Liquidation & Credit markets

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
soo, unfortunately the credit markets are back at a place we hoped they would never be. The internal plumbing of the finance world needs epic liquidity and fed actions to keep the gears running. Stocks are down like 33% right now in a 5-6 week period or so. Credit spreads are blowing out indicating more stress and possibility of credit event, even though the Fed took all those actions to mitigate that risk. Treasury yields and gold are selling off as equities plunge, a sure sign of massive liquidations at large institutions selling assets that arent down 30+ percent. So thats crazy..
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Ackman stating we need a "30 day spring break holiday" funded by the Govt to contain this. Is he wrong there? I mean, we all are isolating maybe now is the time to be bold and shut down with hopes to contain virus & contain duration of shutdown? Guess his point is the alternative presents way too much risk for a long duration until virus containment. Then you got the economic impact, of what industries shutter completely and what others are bailed out/backstopped?

Fiscal stimulus coming, and it will be massive. but if stocks and credit spreads do not reverse course after that - well, I dont want to think about that scenario.

Wishing everyone well and stay safe out there! and a HUGE thanksto all the first responders
 

David Goldsmith

All Powerful Moderator
Staff member
I'm not trying to be cute with this, I just honestly don't see how we don't end up somewhere bad:
OK, so...... we were already running a trillion dollar deficit. Now, between money for Wall St, more money for hotel, airline, restaurant, etc industries, direct payments to millions of people... in addition with everyone out of work, businesses closed, it would seem to me that tax collections are going to be way down. So we're going to add another 2 or 3 trillion dollars to the deficit? And we're going to pay for that by printing money? (Given Powell seems fairly firm on "Read my lips: No negative interest rates") And there will be no negative consequences as a result of that?

I don't see how we get to a Ray Dalio "Beautiful Deleveraging" from here.
 

David Goldsmith

All Powerful Moderator
Staff member
I guess in my mind the issue is that there has been way too much debt of every stripe taken on already (Corporate, Student Loan, Government, etc) and there is no way out of that except write-offs. And there's no way to "Monetary Policy" out of that.
 

David Goldsmith

All Powerful Moderator
Staff member
MSNBC host and business correspondent Stephanie Ruhle tore into hedge fund titan Bill Ackman for his lengthy and tearful doomsday diagnoses of the US economy on Wednesday, which sent the stock markets spiraling further downward.

Speaking with 11th Hour host Brian Williams, Ruhle lashed out at Ackman’s stunningly ominous assessment of the economy, in which he predicted “hell is coming” during a lunchtime interview with CNBC. Nervous market traders heeded his dour warning, cratering the Dow Jones index nearly 1,000 points before recovering some of those losses to close at almost the same level as the day President Donald Trump took office
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
yeah i watched that Ackman interview and was internall going, "omg", but its Ackman. I think he has one part right, if we would all shelter in place for 2-4 weeks only going out for critical needs, we can get control of the curve like Fauci and other top scientists are saying is the critical goal. Im curious how much markets are dislocating right now. According to Deanna Kory, 10-15% in 5-10m sector based on a deal she is putting together. That podcast comes out Monday. Ari Harkov podcast coming out today
 

David Goldsmith

All Powerful Moderator
Staff member
The New (Scary) Fed Steps Into New Territory
Robert BaroneContributor
Great SpeculationsContributor Group
Markets

Shading represents recession

The pandemic’s second wave has appeared in Europe and now in the U.S. The Fed is more concerned about the economy and has taken the unprecedented step of telling Congress it will monetize whatever spending Congress desires. (Not your Father’s Fed!)


The latest weekly unemployment data confirm the Fed’s worst fears: The Recovery has stalled!

Overview

No matter who wins the election, the following issues must be faced:
  • Deflationary forces are at play. The pandemic is ongoing (clearly the second wave is upon us), with no “control” in sight. Even if the virus is brought under “control,” consumer behavior will not return to pre-pandemic status anytime in the foreseeable future. The pandemic has changed the consumer’s psyche. Some parts of the (new) economy will grow, but, on net, high unemployment will hobble economic growth;
  • Even after the pandemic subsides, there will be slower GDP growth due to demographic factors. This was already occurring with the post-Great Recession recovery being the slowest in the post-WWII era. It has to do with the aging demographics in developed countries. Policy can do little to change demographics;
  • Leverage (debt) is at unprecedented levels (both public and private). Besides unthinkable (at least a year ago) federal debt, corporate debt is at record levels with the Fed continuing to support “zombie” corporations with what was, until February, unimaginable monetary policy. While credit card and other revolving debt having fallen to $756 billion from over $1 trillion due to the consumer’s newfound frugality, student debt has ballooned to $1.67 trillion. This will serve to reduce the new labor force entrants’ consumption patterns (unless such debt is “forgiven”).
A Fed Like No Other

The Fed’s September minutes were released the week of October 4th, and, in them, we find heightened concerns about the state of the economy. The following passage is from the minutes (emphasis added):

While the risk of another broad economic shutdown was seen as having receded, participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery. Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses. Most participants raised the concern that fiscal support so far for households, businesses, and state and local governments might not provide sufficient relief to these sectors.


Clearly, the virus has found new legs, as new cases have ballooned all over Western Europe and in most U.S. states (34 at last count).

It appears that the Fed’s concerns about increases in bankruptcies and defaults and stress in the financial system (from the minutes: “…delinquency rates on business loans had risen noticeably”) are beginning to come to fruition. Look in particular at the part of the passage from the Fed minutes that I emboldened. Besides this passage, in recent oral remarks, Fed Chair Powell said: “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side…” (emphasis added).

I used the word “Scary” in the title to this blog. I have been following the Fed and its policies for my entire business career (50+ years). This is the first time, ever, that I have seen them (both Chair and FOMC members) try to influence fiscal policy.

Remember when Trump berated the Fed in 2018-19 for raising interest rates? At that time, the entire set of Fed officers and FOMC members were distraught and indignant that he would seek to influence them. After all, the Fed was clearly intended to be “independent” of the political process. Why is it now ok for the Fed to use its influence to move fiscal policy, or even to be on one side of the fiscal debate? Remember, Fed officials are not elected, so playing in the political process may be dangerous to that concept of “independence.”

Monetization

The upshot of all of this is that this Fed has admitted to monetizing the Treasury’s debt, and Powell has clearly stated that the Fed would be buyers of any additional debt Congress chose to issue (thus keeping rates low no matter how much new Treasury debt is issued).
  • The framers of the 1913 Federal Reserve Act made it explicit that the Fed was not to “monetize” the Treasury’s debt. As a result, the Fed is prohibited from purchasing debt directly from the Treasury. To get around this, the Fed uses the Wall St. Banks which buy the debt at the auction, and then, put it up for sale. The Fed then buys it (and Wall St. Makes a profit!). This is the first time, however, that we have ever heard a Fed official, much less the Chair, talk to Congress about working “hand in hand;”
  • The framers of the 1913 Act put that provision in because a runaway deficit ultimately leads to a weak currency (beware: the potential loss of reserve currency status for the dollar!) and ultimately, to runaway inflation;
  • As an aside and while I am on the Fed’s case: How did 2% become the inflation goal? Pre-Great Recession, stable prices meant 0% inflation. (In fact, in the mid-1990s, when asked at a Congressional hearing what inflation should be, then Fed Chair Alan Greenspan said “0%!”). There is not now, nor has there ever been a body of academic studies indicating that 2% is an appropriate inflation target. There are no Fed white papers on this topic. Where did it come from? Apparently, from Bernanke, when he was Fed Chair.
  • In any event, this is a signal to the financial markets that there is no end in sight to the Fed’s “monetization” of the debt or the double digit percentage expansion of the money supply. This, along with the large Biden lead in all the latest polls (Wall St. sees larger deficits, more spending, therefore more monetization if Biden wins) has given a lift to equity prices of late, even while the real underlying economy continues to falter.
The Economy and Employment

Employment has been and remains the key to the state of the economy. The chart below shows the rise in “permanent” job losers. (Fed minutes: “The participants judged it as less likely for future job gains to continue at their recent pace, because a greater share of the remaining layoffs might become permanent.”). Remember, at the beginning of the pandemic and during the initial business shutdowns, most of the layoffs were seen as “temporary.” But, as the realization has set in that the return to “normal” is anything but imminent, that word “temporary” has morphed into “permanent.” The latest data point on the St. Louis Fed chart (see below) shows 3.8 million permanent job losses.
The latest data point shows 3.8 million permanent job losses

Unemployment Level- Permanent Job Losses

US BUREAU OF LABOR STATISTICS

Look at what happened to this statistic in the Great Recession period. If history is any guide, it appears that we are in the early stages of the shift to “permanent” from “temporary.” In my view, this data is destined to get worse, much worse, before it gets better.

Challenger, Gray and Christmas

Another sign of deterioration in employment comes from the employment placement firm, Challenger, Gray and Christmas. The chart below shows that September layoffs were more than double “normal” September layoff activity. This is especially concerning because it is another indication of a stalled economy.

From Challenger, Gray & Christmas; Sept. layoffs were more than 2x “normal” Sept. activity

Job Cuts During Month of September


State and PUA Data
The data for state Initial Claims (ICs) is shown in the table and chart below. Note how these new layoffs have maintained at or above 800,000 since early August (nine weeks in a row) after having fallen pretty consistently from their April peak. Again, these are new claims, which parallel new layoffs. When the Pandemic Unemployment Assistance (PUA) ICs are added in, there were an unfathomable 1.26 million new unemployment claims the week ended October 3rd. (And that didn’t include the new layoff announcements from Disney or the airlines.) Besides new layoffs, state unemployment data show 10.6 million Continuing Claims (CCs) and 25.6 million when the PUA program is added in.

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2,918 views|Oct 9, 2020,11:41pm EDT
The New (Scary) Fed Steps Into New Territory
Robert BaroneContributor
Great SpeculationsContributor Group
Markets

Shading represents recession

Real M2 Money Stock
FEDERAL RESERVE BANK OF ST. LOUIS
More From Forbes

The pandemic’s second wave has appeared in Europe and now in the U.S. The Fed is more concerned about the economy and has taken the unprecedented step of telling Congress it will monetize whatever spending Congress desires. (Not your Father’s Fed!)

The latest weekly unemployment data confirm the Fed’s worst fears: The Recovery has stalled!
Overview
No matter who wins the election, the following issues must be faced:

  • Deflationary forces are at play. The pandemic is ongoing (clearly the second wave is upon us), with no “control” in sight. Even if the virus is brought under “control,” consumer behavior will not return to pre-pandemic status anytime in the foreseeable future. The pandemic has changed the consumer’s psyche. Some parts of the (new) economy will grow, but, on net, high unemployment will hobble economic growth;
  • Even after the pandemic subsides, there will be slower GDP growth due to demographic factors. This was already occurring with the post-Great Recession recovery being the slowest in the post-WWII era. It has to do with the aging demographics in developed countries. Policy can do little to change demographics;
  • Leverage (debt) is at unprecedented levels (both public and private). Besides unthinkable (at least a year ago) federal debt, corporate debt is at record levels with the Fed continuing to support “zombie” corporations with what was, until February, unimaginable monetary policy. While credit card and other revolving debt having fallen to $756 billion from over $1 trillion due to the consumer’s newfound frugality, student debt has ballooned to $1.67 trillion. This will serve to reduce the new labor force entrants’ consumption patterns (unless such debt is “forgiven”).

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SCROLL TO CONTINUE WITH CONTENT
A Fed Like No Other
The Fed’s September minutes were released the week of October 4th, and, in them, we find heightened concerns about the state of the economy. The following passage is from the minutes (emphasis added):
While the risk of another broad economic shutdown was seen as having receded, participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery. Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses. Most participants raised the concern that fiscal support so far for households, businesses, and state and local governments might not provide sufficient relief to these sectors.

Clearly, the virus has found new legs, as new cases have ballooned all over Western Europe and in most U.S. states (34 at last count).
It appears that the Fed’s concerns about increases in bankruptcies and defaults and stress in the financial system (from the minutes: “…delinquency rates on business loans had risen noticeably”) are beginning to come to fruition. Look in particular at the part of the passage from the Fed minutes that I emboldened. Besides this passage, in recent oral remarks, Fed Chair Powell said: “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side…” (emphasis added).
I used the word “Scary” in the title to this blog. I have been following the Fed and its policies for my entire business career (50+ years). This is the first time, ever, that I have seen them (both Chair and FOMC members) try to influence fiscal policy.
Remember when Trump berated the Fed in 2018-19 for raising interest rates? At that time, the entire set of Fed officers and FOMC members were distraught and indignant that he would seek to influence them. After all, the Fed was clearly intended to be “independent” of the political process. Why is it now ok for the Fed to use its influence to move fiscal policy, or even to be on one side of the fiscal debate? Remember, Fed officials are not elected, so playing in the political process may be dangerous to that concept of “independence.”
Monetization
The upshot of all of this is that this Fed has admitted to monetizing the Treasury’s debt, and Powell has clearly stated that the Fed would be buyers of any additional debt Congress chose to issue (thus keeping rates low no matter how much new Treasury debt is issued).


  • The framers of the 1913 Federal Reserve Act made it explicit that the Fed was not to “monetize” the Treasury’s debt. As a result, the Fed is prohibited from purchasing debt directly from the Treasury. To get around this, the Fed uses the Wall St. Banks which buy the debt at the auction, and then, put it up for sale. The Fed then buys it (and Wall St. Makes a profit!). This is the first time, however, that we have ever heard a Fed official, much less the Chair, talk to Congress about working “hand in hand;”
  • The framers of the 1913 Act put that provision in because a runaway deficit ultimately leads to a weak currency (beware: the potential loss of reserve currency status for the dollar!) and ultimately, to runaway inflation;
  • As an aside and while I am on the Fed’s case: How did 2% become the inflation goal? Pre-Great Recession, stable prices meant 0% inflation. (In fact, in the mid-1990s, when asked at a Congressional hearing what inflation should be, then Fed Chair Alan Greenspan said “0%!”). There is not now, nor has there ever been a body of academic studies indicating that 2% is an appropriate inflation target. There are no Fed white papers on this topic. Where did it come from? Apparently, from Bernanke, when he was Fed Chair.
  • In any event, this is a signal to the financial markets that there is no end in sight to the Fed’s “monetization” of the debt or the double digit percentage expansion of the money supply. This, along with the large Biden lead in all the latest polls (Wall St. sees larger deficits, more spending, therefore more monetization if Biden wins) has given a lift to equity prices of late, even while the real underlying economy continues to falter.


The Economy and Employment
Employment has been and remains the key to the state of the economy. The chart below shows the rise in “permanent” job losers. (Fed minutes: “The participants judged it as less likely for future job gains to continue at their recent pace, because a greater share of the remaining layoffs might become permanent.”). Remember, at the beginning of the pandemic and during the initial business shutdowns, most of the layoffs were seen as “temporary.” But, as the realization has set in that the return to “normal” is anything but imminent, that word “temporary” has morphed into “permanent.” The latest data point on the St. Louis Fed chart (see below) shows 3.8 million permanent job losses.
The latest data point shows 3.8 million permanent job losses

Unemployment Level- Permanent Job Losses
US BUREAU OF LABOR STATISTICS

Look at what happened to this statistic in the Great Recession period. If history is any guide, it appears that we are in the early stages of the shift to “permanent” from “temporary.” In my view, this data is destined to get worse, much worse, before it gets better.
Challenger, Gray and Christmas
Another sign of deterioration in employment comes from the employment placement firm, Challenger, Gray and Christmas. The chart below shows that September layoffs were more than double “normal” September layoff activity. This is especially concerning because it is another indication of a stalled economy.
From Challenger, Gray & Christmas; Sept. layoffs were more than 2x “normal” Sept. activity

Job Cuts During Month of September
UNIVERSAL VALUE ADVISORS
State and PUA Data
The data for state Initial Claims (ICs) is shown in the table and chart below. Note how these new layoffs have maintained at or above 800,000 since early August (nine weeks in a row) after having fallen pretty consistently from their April peak. Again, these are new claims, which parallel new layoffs. When the Pandemic Unemployment Assistance (PUA) ICs are added in, there were an unfathomable 1.26 million new unemployment claims the week ended October 3rd. (And that didn’t include the new layoff announcements from Disney or the airlines.) Besides new layoffs, state unemployment data show 10.6 million Continuing Claims (CCs) and 25.6 million when the PUA program is added in.

New layoffs have maintained at or above 800,000 since early August

Initial Claims
UNIVERSAL VALUE ADVISORS
Now for the kicker: The weekly Department of Labor (DOL) news release of state and PUA unemployment data on Thursday, October 8th was accompanied by this technical note:
In response to recommendations resulting from an internal review of state operations, the state of California has announced a two week pause in its processing of initial claims for unemployment insurance benefits. The state will use this time to reduce its claims processing backlog and implement fraud prevention technology. Recognizing that the pause will likely result in significant week to week swings in initial claims for California and the nation unrelated to any changes in economic conditions, California’s initial claims published in the UI Claims News Release will reflect the level reported during the last week prior to the pause.
With the continuing high level of ICs, how does a two-week “pause” in processing those claims reduce the backlog? Must be California logic.
Conclusions
  • The pandemic isn’t going away, and a return to “normal” is nowhere in sight;
  • The Fed is worried about the faltering economy so much so that it has publicly promised to monetize any debt Congress creates, thus straying from their 107-year role as “independent” from the fiscal process;
  • Wall Street loves this because it promises excess liquidity (“The Fed has our back”) and equity prices have once again responded;
  • Because the employment numbers continue to show a stalled (stalling) economy, there appears to be no end in sight for Fed largesse.
 

David Goldsmith

All Powerful Moderator
Staff member
https://finance.yahoo.com/news/former-ny-fed-chief-central-banks-ability-to-stimulate-economy-rapidly-dimishing-172918988.html?
Former NY Fed chief: Central bank's ability to stimulate economy 'rapidly diminishing'

Former New York Fed President Bill Dudley says the Federal Reserve’s ability to prop up the economic recovery is getting weaker, warning that fiscal policymakers are the only ones who can provide much needed stimulus.
“The efficacy of monetary policy is rapidly diminishing,” Dudley said at the Yahoo Finance All Markets Summit on Monday.
A standoff between Senate Republicans, House Democrats, and the White House leaves the prospect of more stimulus in question. With the election next week, concerns are building that businesses and households across the country will get no help potentially until inauguration next year.

The lack of stimulus casts a shadow over the Fed’s next scheduled meeting right after the election, on November 4 and 5. With interest rates already near-zero, Fed officials have suggested that they could lean more heavily on quantitative easing to provide further accommodation if the recovery looks flat.
But Dudley expressed skepticism about the ability of the Fed to boost the economy.
“We’re already seeing the interest-sensitive sectors of the economy doing fine,” said Dudley, who led the New York Fed from 2009 until 2018. “So if the Fed did more, what would be the effect on the economic trajectory? It would be very, very modest.”

Former New York Fed President Bill Dudley talks to Yahoo Finance during the All Markets Summit on October 26, 2020.
Dudley questioned the efficacy of more unconventional monetary policy tools, adding that negative interest rates would come with the risk of “scaring people.” Dudley clarified that he does not expect the Fed to seriously consider negative rates, and Fed officials themselves have swatted down the possibility of deploying such a policy.
Dudley said he would expect the Fed to further press fiscal policymakers on stimulus, warning that if the reopening slows amid rising case counts, economic data could “show a distinct weakening trend in coming months.”
On Monday, equity markets sold off with the Dow shedding over 800 points by 12:30 p.m. ET. Dudley said the resurgence in COVID-19 cases and the lack of fiscal policy stimulus were to blame for market jitteriness.
 
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