Monday, March 16, 2020

The Fed's 1% Interest Rate Cut Doesn't Address The Shutdown So Will Not Avert The COVID-19 Recession

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"The Federal Reserve is now officially spent.  Saving the U.S. economy from this point forward is now up to others.".  Greg Ip, WSJ, 'Don't Look To The Fed. It's Others' Turn Now'.

It's always sad in a movie when the 'good guy' is pinned against the wall with only one round left in the chamber of his six gun, and the bad guy approaches - say with a bigger weapon.  Then when you see the good guy fire the round to no effect, you know it's all over but the dirges.  The same transpired yesterday when Fed Chair Jerome Powell - desperate to halt the sordid economic effects of unseen enemy - fired off the last round in his chamber. I am talking about the rate cut of effectively 1 percent (down to 0- 0.25%) which will leave nothing in his chamber when the full COVID-19 recession takes off.

As I'd written before, none of these monetary moves work given the nation is in a shutdown - with millions of workers soon forced to stay home either out of choice or necessity (if they get the virus or their kids do).  What they need and badly - is money to tide them over when they can't collect a paycheck. In other words, paid leave. (See my post from yesterday).

Will Powell's rate cut get commercial aviation, now facing a $113 b hole (WSJ, March 14, p. B4) earning again?  Will it fix the supply chain problems all around, including meds from China?  Will it bolster the energy sector- now facing a demand drop from the virus as well as oversupply problems? Hell no, which is why you can expect the markets to tank today. They know the only thing the Fed and Powell have done is to appease Trump. (The dope actually expected the DOW to soar today.)

Most ordinary, e.g. non - financially inclined citizens, still have no clue regarding the economic cyclone about to strike the U.S.   This is the case because they've no inkling of the knock -on effects of prolonged shutdowns or terminated supply chains.  This is apart from the residual core of congenital morons who insist it's "all media hype"  and - to quote one asswit :"If we can't deal with a little bug then we're all a bunch of pansies.".  In regard to either of these denizens I want to hear what either says - assuming they can communicate at all- once they get this "bug" and have to be intubated in an ICU at the nearest hospital.   

The commonality with all these low IQ mutts who try to spread the memes that "it's just a flu" or "no biggie" is: i) They are incapable of doing exponential math, and ii) they have no conception of the limited margin for error we have in terms of our health care system capacity: ICUs, beds, ventilators, medical staff,  i.e. being inundated by a flood of critical care patients when existing resources are at a premium.

Many of these dimwits look at current fatality stats, say 60-odd in the U.S. and are unimpressed, not realizing there are literally thousands backing up in ICUs across the U.S. right now fighting for their lives on ventilators - with loved ones hoping they aren't added to the death toll. You never hear about these cases unless you plow through different newspapers of different cities, say like New Orleans. Where you learn about the current plight of 45 -year old  construction litigator Mark Frilot, now in critical care, and isolated and sedated (using paralytic drugs) on a ventilator.  His wife Heaven said their physician informed them that COVID-19 was likely circulating for a while before Mark got it, and also before the testing kits arrived. That means hundreds may have been spreading it and displayed no symptoms themselves.

The distaff side is that in rural (say red state) areas, we behold a proud populace who fancy themselves above the fray.  As reported in yesterday's Colorado Springs Gazette, many - like in Baca County, or Montrose - see the social distancing measures in cities as "over reaction."  They themselves have no idea how close to perdition they are if the virus hits their little burgs, many with only 1,700- 2,500 people.  But consider this: most of their little community hospitals have only 5 ventilators (ibid.) If the virus strikes a town of 2,000 and 1,000 cases erupt with 200 critical (respiratory failure like with Mark Frilot) they will have 195 citizens who will have to be triaged, or die.  Like the 'no biggie' dimwits they have no clue but for a different reason.

Thank Bonespurs and his spurious maladministration for their colossal failure in implementing the critical testing. (See again Frilot's case described above)

Now, for some hard economic facts for those with IQs over 100:

Mark Zandi of Moody'a Analytics has already projected a $120 b loss by the end of March and has the U.S. effectively in recession now. JPMorgan Chase said Thursday that it expected the U.S. economy to contract in the first two quarters of the year, which would meet a standard definition of a recession. A survey of prominent academic economists, also released Thursday, found that a majority thought the outbreak was likely to cause a “major recession.”  

Coronavirus will cause a recession deeper and more severe than the Great Recession,” Noah Smith, a Bloomberg Opinion economics writer, also predicted.

This will be the case, btw, no matter what manipulations Jerome Powell and the Fed pull with the interest rates (cutting them down to effectively zero yesterday).  None of it will work because what is required now is not any monetary fix but a massive injection of at least a trillion bucks.  This would most expeditiously done via  gov't checks of $1,000 each sent out directly to families hunkered down, like Gee Dubya Bush did back in 2008-09.  (As WSJ columnist Greg Ip related to the CBS a.m. anchors last week)

 In addition we need lots of federal money to support subsidies for hundreds of small businesses to enable them to give paid leave to their sick or secluded employees, without going into the red.  All of which will do far more to keep the economy afloat - and at least avoid the worst potential recession- than the Fed's interest rate gimmicks. 

All of this is needed to support a credible Coronavirus response package - as opposed to that piece of  compromised crap I wrote about yesterday. Or more Fed interest rate cuts (including toward negative interest rates) which don't do a damned thing otherwise than provide cheap crack to the markets.  Which can't avoid crashing anyway if the demand side is basically frozen up, consumers not spending to go out etc.

Measures of consumer sentiment fell sharply in early March, and indexes of business conditions have since cratered. Airlines, ports, hotels and other directly affected industries have already announced layoffs or employee furloughs. In Barbados, docked cruise ships have disgorged passengers mid-voyage who must now try to find air transport back to their homes.  All those cruise companies are now shut down and they didn't even give passengers a heads up. (See, e.g., 'Cruise Business Comes To A Halt', WSJ,  March 14-15, p. B3)


Postings for restaurant jobs were down 26 percent last week compared with the same week a year ago, according to data from the job marketplace ZipRecruiter. Job listings in catering were down 39 percent and those in aviation down 44 percent.

 As energy specialist and pundit Dan Dickers has noted,  lot of this has to do with the U.S. shale oil business being over-leveraged for the past five years at least. Thus, "tons of debt" (Dickers' parlance) has been issued with some $600 b "in triple B bonds or B minus bonds".    Given this, it's little wonder U.S. shale drillers can't beg, borrow or steal any credit now - say from the banks - to support their activities. (See e.g. 'Shale Drillers Face Fight For Survival As PricePlummet', WSJ, today, p. B1).  Indeed Scott Sheffield (Pioneer Natural Resources CEO) estimates (ibid.):  "50 percent of public E&Ps will go bankrupt over the next two years."

Dickers estimated as much as $2 trillion could be out there with U.S. banks holding a lot of it (one reason the bank stocks were "murdered" in the bloodbath yesterday).   All of which points to mammoth liquidity problems in many ways analogous to what presaged the credit crisis 10 years ago.   Worse, "the Fed is now out of quivers".  

Trump has been able to hold up his fake economy - and overextend the life of the Bull (which Dickers insists is 3 years beyond terminal) -  by gimmicks such as tax cuts, deregulation and bullying Jerome Powell's Fed to cut interest rates- as they did again yesterday. But this is  about to end because of the COVID-19 pandemic upends markets everywhere, from sports, to energy, to  entertainment (theaters), restaurant industry, airline industry and banking. As Dickers put it to Hayes:

"The coronavirus will be the straw that broke the camel's back of the global economy."

As Niall Ferguson pointed out in his WSJ op-ed  ('Network Effects Multiply A Viral Threat', March 8, .A17):

"Network effects are the reason it is anything but dumb to worry about this novel coronavirus.  Not only is it spreading much faster than most Americans realize, it is also disrupting global manufacturing supply chains as well as all the economic activities that depend on travel and proximity."

The even more somber specter hanging over the markets is the degree of  ordinary leverage, beyond the already referenced over-leveraged oil markets.  This is the degree to which disproportionate debt underlies the purchase of ordinary stocks, shares. One pundit on CNBCs  'Squawk Box' the day of the 9.9% crash observed that currently for every $1-2  an investor uses to purchase a share -  say for $10  - the balance is appropriated via leverage or going into hock.  Hence, a paper $6 trillion loss in a major sellout could actually turn out to be $50 trillion. 

This warning is not new. Two years ago, we read in the April 17, 2018 Financial Times ('IMF Sounds Alarm On Excessive Global Borrowing') :

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong."


True, in much of the nation the economic hurricane remains invisible, as offices, restaurants, bars remain open - and for now day to day life appears relatively normal.   But in places like Seattle where the virus is now widespread we behold the worst effects as mitigation proceeds to try to flatten the infection curve.  There the downturn is well underway and it will get worse and hit the rest of the nation as testing ramps up and the infected numbers double, triple and quadruple.  For those blinded by stupidity or inability to do exponential math this will be "hype" -until they and theirs also get ill-- from reckless behavior owing to indulging in too much FOX watching.  What we know now, as one economist put it, is that shutdowns and recessions are the way to stop the spread of a virus for which there is no immunity.   As Dr. Anthony Fauci put it, we have a narrow window to act  - especially given Trump blowing the lead time we did have - and if we blow it again now with mitigation (social distancing) then the medical system will be overrun.  We will see a replay of what's happened in Italy but with far more catastrophic consequences.

The workers who are feeling the effects of the pullback first are the ones least able to afford it: low-wage, hourly employees, many of whom aren’t paid if they miss work. Only one-third of leisure and hospitality workers have access to any paid time off, according to data from the Bureau of Labor Statistics.  

Meanwhile, Dotard Donnie Bonespurs clearly feels proud of himself after he managed to bully lapdog Fed Chair Powell into lowering interest rates a full point. He did this by a day earlier speculating that he'd be able to "demote" him.  Btw, do I believe he really tested negative for the belated COVID-19 test he finally took? Hell no! I believe he tested positive and ordered his lapdog doctor to cover for him.  After some 17,000 lies why believe anything Trump or his circle of sycophants claims, or says?  I don't.










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