economy Markets

Red Ink, Too Much Cash, And A Witches’ Brew

The chances of meaningful change are slim. I can't disagree. But "there are plenty of things to buy".

Sad ironies and sigh-inducing headline juxtapositions are a now a fixture of the daily news cycle.

Nowhere is this more apparent than the financial media, where stories documenting a breathtaking comeback for stocks are set against tales of economic calamity and widespread social unrest stemming from pervasive inequality of all sorts.

I’ve spoken at length about this over the past several days, and I imagine polarization will be an ongoing theme from now until something changes. If you ask Ray Dalio (who penned another lament for the state of American democracy and capitalism this week), the chances of meaningful change are slim. I can’t disagree.

According to the ubiquitous people familiar with the matter, Donald Trump was scheduled to huddle with top aides this week to discuss the next virus relief package.

As a reminder, this is important not just because more relief is necessary, but because existing legislation is not properly “stimulus”. Until recently, there was nothing to “stimulate” as the economy was shuttered. The trillions in aid earmarked for individuals, families and businesses was designed to bridge the gap between the time incomes and cash flows ceased, to when they flowed anew.

Having provided the oxygen to keep the patient alive during what JPMorgan has called “an induced economic coma”, it’s now generally seen as advisable to pass a new package of measures aimed at delivering an adrenaline shock now that the patient is awake.

House Democrats, you’ll recall, have already proposed just such a package (the HEROES Act), but… well, but Mitch McConnell.

CBO estimates show the legislation adding $3.4 trillion to the deficit between 2020 and 2025.

Fiscal hawks have been mostly quiet in recognition of the existential crisis facing the economy, but you can expect the squawking to start up again soon.

“The deficit could widen to 21% in 2020 and 11% in 2021, up sharply from 4.6% in 2019, and considerably above CBO baseline projections earlier this year”, Goldman reminds you.

For those interested, there’s a detailed breakdown of the CARES Act and why you shouldn’t fret about government spending in “Who’s Afraid Of Red Ink? COVID Crisis Spawns Bull Market In Deficit Fearmongering“.

Goldman expects $1.5 trillion in additional measures over the course of 2020-2022.

Trump is obviously fine with more stimulus and also with borrowing to fund it. If we’re all being honest, Trump would probably be ok with just mailing everybody a Willy Wonka-style golden ticket redeemable for $50,000 and a free trip to Doral if it meant getting the economy up to speed in time for November. Like his affinity for the Good Book, Trump’s allegiance to Republican orthodoxy around fiscal rectitude is questionable at best. He is, after all, the self-declared “King of Debt”.

But, even as the president has succeeded in transforming the GOP into a personality cult, he still finds it occasionally useful to parrot talking points about budget discipline in the same way he understands that pandering to evangelicals is useful, even though everyone (including evangelicals) knows he has no use whatsoever for religion outside of politicizing it, as he did on Monday evening.

So, the president will apparently side with McConnell who, according to reports, has told administration officials privately that the Senate would likely back another $1 trillion in spending, an amount far short of Democrats’ $3.5 trillion plan.

Whatever the amount, Americans will need it – or at least most Americans will. Unfortunately, discussions around the next package were delayed this week so that Trump could focus on the protests.

“Top aides had planned to meet this week to discuss the next round of pandemic relief as more than 40 million people have lost jobs since states began restricting public activity in March [but] that meeting has been removed from the calendar and has not been rescheduled yet”, sources told Bloomberg, for a Thursday article which notes that “the White House has been consumed this week with protests over police brutality [and] Senate Republicans had no plans to act on a stimulus bill this month”.

As Dalio writes in his exceedingly somber missive, “the racism problem is intertwined with the cycle of the poverty problem in which poverty, crime, and inadequate education leads to systemic disadvantages”. That’s another way of saying that the protests, demonstrations and, yes, riots, are an expression of a larger problem that goes beyond George Floyd to endemic issues, many of which are tied to economic disenfranchisement.

The pandemic has laid bare these problems and now, protests ultimately rooted in frustration over widespread inequality are delaying discussions between the administration and the GOP around moving ahead with a watered down version of Democrats’ proposal to help ameliorate the pandemic pain.

McConnell says he has no plans to move ahead with any stimulus package until after July 20.

Meanwhile, another 1.9 million Americans filed for unemployment benefits last week, bringing the total to almost 43 million since the crisis escalated in earnest.

William Barr on Thursday defended the decision to gas peaceful protesters gathered near the White House on Monday in order to clear the way for Trump to pose with a Bible in front of St. John’s Episcopal Church, despite not being invited or really even welcome, according to Mariann Budde, the bishop of the Episcopal Diocese of Washington.

“This is the federal city. It is the responsibility of the federal government to render that protection”, Barr declared, explaining his order for police to expand a perimeter for Trump, who Barr said “should be able to walk across the street to the church of presidents”.

He also blamed a “witches’ brew” of radicals for injecting violence into otherwise peaceful protests.

Another headline from Bloomberg on Thursday reads “Citi Says Wealthy Clients Are Holding Too Much Cash, Time to Buy”.

Apparently, some of Citi’s private bank clients are sitting on a cash allocation of as much as 35% in their core portfolios.

CIO David Bailin knows this is no time to be bailin’ (sorry) on assets just because the economy is in tatters and protesters are being shot with rubber bullets in front of the White House for the crime of standing between Trump and a church.

In a mid-year outlook piece written for wealthy clients, Bailin reminds the rich that crises are really just opportunities for hedge funds and private equity.

“In 2001 and 2008, for example, average private equity vintage returns increased by 800 and 710 basis points, respectively, over the prior year’s level”, the report reads. “The best distressed opportunities will become available later this year and during 2021”.

That’s right! If you’re rich and you’ve got cash to deploy, you can look forward to snapping up bargains aplenty once the despair really kicks in next year.

“There are plenty of things to buy”, Bailin told Bloomberg, in a phone interview. “The more study we did, the more excited we got”.

I’ll bet. What’s not to be excited about?



18 comments on “Red Ink, Too Much Cash, And A Witches’ Brew

  1. Welcome to Venezuela?

    • I’m in the “Welcome to Japan” camp. Aside from the aspects of American leadership that are akin to leadership of respective institutions in banana republics, we have a lot going for us.

      • Japan is a net exporter … and US a net importer (and getting worse with pandemic as H showed yesterday). The first hint that exporters will take yen, eur, or whatever, and it all crumbles down?

        So US is neither Japan nor Venezuela (one resource economy).

        I’m puzzled about the end game and I would like H to go beyond MMT theory (debt doesn’t matter) to practice. When could US debt start to matter? As there is such a place, just do an ad absurbo thought experiment . . .

        • Think of it this way. Each hundred basis point rise in average rates on UST debt will add at least $160 bil to the federal budget deficit. For a “normal” budget that’s a pretty solid bump. Say “yes” to ZIRP forever.

  2. Public anger over inequality and injustice can be quelled and suppressed for a time but when systemic abuses are not reformed they invariably lead to revolutions. Revolutions generally bring about dramatic change but they are messy and frequently bloody affairs.

  3. There is irony in the fact the Trump and GOP senators are dragging their feet on additional relief that would amount to “proper” stimulus as opposed to bridge liquidity, it would certainly improve their chances in November, betting markets see the senate as a toss up as of today. It is also ironic that we have experienced a V shape recovery in the markets, perhaps if the indices reflected some of the reality on main street further relief would be less controversial. One thing is certain, there are many losers in this debacle, but big corporations that trade in public markets are mostly winners, big businesses will remain and prosper long after the small mom and pop shops and local restaurants become a memory, in the near future most lower income Americans will work at Amazon or Costco or will simply not work at all.

  4. A witches’ brew, indeed. We have spent forty years borrowing from the future and eating our seed corn. Now the cupboard is bare. At no time, in no place, have people who are hungry — emotionally, spiritually, or in actual fact — accepted immiseration and no future as their fate. This time will not be different. There will be a reckoning, and I wouldn’t count on it being peaceful. If it’s any consolation, the country survived the horrors of the Civil War and, inspired by Abraham Lincoln, moved haltingly toward the realization of a more perfect union. There are forces in the country today determined to reverse that progess, as narrow as it was, but they are on the wrong side of history and will be judged harshly by posterity. The moment waits its Lincoln.

    • No one is coming to save us.

    • Neal Howe, Ray Dalio and I are big believers in the cyclical view of history and for us it has worked out very well – Ray made multi-billions and me just a large fraction of one, BUT all of us see HELL in the near future. CYCLES are real. For me and Neal Howe our views depend on life cycles – 4 theortically or 80 years, For at least a decade the 2020 date has been in our calculation. I love quoting 2020, 1940. 1860. 1780 for US history. Neal calls this the Fourth Turning – Steve Bannon loves Neals book and if Trump could read we would really be in trouble. Cycles are not bullshit and we are approaching the heart of some serious bad stuff

  5. Devil’s advocate – couldn’t a particularly cynical investor see the protests and Trump’s appalling response as positive because they give Democrats more leverage to push for $3TR?

    And couldn’t such an investor also see ballooning Federal debt as good, if it reduces the attractiveness of longer-dated Treasuries, thus forcing more money into risk assets?

    Sure this is cynical but that’s a survival trait for investors, no?

  6. I do believe that Congress will pass another stimulus bill but I don’t believe it will be enough. The extra $600 for unemployment is helpful but I read that there is no talk of extending it past July, if that doesn’t happen I believe the riots will continue.
    During this time you may see the US indexes hitting new highs because of the sugar high the Fed has given the markets. I was researching the late 60’s as a period where there were a lot of riots and social discord but because of the Johnson Administration’s Guns and Butter policy the markets went up.

    If the markets were based on reality of future earnings the SP500 would be around 2000 not 3000.

  7. Welcome to Fascism. State manipulation of all inputs to win elections and utter disregard for the welfare of it’s citizens.

    May you not have the misfortune of learning about the power of fascism through the pressure applied by the heal of the boot.

    • One thing our guy and the German have in common is that, even though at first most folks didn’t believe it or were willing to stand by and pretend, in reality neither of these guys had/have any friends. They respected no one … period. To them everyone is an “enemy.”

  8. You really have to wonder who the true leaders are of the Trump, his band of idiots, McConnell and the GOP. Who is pulling the strings??

  9. Black lives matter. Since when? Hell, most White lives don’t matter. Remember the Opium Crisis, remember AIDS and now it looks like we will be approaching a quarter of a million deaths by the time of the elections. I coughed up that number on here a few months back as a minimum and unfortunately It appears I’m going to be right. That, for me, is the problem. It is not a number. It is lives not as Stalin would have it called “statistics”.

    The narrative is that you and I exist but the “we” is a stat. I and you have no choice against inertia since there is no “we” to oppose it but what if the daily deaths were reported as “we have lost 1,000 more lives”? We have been left defenseless and without resources to protect us and our families. “We” needs to make a comeback.

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