efforts will instead only add to unmanageable debt loads, while further straining financial and economic structures. As we’re already witnessing, Trillions of Fed “money” creation ensure market and price level instabilities. Moreover, stimulus measures at this point dangerously exacerbate wealth inequality, and with it social, political and geopolitical instability.

From the New York Times (Nelson D. Schwartz, Ben Casselman and Ella Koeze): “People with the least education have been hardest hit in the downturn… The unemployment rate for workers without a high school diploma stood at 21.2% in April, compared with 8.4% for those with a college degree… Workers earning under $15 an hour account for more than one-third of job losses, far beyond their share of the work force.”

And from the Washington Post (Heather Long): “What’s clear so far is that Hispanics, African-Americans and low-wage workers in restaurants and retail have been the hardest hit by the job crisis. Many of these workers were already living paycheck-to-paycheck and had the least cushion before the pandemic hit. ‘Low-wage workers are experiencing their own Great Depression right now,’ said Ahu Yildirmaz, co-head of the ADP Research Institute… The unemployment rate in April jumped to a record 18.9% for Hispanics, 16.7% for African-Americans and 14.2% for whites.”

We’re witnessing a down-cycle at Pandemic Mach One. Twenty million jobs lost in April. Yet the S&P500 returned almost 13% during the month. The Nasdaq Composite surged 15.5%. Much would remain ambiguous in a typically gradual downturn. Not so with COVID-19. There are no subtleties and little complexity– it’s clear for all to see.

How can much of society not be convinced Federal Reserve support primarily benefits Wall Street and the wealthy? If you are employed in the service sector, odds are you’re facing terrible hardship. If you are fortunate enough to work for Amazon, Microsoft, Google, Apple, Tesla, Netflix, Zoom, or even most tech or biotech companies – with your stock and option grants you’ve likely rarely done better. Covid-19 is laying bare the stark inequity of the current structure. The “trickle down” argument, having remained tenable during the long boom, has in six weeks been blown completely out of the water. “Dow Ends Week 455 Points Higher, Shaking off the Worst U.S. Unemployment Rate Since the Great Depression.”

Federal Reserve Credit rose another $65.5bn last week to a record $6.664 TN, pushing the nine-week gain to a staggering $2.519 TN. M2 “money supply” (with a week’s lag) expanded another $333bn, with a nine-week rise of $2.059 TN. Institutional Money Fund Assets (not included in M2) added $25bn, boosting its nine-week expansion to $946bn.

Meanwhile, a magnitude 5.2 earthquake struck this week along the European Fault Line.

May 6 – UK Telegraph (Ambrose Evans-Pritchard): “Germany’s top court has fired a cannon shot across the bows of the European Central Bank and accused the European Court of breaching EU treaty law, marking an epic clash of rival judicial supremacy. In an explosive judgement, the German constitutional court ruled that the ECB had exceeded its legal mandate and ‘manifestly’ breached the principle of proportionality with mass bond purchases, now topping €2.2 trillion and set to rise dramatically. The bank had strayed from the monetary realm into broad economic policy-making. The court said the German Bundesbank may continue to buy bonds during a three-month transition but must then desist from any further role in the ‘implementation and execution’ of the offending measures, until the ECB can justify its actions and meet the court’s objections. It also said the Bundesbank must clarify how it is going to sell the bonds it already owns. ‘For the first time in history, the constitutional court has found that the actions and decisions of European bodies overstep their legitimate competence, and therefore have no validity in Germany,’ said the court’s president, Andreas Vosskuhle. No country has dared to do this before since the creation of the Community in 1957. It is a revolutionary moment for the European project. Olaf Scholz, the German finance minister, said the court had set ‘very clear boundaries’ and that Europe would henceforth have to find other ways to keep monetary union on the road.”

May 5 – Bloomberg (Stephanie Bodoni): “The European Union’s top court faced the most stinging attack in its 68-year history -- not from Brexiteers, but from its German counterpart. In a long-awaited ruling on the European Central Bank’s quantitative easing program, Germany’s constitutional court in Karlsruhe accused the EU Court of Justice of overstepping its powers when it backed the ECB’s controversial policy. The German court said the EU judges’ December 2018 ruling that QE was in line with EU rules was ‘objectively arbitrary’ and is ‘methodologically no longer justifiable.’ It gave the ECB a three-month ultimatum to fix flaws in the measure. ‘This is a declaration of war on the ECJ, and it will have consequences,’ said Joachim Wieland, a law professor at the University of Administrative Sciences, who sees the real challenge in the future relationship between the EU court and national constitutional tribunals. ‘It’s an invitation for other countries to simply ignore decisions that they don’t like.’”

May 8 – Reuters (Gabriela Baczynska): “The European Union’s top court said on Friday it alone has the power to decide whether EU bodies are breaching the bloc’s rules, in a rebuke to Germany’s highest court, which this week rejected its judgment approving the ECB’s trillion-euro bond purchases… ‘In order to ensure that EU law is applied uniformly, the Court of Justice alone – which was created for that purpose by the member states – has jurisdiction to rule that an act of an EU institution is contrary to EU law,’ the court said in a statement.”

May 7 – Financial Times (Martin Arnold): “Christine Lagarde has fended off criticism of the European Central Bank’s government bond purchases, saying she was ‘undeterred’ by an order from Germany’s highest court to produce a justification of its action. Speaking publicly for the first time since its flagship bond-buying policy was challenged by the German constitutional court, the ECB president said the pandemic meant the Frankfurt-based institution — as well as other central banks — ‘have to go beyond the normal tools to use exceptional measures . . . to avoid a tightening [of financing costs] and to ensure our monetary policy is transmitted across the euro area’. ‘We are an independent institution, answerable to the European Parliament, and driven by our mandate,” she said… ‘We will continue to do whatever is needed, whatever is necessary, to deliver on that mandate. Undeterred.’

Christine Lagarde is undeterred. For the most part, markets remain undeterred (though European yields rose this week). Likely business as usual for the Bundesbank for the next three months. But then significant uncertainty. Once again, COVID-19 timing is awe-inspiring. While Germany’s Constitutional Court ruled previous QE was not categorically illegal monetary financing, the latest $800 billion Pandemic Emergency Purchase Program (PEPP) clearly crosses the line.

Things appear headed in the direction of a real mess. Timing unclear. German Constitutional Court vs. European Court of Justice (ECJ). Additional lawsuits out of Germany challenging “whatever it takes” PEPP ECB QE. Other national courts – and governments – emboldened to flaunt sovereignty and challenge a weakened European Union. Germany’s Bundesbank is in a tough spot, split between the German Constitutional Court (along with its sound money principles) and its role as the largest member of the ECB. Does the ECB continue “disproportional” support for Italian debt markets, inviting a confrontation with Germany’s Constitutional Court? Does the Italian debt market begin fretting a world with less certainty of unlimited ECB buying? This week saw a meaningful chink in the armor of European monetary integration.

“It is of the utmost importance to realize this: given the actual facts which it was then possible for either businessman or economists to observe, those diagnoses – or even the prognosis that, with the existing structure of debt, those facts plus a drastic fall in price level would cause major trouble but that nothing else would – were not simply wrong. What nobody saw, though some people may have felt it, was that those fundamental data from which diagnoses and prognoses were made, were themselves in a state of flux and that they would be swamped by the torrents of a process of readjustment corresponding in magnitude to the extent of the industrial revolution of the preceding 30 years. People, for the most part, stood their ground firmly. But that ground itself was about to give way.” Joseph A. Schumpeter, Business Cycles, 1939

For the Week:

The S&P500 jumped 3.5% (down 9.3% y-t-d), and the Dow rose 2.6% (down 14.7%). The Utilities increased 0.4% (down 12.3%). The Banks added 0.2% (down 37.2%), and the Broker/Dealers jumped 3.8% (down 15.5%). The Transports gained 2.3% (down 23.6%). The S&P 400 Midcaps surged 5.4% (down 18.8%), and the small cap Russell 2000 jumped 5.5% (down 20.3%). The Nasdaq100 advanced 5.8% (up 5.6%). The Semiconductors surged 8.0% (down 4.0%). The Biotechs rose 6.9% (up 5.9%). With bullion up $2, the HUI gold index rose 5.8% (up 17.9%).

Three-month Treasury bill rates ended the week at 0.0925%. Two-year government yields declined three bps to 0.16% (down 141bps y-t-d). Five-year T-note yields slipped two bps to 0.34% (down 136bps). Ten-year Treasury yields rose seven bps to 0.69% (down 123bps). Long bond yields jumped 14 bps to 1.39% (down 100bps). Benchmark Fannie Mae MBS yields gained two bps to 1.59% (down 113bps).

Greek 10-year yields rose three bps to 2.16% (up 73bps y-t-d). Ten-year Portuguese yields jumped 11 bps to 0.92% (up 48bps). Italian 10-year yields gained nine bps to 1.85% (up 43bps). Spain's 10-year yields rose seven bps to 0.80% (up 33bps). German bund yields increased five bps to negative 0.54% (down 35bps). French yields jumped seven bps to negative 0.04% (down 15bps). The French to German 10-year bond spread widened two to 50 bps. U.K. 10-year gilt yields slipped a basis point to 0.24% (down 59bps). U.K.'s FTSE equities index rallied 3.0% (down 21.3%).

Japan's Nikkei Equities Index jumped 2.9% (down 14.7% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.00% (up 1bp y-t-d). France's CAC40 declined 0.5% (down 23.9%). The German DAX equities index increased 0.4% (down 17.7%). Spain's IBEX 35 equities index slumped 2.0% (down 29.0%). Italy's FTSE MIB index fell 1.4% (down 25.8%). EM equities were mixed. Brazil's Bovespa index dipped 0.3% (down 30.6%), while Mexico's Bolsa rose 3.2% (down 13.6%). South Korea's Kospi index was little changed (down 11.5%). India's Sensex equities index sank 6.2% (down 23.3%). China's Shanghai Exchange gained 1.2% (down 5.1%). Turkey's Borsa Istanbul National 100 index dropped 3.2% (down 14.5%). Russia's MICEX equities index declined 0.3% (down 13.3%).

Investment-grade bond funds saw inflows of $6.626 billion, and junk bond funds posted inflows of $3.535 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 3.26% (down 84bps y-o-y). Fifteen-year rates declined four bps to 2.73% (down 84bps). Five-year hybrid ARM rates increased three bps to 3.17% (down 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 3.66% (down 57bps).

Federal Reserve Credit last week jumped $66.0bn to a record $6.664 TN, with a 35-week gain of $2.942 TN. Over the past year, Fed Credit expanded $2.811 TN, or 73%. Fed Credit inflated $3.853 Trillion, or 137%, over the past 391 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0 billion last week to $3.345 TN. "Custody holdings" were down $116bn, or 3.4%, y-o-y.

M2 (narrow) "money" supply surged another $333bn last week to a record $17.566 TN, with an unprecedented nine-week gain of $2.059 TN. "Narrow money" surged $2.998 TN, or 20.6%, over the past year. For the week, Currency increased $8.5bn. Total Checkable Deposits jumped $40.3bn, and Savings Deposits surged $269bn. Small Time Deposits were little changed. Retail Money Funds gained $14.3bn.

Total money market fund assets rose $34.3bn to a record $4.768 TN. Total money funds jumped $1.684 TN y-o-y, or 54.6%.

Total Commercial Paper fell $24.1bn to $1.069 TN. CP was down $12bn, or 1.1% year-over-year.

Currency Watch:

For the week, the U.S. dollar index gained 0.7% to 99.734 (up 3.4% y-t-d). For the week on the upside, the Mexican peso increased 3.9%, the South African rand 2.5%, the Australian dollar 1.8%, the New Zealand dollar 1.2%, the Canadian dollar 1.2%, the Swedish krona 0.8%, the Norwegian krone 0.8%, the Japanese yen 0.2% and the Singapore dollar 0.2%. For the week on the downside, the Brazilian real declined 4.3%, the euro 1.3%, the Swiss franc 1.0%, the British pound 0.8% and the South Korean won 0.1%. The Chinese renminbi declined 0.15% versus the dollar this week (down 1.57% y-t-d).

Commodities Watch:

May 4 – Financial Times (Laurence Fletcher and Henry Sanderson): “Some of the world’s largest hedge funds are raising their bets on gold, forecasting that central banks’ unprecedented responses to the coronavirus crisis will lead to devaluations of major currencies. Paul Singer’s Elliott Management, Andrew Law’s Caxton Associates and Danny Yong’s Dymon Asia Capital are all bullish on the yellow metal, which has risen about 12% this year. They are wagering that moves to loosen monetary policy and even directly finance government spending, intended to limit the economic damage from the virus, will debase fiat currencies and provide a further boost to gold. ‘Gold is a hedge against unfettered fiat currency printing,’ said Mr Yong, founding partner at Dymon Asia…”

The Bloomberg Commodities Index rallied 2.7% (down 23.0% y-t-d). Spot Gold added 0.1% to $1,703 (up 12.2%). Silver surged 5.6% to $15.778 (down 12.0%). WTI crude surged $4.96 to $24.74 (down 60%). Gasoline surged 24.3% (down 44%), while Natural Gas dropped 3.5% (down 17%). Copper rallied 4.1% (down 14.0%). Wheat gained 1.1% (down 7%). Corn increased 0.2% (down 18%).

Coronavirus Watch:

May 7 – New York Times (Benedict Carey and James Glanz): “New York City’s coronavirus outbreak grew so large by early March that the city became the primary source of new infections in the United States, new research reveals, as thousands of infected people traveled from the city and seeded outbreaks around the country. The research indicates that a wave of infections swept from New York City through much of the country before the city began setting social distancing limits to stop the growth. That helped to fuel outbreaks in Louisiana, Texas, Arizona and as far away as the West Coast… ‘We now have enough data to feel pretty confident that New York was the primary gateway for the rest of the country,’ said Nathan Grubaugh, an epidemiologist at the Yale School of Public Health.”

May 5 – Los Angeles Times (Ralph Vartabedian): “Scientists have identified a new strain of the coronavirus that has become dominant worldwide and appears to be more contagious than the versions that spread in the early days of the COVID-19 pandemic, according to a new study led by scientists at Los Alamos National Laboratory. The new strain appeared in February in Europe, migrated quickly to the East Coast of the United States and has been the dominant strain across the world since mid-March… In addition to spreading faster, it may make people vulnerable to a second infection after a first bout with the disease, the report warned.”

May 7 – Bloomberg: “Among recovered Chinese Covid-19 patients, about 5% to 15% may have tested positive again, a Chinese study found. The rate of reactivation in China varied among different places, with some regions showing less than 1% of such cases among recovered patients, Wang Guiqiang, director of department of infection at the Peking University First Hospital. Wang disclosed the figures during a press conference held by China’s National Health Commission… Wang said most of the patients who have tested positive again have yet to show any symptoms, and it needs more work to find out the reason for the reactivation.”

May 5 – Bloomberg (Jen Skerritt and Lydia Mulvany): “America’s meat-processing plants are starting to reopen, but not all workers are showing up. Some still fear they’ll get sick after coronavirus outbreaks shut more than a dozen facilities last month. Employees are taking leave, paid and unpaid -- or just quitting. At a JBS USA plant in Greeley, Colorado, absenteeism is running as high as 30%. Before the pandemic, it was about 13%. The company is paying about 10% of the workforce -- people deemed vulnerable -- to stay home. Others aren’t coming in because they are sick. But some workers are staying home because they are ‘scared’…”

Market Instability Watch:

May 8 – Wall Street Journal (Mike Bird): “Foreign central banks binged on the Federal Reserve’s dollar swap lines in April, just as they did during the global financial crisis. But there’s been a major change: This time, the action is concentrated in Asia, not Europe. Figures released Thursday by the Fed, running to May 5, confirm again that Japan has been by a distance the largest user of the swaps. So far, 46% of the $791.09 billion in lending has been to the Bank of Japan. That’s a huge contrast to the global financial crisis, when the European Central Bank accounted for almost 80% of the roughly $10 trillion in short-term credit extended from 2007 to 2010.”

May 6 – Bloomberg (Eddie Spence): “The euro is heading for the worst week in a month after a surprise ruling by a German court hurt confidence in the European Central Bank’s ability to manage the region’s economic recovery. The common currency has fallen 1.5% in three days, wiping out the previous week’s gains that came after the ECB left the door open to increasing stimulus. That is now in doubt after the ruling from Germany’s constitutional court that the ECB must justify the necessity of its bond-buying program, even though Europe’s top court has ruled in favor of it.”

May 6 – Financial Times (Laura Pitel and Eva Szalay): “The Turkish lira slid towards an all-time low against the US dollar on Wednesday as the country’s finance minister used a rare call with foreign investors to insist that the country would rapidly recover from the economic effects of coronavirus… The call, which was joined by more than 2,000 attendees, came a day after Turkey’s banking regulator moved to curb currency speculation by making it harder for foreign investors to obtain lira.”

May 4 – Reuters (Benedict Mander): “The U.S. Treasury Department… said it plans to borrow nearly $3 trillion in the second quarter of 2020 - more than five times larger than the previous record - as the federal government spends at a frantic pace to mitigate the impact of the coronavirus on the U.S. economy. …Treasury said it would borrow $2.999 trillion during the April-June quarter - higher also than the previous record borrowing for a full fiscal year of $1.8 trillion in 2009.”

May 6 – Bloomberg (Saleha Mohsin and Liz McCormick): “The U.S. Treasury is boosting the amount of debt it plans to issue in the coming quarterly refunding auctions to a record $96 billion to provide government funding as the economy heads into a recession caused by the coronavirus. …It anticipates auctioning the first re-booted 20-year bond on May 20, with an expected initial offering size of $20 billion -- larger than most analysts projected. It also unveiled plans to boost overall issuance with a focus on increases to longer-term debt… The federal deficit is set to surpass estimates of $4 trillion for this year as lawmakers discuss additional economic stimulus.”

May 5 – Associated Press (Paul Wiseman and Martin Crutsinger): “The U.S. government has opened the spigots and let loose nearly $3 trillion to try to rescue the economy from the coronavirus outbreak — a river of debt that would have been unthinkable even a few months ago. And yet the response, even from people who built careers as skeptics of federal debt, speaks to the gravity of the crisis: Almost no one has blinked… ‘Like most folks, I’m not especially concerned about deficit and debt now,’ said Donald Marron, director of the Tax Policy Center, a Washington think tank. ‘Interest rates remain low. Immediate health and economic concerns must take precedence.’”

Global Bubble Watch:

May 3 – Financial Times (Stephanie Kelton and Edward Chancello): “The Covid-19 pandemic has forced governments around the world to spend large sums in an effort to stabilise their economies... Gone, for now, are concerns about how to ‘pay for’ it all. Instead we are seeing wartime levels of spending, driving deficits — and public debt — to new highs. France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100% of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160%. In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237%. With GDP collapsing on a global scale, few countries will escape. In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120% in 2021.”

May 5 – Bloomberg (Enda Curran and Garfield Reynolds): “After the virus, financial markets will never be quite the same again. Public officials have raced to put a floor under the stricken world economy in an intervention so far-reaching it’ll transform the very core of capitalism itself for years to come. A long list of measures that would have looked extraordinary just a few weeks ago has been deployed as central bankers offered loans to an unprecedented range of borrowers and finance ministers said they would shoulder the cost of business payrolls. Airlines, oil-drillers and other troubled industries are in line for bailouts… There’s even open talk of the two arms of economic policy uniting to monetize public debt. The purpose of the multi-trillion dollar, wartime-scale mobilization is to stop a recession turning into depression. But it’s also likely to change the dynamic of industries and markets as prices that were once steered by open trade are now more influenced by the visible hand of policy makers. And history suggests that it will be a long road before such measures are unwound -– if they ever are.”

May 6 – CNBC (Stephanie Landsman): “One of the world’s leading authorities on Asia is worried Wall Street is miscalculating China’s efforts to reopen its economy. While it’s going relatively smoothly on the supply side, Yale University senior fellow Stephen Roach warns the demand side is struggling, and that’s a bad sign for the U.S. economy as it begins reopening. ‘Chinese consumers remain fearful of going out in public, shopping, going to movies and enjoying activities that put them in close proximity with their neighbors,’ the former Morgan Stanley Asia chairman told CNBC…” ‘Consumer behavior is not all that dissimilar in populations subjected to an unprecedented shock in their health security.’”

May 7 – Associated Press (Pan Pylas): “The Bank of England warned… that the British economy could suffer its deepest annual contraction in more than three centuries as a result of the coronavirus pandemic, before roaring back next year. In what it describes as a ‘plausible’ scenario, the bank said the British economy will be 30% smaller at the end of the first half of the year than it was at the start of it, with the second quarter seeing a 25% slump alone following a 3% decline in the first.”

May 5 – Bloomberg (Dhwani Pandya): “Mumbai, Vancouver, Hong Kong, Singapore and Buenos Aires will see the prices of luxury homes fall steeply as the coronavirus outbreak hurts demand, according to a Knight Frank study. Prices in India’s financial hub Mumbai, the nation’s most expensive market, are expected to drop 5% in 2020 and 3% next year. Of the 20 cities Knight Frank analyzed, only four -- Lisbon, Monaco, Shanghai, Vienna -- will avoid falling into negative territory in 2020 either because of historic supply shortages or because transactions were able to continue during lockdowns.”

Trump Administration Watch:

May 4 – Wall Street Journal (Kate Davidson): “The U.S. government expects to borrow a record $4.5 trillion this fiscal year as it steps up spending to battle what is likely to be the deepest economic downturn since the Great Depression… The anticipated new debt for the year ended Sept. 30 is more than triple last year’s $1.28 trillion. The government’s needs are likely to grow even larger as lawmakers on Capitol Hill take aim at the next round of fiscal relief, which could provide hundreds of billions more in federal spending, including money for cities and states to plug gaping holes in their own budgets.”

May 8 – Reuters (Roxanne Liu, Huizhong Wu, Lusha Zhang and Kanishka Singh): “Top U.S. and Chinese trade representatives discussed their Phase 1 trade deal on Friday with China saying they agreed to improve the atmosphere for its implementation and the United States saying both sides expected obligations to be met. The discussion in a telephone call comes amid escalating tension between the countries, exacerbated by a war of words over U.S. criticism of China’s handling of the novel coronavirus outbreak.”

May 3 – Reuters (Alex Alper, David Lawder, Matt Spetalnick and David Brunnstrom): “The Trump administration is ‘turbocharging’ an initiative to remove global industrial supply chains from China as it weighs new tariffs to punish Beijing for its handling of the coronavirus outbreak, according to officials familiar with U.S. planning… ‘We’ve been working on (reducing the reliance of our supply chains in China) over the last few years but we are now turbo-charging that initiative,’ Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the State Department told Reuters… The United States is pushing to create an alliance of ‘trusted partners’ dubbed the ‘Economic Prosperity Network,’ one official said. It would include companies and civil society groups operating under the same set of standards on everything from digital business, energy and infrastructure to research, trade, education and commerce, he said. The U.S. government is working with Australia, India, Japan, New Zealand, South Korea and Vietnam to ‘move the global economy forward,’ Secretary of State Mike Pompeo said…”

May 5 – Wall Street Journal (Laurence Norman and Sha Hua): “The Trump administration is pressing the European Union to support an international inquiry into China’s handling of the new coronavirus, including the origins of the pandemic, as Brussels seeks to avoid taking sides in an increasingly bitter battle between Beijing and Washington… The U.S. is seeking an international probe into whether Beijing mishandled the contagion in its early stages, resulting in a global pandemic that has killed 250,000 and crippled the global economy. Calls by Australian government officials starting in mid-April for an independent inquiry quickly devolved into a testy back-and-forth.”

May 6 – Wall Street Journal (Siobhan Hughes and Lindsay Wise): “Senate Republicans are citing renewed budget-deficit fears as they pump the brakes on more coronavirus-aid spending, putting them at odds with President Trump’s push for tax cuts and an infrastructure package on top of roughly $3 trillion of funds approved so far. Many GOP lawmakers, facing pressure from conservative groups, say any new infrastructure spending is a nonstarter. They are also lukewarm on Mr. Trump’s call to slash payroll taxes, paid by workers and employers. Republican leaders have instead prioritized creating a liability shield for companies operating during the outbreak… ‘We need to hit pause for a while, see what has worked, what hasn’t worked and let’s see how much money—additional money—we need after the economy is opened back up,’ said Sen. John Kennedy (R., La.). Mr. Trump has identified the payroll-tax cut as his own must-have in negotiations, and laid out his priorities…, saying that the elimination of payroll- or capital-gains taxes ‘must be put on the table.’”

Federal Reserve Watch:

May 4 – Associated Press (Dan Burns, Karen Pierog and Ross Kerber): “With the U.S. economy sinking into a severe recession, the Federal Reserve is set to launch a high-risk program through which it will lend money to small and medium-sized companies outside the banking industry for the first time since the Great Depression. More than the eight other lending facilities the Fed has established in the nearly two months since the viral outbreak shut down the economy, its Main Street Lending Program will be the most complex and challenging yet, economists say. It will likely draw the Fed into more public scrutiny than it has faced since the 2008 financial crisis.”

May 5 – Bloomberg (Lisa Lee): “For years, the Federal Reserve warned that too many highly risky companies were engaging in fuzzy accounting that bumped up their earnings -- making it easier for them to obtain loans. The practice was driving up corporate debt to excessive and worrisome levels, regulators chastised. But now, in its latest effort to keep credit flowing, the Fed has done a remarkable about-face. It essentially endorsed the dubious practice with a program that may serve to bail out some of America’s most leveraged companies. The Fed move ‘rewards the worst abusers,’ said Mark Carey, a former Fed official and co-president of GARP Risk Institute… ‘People will see this as a backstop and in the future they will be encouraged to take on really high leverage.’”

May 6 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of Richmond leader Thomas Barkin said… massive government borrowing undertaken to navigate the coronavirus crisis is appropriate, but at some point something needs to be done to deal with the ocean of red ink the U.S. government has been running up. Speaking by video…, Mr. Barkin noted that the U.S. government debt-to-gross domestic product percentage has been steadily rising over recent years and is on course to go from the high-30% range in 2007, just ahead of the financial crisis, to over 100% by year’s end.”

U.S. Bubble Watch:

May 7 – Associated Press (Christopher Rugaber): “Nearly 3.2 million laid-off workers applied for unemployment benefits last week as the business shutdowns caused by the viral outbreak deepened the worst U.S. economic catastrophe in decades. Roughly 33.5 million people have now filed for jobless aid in the seven weeks since the coronavirus began forcing millions of companies to close their doors and slash their workforces. That is the equivalent of one in five Americans who had been employed back in February, when the unemployment rate had reached a 50-year low of just 3.5%.”

May 6 – Bloomberg (Alex Tanzi): “Covid-19 could shutter most American small businesses. That’s according to a new survey from the Society for Human Resource Management which found that 52% expect to be out of business within six months… ‘SHRM has tracked Covid-19’s impact on work, workers, and the workplace for months,’ said SHRM Chief Executive Officer Johnny C. Taylor, Jr., ‘but these might be the most alarming findings to date. Small business is truly the backbone of our economy. So, when half say they’re worried about being wiped out, let’s remember: We’re talking about roughly 14 million businesses.’ Just over a third of small firms expect that they can continue to operate more that 6 months…”

May 5 – MarketWatch (Jeffry Bartash): “The U.S. trade deficit widened by almost 12% in March as the coronavirus pandemic grounded international flights, froze the global tourism industry and caused massive disruptions in the exchange of goods such as new cars and iPhones. Imports fell 6.2%, but U.S. exports tumbled an even deeper 9.6% to cause the trade gap to rise. It’s the biggest monthly decline in exports ever recorded. The U.S. deficit rose to $44.4 billion in March from $39.8 billion in February…”

May 5 – CNBC (Jeff Cox): “Consumer debt hit a fresh record high to start 2020, even as credit card balances declined while Americans adjusted to the coronavirus pandemic. Household debt balances through March totaled $14.3 trillion, a 1.1% increase from the previous quarter and now $1.6 trillion clear of the previous nominal high of $12.7 trillion in the third quarter of 2008…, according to New York Federal Reserve data… However, one area posted a notable decline. Credit card balances fell $34 billion, a drop that helped offset non-housing balance increases of $27 billion in student loans and $15 billion in auto debt. Mortgage balances rose $156 billion to $9.71 trillion.”

May 4 – Reuters (Lindsay Dunsmuir): “Loan officers at U.S. banks reported significantly tightening standards and terms on business loans in the first three months of the year as the coronavirus outbreak in the United States began to shutter large parts of the economy… The officers also said in the Federal Reserve survey… that there was greater demand for business loans from medium- and large-sized firms, but that business loan demand from small businesses was roughly unchanged. Banks reported tightening standards across all three consumer loan categories — credit card loans, auto loans, and other consumer loans - but saw weaker demand for them…”

May 4 – Wall Street Journal (Sarah Chaney): “California has become the first state to borrow money from the federal government so it can continue paying out rising claims for unemployment benefits during the coronavirus pandemic. The Golden State borrowed $348 million in federal funds after receiving approval to tap up to $10 billion for this purpose through the end of July… The U.S. government also has approved loans of up to $12.6 billion for Illinois and up to $1.1 billion for Connecticut through the end of July to replenish state unemployment-insurance funds…”

May 5 – Bloomberg (Shruti Singh and Danielle Moran): “Illinois delayed the planned auction of $1.2 billion of short-term debt as it faces record-high penalties to borrow on Wall Street because of the deep financial hit the state is being dealt by the coronavirus shutdown. The worst-rated state had planned to sell about $1.2 billion of short-term tax-exempt general-obligation debt on Wednesday, its first borrowing during the pandemic… The deal has been moved to ‘day-to-day status,’ meaning it will be sold if market conditions warrant.”

May 2 – Bloomberg (Amanda Albright, Danielle Moran, and Fola Akinnibi): “In Dayton, Ohio, Mayor Nan Whaley has furloughed a quarter of the city’s workforce and is warning that more cuts may follow. In Baltimore, …Mayor Bernard Young is negotiating layoffs with the police union. And in Houston, Mayor Sylvester Turner is deferring all five police cadet classes. New York’s governor, Andrew Cuomo, may have only been referring to his state when he declared… in March that ‘we are broke,’ but he was, in a broader sense, speaking for the vast bulk of city and county and state governments in America. Never before have U.S. municipalities been hit so hard or so quickly or in so many different ways as they are right now by the coronavirus pandemic. With tax revenue plunging and unemployment benefit costs skyrocketing, budget shortfalls for state governments alone are projected to swell to more than $650 billion over the next three years…”

May 8 – Bloomberg (Joe Light): “Mortgage rates are at record lows, but borrowers hoping to take advantage are running into the toughest loan-approval standards in years. Over the past month, lenders have put in place higher credit-score and down payment requirements, and in some cases stopped issuing certain types of loans altogether, in effect shutting down a large swath of the mortgage market. The triggers, industry executives say, include lenders becoming risk-averse during the coronavirus crisis, knock-on effects of Congress allowing millions of borrowers to delay their monthly payments, and policies implemented amid the pandemic by mortgage giants Fannie Mae and Freddie Mac. The impact has been dramatic, with one model showing mortgage credit availability has plunged by more than 25% since the U.S. outbreak of the virus.”

May 3 – Financial Times (Chris Flood): “The financial strength of the US state pension system has deteriorated to its weakest position in at least three decades as a result of the market turmoil unleashed by the coronavirus pandemic. The aggregate funded ratio for US state pension plans dropped 12.2 percentage points during the first quarter to 62.6%, according to Wilshire Consulting… The large drop was due mainly to sharp falls across financial markets during March, leading to an estimated average 15.7% decline in the value of assets held by 130 of the largest state pension plans.”

May 6 – Financial Times (Joshua Chaffin): “In the late stages of the recently concluded US economic expansion, cautious investors prepared for the possibility of a downturn by pouring money into an unsexy sector of the real estate industry: rental apartments. In the real estate world, multifamily housing, as the sector is known, is renowned for its safety because, the thinking goes, people will always need a place to live. While they may cut back on luxuries, preserving a roof over their head is a priority. That thesis is now being put to the test… Thousands of Americans are expected to take to the streets on Friday in support of a rent strike prompted by the pandemic, and landlords… can only guess about how much rent they can expect… Before the pandemic, the multifamily sector was thriving. In 2019, it attracted $184bn in investment, according to Real Capital Analytics — more than any other real estate category and the highest level since the firm began tracking the sector in 2000.”

May 5 – Reuters (David Shepardson and Tracy Rucinski): “U.S. airlines are collectively burning more than $10 billion in cash a month and averaging fewer than two dozen passengers per domestic flight because of the coronavirus pandemic, industry trade group Airlines for America said in prepared testimony… ahead of a U.S. Senate hearing…”

May 6 – Wall Street Journal (Katy Stech Ferek): “The nation’s bankruptcy industry is bracing for a wave of business collapses triggered by the coronavirus pandemic as its ranks have been thinned by a decade of economic growth. The slowed pace of corporate chapter 11 bankruptcy filings—which crested in 2009 with 13,700 cases and has fallen to about half that amount in recent years—has led restructuring firms to shed bankruptcy lawyers and advisers. Now the firms are preparing for the rush.”

May 3 – Reuters (Jonathan Stempel): “Warren Buffett’s Berkshire Hathaway Inc is being hit hard by the coronavirus pandemic, posting a record quarterly net loss of nearly $50 billion… Berkshire said most of its more than 90 businesses have faced ‘relatively minor to severe’ negative effects from COVID-19, the illness caused by the novel coronavirus, with revenue slowing considerably in April even at businesses deemed ‘essential.’”

May 5 – Bloomberg (Erik Schatzker): “Sam Zell, the billionaire known for buying up troubled real estate, said the coronavirus pandemic will leave the same kind of impact on the economy and society as the Great Depression 80 years ago, with long-lasting changes in human behavior that imperil many business models. ‘Too many people are anticipating a kind of V-like recovery,’ Zell said… ‘We’re all going to be permanently scarred by having lived through this.’ Just as the depression left behind a generation that couldn’t shake the experience of mass unemployment, hunger and desperation, the burdens this crisis has forced on society may be similarly hard to forget. Zell, 78, said it won’t be easy for people to live as they did before the ‘extraordinary shock’ of the pandemic.”

Fixed-Income Bubble Watch:

May 5 – Reuters (Tommy Wilkes): “Companies raised new debt on bond markets at a record rate in April, with European markets clocking up their busiest month for capital raising… In Europe, investment grade-rated companies raised $83.2 billion in April, according to Refinitiv data, beating the last biggest month in 2009 as central banks stepped in to unblock credit markets frozen by panic over the coronavirus. The flurry of European activity lifted global investment grade issuance to a record $350 billion - the second consecutive record month for top-rated corporate debt… In the U.S. market, firms in April raised $162.7 billion, beaten only by March’s record…”

May 6 – Financial Times (Robert Armstrong): “Homer Simpson once proposed a toast ‘to alcohol, cause of and solution to all of life’s problems’. For global companies that have drunk deep of debt, his line captures a nasty irony. The pandemic poses especially big economic hazards to companies with highly leveraged balance sheets, a group that now includes much of the corporate world. Yet the only viable short-term solution is to borrow more, to survive until the crisis passes. The result: companies will hit the next crisis with even more precarious debt piles. The cycle needs breaking. In the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47% of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear. Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it boosts earnings. But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.”

May 4 – Reuters (Matt Scuffham): “U.S. mortgage firms facing billions of dollars of missed home loan repayments are continuing to push for emergency government support… The number of people seeking to have mortgage payments paused or reduced rose to 7.5% as of April 26 from 7.0% a week earlier as the economic effects of the novel coronavirus outbreak stretched household finances, …the Mortgage Bankers Association (MBA) showed. The MBA estimates that 3.8 million homeowners are now in forbearance.”

May 5 – Financial Times (Joe Rennison): “The owners of hotel buildings across the US failed to make payments on about a quarter of their mortgages that are bundled into debt deals last month… The travel and leisure industry has been at the centre of the fallout in the $1.3tn market for commercial mortgage-backed securities (CMBS), where property loans are used to create new bonds with varying levels of exposure to the risk of default… Only 76.3% of hotel properties in CMBS deals were up to date on their mortgage payments in April, according to… JPMorgan. In March the share was 95.8%. Other CMBS sectors have seen borrowers struggle to make payments. In the retail sector, the number of up-to-date borrowers dropped from 96.3% in March to 88.5% in April…”

May 5 – Bloomberg (John Gittelsohn): “Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities, an early sign of a pandemic-induced real estate crisis. Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch... Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.”

May 7 – Financial Times (Nikou Asgari and Joe Rennison): “The number of companies with rock-bottom credit ratings has exceeded the peak of the 2008 financial crisis, as dozens of businesses struggling under heavy debt burdens have been downgraded. Many of the companies suffering cuts to their ratings are owned by private equity firms… The trio joined a long list of companies whose debt was docked by Moody’s last month, as efforts to reduce the spread of Covid-19 squeezed cash flows. The total number of companies on the bottom five rungs of the agency’s credit ratings ladder, along with those at risk of a downgrade from the rung above, has grown by 213 to 412, marking a more than 40% increase from the depths of the last financial crisis.”

China Watch:

May 6 – South China Morning Post (Karen Yeung): “China may move to reduce its vast holdings of US Treasury securities in the coming months in response to a resurgence in trade tensions and a war of words between the world’s two largest economies over the origins and handling of the coronavirus outbreak, analysts said. US news reports indicated that White House officials have debated several measures to offset the cost of the coronavirus outbreak, including cancelling some or all of the nearly US$1.1 trillion debt that the United States government owes China. While analysts added that the US was highly unlikely to take the ‘nuclear option’, the mere fact that the idea has been discussed could well prompt Beijing to seek to insulate itself from the risk by reducing its US government debt holdings. That, in turn, could spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance to pay for a series of programmes to combat the pandemic and the economic damage it is causing.”

May 3 – Reuters: “An internal Chinese report warns that Beijing faces a rising wave of hostility in the wake of the coronavirus outbreak that could tip relations with the United States into confrontation… The report, presented early last month by the Ministry of State Security to top Beijing leaders including President Xi Jinping, concluded that global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown, the sources said. As a result, Beijing faces a wave of anti-China sentiment led by the United States in the aftermath of the pandemic and needs to be prepared in a worst-case scenario for armed confrontation between the two global powers…”

May 7 – Bloomberg: “Top Chinese and US trade negotiators will speak as soon as next week on progress in implementing a phase one deal after US President Donald Trump threatened to ‘terminate’ the agreement if Beijing wasn’t adhering to the terms. Chinese Vice-Premier Liu He will be on the call… The US will be represented by US Trade Representative (USTR) Robert Lighthizer… The planned phone call will be the first time Liu and Lighthizer speak officially about the agreement since it was signed in January…”

May 7 – Reuters (Lusha Zhang): “China’s exports unexpectedly rose in April for the first time this year as factories raced to make up for lost sales due to the coronavirus pandemic, but a big fall in imports signalled more trouble ahead as the global economy sinks into recession… Overseas shipments in April rose 3.5% from a year earlier… That compared with a 15.7% drop forecast… Imports sank 14.2% from a year earlier, the biggest contraction since January 2016 and below market expectations of an 11.2% drop.”

May 7 – Reuters (Lusha Zhang and Se Young Lee): “China says sales of durable consumer goods such as automobiles and home appliances rebounded significantly during the May Day holiday.”

May 4 – Bloomberg (Eric Lam and Jinshan Hong): “Hong Kong’s retailers will need to get creative to survive the deepening recession that’s enveloped the city as tourists from the mainland who fueled past rebounds are unlikely to come to the rescue this time. The city’s retail sales by value in March sank 42% from a year earlier to HK$23 billion ($2.97bn)… By volume, sales dropped 43.8% from a year earlier.”

May 5 – Reuters (Huizhong Wu, Yew Lun Tian, Se Young Lee, and Anne Marie Roantree): “China’s Hong Kong affairs office warned… the city will never be calm unless ‘black-clad violent protesters’ were all removed, describing them as a ‘political virus’ that seeks independence from Beijing. The strongly worded statement comes amid mounting concerns among democracy activists that China is tightening its grip over the former British colony, while a lockdown to prevent coronavirus infections has largely kept their movement off the streets.”

ECB Watch:

May 5 – Financial times (Martin Arnold and Tommy Stubbington): “Germany’s constitutional court has threatened to block fresh purchases of German bonds through the European Central Bank’s flagship stimulus programme, potentially weakening the bloc’s monetary policy response to the coronavirus crisis. The court… ordered the German government and parliament to ensure the ECB carried out a “proportionality assessment” of its vast purchases of government debt to ensure their ‘economic and fiscal policy effects’ did not outweigh its policy objectives, and threatened to block new bond-buying unless the ECB did so within three months. In recent weeks the central bank has vastly expanded its quantitative easing programme of bond-buying to mitigate the economic consequences of coronavirus. It has bought more than €2.2tn of public sector debt since launching quantitative easing in 2014 in an attempt to halt a slide in inflation.”

May 5 – Financial Times (Ben Hall and Martin Arnold): “A bombshell ruling by Germany’s constitutional court questioning the legality of European monetary policy impinges on central bank independence and imperils the EU legal system, former policymakers and legal experts have warned. The court… ordered the German government to ensure the European Central Bank carried out a ‘proportionality assessment’ of its vast purchases of government bonds to ensure their ‘economic and fiscal policy effects’ did not outweigh other policy objectives. It threatened to prevent the Bundesbank, Germany’s central bank, from making further asset purchases if the ECB failed to comply within three months. ‘It is a very dangerous argument,’ said Lorenzo Bini Smaghi, former member of the executive board of the European Central Bank. ‘The next time the ECB raises interest rates it would have to look at all the negative effects it would have on debtors, the unemployed or on governments whose borrowing costs would rise. It is a very delicate argument that would lead to infringement of independence and of the price stability mandate.’”

May 5 – Bloomberg (Karin Matussek): “The European Central Bank can continue its bond purchases, but will have to justify its policies within three months after Germany’s top court expressed a number of concerns with the program. The judges’ critical language sets a hurdle for the ECB’s crisis-fighting, though the ultimate impact may be muted. The new 750 billion-euro ($813bn) Pandemic Emergency Purchase Program… isn’t covered by the ruling. In a 7-to-1 ruling, the judges said that the quantitative easing program isn’t backed by European Union treaties. That’s why German authorities acted unconstitutionally by not challenging the 2.7 trillion euro plan.”

May 6 – Bloomberg (William Horobin): “The European Central Bank will probably have to add monetary stimulus to raise inflation, Governing Council member Francois Villeroy de Galhau said as he defended the institution’s independence the day after Germany’s highest court expressed concerns about its policy. Speaking to the finance committee of the French National Assembly, Villeroy said the ECB will be as ‘flexible’ and ‘innovative’ as necessary with its various measures, including asset purchases and record-low rates, in order to bring price growth in line with its goal of just under 2% and ensure that there aren’t ‘unjustified rate increases’ in some countries.”

May 6 – Financial Times (Martin Arnold): “The European Central Bank is expected to resist pressure from Germany’s constitutional court for it to produce a justification of its massive purchases of government bonds, according to several members of its governing council. Four ECB council members told the Financial Times… they were determined it should not respond directly to the German court, arguing such a move would impinge on the central bank’s independence and expose it to pressure from other national courts. A majority of ECB council members oppose giving a response, they said.”

Central Bank Watch:

May 3 – Financial Times (Siobhan Riding): “Central banks have injected close to $100bn to prop up investment funds hit by the coronavirus-induced market turmoil, raising fresh questions about the systemic risks posed by the asset management industry. Monetary authorities including the US Federal Reserve and the Reserve Bank of India stepped in to relieve stress on their fund markets after the escalating health crisis triggered heavy fund outflows and sharp falls in asset prices.”

May 6 – Bloomberg (Rafaela Lindeberg and Love Liman): “The European Central Bank isn’t the only monetary authority trying to defend the legality of its crisis measures. In Sweden, the Riksbank just stepped up its battle against lawmakers in an effort to defend its right to buy corporate bonds. The Riksbank’s general counsel has rebutted a claim by the expert advising Sweden’s parliament that the bank doesn’t have the legal right to purchase company debt.”

Europe Watch:

May 6 – Financial Times (Sam Fleming and Mehreen Khan): “The coronavirus crisis threatens the stability of the eurozone and risks exacerbating economic and social divisions within the EU, the European Commission has warned… The commission’s spring forecast… predicted that under ‘benign assumptions’ EU output will fall 7.4% this year, the steepest slump in the bloc’s history, with a rebound of only 6.1% in 2021. The EU is heading for an €850bn shortfall of investment in 2020 and 2021 compared with the position outlined in its autumn forecast… The commission renewed its call for a pan-European ‘recovery plan’ to help compensate for diverging fiscal firepower between member states.”

May 6 – Bloomberg (Alexander Weber and Viktoria Dendrinou): “Barely a decade after the euro-area sovereign debt crisis threatened to blow up the currency zone, the pandemic has put Europe’s south back in the eye of the storm. Italy, Spain and Greece all face economic contractions of more than 9% this year, according to the European Commission. Spending on rescue programs will bloat already stretched public finances, widening the gulf between northern and southern countries and straining the bloc. The risk was underlined by the commission… as it warned that the EU faces the deepest downturn in its history. The bloc’s executive body was blunt: Without some form of common rescue plan, distortions call into question the stability of the region.”

May 6 – Associated Press (Lorne Cook): “The European Union predicted… ‘a recession of historic proportions this year’ due to the impact of the coronavirus as it released its first official estimates of the damage the pandemic is inflicting on the bloc’s economy. The 27-nation EU economy is predicted to contract by 7.5% this year, before growing about 6% in 2021, assuming countries steadily ease their lockdowns.”

Brazil Watch:

May 5 – Reuters (Jamie McGeever): “Fitch… lowered its outlook on Brazil’s credit rating to negative from stable, the latest indication of the severe economic and financial damage being wrought on Latin America’s largest economy by the coronavirus pandemic. Maintaining its ‘junk-status’ BB-minus sovereign credit rating, Fitch said Brazil’s economy is on course to shrink 4% this year with risks still tilted to the downside, and noted a rapidly deteriorating fiscal position and growing political risks. ‘Brazil entered the current period of stress with a relatively weak fiscal balance sheet and low economic growth. The pandemic and the related recession will further increase public indebtedness, eroding fiscal flexibility and increasing vulnerability to shocks,’ Fitch said…”

May 7 – Bloomberg (Shannon Sims): “‘So what? Sorry. What do you want me to do about it? … I can’t work miracles.’ Brazilian President Jair Bolsonaro’s response on April 28 to the news that his country had surpassed 5,000 coronavirus deaths wasn’t exactly encouraging. Bolsonaro has made a point of being as contrarian as possible during the pandemic, refusing public-health guidance even as Brazil’s hospitals are overwhelmed and gravediggers work as fast as they can to bury the dead. Now Brazil faces a frightening outlook. Weeks after Covid-19 cases surged in other parts of the world, the number of people to test positive continues to rise in Latin America’s biggest country, with no peak in sight.”

May 6 – Bloomberg (Mario Sergio Lima): “Political consensus helped Brazilian central bank chief Roberto Campos Neto slash interest rates to a record low last year. It’s a different story in 2020. As the bank looks to continue with the easing cycle amid prospects of a deep recession in Latin America’s largest economy, the always volatile world of Brazilian politics have now become a red light for Campos Neto, limiting the scope for aggressive reductions… While most analysts expect policy makers to cut the Selic rate by half a point on Wednesday to 3.25%, the road ahead has turned increasingly murkier… Just two weeks ago, most traders expected the central bank to cut by 75 bps at this meeting and start raising rates only in March, taking the Selic to 4.75% by the end of 2021. Now they bet policy makers will be forced to hike as early as December, and that borrowing costs will reach at least 5.75% by the end of next year.”

EM Watch:

May 5 – Bloomberg (Asli Kandemir): “Turkey’s push for cheap credit to mitigate the fallout from the coronavirus is bearing fruit, as companies and consumers take advantage of lower borrowing costs to refinance debt and shore up their finances. Lending surged more than 60% in the 13 weeks through April 24 when annualized and adjusted for foreign-exchange fluctuations, after shrinking as much as 10% on the same basis during early 2019… Commercial loans soared more than 80% and retail facilities by about 45%. The acceleration, albeit led by state-owned lenders, is fulfilling President Recep Tayyip Erdogan’s long-held desire to stoke economic growth using debt… In Turkey, that drive resulted in deep interest-rate cuts and a series of regulations aimed at forcing banks to lend, including a new asset ratio introduced last month.”

May 6 – Bloomberg (Constantine Courcoulas, Kerim Karakaya and Asli Kandemir): “Turkish policy makers are ramping up their defense of the lira, which is edging closer to a record low despite concerted efforts to keep a lid on depreciation. The central bank… raised the amount of foreign-currency swaps private lenders can hold on their books… That could be a sign the monetary authority is preparing to increase its hard-currency buffer by borrowing more from domestic lenders, as state banks continue to intervene on the spot market to prevent the lira weakening… Turkey’s gross reserves, including gold, have dropped by about $20 billion this year to $86.4 billion through April 24, the lowest level since October 2018. Net reserves -- which exclude some liabilities such as lenders’ required reserves -- are down more than $15 billion, to just over $25 billion.”

May 4 – Financial Times (Benedict Mander): “Argentina’s economy minister has sought to raise the stakes with the country’s bondholders by suggesting his government would consider defaulting on $65bn of foreign debt unless investors engaged in negotiations to alleviate its financial burden while tackling the coronavirus pandemic. Speaking to the Financial Times before the expiry on Friday of an offer involving a three-year debt service moratorium, Martin Guzmán said the government would not accept a deal ‘based on illusions and rosy scenarios’ because it would herald yet another debt crisis in the future. Asked whether a default was too great a price to pay for Argentina, Mr Guzmán said: ‘Every path is associated with trade-offs.’”

May 5 – Bloomberg (Rahul Satija and Suvashree Ghosh): “Indian money managers are dumping corporate bonds as they struggle to meet redemptions after the biggest-ever forced closure of funds in the country last month. Even higher-rated debt is under pressure. Notes issued by government-backed lenders Punjab National Bank, Andhra Bank and Canara Bank were traded in the past few days at the highest yields in over a year of at least 12.5%... Mutual funds struggling with redemptions were among the sellers…”

Leveraged Speculation Watch:

May 4 – Bloomberg (Justina Lee): “Hedge funds have seen their net stock exposures jump to the highest in at least three years in a spate of short covering and bullish bets on cyclical companies. U.S. long-short funds have assumed a more risk-on posture amid the $4.6 trillion trough-to-peak rally across some of the industries most exposed to the coronavirus fallout, according to Credit Suisse…”

May 7 – Reuters (Svea Herbst-Bayliss): “Global hedge funds posted their biggest monthly gain in more than a decade in April when stocks rocketed higher with the help of government rescue packages designed to fuel growth stalled by the coronavirus outbreak… The HFRI Fund Weighted Composite Index climbed 4.8% last month, marking its best showing since May 2009 when it gained 5.15% at the tail end of the financial crisis, research firm Hedge Fund Research said.”

May 6 – Wall Street Journal (Miriam Gottfried and Allison Prang): “KKR & Co. logged a hefty loss for the first quarter as the coronavirus pandemic shook markets and forced it to mark down its investments, but the private-equity firm’s portfolio held up better than the broader market. KKR reported a net loss of $1.28 billion for the quarter, compared with a profit of $709.3 million a year ago.”

May 7 – Bloomberg (Bei Hu, Viren Vaghela and Nishant Kumar): “The sudden breakdown of a decades-long relationship between U.S. and Asian stocks has blindsided hedge funds, turning what were meant to be low-risk bets on volatility into big money losers. Managers… suffered losses in March on wagers that equity-market swings in Asia would be more extreme than those in the U.S. or Europe… The bets were widespread among traders who focus on volatility, said Govert Heijboer, co-chief investment officer of… True Partner Capital…”

May 6 – Bloomberg (Lisa Lee, Alastair Marsh and Sally Bakewell): “In one of the more desperate acts of the coronavirus-fueled credit crunch, a hedge fund last month sold about $100 million of European collateralized loan obligations for about a fifth of their face value… The hedge fund offloaded stakes in the lowest-rated tranches of European CLOs to a small group of banks including Bank of America Corp., said the people…”

May 7 – Bloomberg (Nathan Crooks): “‘Printing money is the most expedient, least well-understood, and most common big way of restructuring debts,’ Ray Dalio wrote… in an appendix to the latest chapter of his upcoming book on the changing world order. ‘It’s like playing Monopoly in a way where the banker can make more money and redistribute it to everyone when too many of the players are going broke and getting angry.’ The billionaire investor and founder of Bridgewater Associates said that money printing, when compared to the other tools that policy makers can use like austerity, debt defaults and higher taxes, feels ‘good rather than bad’ to most people.”

Geopolitical Watch:

May 3 – Bloomberg (Jordan Fabian, Jennifer Jacobs, and Iain Marlow): “U.S. President Donald Trump promised a ‘conclusive’ report on the Chinese origins of the coronavirus outbreak, showing relations between the world’s biggest economies are set to remain rocky at least until the next election… Trump pledged the report… in a ‘virtual town hall’ with Fox News, in which he added that he had little doubt that Beijing misled the world about the scale and risk of the disease… ‘We’re going to be giving a very strong report as to exactly what we think happened. And I think it will be very conclusive,’ Trump said… ‘My opinion is they made a mistake. They tried to cover it. They tried to put it out, just like a fire.’”

May 4 – Bloomberg (Nick Wadhams and Peter Martin): “China’s leaders risk a popular backlash if they don’t loosen controls on free speech and let its people have a stronger hand in their government, a senior White House official said in a speech likely to further exacerbate tensions with Beijing. Deputy National Security Adviser Matt Pottinger said in a speech… directed to the Chinese people that Beijing’s efforts to punish critics -- like the doctors who the sounded early warnings over the coronavirus outbreak -- would eventually backfire. ‘When small acts of bravery are stamped out by governments, big acts of bravery follow,’ Pottinger said in remarks delivered by video to the University of Virginia’s Miller Center in Chinese with English subtitles.”

May 2 – Reuters (Engen Tham, Alexandra Harney and Yew Lun Tian): “China has published a short animation titled ‘Once Upon a Virus’ mocking the U.S. response to the new coronavirus using Lego-like figures to represent the two countries… In the animation…, red curtains open to reveal a stage featuring Lego-like figures in the form of a terracotta warrior wearing a face mask and the Statue of Liberty. ‘We discovered a new virus,’ says the warrior. ‘So what?’ replies the Statue of Liberty. ‘It’s only a flu.’ As the warrior issues warnings about the virus and counts off the grim milestones in China’s outbreak, the Statue of Liberty replies dismissively with echoes of Trump’s press conferences in which he played down the severity of the illness. ‘Are you listening to yourselves?’ asks the warrior as the statue begins to turn red with fever and gets hooked up to an intravenous drip.”

May 4 – CNN (Nectar Gan): “A nationalist tabloid controlled by the Chinese Communist Party has dismissed claims by the Trump administration that the novel coronavirus originated from a laboratory, as the war of words over the pandemic escalates between Washington and Beijing. US Secretary of State Mike Pompeo said… there was ‘enormous evidence’ Covid-19 originated in a laboratory in the Chinese city of Wuhan… China’s state owned Global Times newspaper said in an editorial… that the former CIA director had ‘stunned the world with groundless accusations.’ ‘Since Pompeo said his claims are supported by 'enormous evidence,' then he should present this so-called evidence to the world, and especially to the American public who he continually tries to fool,’ the editorial said. ‘The truth is that Pompeo does not have any evidence, and during Sunday's interview, he was bluffing.’”

May 6 – Wall Street Journal (Kate O’Keeffe, Michael C. Bender and Chun Han Wong): “Relations between the U.S. and China, strained for years, have deteriorated at a rapid clip in recent months, leaving the two nations with fewer shared interests and a growing list of conflicts. The Trump administration has moved to involve much of the U.S. government in a campaign that includes investigations, prosecutions and export restrictions. Nearly every cabinet and cabinet-level official either has adopted adversarial positions or jettisoned past cooperative programs with Beijing… Chinese officials… are following through on President Xi Jinping’s call last fall to resist anything they perceive as standing in the way of China’s rise. They have stepped up military activities in the contested South China Sea and intimidation of Taiwan, a U.S. ally, and state media has issued extraordinary public denunciations of Secretary of State Mike Pompeo.”

May 6 – Reuters (David Lague): “As Washington and Beijing trade barbs over the coronavirus pandemic, a longer-term struggle between the two Pacific powers is at a turning point, as the United States rolls out new weapons and strategy in a bid to close a wide missile gap with China. The United States has largely stood by in recent decades as China dramatically expanded its military firepower. Now, having shed the constraints of a Cold War-era arms control treaty, the Trump administration is planning to deploy long-range, ground-launched cruise missiles in the Asia-Pacific region.”

May 7 – Wall Street Journal (Gordon Lubold and Michael C. Bender): “The U.S. is removing Patriot antimissile systems from Saudi Arabia and is considering reductions to other military capabilities—marking the end, for now, of a large-scale military buildup to counter Iran, according to U.S. officials. The U.S. is removing four Patriot missile batteries from Saudi Arabia along with dozens of military personnel deployed following a series of attacks on the Saudi oil facilities last year, according to several U.S. officials. The attacks were part of hostilities that took place over several months. Two U.S. jet fighter squadrons also have left the region, and U.S. officials also will soon consider a reduction in the U.S. Navy presence in the Persian Gulf…”

Friday Afternoon Links

[Reuters] Wall Street jumps as historic job losses better than feared

[CNS] Federal Debt Tops $25 Trillion for First Time; Jumped $1 Trillion in Just 28 Days

[Reuters] Pandemic inflicts historic U.S. job losses, as states struggle to reopen

[CNBC] Coronavirus live updates: Restaurants face rocky path to recovery, 4.1 million homeowners skip mortgage payments

[Reuters] Exclusive: Brazil asks mint to work overtime as currency shortage looms

[News24] Germany to reimpose lockdown, Italy death toll tops 30 000

[Bloomberg] Trump Casts Doubt on Future of China Trade Deal After Phone Call

[Bloomberg] California’s Budget Gaps Could Total $126 Billion in Worst Case

[Bloomberg] Drilling Sinks to Record U.S. Low With Oil Sector in Retreat

[Bloomberg] Spain’s Banks Use Covid Loans to Move Risk Off Their Books

[WSJ] Formal Talks Paused on Next Stimulus Package, Trump Economic Adviser Larry Kudlow Says

[FT] US and China: edging towards a new type of cold war?

[FT] Colony Capital reveals $3.2bn default on portfolio company loans