Is Monetary Policy Too Tight?

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No negative interest rates — “for now.”

This we have on authority of the Federal Reserve chairman himself. For Mr. Powell announced yesterday that:

I know there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good tool kit, and that’s the one that we will be using.

Like a fireman hosing a junior fire before it fans an inferno… Powell was out to stream freezing water upon all talk of them.

From one direction the president was pushing him…

On Tuesday Mr. Trump implored the Federal Reserve to “accept the GIFT” of negative interest rates.

From another direction the market was pulling him…

The futures markets had begun to project negative rates — by mid-2021.

What if Mr. Powell failed to swear off negative rates yesterday?

“Forward Guidance”

Silence often talks louder than talking itself. And markets may have heard a shout in his silence. It would have informed them that negative rates are truly in prospect.

The stock market would have begun to factor them. And it would have endured a severe letting-down if Powell failed to carry through. Do not forget:

“Forward guidance” is one of the implements in the fellow’s “tool kit.”

Its purpose is to telegraph rate policy — to wire a sort of advance weather report — so markets can chart a proper course.

An unexpected gust could knock them off their heading.

What, Monetary Policy Is Too Tight???!!!

Yet the stock market is not the economy. And the economy is in for dirty weather.

Only additional easing will see it across the other side… or so we are told.

We are further told monetary policy is too tight for the challenge ahead — if you can believe it.

Deutsche Bank’s credit strategist Stuart Sparks, for example, tells us:

For all the measures taken by the Fed and fiscal authorities to counter the COVID-19 shock, policy remains too tight.

Yet rates are presently set to zero. How can monetary policy remain too tight?

To locate the answer we must get… “real.” That is, we must look beyond nominal interest rates… to real interest rates.

It’s the Real Rate That Counts

Explains Jim Rickards:

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate…

If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

Just so. What then is today’s real rate?

A Shocking Conclusion

The 10-year Treasury note currently yields a skeletal 0.614%. Meantime, the latest core inflation runs to 1.4%.

If we subtract the core inflation rate (1.4%) from the nominal rate (0.664%)… we find the real rate equals -0.786%.

Thus the real rate is negative — but only slightly.

Let us compare today’s real rate with the real rate from 1981…

Nominal rates at the time were killingly high — 13%. But real rates? Once again, Jim Rickards:

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Thus today’s real rate — though negative — nonetheless runs higher than 1981’s -2% real rate.

This, despite the fact that 1981’s nominal rate (13%) vastly overtowered today’s vanishing 0.664%.

It may flabbergast you, it may astound you. It may dynamite the bedrock upon which you stand.

But the facts are the facts.

And so comes the question: Are today’s rates negative enough?

Not according to Harvard economist Kenneth Rogoff…

The Economy Needs -3% Rates

You may recognize the name from these pages. That is because we have often brought him into ridicule.

He is perhaps the loudest drummer for negative interest rates — and the abolition of cash. And Mr. Rogoff believes today’s slightly negative real rate is inadequate to purposes.

The following is from a Reuters article, summarizing Rogoff’s position:

While core inflation excluding volatile energy prices was a healthier 1.4%, that fall in inflation could mean “real” interest rates are not deeply negative enough to swiftly revive the virus-hit economy as the Fed hopes.

To what depth should real rates sink?

Minus 3% — “or lower.” The blessings would spread wide, far and deep:

Negative rates of -3% or lower could lift firms, states and cities from default, boost demand and jobs and be a boon to many hobbled emerging economies too.

Assume for the moment this fellow is correct. Only deeply negative rates could work the trick. Yet Mr. Powell has declared against negative rates.

Can he nonetheless engineer negative real rates to push up the economy? How?

Look to the Balance Sheet

The aforesaid Stuart Sparks — of Deutsche Bank — lights the path:

“Further easing must be provided by the size and composition of the Fed’s balance sheet.”

That is, by additional quantitative easing.

As the gentlemen of Zero Hedge remind us, the Federal Reserve has made the previous estimation:

Each $100 billion of quantitative easing roughly equals three basis points of rate cuts (a normal rate cut is 25 basis points).

Let us assume the Federal Reserve takes aboard Mr. Rogoff’s counsel… and guns for a real -3% rate.

Recall, today’s real rate is -0.786% by our calculations. The Federal Reserve would need to sink the real rate at least two percentage points. Only then would it scrape -3%.

Two percentage points equal 200 basis points.

If $100 billion of quantitative easing approximates three basis points of rate cuts… the Federal Reserve would therefore require the equivalent of 66 rate cuts.

Thus it must empty a satanic $6.66 trillion onto the balance sheet.

That balance sheet presently swells to $6.72 trillion. $6.66 trillion would double the thing to $13.38 trillion — three times its 2015 high.

And so the Federal Reserve could plunge real rates to -3% while nesting nominal rates at zero.

Will it come to pass?

Powell’s Conundrum

We hazard no prediction. And we do not believe monetary policy can bring the economy back up.

We merely sketch a blueprint.

Is Mr. Powell prepared to balloon the balance sheet to a delirious $13.38 trillion?

Balance sheet expansion has a limit. An unknown limit — but a limit.

Drive past it and the dollar could crumble, all confidence lost.

And so we find Mr. Powell hung upon the hooks of a mighty dilemma…

In his mind he could:

A) Risk a dollar collapse by inflating the balance sheet to $13 trillion, or…

B) Risk a deeper economic collapse by failing to inflate the balance sheet to $13 trillion.

Our wager is on A…


Brian Maher
Managing editor, The Daily Reckoning

The post Is Monetary Policy Too Tight? appeared first on Daily Reckoning.

True Courage

This post True Courage appeared first on Daily Reckoning.

Under half of all working-age Americans will collect a wage next month.

This we learn from Mr. James Knightley, ING chief international economist.

A portion of them have received — or will receive — $1,200 from the United States Treasury.

But $1,200 does not extend very far. And our men inform us that only 15% of federal assistance is emptying into pockets of “everyday” Americans.

The remaining 85% charts a course for Wall Street… and large business.

Perhaps the percentages should run the other way.

The Value of Bankruptcy

A string of corporate bankruptcies would teach a lesson. A severe lesson it would teach — but a crucial lesson.

That assuming excessive debt is reckless, for example. That it pays to take the long view.

That is, stock buybacks to lift the short-term stock price may not represent the most prudent use of capital.

And that keeping a “rainy day” fund is sound business. It represents the purchase of an umbrella against the inevitable squall.

A rescue — the second in under 12 years — informs them they do not require the umbrella.

The Federal Reserve will simply hand them one when the water starts down.

Thus it powerfully discourages thrift, prudence… and forbearance.

But comes the objection:

“The present crisis is unlike 2008 when banks brought trouble upon themselves. Wall Street did not cause the pandemic. A string of bankruptcies would only punish the innocent.”

Just so. But the future is always full of rainstorms.

The Rain Will Come Eventually

The sky overhead may be bright and cloudless today. But a responsible business always keeps a weather eye upon the horizon. It knows the clouds will come across one day. It does not know if they will blow in from east, west, south or north.

But it knows it must ready for eventual rain — from whichever direction — and however distant.

Wall Street instead basked in perpetual sun for one entire decade, believing the Federal Reserve would push away the clouds forever.

Or — if the rains did come — that it would bring everyone in under cover.

Their assumptions have proven correct. And what conclusions can they draw?

That the Federal Reserve — and the United States government — will have the same umbrellas ready for the next downpour.

Why then should they purchase their own? And so the evil cycle perpetrates.

A Steep Price to Pay

The rescues may keep the stock market and the corporations going. But they come at a mighty price…

The financial system will sag and groan under even heavier loads of debt.

They nearly ensure that no meaningful recovery is in prospect. That is because the claims of the past and the present will prove too great.

Corporations must funnel future earnings off into the service of existing debt. They cannot invest in the future… because they will be paying too dearly for the past.

As a vessel overloaded with cargo cannot make much headway… neither can an economy overloaded with unproductive debt.

Might it be best to heave much of the deadweight over the side?

A rash of bankruptcies would clear out a pile of unproductive debt. It would restructure remaining debts.

The economy would then sit higher in the water. And maybe it could begin to rebuild its steam. It could go somewhere.

But that is not the option the monetary and fiscal authorities selected. And so they tossed aside a spectacular opportunity.

“Governments and Central Banks Have Missed a Great Opportunity for a Reset”

Mr. Guy Haselmann formerly directed global macro strategy at Scotiabank. Says he:

“Governments and central banks have missed a great opportunity for a reset.” More:

Financial markets play an important role in the economic growth of a country. They act as intermediary between lenders and borrowers providing for the efficient deployment of capitala critical role for businesses, employment and economic expansion. It’s supposed to be a place where supply and demand factors combine to determine equilibrium prices. Unfortunately, trouble arises when government institutions like the Federal Reserve manipulate and distort this process…

The recent bailout(s) has turned this… on its head. Those who were willing to accept higher market risk have already been rewarded for many years through higher returns. The bailout rewards the risk-seekers a second time and socializes their losses… Losses should be borne by the risk-taker and not be distributed or financed by the taxpayer. After all, it was the risk-taker’s decision to assume the risk in the first place…

And what about our preferred option of Chapter 11 bankruptcy?

Would it be better to allow bankruptcy that wipes out equity and debtholders? After all, companies often continue to function with employees keeping their jobs, and with new management operating from a stronger position. Allowing bankruptcies would help refocus investors on the true meaning of risk and encourage stronger corporate management in the future.

What is more, when the laggards go under the water, resources are then channeled into more productive lines:

New beneficial technologies would come along improving productivity that eventually wipes out the profits of the “old.” Necessity is a great motivation for innovation, so bad and insolvent companies should go under. When they do, labor and capital are redirected to more productive sources and away from “zombie companies.” Entrepreneurial innovation then operates at its fullest, making higher standards of living possible.

Alas, the authorities have chosen more of the same — only more so. No previous bailout comes within miles and miles of the rescue presently unfolding.

Thus there will be no reset. Nor can you expect a reset come the next calamity… whenever it may be.

We have already traveled too far in this direction.

True Courage

Mr. Bernanke could have allowed the system to reset nearly 12 years ago. He congratulates himself for finding the courage to act.

But he would have required far greater courage not to act. It was not in him.

Interest rates would have gone soaring. Marginal businesses dependent on low interest rates and cheap credit would have gone to the bottom.

The agony of bankruptcy would have been acute. But the agony of bankruptcy would have likely been brief.

A new, sturdier economy could have risen upon stronger anchorings. And business could have clawed its way back up.

Soaked by the recent crisis, it would have been sure to purchase the umbrella. After all, hard experience would have taught it that the Federal Reserve would not offer one.

And corporations may have stored in adequate cash reserves to see them through the present rainfall.

Instead the taxpayer must keep them dry.

Meantime, the stock market may not have boomed the past 11 years. But it likely would not have bubbled either. It could have found its own way… at its own pace.

In brief, a far saner system could have emerged from the previous crisis. But Mr. Bernanke lacked the courage to sit upon his hands.

And it is not in Mr. Powell…


Brian Maher
Managing editor, The Daily Reckoning

The post True Courage appeared first on Daily Reckoning.

The Fed Is Stealing Our Future

This post The Fed Is Stealing Our Future appeared first on Daily Reckoning.

The pestilence presented the Federal Reserve two options.

The first was to wash out the sins of the past decade. The second was to sin on a vastly mightier scale.

Lance Roberts of Real Investment Advice:

    1. Allow capitalism to take root by allowing corporations to fail and restructure after spending a decade leveraging themselves to [the] hilt, buying back shares and massively increasing the wealth of their executives while compressing the wages of workers. Or…
    2. Bail out the “bad actors” once again to forestall the “clearing process” that would rebalance the economy and allow for higher levels of future organic economic growth.

The Federal Reserve selected option two. That is, it chose sin on a vastly mightier scale.

All the imbalances, all the fraud, all the dishonesty of the past decade it is multiplying — by two, by three, by four, by five.

And so it is condemning the United States economy to a lost decade of stagnation and anemia.

Cutting off the Future

The Federal Reserve is dynamiting the bridges leading from present to future. To future recovery. And future growth.

That is because massive debt drains the future… and leaves it emptied.

Plunging into debt introduces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.

And so investment in the future goes channeling backward. It is a titanic larceny of the future.

And artificially low interest rates are the stickup gun.

The Chains of Debt

Explains Roberts:

Low to zero interest rates incentivize nonproductive debt. The massive increases in debt, and particularly corporate leverage, actually harm future growth by diverting spending to debt service…

The rise in corporate debt, which in the last decade was used primarily for nonproductive purposes such as stock buybacks and issuing dividends, has contributed to the retardation of economic growth…

The massive debt levels being added to the backs of taxpayers will only ensure lower long-term rates of economic growth.

A debt-based financial system heaves every principle of sound economics out upon its ear.

It is an economics of the hamster wheel — frantic — but stationary.

In back of it all is a vicious hostility to savings…

The Fed’s War on Savings

The Federal Reserve would heat your savings into a potato so hot you cannot hold them for an instant.

You must throw them into profitable investments… which will coax the economic engine to life.

Or you must spend them on goods and services. That will yield the same healthful effect.

This is the royal route to growth — as the theory runs.

Thus the saver is a public menace, a criminal of sorts, a rascal.

Saving is a passable evil in normal times, most economists allow.

But in dark times — as these — saving locks needed capital out of the productive economy.

The central bank must therefore suppress savings to increase spending. And investment.

But there can be no investment without savings, say the old economists… as there can be no flowers without seeds.

Saving Equals Investment

Explained the late economist Murray Rothbard:

Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings… In order to invest resources in the future, he must first restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

The more accumulated savings in the economy… the more potential investment.

An economy built atop a sturdy foundation of savings is a rugged economy, a durable economy.

It can withstand a blow.

In the past we have cited the example of a frugal farmer to demonstrate the virtue of savings. Today we cite it again…

The Prudent Farmer

This fellow has deferred present gratification. He has conserved a portion of prior harvests… and stored in a full silo of grain.

There this grain sits, seemingly idle. But this silo contains a vast reservoir of capital…

This farmer can sell part of his surplus. With the proceeds he purchases more efficient farm equipment. And so he can increase his yield.

Meantime, his purchase gives employment to producers of farm equipment and those further along the production chain.

Or he can invest in additional land to expand his empire. The added land yields further grain production.

This in turn extends Earth’s bounty in wider and wider circles — and at lower cost.

That is, his capital stock expands and the world benefits. Only his original surplus allows it.

He also retains a prudent portion of his grain against the uncertain future.

There is next year’s crop to consider. If it fails, if the next year is lean, it does not clean him out.

He has plenty laid by. And so his prior willingness to defer immediate gratification may pay a handsome dividend.

He can then proceed to rebuild his capital from a somewhat diminished base. Without that savings base of grain… he is a man undone.

We will call this man Farmer X. Contrast him, once again, with Farmer Y…

The Wastrel Farmer

This man enjoys rather extravagant tastes for a farmer. He squanders his surplus on costly vacations, restaurants, autos, etc.

He likes to parade his wealth before his fellows.

It is true, his luxurious appetites keep local business flush. But his grain silo perpetually runs low.

That is, his capital stock runs perpetually low. That is, he has little savings. That is, he has little to invest.

He deprives the future so that he may gratify the present… and rips food from future mouths.

And should next year’s crop fail, this Farmer Y is in a dreadful way.

Assume next year’s crop does fail.

The surplus grain that could have sustained him he has dissipated. He has no reserves to see him through.

He is hurled into bankruptcy. He must sell his farm at a fire sale.

If only this wastrel had saved.

The Lesson

Multiply this example by millions and it becomes clear:

A healthy economy requires a full silo of grain — of savings, that is.

An empty silo means no investment in the future. And society has nothing stored against future crises… like an imprudent squirrel that has failed to stock acorns against winter.

Henry Hazlitt, from Economics in One Lesson:

The artificial reduction of interest rates discourages normal thrift, saving and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that “economic growth” that “progressives” profess to be so eager to promote.

The Enemies of Savings

The critic of savings will concede that saving may make individual sense.

But if everybody saved, he argues, consumption would wind to a halt.

Government must therefore race in to supply the demand that individual savers will not.

It must be “the spender of last resort.”

But that which applies to the individual applies to society at large, the old economists insist.

Saving Is Actually Spending

When society saves in lean times, it is not eliminating consumption. It is merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Thus today’s savings are therefore tomorrow’s spending, tomorrow’s consumption.

Or to return to Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Artificially low interest rates drain the pool of savings… and leaves society poorer.

But the Federal Reserve has made its choice. It will drown us all in debt. And all for a mess of pottage.

Thus we face a future of limited growth… slender prospects… and frustrated ambitions.

But at least Wall Street will prosper…


Brian Maher
Managing editor, The Daily Reckoning

The post The Fed Is Stealing Our Future appeared first on Daily Reckoning.

Are We Wrong About Reopening the Economy?

This post Are We Wrong About Reopening the Economy? appeared first on Daily Reckoning.

Above the initials Scott B. we are dealt with as follows:

Listen, dumb****s! I am a professional on the front lines intubating these patients and years of education to understand this, but I will attempt to relate to the lowest common denominator mentality of this society and the financial segment in particular (notoriously self-involved)… I will make this simple. Have you seen anything cause bodies to be piled into refrigerator trucks or mass graves in your lifetime?!! Quit arguing just what the fucking death rate percentage is! It’s obviously high! Shut the [expletive] up and listen to people who obviously know more than you!

Legions and legions know more about respiratory disease than your humble editor. We know very little.

And no, we have never seen the phenomenon the reader describes.

Yet many vastly credentialed medical authorities believe the fatality rate — assuming a much larger number of possible infections than officially reported — is nonetheless low.

Antibody testing in New York City indicates that 21.2% of its residents have already hosted the virus.

The high recovery rate implies a low mortality rate.

Of course the true figures are uncertain. And testing is not entirely reliable.

The Grisly Human Toll

Regardless, a low mortality rate is thin consolation for the dead who suffered damnably. Victims slowly drown in their own liquids.

It is also thin consolation for the medicos like our reader. They must attend the miserable dying.

And our heart extends to them.

Alas, it appears that many who require ventilation stand condemned.

The numbers from New York reveal that 88% of its ventilated do not survive. The virus has plunged its teeth too deeply.

Are Ventilators the Answer?

Some studies — we of course know nothing of their validity — suggest ventilation may work more harm than good.

The pressure settings may exceed tolerances. Reports one physician:

It’s like using a Ferrari to go to the shop next door you press on the accelerator and you smash the window.

Yet since we are the very soul of fairness… some physicians claim ventilation is crucial under certain conditions.

But it requires a deep and subtle knowledge of the business. Not all physicians are equal to it. Says one pulmonologist:

It’s not just about running out of ventilators, it’s running out of expertise… We intensivists don’t ventilate by protocol. We may choose initial settings, but we adjust those settings. It’s complicated.

No doubt it is.

Meantime, the United States economy continues to wallow in mandated purgatory…

565 Lost Jobs for Every Fatality

The economy has shed 565 jobs for each confirmed COVID-19 fatality.

Thousands and thousands of businesses remain shuttered, dark, lifeless. Many will never get up.

How much longer can this economy exist in the present state… before the social fabric unravels?

Protestors have already taken to the streets. And we are warned of looming food shortages.

A dormant economy cannot be awakened at a stroke. It comes to gradually. It must rub the sand from its eyes. It must stretch its muscles. It must find its legs again.

And this economy will waken to a far different America than it knew before the coma…

The Mass Psychology Has Swung

COVID-19 will be with us for a good stretch.

Absent a proven virus killer, Americans will not likely swarm the restaurants, the pubs, the cinemas, the ballparks, the theme parks, the airports, the hotels.

That is, the mass psychology has swung. And it will not swing easily back.

Some of the mentioned industries peg along on thin profit margins even in flush times. How will they endure the depressed times to come?

Old Daily Reckoning contributor Simon Black examines the Black Plague of 1349 for parallels….

An Ominous Historical Example

Simon says:

When people sensed the worst was over, they slowly came out of their homes.

There was no grand reopening of the economy like some department store suddenly under new management. People remained highly mistrustful of one another, continuing to avoid even the most basic interactions with friends, family and professional colleagues.

Commerce was slow and the economy remained depressed for years.

Did the economy revive at that point?

Just when it seemed that the situation was finally starting to improve, the plague struck again in 1360. And again in 1374.

Medieval Europeans quickly realized that if there was just a single rat left on the planet carrying the disease, then another wave of the pandemic could begin anew.

And that made it next to impossible for anything to return to normal…

Commercial trade dwindled. Italy’s woolen textile industry practically ceased to exist. Many prominent banks in Europe collapsed. And there were even government debt defaults.

Concludes Simon, with a deep gulp:

Right now most people are barricaded in their homes while policymakers wait for this virus to die off.

But that’s not how biology works.

Just like in the 1300s, if there’s even a single carrier of the coronavirus remaining, then the whole thing starts over.

That person transmits the virus to two–three people, those people transmit the virus to two–three other people and the exponential growth curve begins again.

Lockdowns don’t kill off the virus. They just reset the clock.

Of course we cannot pit COVID-19 against the bubonic plague. The plague carried off some 60% of Europe’s population. The current pandemic is a sneeze next to it.

Returning to normal may nonetheless prove exceedingly difficult.

Not a Matter of the Economy vs. Lives

We are accused of placing economy above life, that we have no thought above the dollar.

Yet it is untrue. The choice is false.

The matter before us is not one of dollars versus lives. It is a matter of lives versus lives.

As we have reported repeatedly:

Each 1% increase in the unemployment rate may yield perhaps 30,000 deaths of despair… and from reduced living standards.

Each day, each week, each month the economy sleeps, the steeper the toll.

That is the bitter reality before us.

And what about the non-coronavirus sick?

They may be denied adequate doctoring. That is because the medical system is hurling such immense resources against the virus.

Many may perish from otherwise treatable maladies.

Sweden May Be Nearing “Herd Immunity”

We have held up Sweden as a model. It has maintained a fairly normal economic life throughout the pandemic.

It shielded the aged and vulnerable, while keeping commerce rubbing along.

Sweden reports a marginally higher fatality rate than the United States. But the virus has spread among the young and robust. And they have withstood it.

Thus the nation may attain “herd immunity” within weeks, some claim.

The virus will die in place, unable to spread among a heavily immunized people. And its evil reign will end.

This outcome is not certain. Only time will reveal the wisdom — or its absence — of Sweden’s choice.

Volvo Reopens Its Factories

But so confident is Volvo that it reopened its Swedish auto factories this past Monday. Some 20,000 Swedes thus resumed their livelihoods… and some measure of normalcy.

To whom they will peddle their vehicles, we do not know.

How many Europeans and Americans can presently purchase a new Volvo? Or Hyundai? Or Chevrolet?

And when can they? We have no answer.

“History is a nightmare from which I am trying to wake,” wrote James Joyce.

This virus is a nightmare from which we are trying to wake…


Brian Maher
Managing editor, The Daily Reckoning

The post Are We Wrong About Reopening the Economy? appeared first on Daily Reckoning.

Making a Bad Situation Worse

This post Making a Bad Situation Worse appeared first on Daily Reckoning.

One entire decade of employment gains washed out in one single month…

The United States economy took on 22.13 million jobs during the past 10 years. Yet it has given back 22.03 million within the past four weeks.

Rather, 22.03 million jobs were deliberately strangled out of the economy. The “lockdown” was, after all, self-imposed.

April unemployment may nonetheless scale 17% — a post-WWII record. Let us not forget:

Behind each cold statistic beats a human heart, a broken heart. Our men forward us the following information:

Each 1% increase in the unemployment rate may yield up to 30,000 fatalities from suicide, alcohol, drugs and related deaths of despair.

We are further informed that each 1% unemployment increase elevates the odds of death the following year by 6%.

We do not know if the figures have full accuracy. But we suspect there is a high degree of justice in them.

Three Months of Savings

Meantime, one recent survey revealed that 41% of working adults claimed only enough savings to see them through for three months.

If the present economic paralysis represented a mere suspended animation — if the idle returned to duty within three months — the blow would not prove fatal.

Yet many will be turned out forever and ever, orphaned and abandoned. Their positions will be permanently deleted.

Many will be unable to take up employment in new lines. How will they rub along on three months’ savings?

Government checks will only take them so far.

It is a grim calculus.

$25 Billion per Day

Meantime, the top man at the St. Louis Federal Reserve hazards this estimate:

The United States economy hemorrhages $25 billion in lost business each day of economic coma.

No economy can withstand months and months of it.

The lights must flicker back on, the machinery must begin to whine, workers must punch the clocks.

Else the cure will prove deadlier than the disease that afflicts us.

When will the economy reopen its doors for business?

The question is easier asked than answered.

North Dakota has issued “guidelines” to open up May 1. But with the highest respect… the Peace Garden State is not central to the United States economy.

New York’s economy represents a much larger chunk. And Gov. Andrew Cuomo has extended the statewide jail term through May 15.

California — an even larger chunk of the national economy — is no closer to opening.

But what the nation is losing in output… it is gaining in debt.

The Shattered Keynesian Multiplier

The entire economic and financial system was dreadfully indebted before the pandemic.

Now it is plunging deeper and deeper into debt without the economic activity to cushion the cost.

The Federal Reserve’s balance sheet is expanding to dimensions truly obscene… like a 600-pound man with a mania for donuts.

And governments are ladling out reams and reams of borrowed money. That is, money they do not in fact possess.

Who will pay for it? And what good will it work?

The miracle of water into wine — of the Keynesian multiplier — says each watery dollar yields a surplus of rich wine.

It is therefore an “investment” in future growth.

The theory may have something in it under debt-free conditions.

But today’s system is so soaked through with debt… additional debt yields not wine… but vinegar.

It subtracts rather than adds.

Well Past the Point of Diminishing Returns

Economists Kenneth Rogoff and Carmen Reinhart have arrived at this conclusion:

When a nation’s debt-to-GDP ratio exceeds 90%, median growth drops 1%. And average growth “falls considerably more.”

The United States entered the present catastrophe with a debt-to-GDP ratio of 105%.

Now debt is galloping ahead under full steam. But GDP is going backward. The ratio will only increase. And growth will lag even further.

Perhaps Rogoff and Reinhart are off — critics allege they are.

But we do not believe that plunging deeper into debt will lift up the gross domestic product.

We certainly expect no V-shaped recovery like the rah-rah men gabble about.

We expect rather a protracted guttering along, an extended economic lethargy, a long, cold drizzle.

Unproductive Debt

What is more, much of current debt is “unproductive.” That is, it holds no theoretical promise of return.

It merely fulfills existing political promises.

Some 50% of all Americans already receive at least one federal benefit.

Some 63 million receive Social Security payments. Sixty million receive Medicare. Medicaid, 64 million. Five million American households claim housing subsidies.

And 40 million Americans receive “supplemental nutritional assistance.” That is, food stamps.

Even pre-crisis, this federal transfer spending — largely spending that shovels money to those who did not earn it — was on the track for a record $3.22 trillion this year.

These payments would have likely accounted for 68% of all 2020 federal shellouts, or 14.4% of GDP.

But comes your objection:

“My taxes pay for Social Security, Medicare and Medicaid. How can you call those transfer payments when I in fact pay for them?”

Yet these programs qualify as transfer payments under United States accounting rules.

Regardless, taxes to fund benefits already fell far short.

We remind you that was before the present crisis. And now?

The Difference Between Today and the Great Depression

Take the year 1940 as your comparison. The United States government dedicated a mere 2.1% of GDP to these types of payments.

But here is the difference between the economy of the Great Depression and the economy of today:

Real GDP 1929–1940 expanded at a cumulative 19.89% rate. And for the past 11 years?

Cumulative GDP expanded at 18.85%.

That is, the economy of the Great Depression — cumulatively — outperformed today’s.

It turned in years of 12.9% growth… 10.8%… 8.8%… and 8.0%.

Meantime, not a single one of these past 11 years exceeded 3% growth. This year certainly will not. And the next several may be spent simply clawing out.

Deficits to the Moon and Beyond

Thus we arrive at this sad conclusion:

Many American households drain more money out than they pour in. And less real growth supports the operation.

These twin trends are now vastly accelerated.

The tax stream is running dry… while the demand for government relief inflates to extravagant dimensions.

Annual deficits may surge to $2 trillion — or $3 trillion.

Pre-crisis, the Congressional Budget Office (CBO) projected a $28.7 trillion national debt by 2029.

But these Pollyannas never accounted for recession — much less depression.

Now assume $2–3 trillion annual deficits. The national debt could well approach $40 trillion by 2029.

Meantime, CBO previously projected that debt service would rise to $915 billion by 2028 — nearly 25% of the entire budget.

For some slight perspective, consider:

That $915 billion roughly approximates 2018’s combined Medicare and Medicaid costs.

And do not forget: That calculation assumed a $28.7 trillion national debt. It did not assume a $40 trillion national debt.

Interest payments in this second scenario would swamp the entire federal budget.


How America is to rebuild its finances, we do not pretend to know. We are certain only that debts that cannot be paid will not be repaid.

Default of one form or other appears inevitable.

But let us stow our worries, draw a smile across our features… and take heart.

For the stock market was up again today…


Brian Maher
Managing editor, The Daily Reckoning

The post Making a Bad Situation Worse appeared first on Daily Reckoning.

Investing Is Now Simple

This post Investing Is Now Simple appeared first on Daily Reckoning.

The raging pandemic has served one high and worthy purpose:

It has made obvious — to all with open eyes — that the stock market is a crook’s game, a vast swindle.

How else could the stock market regain so many of its initial pandemic losses… while 16 million Americans file unemployment claims… and second-quarter GDP may contract 40%?

The Federal Reserve has expanded its balance sheet some $1.6 trillion these past four weeks.

There is your answer.

All vestiges of fair and honest markets have gone whooshing down the chute.

A Tremendous Gambling Racket

The Federal Reserve heads a tremendous gambling racket. It deals dishonest cards. It weights the dice. It tinkers the slots.

Anything and everything it will do to rook bears out of their rightful jackpots.

And so we ask:

Where would the stock market presently sit without the Federal Reserve’s massive fixing?

The numbers men at One River Asset Management have tackled the question.

Their conclusion shortly.

First we look in on the blackjack table…

A Touch of Reality

The Dow Jones shed 445 points today. The S&P gave back 62; the Nasdaq, 122.

Why today’s setback?

We learn this morning that March retail sales plunged a savage 8.7% — a record jolt to business. No previous figure approaches it.

We further learn that United States industrial production plunged 5.4% month over month.

That represents its steepest monthly fall since January 1946… not long after the nation began beating its belligerent swords into peaceful plowshares.

Meantime, earnings season is once again upon us. And corporate earnings are presently dropping away…

Bank of America claims first-quarter profits plummeted 45%. Citigroup profits went 46% backward. Goldman Sachs also reported a violent 46% retreat.

Quincy Krosby — Prudential Financial’s chief market strategist — drips icy sweat as he canvasses the numbers:

If this is a precursor to what we can expect throughout the U.S.… there’s no word for it. This reflects the complete shutdown of the economy.

Yes it does. Yet the abysmal numbers were all but guaranteed. And still the stock market jumped for weeks.

Yes, the market was down today.

Yet we suspect further pledges of Federal Reserve trickery will coax stocks up again — for a time at least.

The New Investment Strategy

BlackRock is the largest asset manager on Earth. It is also in command of the Federal Reserve’s asset-purchasing program.

This is the program that is lifting creaky debt off corporate balance sheets… and dropping it into taxpayers’ laps.

And what is BlackRock’s present investment strategy?

To simply hitch its cart to whichever assert the Federal Reserve purchases. Explains Mr. Rick Rieder, director of BlackRock’s global allocation unit:

We will follow the Fed and other [developed market] central banks by purchasing what they’re purchasing, and assets that rhyme with those.

That is, the central banks will ultimately select BlackRock’s investments. What kind of capitalism is this?

And is there not something uniquely swinish about this arrangement… perhaps even unlawful?

BlackRock is directly involved in the Federal Reserve’s asset purchases. It therefore knows which assets will get a lift. It can place its wagers accordingly — before all others.

Where is the Securities and Exchange Commission to investigate insider trading?

Ecstatic Markets

But markets are “ecstatic,” says Rabobank’s Michael Every.

That is because they need only lean back on their oars… and drift with the Federal Reserve’s gravitational tide:

Markets are ecstatic because there is no need to actually do any thinking at the moment. The Fed has made clear that there are to be no losers — or at least that one does not have to bother trying to pick the winners.

And so the Federal Reserve has quieted capitalism’s mighty gales of creative destruction. These are the gusts that push progress along, that push society along.

They blow away the inept and inefficient… and sweep in the new and improved.

Improved mousetraps, superior widgets, better living — these come out of capitalism’s destructively creative gales.

But the Federal Reserve has hushed them down.

Each Intervention Adds More Unproductive Debt

Each intervention piles up additional debt within the system. Thus the system sags under the added weight.

Progress slows as the laggards absorb capital that could have flowed into worthier hands. Yet the inefficient know they will not sink under. They realize the authorities will keep them up.

Deutsche Bank strategist Jim Reid:

The authorities have been so reluctant to see the creative destruction that’s so important to successful capitalism that they had to make another stunning major intervention.

Ever since the Fed of the late 1990s decided to bail out the financial system post the Long Term Capital Management collapse, we’ve had rolling state-sponsored capitalism and large moral hazard. This has meant that each subsequent default cycle (or mini market cycle) has been less severe than the free-market parallel-universe version would have been and has left increasingly more debt in the system as a result and meant that the intervention necessary to protect the system has got greater and greater. In my opinion, it also helps lock in lower productivity as you keep more low/no growth entities alive.

This fellow cites productivity. Productivity is the source of authentic long-term prosperity…

No Productivity, No Growth

Productivity growth averaged 4–6% for the 30 years after WWII. But average productivity has languished between 0–2% since 1980.

Meantime, labor productivity averaged 3.2% annual growth from World War II through the end of the 20th century. But since 2011?

A mere 0.7%.

The United States government borrowed perhaps $12 trillion since the financial crisis — even before the latest debt delirium.

But the American economy expanded only $5.1 trillion over the same space.

That is, GDP increased 35%. But the national debt increased 122%.

Where Will Productivity Originate?

We presently confront spiraling debt… and diminishing growth. The unfolding cataclysm will only deepen the trend.

Concludes Michael Lebowitz of Real Inve‌stment Advice:

“Given the finite ability to service debt outstanding… future economic growth, if we are to have it, will need to be based largely on gains in productivity.”

If we only knew the source of that productivity.

But we conclude by returning to our question of the day:

Where would the stock market presently sit without the Federal Reserve’s mammoth manipulations?

One River Asset Management has taken up the question. Here is their answer:

Down 50–80%…


Brian Maher
Managing editor, The Daily Reckoning

The post Investing Is Now Simple appeared first on Daily Reckoning.

Worst Recession in 150 Years

This post Worst Recession in 150 Years appeared first on Daily Reckoning.

The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.

Not the Early 19th Century Anymore

It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

If you let England produce sweaters and Italy make shoes, everybody was better off at the end of the day. It’s a simple example, but you get the point.

But in today’s highly integrated and globalized world, where you can simply relocate a factory from one country to the next, comparative advantage has much less meaning. You can produce both sweaters and shoes in China as easily as you can produce them in England and Italy (and much more cheaply besides).

There are many other examples of lazy, dogmatic analysis among mainstream economists, too many to list. Yet there are some exceptions to the rule.

A few economists have developed theories that are supported by hard evidence and do a great job of explaining real-world behavior. One of those economists is Ken Rogoff of Harvard.

The Worst Recession in 150 Years

With his collaborator, Carmen Reinhart and others, he has shown that debt-to-GDP ratios greater than 90% negate the Keynesian multiplier through behavioral response functions.

At low debt ratios, a dollar borrowed and a dollar spent can produce $1.20 of GDP. But at high ratios, a dollar borrowed and a dollar spent will produce only $0.90 of GDP.

This is the reality behind the phrase “You can’t borrow your way out of a debt crisis.” It’s true.

Meanwhile, the U.S. debt-to-GDP ratio was about 105% even before the crisis. It’s only going higher. We’re just digging a deeper hole for ourselves.

So when Ken Rogoff talks (or writes), I listen. In his latest article, Rogoff offers a dire forecast for the recovery from the New Depression resulting from the COVID-19 pandemic.

He writes, “The short-term collapse… now underway already seems likely to rival or exceed that of any recession in the last 150 years.”

That obviously includes the Great Depression and many other economic crises.

This is something you should really consider before you decide the coast is clear and it’s time to jump back into stocks.

Complex Systems Collide

Zooming out a bit, and as I’ve argued before, the pandemic is a prime example of complex systems colliding into one another…

Investors and everyday citizens are focused on how the COVID-19 pandemic (one complex dynamic system) is crashing into the economy (another complex dynamic system) and influencing the political process and the upcoming U.S. presidential election (still another complex dynamic system).

Analyzing the operations of one complex dynamic system is difficult enough; most analysts can’t do it because they’re using the wrong paradigms.

Analysis becomes far more challenging when multiple complex systems interact with each other and produce feedback loops. That’s where the real so-called “Black Swans” reside.

And this crisis is the blackest swan most people alive today have ever seen, especially if Rogoff’s insight is correct — 150 years is a very long time.

That’s not to minimize in any way recent events like 9/11 or the 2008 financial crisis. Both were devastating. But neither led to a virtual lockdown of the entire economy like we’re seeing now. The current crisis simply has no precedent.

What we’re seeing is a full-fledged global contagion.

Biological and Financial Contagions

Let’s discuss the word “contagion” for a minute because it applies to both human populations and financial markets — and in more ways than you may expect.

There’s a reason why financial experts and risk managers use the word “contagion” to describe a financial panic.

Obviously, the word contagion refers to an epidemic or pandemic. In the public health field, a disease can be transmitted from human to human through coughing, shared needles, shared food or contact involving bodily fluids.

An initial carrier of a disease (“patient zero”) may have many contacts before the disease even appears.

Some diseases have a latency period of weeks or longer, which means patient zero can infect hundreds before health professionals are even aware of the disease. Then those hundreds can infect thousands or even millions before they are identified as carriers.

In extreme cases, such as the “Spanish flu” pandemic of 1918–20 involving the H1N1 influenza virus, the number infected can reach 500 million and the death toll can run over 100 million.

A similar dynamic applies in financial panics.

It can begin with one bank or broker going bankrupt as the result of a market collapse (a “financial patient zero”).

But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008.

Still, the comparison between medical pandemics and financial panics is more than a metaphor.

Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus.

But what happens when these two dynamic functions interact? What happens when a biological virus turns into a financial virus?

We’re seeing those effects now.

Get Ready for Social Disorder

Yet even this three-system analysis I just described (pandemic > economy > politics) does not go far enough. The next phase has been little noticed and less discussed.

It involves social disorder. An economic breakdown is more than just economic. It leads quickly to a social breakdown that involves looting, random violence, fraud and decadent behavior.

The Roaring ’20s in the U.S. (with Al Capone and Champagne baths) and Weimar Germany (with riots and cabaret) are good examples.

Looting, burglary and violence in the midst of a state of emergency are the shape of things to come.

The veneer of civilization is paper-thin and easily torn. Most people don’t realize how fragile it is. But they’re going to learn that lesson, I’m afraid.

Expect social disorder to get worse long before it gets better.


Jim Rickards
for The Daily Reckoning

The post Worst Recession in 150 Years appeared first on Daily Reckoning.

No Words for This

This post No Words for This appeared first on Daily Reckoning.

6.6 million fresh unemployment claims this week. 3.3 million last week.

Combined you have a cataclysm of 9.99 million claims within two weeks.

“No words for this,” writes Pantheon Macroeconomics chief economist Ian Shepherdson — speechless, gobsmacked, floored, broken beyond endurance.

“What we are going through now dwarfs anything we’ve ever seen,” laments Heidi Shierholz, the Economic Policy Institute’s senior economist — “including the worst weeks of the Great Recession.”

Alas, the lady is correct.

This week’s unemployment figure rises 10 times higher than any week between 2007 and 2009.

In all, the United States economy shed 15 million jobs in that 18-month span. But at the present gallop… the economy will give up 15 million jobs in weeks.

Inconceivable — but there you are.

“The great financial crisis happened over a number of years,” says Wharton finance professor Susan Wachter. “This is happening in a matter of months — a matter of weeks,” she adds.

The New York Times estimates the unemployment rate is presently 13% and “rising at a speed unmatched in American history.”

You may wish to consider the reliability of the source. The true rate may be lower. But this you also must consider:

It may be higher.

And the Congressional Budget Office presently projects second-quarter GDP to plummet to an annualized -28%. That is correct.

One small example:

National box office sales ran to $204 million one year ago this week. And one year later?

$5,179 — essentially a $204 million collapse of the cinema industry.

The travel, retail and restaurant and ale house industries confront similar hells.

An economy such ours is like a long stretch of dominoes. Knock one down and the others go over…

The suddenly unemployed may lack the wherewithal to make rent. The landlord who depends on it may be unable to meet his own obligations. So with the person above him… and the next above him… all the way up the ladder.

A fellow going by the name of Mark Zandi is Moody’s Analytics chief economist. His researches indicate perhaps 30% of Americans with home loans — some 15 million of them — could fall into arrears if the economy remains shuttered through summer.

Meantime, the freshly unemployed send additional dominoes toppling…

The unemployed store manager can no longer afford the auto he planned to purchase. And so the automobile salesman goes without. His planned vacation he must cancel. He further abandons plans to renovate the kitchen or add the extension to his home.

The airline and hotel people then must suffer. As must the carpenter who would have worked the job. And the lumber men who would have sold the wood. As must the gasoline vendor who would have fueled its transportation.

And so on and so on, one domino knocking down the next in line, all the way through.

Multiply the business by 10 million, 15 million — 20 million — and you face a situation.

“No words for this.”

The Federal Reserve estimates the unemployment number may scale an unspeakable 47 million.

We find limited solace knowing the Federal Reserve nearly always botches the numbers. It is nonetheless a bleak arithmetic we confront.

The United States government is attempting to choke off the hemorrhaging with payments to businesses and the unemployed. But it will prove dreadfully unequal to its task.

What is more, multiple sources report some checks may not mail for 20 weeks — five months.

How will the unemployed with no savings rub along for five months?

Tens of thousands were driven to suicide during the Great Depression. Over 10,000 took the identical route out of the Great Recession.

Another suicidal wave — a large one — will wash on over should present conditions extend too long.

But you may be relieved to learn that the Federal Reserve is on the job…

It has expanded its balance sheet $1.6 trillion since mid-March alone. It required 15 months to attain that same figure during QE3.

And the balance sheet presently bulges to $6 trillion — a 60% increase in a mere six months.

One staff member of the Federal Reserve, meantime, believes it will swell to $9 trillion by year’s end.

We place high odds that it will expand further yet.

Well and truly… this is a time of superlatives.

But how much can the balance sheet expand… before bursting at the seams?

No one truly knows. But do we wish to find out?

Besides, its previous manias of balance sheet inflating did little for the real economy, the economy of things.

There is little reason — none, that is — to expect a different outcome now.

Here is another superlative:

The Dow Jones has endured its deepest first-quarter plunge in its entire 124 years. And heavier losses await, depend on it.

And so here we are, trapped… the devil to one side… the deep blue sea to the other.

“No words for this.”


Brian Maher
Managing editor, The Daily Reckoning

The post No Words for This appeared first on Daily Reckoning.

“Hell Is Coming”

This post “Hell Is Coming” appeared first on Daily Reckoning.

We sense that we are among unrealities…

It is as if some hinge, deep within the national psychology, has suddenly given way.

The daily rites of life are suspended. Businesses, schools and arenas the nation over have gone dark. Travel is hopeless…. and borders are sealed shut.

Unemployment claims are piling up. Treasury Secretary Mnuchin has suggested they may ultimately scale a depression-level 20%.

San Francisco residents are under house arrest, confined to barracks 24 hours of the day. Emergencies and food shopping provide the only officially sanctioned furloughs.

(Our spies report large numbers of lawless who are flouting the ban.)

Rumors are on foot that other municipalities — New York City included — will follow.

USNS Comfort — a hospital ship — is presently plowing a course for New York Harbor, under presidential orders.

An identical vessel steams for the West Coast.

You Can’t Even Go to Church

Locally, a blanketing hush has fallen over the city of Baltimore. Residents have abandoned the streets. Dining and ale houses are shuttered.

Those who hazard a public appearance approach one another with suspicion… as if every stranger has a gun in his hand and murder on his mind.

Even the churches have suspended their Godly operations, their flocks scattered to the winds:


Even in wartime a fellow can take refuge in the comforting arms of God. But not when a pestilence is loose.

Yet the trees near our office are in blossom:


And old Washington keeps his reassuring watch over the city:


And we shall remain chained to our post… bound in solemn duty.

Three Years of Gains Wiped Out

The stock market went to the devil again today.

The Dow Jones slipped into the 18,000s today. It “recovered” to 19,899 by closing whistle… a 1,338-point loss on the day.

The S&P shed another 130 points; the Nasdaq 345.

Thus all market gains since Mr. Trump assumed his office are eliminated — three years of gains into the furnace.

“We’re only about halfway there,” hazards one trader. That of course being the bottom.

Gold, meantime, absorbed another slating today, down $30 and change.

But the 10-year Treasury yield went shooting in the other direction…

Yields vaulted 27% to 1.266%.

The reason is the promise of economic “stimulus” (more on which below).

The “Coronavirus Investment Summit”

Jim Rickards predicted the coronavirus scourge in early February, before markets caught the fever.

Wrote Jim in an email dated Feb. 5:

The real infection rate and death rate may be 10 times the official statistics… If you want to see how bad things can get, study the “Spanish flu” pandemic of 1918–20. Over 50 million dead.

And while the stock market was thundering down, Jim’s readers enjoyed the opportunity to nearly triple their money with one of his recommended trades — in one single day.

“Hell Is Coming”

We presently confront a springtime not of growth and life but of sickness and death.

And the carefree days of summer will likely yield to the careful days of summer… heavy with the mighty fear of a miniature bug.

The president — after all — let slip the other day that fortunes may only swing in August.

“Hell is coming,” shrieks Bill Ackman of Pershing Square Capital. He continued:

We need to shut it down now… This is the only answer… America will end as we know it. I’m sorry to say so, unless we take this option.

What precisely constitutes “this option”?

Chaining down the entire economy for 30 days. All gears of commerce must wind to a complete and immediate 30-day halt. More:

The hotel industry and the restaurant industry will go bankrupt first. Boeing is on the brink, Boeing will not survive without a government bailout… Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown…

Every hotel is going to be shut down in the country… If we allow this to continue the way we have allowed it to continue, every hotel company in the world is done. No business can survive a period of 18 months without revenue.

Will the president heed this fellow’s counsel?

“Wartime President”

Mr. Trump has now declared himself a “wartime president.”

And he has pledged to invoke the 1950 Defense Production Act (Pub.L. 81–774) — “in case we need it.”

The Defense Production Act is:

An Act to establish a system of priorities and allocations for materials and facilities, authorize the requisitioning thereof, provide financial assistance for expansion of productive capacity and supply, provide for price and wage stabilization, provide for the settlement of labor disputes, strengthen controls over credit and by these measures facilitate the production of goods and services necessary for the national security, and for other purposes.

“Other purposes,” of course.

From bull market to wartime economy within the space of one month — if you can believe it.

A journalist once asked British Prime Minister Harold Macmillan what could knock his plans off the course.

“Events, dear boy, events,” came his supposed response.

The president has been washed over by events.

Emergency Relief

Meantime, the administration proposes to write Americans checks — $500 billion worth in total.

The first would go in the mail April 6 — pending congressional approval of course. The second batch would go on May 18.

The specific amounts will depend upon a family’s income and number of children in residence.

“Millionaires,” we are told, are ineligible for relief.

Meantime, we are informed the Senate has the votes sufficient to expand paid leave and unemployment insurance.

The bill has already cleared the House of Representatives. Off it goes for the president’s signature once the Senate pushes it out.

But what will the rest of us purchase with the money we are to receive?

“The. Party. Is. Over.”

Our colleague Byron King laments we have “silent spring” on our hands, “courtesy of one too many imports from China.”

And the shelves may run thin by summer:

My maritime friends tell me that over the past two months, over 260 large cargo ships — 10,000–20,000 containers and more per each one — were canceled or sailed partly loaded (from China). Out of over 4 million containers that “should” have shipped, 2 million — about 50% — never made it.

What you see on the current shelves — the Chinese stuff — all showed up last fall and early winter. Looking ahead, those missing containers of Chinese goods will compound future shortages of all manner of things.

Expect to start seeing the effects in April, May and June.

Concludes Byron, with dreadful emphasis:

“The. Party. Is. Over.”

We hope he is mistaken. Yet we fear he is not.

We do not care one whit for this new America. Please, 1,000 times, please, return us to the former America — botched as it may have been.

But if our choices are reduced to death by coronavirus or death by hunger… we opt for the virus.

The end comes much faster.


Brian Maher
Managing editor, The Daily Reckoning

The post “Hell Is Coming” appeared first on Daily Reckoning.

“Close the Whole Thing Up”

This post “Close the Whole Thing Up” appeared first on Daily Reckoning.

“If this doesn’t work,” wonders Seema Shah, Principal Global Investors central strategist…

“What will?”

“This” is of course the Federal Reserve’s desperate harum-scarum yesterday afternoon.

Mr. Powell and crew knocked down rates one entire percentage point. The federal funds rate now squats between 0% and 0.25% — zero essentially.

And so as a dog returneth to its vomit… the Federal Reserve returneth to zero.

The scoundrels of Zero Hedge label it part of the “the biggest emergency ‘shock and awe’ bazooka in Fed history.”

But we are not shocked. Nor are we awed.

Our only surprise is the scheduling — our hazard was a return to zero later this week.

Yet the business was so urgent, all hanging in balance… it could not even wait for this week’s formal FOMC confabulation (now canceled).

Not Just Rate Cuts

We were further informed yesterday that quantitative easing (QE) is commencing anew.

The Federal Reserve will purchase “at least” $500 billion of United States Treasuries — and $200 billion of mortgage-backed securities — $700 billion in all.

We are betting high on “at least.” This merely represents the opening installment.

The Federal Reserve is also extending fresh ratlines — our apologies, swap lines — to foreign central banks.

That is intended to maintain dollar liquidity against the global coronavirus delirium presently obtaining.

Greg McBride, Bankrate chief financial analyst, in summary:

The Fed is dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to U.S. dollar liquidity, cutting interest rates to zero and opening the Fed’s discount window to ensure the flow of credit through banks to consumers and businesses.

“It’s really great for our country,” gushed the president.

But is it? Did yesterday’s “shock and awe” bazooka blast score a hit?

It did, yes. A direct hit — to the wrong side.

Shocked and Awed…

Stock futures went careening last evening, so shocked, so awed were they. They promptly went “limit down.”

The future arrived this morning at 9:30 Eastern. And markets remained shocked and awed…

The Dow Jones plunged nearly 10% from the opening whistle. The S&P and Nasdaq followed in lockstep.

Once again the breakers tripped… and trading was suspended 15 minutes.

“The central banks threw the kitchen sink at it yesterday evening, yet here we are (with deep falls in stock markets),” yelled Societe Generale strategist Kit Juckes.

“This is what panic looks like,” hollered Patrick Healey, president of Caliber Financial Partners.

Yet we are not surprised. Markets can see the beads of perspiration forming about Mr. Powell’s forehead. Markets are flighty birds easily frightened.

And what telegraphs fear more than a “shock-and-awe bazooka”?

The shock and awe deepened throughout the day…

Another “Worst Day Since Black Monday”

We grow weary of repeating it. But the Dow Jones once again suffered its mightiest whaling since Black Monday, 1987.

The index gushed another 2,997 points today to close at 20,188 — giving back another 12.93%.

The S&P lost 325 points, or 11.98%. The Nasdaq, 970 points and 12.32%

And so additional trillions of stock market wealth vanish into the electricity, lost.

Losses accelerated towards day’s end. Why?

Late this afternoon the president said the “worst of the outbreak” could stretch into August.

Fear gauge VIX went skyshooting to 83 today — within shouting distance of its record 90 from October 2008.

And so we return to our opening question:

“If this doesn’t work… what will?”

Alas, the question is easier asked than answered…

“Just Close the Whole Thing up”

One CNBC host even suggests shuttering Wall Street. Shrieks Mr. Scott Wapner:

How are folks supposed to focus on trading stocks when they’re dealing with nervous kids out of school, spouses working from home and scrambling to keep up, all while managing their own anxieties? Just close the whole thing up and start again later. It’s the right thing to do.

It may be the right thing to do or the wrong thing to do. Regardless, it has been done before.

The stock market was suspended 10 days during the panic of 1873 — and four entire months at the outset of the First World War.

Examples abound. Most recently in October 2012 when a hurricane, Sandy by name, closed the market two days.

But now the Federal Reserve confronts a different variety of hurricane…

“Very Serious Trouble”

“The Fed is now in very serious trouble,” gulps Graham Summers of Phoenix Capital — whom we recently introduced to you, our reader.

“Put another way,” he continues…

The Fed has gone truly NUCLEAR with monetary policy… and the market is STILL imploding…

The Fed can do NOTHING to stop this. No amount of rate cuts or stimulus from the Fed will make people want to go out and spend money if the country is on lockdown/facing a health crisis triggered by a pandemic.

The country is indeed verging upon a lockdown of sorts…

National Lockdown

The Centers for Disease Control and Prevention has recommended that all sizable gatherings and events be “postponed” for the following eight weeks.

New York, New Jersey and Connecticut — home to a fair number of Americans — have taken aboard its counsel.

All gatherings of 50 persons or greater thus are banned.

We remind you that restaurants frequently entertain crowds exceeding 50. As do other dens of vice including drinking establishments, casinos, theaters, concert halls, ballparks, gymnasiums and houses of worship — to name some.

Houses of ill repute, we assume, must ration admission ruthlessly… else court the wrath of the law.

New Jersey residents are now confined to barracks between 8 p.m. and 5 a.m. All travel is “strongly discouraged,” save in emergency.

Other States Follow

Meantime, Illinois bars and restaurants will close to the public beginning tonight. Their doors will not reopen until March 30.

Delivery and takeout services are available, however, as they are in New York, New Jersey and Connecticut.

Washington state has followed their example. As has the great state of Michigan. As has our own state of Maryland.

Massachusetts has exceeded even CDC’s draconian limit of 50. Gatherings of 25 or more are presently forbidden in this, the cradle of American liberty.

Meantime, over 30 million students in at least 31 states are exiled from the classroom. The Ohio governor has suggested his state’s may not come back until autumn.

Even the Supreme Court of the United States will no longer hear arguments — until early April at the earliest.

Do not forget, six of nine justices are aged 65 or above. And the coronavirus harbors a savage antagonism toward the elderly.

Thus a grateful nation is insured against a potential holocaust of justices.

A Ban on All Air Travel?

And now… rumors are on foot that a complete ban on domestic air travel is under active consideration.

We have assigned our men to investigate.

Regardless, the airlines are suffering damnably. Delta Air Lines claims conditions are worse than even the Sept. 11 afterblow.

“The speed of the demand fall-off is unlike anything we’ve seen,” laments Chief Executive Officer Ed Bastian.

The airline has gutted operations some 40%. And 300 planes are tied down to the tarmacs.

Meantime, all American cruise liners will remain tied up to the piers for 60 days.

A bailout of the air and cruise lines is on the way — depend on it.

So too, perhaps, is a bailout of the American citizen…

$1,000 Check Every Month

Sen. Mitt Romney (R-Utah) proposes to hand every American adult $1,000 per month so long as the coronavirus rages.

Reads a press release under his name:

Every American adult should immediately receive $1,000 to help ensure families and workers can meet their short-term obligations and increase spending in the economy.

Of course, the money must originate somewhere… as the government has none of its own.

In many cases it would amount to lifting money out of a fellow’s back pocket and lowering it into his front pocket.

But crises bring forth ideas that would never get a hearing otherwise. Many are of course lunatic.

Americans would acclimate rapidly to the monthly stipend. Who would take it away from them once the all clear signal goes out?

This is an election year, do not forget, when votes go up for sale. A monthly check can purchase many.

“The Worst Is yet Ahead for Us”

But just when might the coronavirus lose its stranglehold on American life?

“The worst is yet ahead for us,” warns Dr. Anthony Fauci of the National Institutes of Health.

We hope the fellow is mistaken.

We further hope the worst is behind for markets.

But we fear the worst is ahead for the economy.

And so again we ask:

“If this doesn’t work… what will?”


Brian Maher
Managing editor, The Daily Reckoning

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