American Reality Check

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The U.S. Federal Reserve warned Friday that the financial sector faces “significant” vulnerabilities due to the coronavirus pandemic, as businesses and households grapple with fragile finances for the foreseeable future.
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Friday’s report noted the financial stresses that could build if the crisis persists, and households and businesses continue to be deprived of wages and revenue.

In short, no one from hedge funds to major banks to households would be immune from the risk they might default on debt, be forced to sell off assets, end up in bankruptcy, or see the value of assets dwindle.
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... Fed Governor Lael Brainard ... highlighted a key worry at the central bank: that what might start as a cash crunch could spiral into something worse. Among highly indebted businesses, she said, “we will be monitoring closely for solvency stresses...which could increase the longer the Covid pandemic persists.”

Few if any parts of the economy are safe. ....

“Financial sector vulnerabilities are likely to be significant, in the near term,” the Fed said. “The strains on household and business balance sheets from the economic and financial shocks since March will likely create fragilities that last for some time.”
https://www.reuters.com/article/us-...l-vulnerabilities-from-pandemic-idUSKBN22R34Y
 

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Kenneth Rogoff said:
... As an analogy, the IMF or Chapter 11 bankruptcy is very good at dealing with a couple of countries or a couple of firms at a time. But just as the hospitals can’t handle all the Covid-19 patients showing up in the same week, neither can our bankruptcy system and neither can the international financial institutions.

So there are going to be phenomenal frictions coming out of this wave of bankruptcies, defaults. It’s probably going to be, at best, a U-shaped recovery. And I don’t know how long it’s going to take us to get back to the 2019 per capita GDP. I would say, looking at it now, five years would seem like a good outcome out of this.
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https://www.bloomberg.com/news/feat...ts-this-time-really-is-different?srnd=premium
 

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5/21/20 - $7.085T

$103B increase. Less than half of last week's increase.
 

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The monthly tally of defaults in the U.S. leveraged loan market has hit a six-year high, data from Fitch Ratings showed, as companies are either missing payments or filing for bankruptcy because of the fallout from the coronavirus pandemic.
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https://www.reuters.com/article/us-usa-debt-leveraged-idUSKBN22X1BD

It's the start of the Fed's worst nightmare (massive loan defaults which could cascade into bank failures):
 

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Banks are selling leveraged loans backing acquisitions at the fastest pace in months as they seek to shed risk accumulated prior to the pandemic.
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Analysts are more gloomy on the outlook for loans compared to junk bonds, which have seen spreads tighten about 190 basis points since the Federal Reserve’s historic pledge to buy some speculative-grade debt early last month.

UBS Group AG strategists wrote last week that the global leveraged loan market is vulnerable to a sell-off as earnings weaken and defaults stack up. They expect U.S. leveraged loan spreads to revisit March wides of 825bps from the 672bps level recently seen as default risk increases.
https://www.bloomberg.com/news/arti...ns-hit-market-as-banks-start-to-clear-backlog
 

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5/28/20 - $7.145T

$60B increase over last week. Balance sheet expansion appears to be slowing down.
 

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Cops are likely making a lot of sweet overtime right now.

Insurance companies going to be paying out a lot of claims. They are probably TBTF so no worries if they end up needing a bailout.
 

Chigg

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A lot of insurance companies policies don't pay out for damages caused by civil unrest.
Seems like I heard some folks complaining about a month or so ago that their health insurance was balking at claims related to covid 19.
 

rblong2us

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If you are at the bottom end of the american dream and have no certain means of buying food, no liklihood of a job, no hope for a future, you might not be too worried about taking a little of other peoples apparent success.
If you are a bankster or at the upper end of the food chain, you will not be too concerned cos its only money and theres always more

If you have worked for what you have and paid all the hands held out so they would leave you alone and something bad happens, its tough luck but dont worry you can always follow your dream and with hard work, rebuild it all ......... or more likely join the bottom feeders bringing your bitterness and anger to the party.

The short term future doesnt look good.
 

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6/4/20 - $7.213T

$68B increase over last week.

June 03, 2020

Federal Reserve Board announces an expansion in the number and type of entities eligible to directly use its Municipal Liquidity Facility
For release at 1:00 p.m. EDT

The Federal Reserve Board on Wednesday announced an expansion in the number and type of entities eligible to directly use its Municipal Liquidity Facility (MLF). Under the new terms, all U.S. states will be able to have at least two cities or counties eligible to directly issue notes to the MLF regardless of population. Governors of each state will also be able to designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities (such as public transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.

In addition to the expanded terms outlined above, the MLF continues to be directly open to U.S. states, the District of Columbia, U.S. cities with a population of at least 250,000 residents, U.S. counties with a population of at least 500,000 residents, and certain multistate entities.

The MLF was established under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. It will offer up to $500 billion in lending to states and municipalities to help manage cash flow stresses caused by the coronavirus pandemic.
 

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Emphasis is mine:
With highly questionable legality on top of a 100% certain moral hazard, here are the details of the Fed's new Secondary Market Corporate Credit Facility
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  • The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds of issuers that are investment grade at the time of purchase.
  • The Facility will leverage its equity at 7 to 1 when acquiring corporate bonds of issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.
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I think we need a new name to properly explain what it really is: an asset price support mechanism.

Not only is the facility a legally questionable moral hazard, it is also nothing but an asset prices support system that keeps zombie corporations alive.
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So about them zombies...
 

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I wasn't near my computer for the last few days... Missed the Fed report last Thursday...

6/11/20 - $7.217T

Just a $4B increase over the week before. That's incredible. Lowest I've seen since the recent madness started.
 

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6/18/20 - $7.143T

Incredibly, the Fed is reporting that their balance sheet actually shrunk $74B over the last week.

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This $74 billion decline in total assets during the week was powered by a plunge in repo balances and foreign central bank liquidity swaps, while some alphabet-soup programs also unwound. And the junk-bond and ETF buying program stalled.

And there is a big shift happening: The Fed has started lending to entities, including states and banks, under programs that channel funds into spending by states, municipalities, and businesses, rather than into the financial markets. These types of programs are propping up consumption – not asset prices. That’s a new thing. I don’t think the hyper-inflated markets, which have soared only because the Fed poured $3 trillion into them, are ready for this shift.
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rblong2us

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I guess that once the CB's get the hang of helicopter money they will explore different ways of pushing it out.
Public awareness of where it has been going is increasing and unrest is a significant possibility.....
Got any 'shovel readies' ?
Perhaps all the crazy housebuilding ( certainly here in Blighty) resources can be redirected to infrastructure ?
 

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6/25/20 - $7.130T

$13B decrease. More or less holding steady right now. If CV19 hospitalizations continue to grow, and shot downs expand, I expect more stimulus will be on the horizon.
 

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So I slacked off a bit on keeping tabs on the Fed balance sheet. July's numbers:

7/2/20 - $7.057T (76B decrease from week before)
7/9/20 - $6.969T (88B decrease from week before)
7/16/20 - $7.007T (38B increase from week before)
7/23/20 - $7.013T (6B increase from week before)

Balance sheet might have gone as low as it's going to go for the near term.
 

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Federal Reserve Chair Jerome Powell has likely heard it all about negative U.S. real yields: How they’re devastating for pensions and life insurers, causing equity valuations to outpace the economic recovery, encouraging a stampede into gold and out of the dollar and giving the green light for American companies to gorge on cheap debt once again.

The message he and his colleagues are likely to convey at their meeting this week: That’s all fine with us.
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Somehow, I really doubt the Fed will be fine with a stampede into gold.
 
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