- Who needs the Constitution when there’s a crisis going on?
- $500 billion in corporate bailouts, not connected to coronavirus
- How the Fed will buy corporate bonds, even though it’s illegal
- “To live in the process is absolutely not to notice it”
- India’s lockdown on four hours’ notice — another experiment?
We begin this week with a nod to the events of last week… and a tip of the hat to Rep. Thomas Massie (R-Kentucky).
As we mentioned last week, the $2 trillion “stimulus” bill was rushed through the Senate — sent to members’ offices around 10:00 p.m. EDT Wednesday and passed 96-0 shortly before midnight. We plebes never had a chance to review the bill, much less express an opinion about it.
Then it was the House’s turn to vote on Friday. Speaker Nancy Pelosi hadn’t bothered calling members back to Washington, figuring she’d get away with a voice vote in a near-empty chamber. But despite the crisis-must-act-now atmosphere, Massie invoked that pesky procedural thing known as the U.S. Constitution — meaning at least 216 members have to be present.
That, plus he was offended by the notion that no one would have to have their name attached to a yea-or-nay vote on the most costly spending bill in U.S. history.
For his insistence on accountability, Massie earned the contempt of the entire political class, Republican and Democrat.
It’s a big club, and you ain’t in it.
In the end, enough members returned to Washington that the quorum requirement was met — allowing for a voice vote anyway.
To be clear, the $500 billion in corporate bailouts under the legislation has nothing to do with coronavirus.
Explains Nomi Prins, our ex-investment banker: “The rescue package throws a bone to everyday Americans but a big, fat, juicy steak to the people who spent the past dozen years going deep into debt so they could buy back their stock to increase their stock prices and enhance their bonuses.
“Corporations invested little in workers, research and development or expanding their businesses. It was primarily about goosing their stock prices in the short term. And now they want to wash their hands of it all and unload all their bad debt on the American taxpayer.
“That means they won’t have to pay for their mistakes. That’s not how capitalism works, but it’s how crony capitalism works in today’s ‘too big to fail’ world.”
It was Nomi who warned us in late 2018 that the biggest threat to the markets was all the debt racked up by corporate America ever since the Panic of 2008. Now Congress and the White House are riding to the rescue of irresponsible CEOs.
But the special favors in this crisis-must-act-now environment don’t end there. Which brings us to the Federal Reserve.
In this crisis-must-act-now atmosphere of recent weeks, we’ve struggled to keep up at times… and thus we’ve underplayed the Fed’s plans to buy corporate bonds. Oh, and ETFs linked to corporate bonds too.
Technically, that’s a no-no. “Legally,” Nomi explains, “the Fed can only purchase Treasury debt or mortgage-backed securities, which are guaranteed by the government. It can’t buy corporate debt, for example. But the Fed has announced that it will buy corporate bonds, including some of the riskiest.”
So what’s the loophole?
“It has to do with something called a Special Purpose Vehicle (SPV),” she tells us. “I don’t want to get too deep in the weeds here, but that’s a separate entity that assumes risky corporate debt.
“In this case, the Treasury Department would take on huge amounts of corporate debt including, again, some of the riskiest. So the Treasury, not the Fed, would assume all the liability and risk involved. The Fed would provide financing but it wouldn’t assume the risk.
“But guess who the Treasury is backed by? Us taxpayers! That’s right, we’d be on the hook.”
Then again, are you surprised?
Events of the last four weeks have moved so quickly — again, that crisis-must-act-now atmosphere — that we haven’t given proper space to some of the Fed’s other “extraordinary measures.”
As in 2008, the Fed has launched an alphabet soup of programs to shore up various parts of the financial system. Jim Bianco, chief of Bianco Research, offers a helpful summary in a recent Bloomberg column:
- CPFF (Commercial Paper Funding Facility) — buying commercial paper from the issuer
- PMCCF (Primary Market Corporate Credit Facility) — buying corporate bonds from the issuer
- TALF (Term Asset-Backed Securities Loan Facility) — funding backstop for asset-backed securities
- SMCCF (Secondary Market Corporate Credit Facility) — buying corporate bonds and bond ETFs in the secondary market
- MSBLP (Main Street Business Lending Program) — Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.
“To put it bluntly, the Fed isn’t allowed to do any of this,” Mr. Bianco says.
It comes back to what Nomi said earlier: The Fed is allowed to buy (or lend against) only those securities that have a government guarantee. So the Fed is doing an end run with the help of the Treasury Department.
“In essence,” Bianco writes, “the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing.”
What’s more, “The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.
“In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.”
Which sounds shady enough, but Nomi tells us that’s not the end of it. “We envision a large overlap between names BlackRock already likes and ones that get selected. BlackRock is also allowed to buy U.S. investment-grade bond ETFs — including ETFs of its own.”
BlackRock runs the iShares family of ETFs — including the biggest group of bond ETFs out there. Conflict of interest much?
For the record: The Fed’s various rescue activities to date have blown up its balance sheet well past the $5 trillion mark.
Just looking at the chart you can see how the response to the corona-shock is even more extreme than the response to the Panic of 2008…
Perspective from Wolf Richter, writing at his Wolf Street blog: “If the Fed had sent that $942 billion it created over the past two weeks to the 130 million households in the U.S., each household would have received $7,250. But that didn't happen. That was helicopter money for Wall Street.
“Since mid-September when the Fed started bailing out the repo market that had blown out, total assets on the Fed's balance sheet soared by $1.41 trillion. If the Fed had sent that $1.41 trillion to the 130 million households in the U.S., each household would have received $10,840. But that didn't happen either. It was helicopter money for Wall Street.”
The speed with which everything is happening — again, the crisis-must-act-now atmosphere — is taking your editor to a very uncomfortable place this morning.
There’s a somewhat famous passage from a book called They Thought They Were Free. It was about the mindset of everyday Germans as the Nazis consolidated power in the early 1930s.
To be clear, I am not labeling U.S. political leaders Nazis. Rather, I’m calling attention to the similarity of the zeitgeist.
Author Milton Mayer quotes a university professor at length: "The crises and reforms (real reforms too) so occupied the people that they did not see the slow motion underneath, of the whole process of government growing remoter and remoter…
“To live in the process is absolutely not to notice it — please try to believe me — unless one has a much greater degree of political awareness, acuity, than most of us ever had occasion to develop.
“Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted’… Believe me, this is true. Each act, each occasion, is worse than the last, but only a little worse. You wait for the next and the next. You wait for one shocking occasion, thinking that others, when such a shock comes, will join you in resisting somehow…”
In the present moment, the process is likewise not noticeable and resistance is nearly impossible — not when legions of Americans fear either 1) loss of their livelihood with no immediate prospect of recovering it or 2) dying in a hospital… gasping for breath… alone because loved ones aren’t allowed near anyone who’s infectious.
Meanwhile, we can’t shake the thought that — once again — India is a template for future events here or elsewhere.
Early last week, Prime Minister Narendra Modi declared a nationwide lockdown. He gave only four hours’ notice.
“The lack of prior warning, and preparation, for maintaining supplies of foods, medicine and other household items during the lockdown has led to the breakdown of critical supply chains,” says the Financial Times, “as well as concerns about how many vulnerable people will make their living, or even survive.
“Police have stopped goods trucks from moving across state lines, and harassed couriers delivering online orders to urban middle-class homes.”
Meanwhile, reports the BBC, “All over India, millions of migrant workers are fleeing its shuttered cities and trekking home to their villages” — in many cases, on foot because there’s no other transportation available…
“Last week's lockdown turned them into refugees overnight. Their workplaces were shut, and most employees and contractors who paid them vanished.”
You don’t have to look far for videos of Indian police beating people with sticks for violating the corona curfew — or humiliating them by making them perform push-ups or squats.
Here’s a collection of clips depicting life as it’s lived today in “the world’s biggest democracy”…
Modi apologized yesterday for the hardships — there’s that “regretted” part about the “crises and reforms” described by the German professor — but he said the measures are “needed to win” the battle against the pandemic.
If you’ve been reading us for a while, you might recall another extreme measure imposed by Modi with no warning — a sudden ban on the country’s most common bank notes in late 2016. Indians were required to bring their cash to a bank, where it could be deposited in a digital account or converted to other denominations. Chaos ensued for weeks; in some places, money riots broke out.
Modi was explicit about the aim: “We can gradually move from a less-cash society to a cashless society."
Documents uncovered in early 2017 by the German journalist Norbert Haering revealed the Indian initiative was spurred in part by the U.S. Agency for International Development — in cahoots with the Gates Foundation and the major credit card companies.
No evidence yet that this latest experiment on 1.3 billion human guinea pigs was likewise hatched in Washington. But nothing surprises us anymore…
Our 5 Mins. are nearly up — just enough time to take the pulse of the markets and check the mailbag.
The major U.S. stock indexes are recovering some of Friday’s losses. At last check, the Dow is up 1.5% and only 13 points away from the 22,000 mark. That’s still 7,500 points off the all-time high barely six weeks ago.
Bonds are also catching a bid today, the 10-year note at 0.62%. Gold not so much, though, the bid down $9 at $1,618.
But the big loser is crude — down more than 6.5% and only pennies away from breaking below $20.
No major economic numbers to speak of today. We’ll get a reading on consumer confidence tomorrow and a string of job reports Wednesday through Friday.
They’ll all be awful. It’s just a matter of how much. (Just in: Macy’s is about to furlough the majority of its 130,000 employees.)
“Thank you, sir, for your words of wisdom,” a reader writes after Friday’s 5.
“What a smart, well-written truth about our country and the condition we are in…”
The 5: Thanks. Grim stuff, I know. Today too.
But even though these are dicey times for the markets, terrible times for the economy and even worse times for the trajectory of society… there are still attractive opportunities for short-term trades using a handful of strategies. We’ll be telling you more about them in the coming days.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Actually, there’s one strategy we’d like to draw to your attention right now — courtesy of former hedge fund manager James Altucher.
This week could be your last chance to catch a crucial message he has about protecting your wealth during this choppy market.
You can watch it right here. Just know that it’s coming down when the market opens Wednesday at 9:30 a.m. EDT — for reasons you’ll see when you click.
