The Economy: How bad will it get?

 

The overwhelming consensus is that the best case scenario, is going to dwarf all other post World War II recessions. Many economists expect both the economic contraction and real unemployment figures to rival those of the early 1930s in the dark days of the Great Depression.

So, are we going to have a depression? That would depend on how deep the economic downturn goes, and importantly, how long it lasts. It is almost a running joke that use of the 'D' word is prohibited in academia and among business people, as well as the talking heads on the various financial news networks, except when used in historical reference to the events of the 1930s. And it  doesn't help that there is no hard and fast definition of what constitutes a depression.

Most economists and historians have avoided labeling any of our post-war downturns as depressions, though I would argue that two probably meet the vague definition. The first would be the downturn that began in the last year of the Carter administration and continued through the first couple of years of the Reagan administration. Roughly late 1979 to 1983. The second would be the most recent financial crisis of twelve years ago. A number of countries and regions, notably in southern Europe, never recovered and were still experiencing devastating unemployment aggravated by sovereign debt crisis right up to the arrival of COVID-19.

To my mind the odds of a quick 'V' shaped recovery that Wall Street seems to be hoping for are poor. The economy, especially in our globalized era, cannot be turned on and off like a light switch. When you break the glass and hit the red button labeled "Emergency Stop," the engine is going to seize. In furtherance of the damage to the engine is that we don't have either a cure or a vaccine anywhere on the horizon. This means all of the global distancing rules are going to remain in effect for the foreseeable future. And the mass unemployment is going to send shock-waves out inflicting even more damage. Unemployed people generally can't afford much in the form of goods and services. So what we have is the prospect of an economic contraction functioning like a giant snowball rolling down hill while gaining both size and velocity.

Fortunately we do have a few things going for us. The first is that we have learned a bit since the 30s. So the catastrophic policy mistakes of that era are, we hope, unlikely to be repeated. Raising taxes (both Hoover and FDR), massive increase in government regulation of the economy (FDR), tightening monetary policy (the Fed of the early 30s) and raising protectionist tariffs (Hoover). The last one is a bit alarming since we have a president who is enamored of economic protectionism.

Also unlike in the 30s, we do have something of a social safety net. Granted, it is among the weakest in the developed world. But it is like noon on Miami Beach compared to the long winter of the early 30s where the unemployed and homeless were almost entirely dependent on private charity, which quickly became overwhelmed.

Which brings us to; where are we going? There are just too many variables to give any kind of concrete prediction. But I will make a few general observations. The medical community seems resigned that this thing is going to be with us for years. So until a vaccine is developed we can expect succeeding waves of COVID. Some of those could be worse than what we have experienced thus far and could inflict even more loss of life and economic damage. Unemployment is likely to breach 20% and the contraction in GDP is unlikely to be less than 25%. In that scenario I don't see even the beginning of a meaningful recovery for at least a year, and more likely two to three.

So... depression? Yeah, very likely. Great Depression Part II? I doubt it. It was the government that put the "Great" into the depression of the 1930s. And while I always encourage taking a deep breath before putting any upward limit on the stupidity of politicians and bureaucrats, if... we can avoid the mistakes of the Hoover/Roosevelt years, I am cautiously hopeful that the worst will be over within four to five years.

But for now, I think we are just going to have fasten our seat belts and hang on. Because even the rosiest predictions suggest we are in for one hell of a bumpy ride.

(To those who are fortunate enough to be doing OK, please remember the many who are not.)

Rescue bills hide huge tax breaks for the wealthy

...One provision tucked into the federal economic-rescue law increases the amount of deductions companies are permitted to take on the interest they pay on large quantities of debt. Only companies with at least $25 million in annual receipts can qualify for that break.

Another change lets people deduct even more of their businesses’ losses from any winnings they reaped in the stock market, sharply reducing what they owe in capital gains taxes. Only households earning at least $500,000 a year — the top 1 percent of American taxpayers — are eligible.

And yet another provision in last month’s rescue package allows companies to deduct losses in one year against profits that they earned years earlier. The tax break most likely won’t put any extra cash directly into the hands of companies hit by the current crisis for at least a year.

The bottom line is that, barely two years after congressional Republicans and President Trump lavished America’s wealthiest families and companies with a series of lucrative tax cuts, those same beneficiaries are now receiving a second helping.

Many of the tax benefits in the stimulus are “just shoveling money to rich people,” said Victor Fleischer, a tax law professor at the University of California, Irvine. While the 2017 tax-cut package was a bonanza for big companies and wealthy individuals, in order to keep the law’s overall costs down it  imposed a number of restrictions on who could take advantage of certain tax breaks and how much those taxpayers could reap.

Read the rest here.

Oil Crashes -300%

The price of oil collapsed deep into negative territory for the first time in history today with persons holding oil contracts paying around $35 a barrel for someone to take it off their hands.Traders however were cautioning that this is likely at least in part a technical event and that, as battered as the oil market is, the true value of oil remains positive.

The Stock Market Bounces (and a personal note)

So the stock market just had it's best three day run since 1931. Yep, that's impressive. And I honestly hope that this is the first sign of confidence in a general economic recovery. But something worth remembering is that the early 30's on Wall Street became infamous for bear market rallies. These wild upward ticks, also known as suckers rallies or a dead cat bounce, never fully recouped the earlier losses and always preceded another sharp sell off. 

With a veritable wave of ugly news still waiting in the wings, I have no confidence in this stock market. And now that the government is printing money like it is water and monetizing the bond market, the only asset I'm nibbling in right now, is gold.

To be clear, I'm not making any predictions here. All I'm saying is that these are dangerous times economically and it does not feel like we are near the end. My gut says things may be just warming up. So if you have a well diversified portfolio (stocks indexed, bonds, a solid cash reserve and maybe some gold) I'd just sit tight and wait things out. Nine times out of ten, selling into a financial panic just locks in losses. But I'd definitely not be making speculative investments right now unless it was with money I could afford to lose.

[On a personal note; thank you to those who have inquired about my health. My symptoms have, thank God, been very mild. A persistent dry cough that turned into the achy blahs with on again off again low grade fevers. A little shortness of breath and the urge to lie down every time I did anything even remotely active. This has lasted for around three weeks now and I am sorry to say when it first started I didn't even realize my cough could be more than a reaction to my dogs shedding. Happily the symptoms have been fading lately to the point where I mostly feel fine now. I hope to be able to begin the seven day countdown either tomorrow or Saturday where if no symptoms return I can bust out of this joint. Options of places to go are pretty limited right now but even just a trip to the gas station would be a relief. Stay safe everybody.]

They need to close the financial markets

Trump should issue an emergency decree and close the financial markets for the next thirty days. The global economy is slowing to a near halt in some sectors. There are reports of a run on banks and ATMs for cash. There is no reason to allow the rapidly spreading panic to cause even more economic damage.

Cyprus scrambles to avert meltdown

NICOSIA (Reuters) - Cyprus considered nationalizing pension funds and ordered banks to stay shut till next week to avert financial chaos after it rejected the terms of a European Union bailout and turned to Russia for aid.

Crisis talks among the political leadership in Nicosia are set to resume on Thursday after late-night meetings to discuss a "Plan B" broke up on Wednesday without result.

EU officials voiced frustration but little sympathy for an ambitious but now bust banking system that extended itself well beyond the island; Russia, whose citizens have billions to lose in those Cypriot banks, called the EU a "bull in a china shop".

Read the rest here.

Cyprus plans to confiscate up to 10% of bank deposits

It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.

Early Saturday, the nation reached an agreement with international lenders for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut. Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.

Read the rest here.

I think this is a colossal mistake. People are very logically going to conclude that if this can happen in Cyprus why not in another debt strapped country? It could precipitate a run on banks in every Euro Zone country that has major debt problems. If I lived in Greece Italy Spain or Portugal I would be waiting at my bank on Monday morning to yank every Euro and then convert half to gold and silver coins and bury them in the backyard.

Whatever You Do, Don’t Say ‘Bank Run’

It’s a very bad time to even breathe the words “bank run” anywhere in Europe.

Shares of Bankia, Spain’s fourth-largest bank and as of last week a ward of the state, were down as much as 29% today after the Spanish paper El Mundo reported that in the past week depositors had withdrawn 1 billion euros (story’s in Spanish, incidentally, Google translation is pretty poor but you’ll get the gist.)

The report was quickly denied by the Spanish government, but the bank itself had no comment.

This is customers voting with their feet and investors voting with their keyboards. It shows a profound lack of faith in the government of Prime Minister Mariano Rajoy to rescue the nation’s banking system as it grapples with a massive housing bust.

European shares are down about 1% across the board, including Spain’s IBEX. The euro fell to as low as $1.2665, but lately is over $1.27.

This is what happens when a currency union fails in the middle of a sovereign-debt crisis with a leadership group that’s incapable of doing anything save stall for time. Once panic sets it, it’s too late. The fear is if Greece leaves the euro, it will start a chain reaction that will spread to other nations, like Spain and Italy, the two economies that are too big to fail, and too big to save.

Read the rest here.

Europe: Major Bank Failures Are Imminent

Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region's struggling banks, however City figures said a "collateral crunch" was looming.

"If anyone thinks things are getting better then they simply don't understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.

Read the rest here

Euro Collapse Likely to Hit US Hard

To get a sense of how vulnerable the U.S. economy could be if the euro currency union cracks apart, start with the volume of U.S. exports to the euro zone — $153 billion in the first six months of the year. Add several hundred billion dollars in investments by U.S. banks in the euro zone and several trillion dollars’ worth of other financial contracts between the two economies.

As European leaders meet later this week to try to resolve their spreading debt crisis and prevent the breakup of the 17-nation euro zone, U.S. politicians, corporate leaders and financial analysts are watching anxiously for a breakthrough.

The alternative could be staggering for the U.S. economy. American banks and other companies could find themselves battling with any country that leaves the euro union and reinstates its own currency.

“The risk is likely paralysis,” said Michael Hood, a market strategist at J.P. Morgan Asset Management. “You won’t even know what people owe you.”

Read the rest here.

IMF advisor says we face a Worldwide Banking Meltdown

Analysis: Bank of England hits the panic button

Who was it who said that QE – printing money by another name – is the last resort of desperate governments, when all other options have failed?

As Labour's Ed Balls gleefully points out, it was indeed George Osborne, the current Chancellor (British Treasury Secretary A/O). It is the sort of thing politicians say in opposition and then bitterly regret when they get into government and have to take the decisions.

Yet in a sense, his words are even truer today than they were then. You wouldn't choose further to expand the Bank of England's purchases of government debt unless you were desperate, and all other options had been exhausted. The Chancellor condemned it then; now he welcomes it.

Since nominal interest rates are already as low as they can realistically go and the Government has, rightly, ruled out easing back on deficit reduction - more QE is about the only thing left in the locker as the world slides, inexorably, towards depression.

As regular readers will know, until quite recently I've argued steadfastly against QE2, but on the never say never principle, I was always careful to add some riders. When faced by an extreme deflationary threat, almost anything can be justified, and that's precisely what we are seeing now. As the Governor of the Bank of England, Sir Mervyn King, put it on Thursday, "when the world changes, we must change our response".

Read the rest here.

World facing worst financial crisis in history, Bank of England Governor says

The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.

Read the rest here.

Europe: Who is going to foot the bill?

Efforts to resolve Europe’s debt crisis are, at their core, an exceptionally high-stakes game of chicken, pitting the continent’s central bank against its national governments. Hanging in the balance: the entire world economy.

If an economic calamity is to be avoided, some Europe-wide entity probably will need to funnel money to Greece and other troubled nations and jointly guarantee the debts of the continent’s governments in a we’re-all-in-this-together show of solidarity. The great debate in Europe right now is over what entity will be stuck holding the bag.

Read the rest here.

New York Investigates Banks’ Role in Fiscal Crisis

Eric T. Schneiderman, the New York attorney general, has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

Officials in Mr. Schneiderman’s office have also requested meetings with representatives from Bank of America, Goldman Sachs and Morgan Stanley, according to people briefed on the matter who were not authorized to speak publicly. The inquiry appears to be quite broad, with the attorney general’s requests for information covering many aspects of the banks’ loan pooling operations. They bundled thousands of home loans into securities that were then sold to investors such as pension funds, mutual funds and insurance companies.

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

Read the rest here.

Whose to blame for California's fiscal disaster?

Time for California voters to look in the mirror and face some tough facts.

...The results Tuesday fit Californians' long-standing pattern of demanding what is ultimately irreconcilable, all the more so in an economic downturn: lower taxes and higher spending.

"We all want a free lunch, but unfortunately that doesn't exist," said former Gov. Gray Davis, whose 2003 recall stemmed largely from a budget crisis brought on by the dot-com bust. For decades, Davis said, Californians have been "papering over this fundamental reality that the state has been living beyond its means."

Davis and many other elected officials bear some responsibility for that. But so do voters.

In the Proposition 13 tax rebellion of 1978, Californians voted to require a two-thirds approval by the Legislature to raise taxes, a major obstacle to budget agreements. Over the last couple of decades, voters have also passed a patchwork of ballot measures directing billions of dollars to favorite causes, among them public schools and transportation projects.

On Tuesday, Californians showed they were unwilling to scale back their demands in tight times: Voters turned down propositions that would have freed up money that they set aside years ago for mental-health and children's programs.

"The irony is that the more the hands of the Legislature and governor are tied up, the more frustrated people are," said Tim Hodson, director of the Center for California Studies at Cal State Sacramento.

Together, voters' piecemeal decisions since the 1970s have effectively "emasculated the Legislature," said John Allswang, a retired Cal State L.A. history professor.

"They're looking for cheap answers -- throw the guys out of power and put somebody else in, or just blame the politicians and pretend you don't have to raise taxes when you need money," he said.

"This is what the public wants, and they deceive themselves constantly. They're not realistic..."

Read the entire story.

CRASH

It's time to call this what it is... a stock market crash. It's occuring in slow motion. But it's a crash all the same.

Yesterday's Vote

Move over Ronald Reagan. I am convinced that the modern Republican party has a new idol. Or more correctly three. Smoot, Hawley and Hoover. I think we would have to go back a long ways to find such a dedicated act of political pettiness and suicide. The only thing more scarce than bank credit right now is true leadership in the GOP. These people don't have a clue about economics. What's worse is that a lot of them seem to know it and still don't care. Their almost glib sound bite comments keep referring to party principals and fiscal conservatism (where were these principals over the last eight years?). The GOP is setting itself up for one of the most crushing electoral defeats in history, and rarely has a party been more deserving of it.

Time to Kill the Happy Talk

To ward off panics, financial media organizations are keeping Un-Happy Talk to a minimum. "We're very careful not to throw words around like 'meltdown' and 'free fall'," CNN correspondent Ali Velshi, who is getting mucho face time thanks to the meltdown and free fall, told The New York Times. The Rupert Murdoch-owned Wall Street Journal is engaging in un-Murdochian restraint, banishing words like "crash" and "pandemonium." Maybe I have a limited vocabulary, but I'm not sure how else to characterize a month in which the country's largest financial institutions, Fannie Mae and Freddie Mac, had to be nationalized; Lehman Brothers, the fourth largest investment bank, filed for Chapter 11; AIG, a component of the Dow Jones industrial average, turned over most of its stock to the government in exchange for an $85 billion loan; the Treasury Department had to guarantee money-market funds to stop people from hoarding cash under their mattresses; gigantic Washington Mutual collapsed, the largest bank failure in U.S. history; and the nation's greatest financial minds have declared that a bailout the size of the Netherlands' GDP is needed to stop the bleeding. Yes, we have to be careful about crying "fire" in a crowded theater. But calling Wall Street's meltdown a meltdown is more like crying "fire" in a crowded inferno.

Read the rest here.

Did We Just Dodge A Bullet?

I think we did.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”

“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.

Read the rest here.