Three and three

We are in the very early Days of a Credit Breakdown combined with Covid-19

First and foremost, the fund is positive for the year, with official numbers posting for our investors at the end of the month.   In an attempt to make the current financial situation easier to understand, we will be discussing the following in this blog: The Economy, Monetary Stimulus and Fiscal Stimulus.  We are only a bit more than three weeks for the virus spread in the United States and approximately 3 months for the virus to be recognized in China.  So why is our country in such a Pickle so quickly?

The Economy-The U.S. has been told repeatedly over the past years that “the economy is doing well.”  Source-CNBC, Bloomberg, The Washington Post and President Trump.    Official GDP last year clocked in at 2.1%.  Average GDP for the U.S. is 3.3-3.7% historically, so obviously, the U.S. was not doing well-let’s say the economy was doing ok.  Last week, well over 3.3 million people were counted as filing for unemployment raising the U-3 unemployment number to between 5.5 to 7%.  Unemployment was at historical lows, 3.5% according to the Bureau of Labor Statistics (BLS) and in one week it rose 50-100%.  Ok-we will believe the ‘official’ way  U-3 unemployment is calculated, (not counting any discouraged and underemployed workers).   For informational purposes, the U-6 employment rate includes the discourage, underemployed and unemployed workers, thus is a more meaningful number-but we are not in charge of the media and can’t help they report in the manner they do.   The U.S. has an approximate $22 Trillion dollar economy.  Roughly 70% of this economy is consumer spending-about $15 T plus.  As the consumer pulls back due to job loss, shelter in place, social distancing and full-blown lock-down consumer spending will continue to drop.  Even once the virus peaks, it is highly likely that spending will be lower for the next few months as well. Our analysis shows the peak of the virus will hit the U.S. in early June but considering this is a virus, this timeframe could change as the data changes.

To recap, just about three weeks ago, Covid-19 hit the U.S.  The media is telling us, in just three weeks we see a massive number of claims for unemployment.  Does this seem reasonable?  The teachers, healthcare workers, retail workers, gym employees etc. are still getting paid and are employed presently.  Is it possible the numbers of unemployed were held back and all released last week?  Who knows, but the main point is the main economic indicators will continue to deteriorate for most of this year.  These numbers are released after the fact.  GDP, consumer spending, wages, home and auto sales and on and on will be affected.   

Monetary and Fiscal Policy-

The FED has unleashed a massive grab for the banks and corporations under the guise of helping the ‘unemployed and those affected by coronavirus.’  To be fair, approximately 20% of the Fiscal stimulus is geared toward this goal of helping individuals.  The monetary stimulus includes purchasing an unlimited amount of Treasuries and Mortgage Backed Securities, including familiar programs such as TALF from the previous crisis.  The Fed has added some new items-the FED can now purchase Investment Grade Corporate Bonds and ETF’s as collateral to attempt to unfreeze the credit markets.  This can only be called a massive bailout yet most investors who read and watch the mainstream news will have no idea of the massive change in policy that occurred under the Coronavirus cover.  The best and most insightful article we have read is titled Corruption in the time of Coronavirus.  We provide a link here: https://wolfstreet.com/2020/03/29/corruption-in-the-time-of-coronavirus-fed-treasury-corporate/ .  Since we are all sheltering at home, it will be easy to add a bit of reading to our daily schedules, which will assist in navigating the uncertainty yet to come.  If you are still feeling a bit lazy, here are a few of the bombshells in the CARES act that reveal who the bill really CARES about:

“Our Central Bank, supposed defender of the currency, can now purchase an unlimited amount of US Treasury and agency-mortgage-backed securities (now running at the unheard-of rate of $625 billion per week.)  That’s on top of $1Trillion per week in repurchase operations. .The Treasury will create a series of special purpose vehicles to buy all manner of financial assets, backed by $425B in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund.  ….That includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper and every variety of asset-backed security….These SPV’s involve the Fed in nearly every major US financial market…..Democrats in Congress made a big show of their supposed oversight of these programs; in reality there is none….These bailouts are not (or should not) be necessary……that sounds like a very good outcome for CEO’s who set their companies up for failure by leveraging their balance sheets in order to buy back stock and juice their own compensation rather than saving some cash for a rainy day.  Additionally, there is little incentive for bailed-out firms to protect their employees,…..You cannot revive a consumer-led economy by depriving people who need money to survive while rewarding those who don’t need it at all.  Even a cynic knows the math doesn’t work.”

Crony Capitalism is in full swing.  It is amazing that investors have fallen for this.  It is really high time we vote everyone currently in office out.  Hopefully we can find some real capitalist candidates to vote in.  The economy was crashing under the surface before COVID-19.  The asset bubble that was blown had started to deflate prior to this virus.  It just provided the cover the government, and the Federal Reserve needed to be overinvolved in solving ‘the problem.’  If you want to read a bit more, Nassim Taleb’s article, Corporate Socialism: The Government is Bailing out Investors and Managers Not You, is worth a read:  https://medium.com/incerto/corporate-socialism-the-government-is-bailing-out-investors-managers-not-you-3b31a67bff4a 

In closing.  the corporations and bond market will receive most of the money.  The consumer will get about 20% of the total 2T.  Once again, the United States sends the wrong message to the major companies-do whatever you want and you will be bailed out once again.  Investors cheer because a government run market goes up on poor fundamentals and they ‘think and believe’ they are investors.  This will not last indefinitely.    Our support levels still hold and even with this unprecedented bail-out package, it is likely that the market will retest the 1700 range on the S&P500, and perhaps lower.  This first wave down was deleveraging, the next wave will be due to lack of corporate buy backs and huge decreases in earnings from companies.  The last wave down happens when individuals capitulate.  As Taleb states in his article, “while we clearly insist that these companies must be saved, there may be ethical, economic and structural problems associated with the details of the execution.  As a matter of fact, if you study the history of bailouts, there will be.”   We expect additional money to be pumped into the system.  Last September, the Fed pumped about $500B into the system, which did nothing.  They added $200B over the next couple of months.  Now, they are putting in $2-4T-5-10 times the amount.  The credit is coming unraveled, while the economy has slowed to a crawl.  Even with this massive monetary infusion in March, the market is down about 20%.  Very short-term expectations are for a small bounce-end of the quarter rebalancing and new pension money is coming in.  This will end approx. April 2nd, then earnings season begins.  Companies have been blinded by the virus and can’t predict how long it will last and how deep it will be.  Many corporations have discontinued forward guidance.  Analysts have already begun to drastically reduce guidance.  Rating agencies have been downgrading corporate bonds on a large scale; almost 70 companies went into junk status just last week.  Sometime April 2nd/ during April, we expect the market to continue the next wave of the downturn.

It’s only been three weeks for a reduction in demand in the US and three months in China.

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