American Reality Check

The Federal Reserve swept into action on Sunday to save the U.S. economy from the fallout of the coronavirus, slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least $700 billion.
The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines. ...
The Fed’s emergency action came as more and more evidence emerged that the U.S. economy is being hit hard by the virus. On Sunday alone, Ohio ordered all bars and restaurants closed indefinitely, Nike shuttered all its stores at least through March 27 and airlines announced drastic cuts to their international flight schedules. Businesses are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.

As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts on Sunday. It’s now predicting zero growth in the first quarter and a 5% contraction in the second.

Bazooka time.
Wealthy internets acquaintance posted a transcript of a Goldman Sachs memo on another forum I visit:
Conclusions of Goldman Sachs Investee call where 1,500 companies dialed in. The key economic takeaways were:

50% of Americans will contract the virus (150m people) as it's very communicable. This is on a par with the common cold (Rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2-4 per year.

70% of Germany will contract it (58M people). This is the next most relevant industrial economy to be effected.

Peak-virus is expected over the next eight weeks, declining thereafter.

The virus appears to be concentrated in a band between 30-50 degrees north latitude, meaning that like the common cold and flu, it prefers cold weather. The coming summer in the northern hemisphere should help. This is to say that the virus is likely seasonal.

Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu; these are stay at home for two weeks and rest. 5% will be critical and highly weighted towards the elderly.

Mortality rate on average of up to 2%, heavily weight towards the elderly and immunocompromised; meaning up to 3m people (150m*.02). In the US about 3m/yr die mostly due to old age and disease, those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3m new deaths from the virus, it means elderly people dying sooner due to respiratory issues. This may however stress the healthcare system.

There is a debate as to how to address the virus pre-vaccine. The US is tending towards quarantine. The UK is tending towards allowing it to spread so that the population can develop a natural immunity. Quarantine is likely to be ineffective and result in significant economic damage but will slow the rate of transmission giving the healthcare system more time to deal with the case load.

China’s economy has been largely impacted which has affected raw materials and the global supply chain. It may take up to six months for it to recover.

Global GDP growth rate will be the lowest in 30 years at around 2%.

S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall.

There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the 2nd half of the year.

In the past week there has been a conflating of the impact of the virus with the developing oil price war between KSA and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.

Technically the market generally has been looking for a reason to reset after the longest bull market in history.

There is NO systemic risk. No one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is very well capitalized. It feels more like ‪9/11‬ than it does like 2008.

Bold emphasis is mine. Lol. Fed's repo operations were signalling liquidity issues in the system. There were/are issues in the credit markets. The Fed just unleashed all of it's ammo in a 21 bazooka salute. Did Goldman Sachs even notice that they (the Fed) also reduced reserve ratios for banks to zero? Zero reserve banking. Holy shit. No systemic risk at all.
I called my bank today and told them I wanted to make a large withdrawal. Asked if I needed to make an appointment or such. Manager transferred me to a teller. I told the teller what i wanted and she put me on hold for a moment while she checked the cash available for withdrawals. She comes back and says they can cover me no problem. Great!

I head down to the bank. I walk in the lobby and there is only one teller there - the same one I talked to on the phone. I approach and tell her I'm the one who called about the large withdrawal. She gets this look on her face and says she was just about to call me back. She said she was looking at Friday's numbers when she thought they had enough, but there had been substantial withdrawals over the weekend. She could only give me half of what I wanted today. Said they should be getting more cash in on Wednesday, but to call before I come back just to make sure.

Bird in the hand....
A corner of the financial system that provides corporate America with short-term IOUs to buy inventory or make payrolls is seizing up, triggering a scramble for cash elsewhere and fueling speculation that the Federal Reserve will intervene.

In the $1.13 trillion commercial paper market, yields over risk-free rates have surged to levels last seen during the 2008 financial crisis. The strains are causing companies to draw down on backup credit lines, according to people with knowledge of the situation.

The longer the commercial paper market remains stressed, the more companies will look to tap credit lines, increasing the risk that banks will need to raise funds themselves, Bank of America Corp. strategists Mark Cabana and Olivia Lima wrote in a March 13 note. Cabana said the Fed needs to start buying commercial paper to unclog the market.

“It’s prudent for everyone to try and raise liquidity, and the Fed needs to facilitate this,” he said. If not contained, the turmoil could increase risks for money-market funds that hold the debt, he said.

This explains the smashing of the bank reserve ratio I think.
... moments ago the Fed continued to inject liquidity, by conducting two repos amounting to just under $189BN.

The first one was an oversubscribed 14-Day repo, which saw $46.6BN in submissions, with the max available $45BN allotted.

This was followed half an hour later by the $500BN overnight repo which merely rolls over the prior day's expiring overnight, and which saw some $142.65BN in usage.

With no other repos scheduled for today, and the next $500BN 84-day facility not due until Friday, banks may soon find themselves in another funding panic, and the Fed may respond as it did yesterday, with an ad hoc $500BN facility later in the day if funding conditions refuse to ease ...
March 17 (Reuters) - The Federal Reserve is planning to reinstate a facility previously used during the 2007-09 financial crisis to improve liquidity in a key short-term funding market, two sources familiar with the matter told Reuters.

An announcement about the reintroduction of the Commercial Paper Funding Facility (CPFF) could be made as early as Tuesday, the sources said. The move is one of several being taken by the central bank to counter the economic impact of the coronavirus outbreak.

The move will allow the Fed to circumvent banks and get liquidity straight to ailing businesses. It is seen as a key tool as the Fed looks to support smaller firms, one of the sources said.

The CPFF involves the Fed buying commercial paper from issuers directly. The commercial paper market is used by companies for short-term loans and maintaining liquidity in the market is important to ensure companies can get funding.

The Trump administration is preparing to ask Congress to infuse about $850 billion in additional stimulus to prop up the economy, which is facing a deep downturn as businesses shutter amid the coronavirus pandemic.

Treasury Secretary Steven Mnuchin is expected to pitch Republican senators on the administration’s request for additional fiscal firepower, the centerpiece of which is the payroll tax cut that President Trump has been calling for, according to people familiar with the plans.

At a luncheon in the Capitol, he also intends to make the case for senators to embrace a narrower relief package the House passed last week that includes paid leave, unemployment insurance, free coronavirus testing and additional food and health care aid. Some Republican senators have been reluctant to accept that bill.

The Trump administration is also supporting a request for $50 billion in economic relief for the airline industry as part of the broader package. The industry’s lobbying group publicly made the request on Monday, asking for grants, loan guarantees and tax relief. The administration is also considering ways to support the cruise ship industry.

Widespread travel restrictions are throttling both industries and are expected to be a major drag on global economic growth. Economists at Capital Economics predicted that tourism worldwide could be cut by 50 percent over the next six weeks, sapping in 0.7 percentage points from the world’s annual gross domestic product.

The proposal is emerging amid a growing sense of urgency among lawmakers to step in with aggressive measures to stanch the economic pain wrought by the pandemic, and mounting anxiety that Congress is running out of time to do so. With public health officials counseling significant measures to slow the spread of coronavirus, and states and cities ordering businesses to close, limitations on travel and other restrictions on movement, it is not clear how long lawmakers will be able to continue gathering in Washington.

Republican senators have also been coming up with their own stimulus proposals. Senator Mitt Romney, a Utah Republican, said this week that every adult American should receive a $1,000 check from the government to help boost spending in the economy. A group of Democratic senators, led by Michael Bennet of Colorado, Cory Booker of New Jersey and Sherrod Brown of Ohio, is pushing Congress to send as much as $4,500 to nearly every adult and child in the United States this year, as part of a sustained government income-support program to counter the economic slowdown from coronavirus.


$850 billion, $850 trillion. What does it matter? It's just monopoly money.
The Federal Reserve acted to backstop a key source of short-term funding for big businesses on Tuesday, after calls by investors for the U.S. central bank to unclog the so-called commercial paper market.

The Fed opened up the commercial paper funding facility under section 13(3) of the Federal Reserve Act which enable it to support the real economy, rather than just the financial sector. The U.S. central bank received permission from Treasury Secretary Steven Mnuchin.


The Fed is going to be "printing" money like crazy. How long before our global partners start to question the (true) value of the dollar?
The New York Federal Reserve said it will make up to $1 trillion a day available for loans in the repo market for the remainder of this week.

The Fed said it will offer up to $500 billion in overnight repo loans each morning and an additional $500 billion in overnight repo loans each afternoon.

Some details on the Fed's CPFF mentioned above:
The new facility will offer funding with maturities up to 90 days starting on March 20 and be in place for at least six months. Credit extended under the new facility for primary dealers would be collateralised by a "broad range" of investment grade debt, including commercial paper, municipal bonds, and equities. The interest rate charged would be the discount rate of 25 basis points.

I have to laugh at that Goldman Sachs declaration that there is no systems risk, the banking sector is well capitalized and this isn't 2008. There is a raging liquidity crisis happening that is/was threatening to shut down the money market funds, just like 2008. The Fed is shooting bazookas almost every day now.

The Fed is monetizing stocks and bonds now (for their primary dealers of course). I'm sure that won't engender any moral hazard or market distortions in the equities markets now that primary dealers can afford to pay whatever for equities as they are financed by monopoly money.
The Fed fires another bazooka...
The Federal Reserve Board on Wednesday broadened its program of support for the flow of credit to households and businesses by taking steps to enhance the liquidity and functioning of crucial money markets. Through the establishment of a Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds.
A Senate bill to be introduced Friday would allow the Federal Reserve to purchase municipal debt, in an effort to ease the economic strain of the coronavirus pandemic on state and local governments.

The measure from Senator Bob Menendez, a New Jersey Democrat on the Senate Banking Committee, would amend the Federal Reserve Act to allow the Fed to buy municipal bonds under “unusual and exigent circumstances.” The rule would be triggered by events like the rapid spread of a virus, other health emergencies or crises.

“States and localities are on the front lines in the fight against COVID-19 and need assistance from the federal government to be able to finance the increasing costs of the response to this health emergency,” Menendez said in a statement. “The Municipal Bonds Emergency Relief Act would do that by allowing the Federal Reserve to provide support to state and local governments for this crisis and similar future emergencies.”

Looks like the Fed may end up bailing out Chicago/Illinois and every other bankrupt city in the USA if this legislation passes.
A lot easier to do this now .........

No outcry from the more solvent cities cos everyone gets whatever they need.

Soon we will be lobbing quadrillions around and no one will care.

Gotta keep a lid on those pesky metals though )-:
With all the measures the Fed has announced, and the bailouts the government is planning, I wouldn't be surprised to see the Fed's $4.7T balance sheet double or even triple in the coming months. It boggles my mind trying to comprehend the possible consequences of that.
MMF Mayhem...

Goldman Sachs Group Inc (GS.N) poured more than $1 billion into two of its prime money-market portfolios this week due to heavy investor withdrawals, according to a filing with the U.S. securities regulator.

The Wall Street bank purchased $722.4 million in assets from its Goldman Sachs Financial Square Money Market Fund (GPMXX.O) and $301.2 million from its Goldman Sachs Fund Square Prime Obligations Fund.
The bank repurchased securities from its two funds on Thursday after investors withdrew a net $8.1 billion from them during a four-day stretch, according to the disclosure.

Industrywide, investors pulled tens of billions of dollars from prime money-market funds, which buy top-rated corporate debt. Although they are among the tamest investment vehicles, they can be riskier than portfolios that rely more on U.S. government bonds.

The U.S. Federal Reserve rolled out three emergency credit programs this week to battle a global economic shutdown that has roiled the $3.8 trillion money-market mutual fund industry. The Fed is in effect encouraging banks to buy assets from those funds, insulating them from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.

Weekly liquidity levels at the nearly $18 billion Goldman Sachs Fund Square Money Market Fund dropped to 34% on Thursday from 43% on Monday. SEC rules on weekly liquidity dictate that funds have to keep at least 30% of their portfolios in securities that can be converted to cash in five business days.

During that four-day stretch, investors made $6.84 billion in net withdrawals from the fund, Goldman disclosures show.

Goldman’s support is unusual, but it does not stand alone in supporting its funds during the coronavirus panic. Bank of New York Mellon Corp (BK.N) also stepped in twice this week with a total of $2.1 billion to prop up Dreyfus Cash Management.

That $10.5 billion portfolio was also hit by heavy investor withdrawals. BNY bought $1.2 billion from the prime money-market fund on Wednesday and then another $949 million on Thursday, according to fund disclosures, part of which was first reported by the Financial Times.

If a prime fund’s weekly liquidity level falls below 30%, SEC rules give its board discretion to introduce redemption fees of up to 2% to slow down investor withdrawals. They can also put up gates for up to 10 business days.

Those moves, however, would not be welcomed by investors. That’s why fund sponsors like Goldman and BNY Mellon can provide capital support so liquidity levels don’t drop below the threshold. Other fund sponsors have stayed more heavily weighted in liquidity.

The recent market panic has been reminiscent of what happened in 2008, when money-market fund problems threatened to freeze up global markets.
Good morning America....

The Federal Reserve said Monday it will launch a barrage of programs aimed at helping markets function more efficiently in the wake of the coronavirus crisis.

Among the initiatives is a commitment to continue its asset purchasing program "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy."

That represents a potentially new chapter in the Fed's "money printing" as it commits to keep expanding its balance sheet as necessary, rather than a commitment to a set amount.

Others include an unspecified lending program for Main Street businesses and the Term Asset-Backed Loan Facility implemented during the financial crisis. There will be a program worth $300 billion "supporting the flow of credit" to employers consumers and businesses and two facilities set up to provide credit to large employers.
The Fed also said it will purchase agency commercial mortgage-backed securities as part of an expansion in its asset purchases, known in the market as quantitative easing. The move represents an expansion into the commercial sector of real estate for the central bank's acquisitions.

"We are now in QE infinity, again," Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note.

Additional measures include the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets.

The moves come on top of programs the central bank announced last week aimed at easing the flow of credit markets and the short-term finding that banks need to operate. The Fed said it will expand its money market facility announced last week to include a wider range of securities that it will accept.
Monday's announcement represents the most aggressive market intervention the Fed has made to date.



While Fed and Treasury officials have been repeatedly assuring Americans that these Wall Street behemoth banks have plenty of capital, they’ve actually been bleeding their common equity capital faster than a snow cone in July. In just the past five weeks, from the close of trading on Friday, February 14 through the close of trading on Friday, March 20, five of the largest Wall Street banks have lost an average of 45 percent of their common equity capital.
and there you have it ........

always denied, fiscal responsibility and all that tosh

now the only way to maintain any confidence

Presumably there will be no need for the IRS in future ?
A wave of credit rating downgrades in the corporate sector risks deepening a funding crisis for company bosses and spreading it to other markets.

The coronavirus’ suckerpunch to the global economy has prompted Moody’s rating agency to review its corporate ratings, the agency told Reuters this week, with a slew of downgrades or downgrade warnings on the cards.

A credit rating cut is a blow for a company in any circumstance, making it more expensive to raise fresh debt or refinance existing bonds. But it is potentially devastating when markets are in a panic and company cashflows are shrinking.

A downgrade to ‘junk’ status, the lowest credit rating indicating a higher risk of default, forces investors to scatter because many asset managers cannot hold junk-rated debt. Without any willing buyers, the risk is a panicked sell-off which could also spread to other markets.

Zombies need braaaaaainsssss....

The Cheesecake Factory sent a letter notifying landlords that its restaurants won’t pay rent for the month of April after business slowed sharply because of the coronavirus pandemic.

In a letter dated March 18, Cheesecake Factory (ticker: CAKE) Chairman, founder, and CEO David Overton wrote that the chain’s locations will resume paying rent as soon as possible.
Many of Cheesecake Factory’s landlords are malls and shopping centers. That sector has had plenty of its own problems in recent years.

Bonds backed by mall-operator mortgages have been an unloved sector among Wall Street investors, thanks to declining foot traffic and the rise of online shopping.

The Cheesecake Factory is a tenant of malls backing several commercial mortgage-backed securities issued in the past two years, according to credit-ratings firms. For example, the Cheesecake Factory’s rent provides cash flows for securities backed in part by the mortgages of the Galleria Mall in St. Louis and the Christiana Mall in Newark, Del.

Economic fallout from Covid19 response are just getting started. I expect the Fed will unleash bazookas to keep commercial bond markets from collapsing, but just how much are they going to have to devalue the dollar to do it?
I'm surprised Bloomberg published this...
Jim Bianco said:
The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus. Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be.

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:
  • 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. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. 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.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.

Back on March 21 (post #290), I referenced a story announcing a Senate bill to amend the Federal Reserve Act so the Fed could buy up municiple bonds. Looks like Dems in Congress are going to try and shoehorn that measure into the next stimulus bill...

Democrats in Congress want the Federal Reserve to buy all types of municipal debt, regardless of rating, to help ease the impact of the coronavirus pandemic on state and local governments.

“I think they should take the risk,” said Representative Rashida Tlaib, a member of the House Financial Services Committee. “We did it for the big banks, they should be able to do it for the local governments. Local governments are too important to fail right now.”

The coronavirus pandemic has crushed sources of tax revenue for states and localities at a time when resources, including paramedics and hospitals, are being committed to combat the threat to public health.

Tlaib said that her view has the support of Financial Services Chairwoman Maxine Waters and House Speaker Nancy Pelosi. She’s pressing to pass legislation that would change Section 14b of the Federal Reserve Act to allow the central bank to buy municipal debt of any duration in response to crises and emergencies A bill introduced in the Senate by New Jersey Democrat Bob Menendez also backs such an amendment.
4/9/20: $ 6.131T

Much lower than I was expecting. Seems unreal with all the programs the Fed has initiated.
4/16/20 - $ 6.416 T

Just another ho hum $300B increase.
4/23/20 - $ 6.621 T

Only $205B this week.
I heard there are famines going on in Europe, and Russia isn't sending food. I wonder how much this'll affect us.
I heard there are famines going on in Europe, and Russia isn't sending food. I wonder how much this'll affect us.

Where did you get this info Fiddle ?
Russia probably isnt sending food cos 'Russia bad' and you never bought food from them in the first place ........

I am in UK and I am not aware of any undercurrent of food shortages here.

I am reading about the shutting down of a significant percentage of meat processing plants in the US though.
It occurrs to me that this will absolutely destroy the meat producers as they now have animals ready for market and no market.
Yeah they can continue to feed them but once they go past their optimal conditioning to get them ready for market its not the same quality .......

Perhaps Beyond Meat can pick up the slack and assure the destruction of livestock farming :flushed:
Where did you get this info Fiddle ?
Russia probably isnt sending food cos 'Russia bad' and you never bought food from them in the first place ........

I am in UK and I am not aware of any undercurrent of food shortages here.

I am reading about the shutting down of a significant percentage of meat processing plants in the US though.
It occurrs to me that this will absolutely destroy the meat producers as they now have animals ready for market and no market.
Yeah they can continue to feed them but once they go past their optimal conditioning to get them ready for market its not the same quality .......

Perhaps Beyond Meat can pick up the slack and assure the destruction of livestock farming :flushed:

Maybe it was a ploy by big BYND since that stock just keeps shooting up.
The global coronavirus outbreak threatens to worsen the existing food crises around the world and create “a hunger pandemic,” the chief of the United Nations Food Program warned earlier this week.
4/30/20 - $ 6.703 T

Just $82B increase. Not sure how the equity markets are levitating so much when the balance sheet expansion is slowing down so much.
Related to post #315:
Responding indirectly to Jeff Gunlach's late Friday tweet, in which the bond king observed something we had noted previously, namely that "the Fed has not actually bought any Corporate Bonds via the shell company set up to circumvent the restrictions of the Federal Reserve Act of 1913" adding that this "must be the most effective jawboning success in Fed history if that is true"...

... moments ago the The New York Fed announced on its website that it expects to begin purchasing eligible ETFs, most notably the LQD and JNK, but also many others as detailed previously...

... as part of its emergency lending programs in "early May."

4/30/20 - $ 6.703 T

Just $82B increase. Not sure how the equity markets are levitating so much when the balance sheet expansion is slowing down so much.

yeah apparently the printing ink manufacturers are having problems with staff self isolating
And theres no planes flying from Zimbabwe, where theres plenty :rotflmbo: :pffftt:
5/7/20 - $ 6.769 T

Just a $66B increase. Looks like the Fed now owns $4B in the "Commercial Paper Funding Facility II LLC".
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