‘Where We’re Going, There Are No Roads’: Revolvers, 12-Sigma Plunges And Reluctant Swipers

Perhaps unsatisfied that his already dour projections were resonating, Jim Bullard on Monday told Bloomberg that unemployment could spike as high as 42% over the coming months, as the US economy effectively shuts down in an effort to stop the spread of a deadly pathogen which has infected nearly 800,000 people globally.

Bullard previously projected unemployment could soar to 30% and also suggested Donald Trump implement a “National Pandemic Adjustment Period” until at least July 1, during which production would be carried out “only if (1) the good or service is deemed ‘essential’, or (2) the good or service can be produced in a way that does not risk transmission of the virus”. Bullard said real GDP would decline roughly 50% during this period.

Some thought Bullard’s idea – floated just a week ago – was ludicrous, but it’s looking more and more likely that the US will end up effectively implementing it one way or another. “At this point I think everybody wants to stay home until the virus goes away”, Bullard said Monday. “Because of that I think all across the country you’re basically in a partial shutdown situation”.

Indeed, Trump told the media he’s considered a nationwide stay-at-home order, but for now thinks it won’t be necessary. “We’ve talked about it”, the president said, at the daily White House virus briefing. “If we do that, I will let you know, but it’s pretty unlikely, I would think, at this time”.

In a filing on Monday, Visa tempered its outlook for the second time this month, citing lower cardholder spending associated with COVID-19 containment measures.

“As the virus has spread in the last few weeks, the impacts we saw in Asia in February are now occurring in the rest of the world, with a rapid deterioration of cross-border travel related spending, both card present and card not present”, the company said. “As countries have imposed social distancing, shelter-in-place or total lock-down orders, domestic spending, most notably in travel, restaurants, entertainment and fuel, has sharply declined week on week with a meaningful deterioration in volume and transaction trends in the second half of March”.

Meanwhile, America’s largest banks are politely asking the country’s most credit-worthy corporates to refrain from tapping revolvers.

Over the past several weeks, companies have aggressively drawn down credit lines amid all manner of turmoil, including a deep-freeze in the commercial paper market. More downgrades are inevitable and the Fed’s efforts to avert systemic credit events notwithstanding, the default cycle which has been delayed time and again by central bank largesse seems to be upon us.

With no real visibility into how the epidemic will evolve, the C-suite is hoarding cash. And, really, can you blame management? Sure, the Fed has committed to keeping banks flush, but this is just the old “smoke ’em if you got ’em” adage playing out in a crisis.

According to Bloomberg’s calculations (based on company filings) US corporates have tapped their revolvers for more than $162 billion over the past three weeks.

As alluded to above, this isn’t really a liquidity problem for banks. Rather, it’s about profitability.

“Investment-grade revolvers… are a low margin business, and some even lose money”, a Bloomberg piece published Monday explains.

The point of the facilities is to “cement relationships with clients” so that those clients choose that bank when it’s time to raise capital, do some M&A or anything else where the margins are higher. “That’s fine under normal circumstances when the facilities are sporadically used, but with so many companies suddenly seeking cash anywhere they can get it, they’re now threatening to make a dent in banks’ bottom lines”, Bloomberg says.

So, instead, companies like McDonald’s are taking out new (and in some cases more expensive) loans and/or issuing debt. Why? Well, for one thing, because it keeps the existing revolver untapped (in case they really need it later). On top of that, it has a signaling effect to the market – i.e., “We’ve got access to all the financing we need”.

One thing is clear: The next two months are going to be really, really dicey. Monday’s Dallas Fed plunge bordered on the comical, and at least one estimate for Thursday’s jobless claims print sees filings nearly doubling from last week’s all-time record.

That’s bad news, to put it mildly.

“Our previous work has found that jobless claims are the single best real-time indicator of recession, so this rise leaves no doubt that the US economy is currently in the midst of a recession”, Deutsche Bank wrote, in a COVID-19 update.

“Going forward, claims will be very important to monitor on a week-by-week basis for the extent of the economic fallout as well as for any indication that stimulus provisions aimed at keeping workers on payroll are having an effect”, the bank goes on to say, adding that “consistent with the sharp rise in claims, our summary index of these high frequency indicators has essentially gone into free fall, indicating data which is about twelve standard deviations worse than average”.

(Deutsche Bank)

Of course, the amusing (or not, depending on how you want to look at things) part about this is that even a twelve standard deviation move in high frequency indicators of economic health likely doesn’t capture how tumultuous things are about to get.

“As the full extent of the job loss and economic fallout becomes evident over the next couple weeks, we expect our tracker to worsen even further”, Deutsche sighs. The name of the piece from which that chart is excerpted: “Where we’re going, there are no roads”.



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2 thoughts on “‘Where We’re Going, There Are No Roads’: Revolvers, 12-Sigma Plunges And Reluctant Swipers

  1. As dire as the situation is, it’s clear that Bullard is throwing out worst-case scenarios to try and stir-up more support for increasingly unconscionable Fed intervention.

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