Our theme today is all-time highs and the exploration of exactly what it is that both Wall Street and Washington are higher than a kite upon.
On the fiscal front it is useful to recall that April has always and everywhere been a surplus month regardless of war, pestilence or depression because that’s the month in which Uncle Sam collects all that’s still owed on last year’s incomes. Last April, for instance, the monthly surplus was $160 billion and in April 2018 it was $214 billion.
But not this year.That plunging red line in the chart below represents the incredible $738 billion of red ink racked up during April 2020—a vertigo-inducing $900 billion deterioration from last April.
The culprits, of course, are upwards of 40 million taxable paychecks which have gone missing, the 130 million helicopter checks which were dropped from coast-coast, and the Everything Bailout’s soup-lines for the unemployed, small, medium and large businesses, state and local government, hospitals, and the National Endowment for the Arts, too.
And then to add insult to injury the nice Mr. Mnuchin took pity on the rich people and corporations, who pay the bulk of the true-up taxes on April 15 ( as well as estimated taxes for this year’s first quarter), and deferred the due date to July 15 for some and year-end for many companies.
That contrasts with the 85 million or so ordinary taxpayers who get a refund each year because they have been intentionally over-withheld during the previous 12 months in order to give Uncle Sam some free float (shhh!)
As it happened, about 21 million mostly upper income filers have taken advantage of the Mnuchin’s generosity and it did put a dent in the April collections. To wit, last year the US Treasury collected $155 billion in corporate and non-withheld individual income taxes but only $19 billion this year.
Did some of that $136 billion deferral go into stock buybacks and brokerage accounts?
Even if it didn’t, of course, the question recurs. Why in the world did the Secretary of the Treasury and the Donald conclude that the rich needed a tax free loan from Uncle Sam, when the latter is already on a greased track toward fiscal calamity?
Monthly US Budget Deficit
And we are not indulging in hyperbole. As near as we can figure based on the Q1 actual run-rate of GDP, the sharp drop at the end of March after Lockdown Nation incepted and the expected 12% decline in Q2 GDP (50% at an annualized rate), during the last 80 days (March 13 thru June 2) nominal GDP amounted to $4.1 trillion.
By the reports of the Daily Treasury Statement, the public debt exploded from $23.4 trillion to a hair under $26 trillion during the same 80 day period. That is, Uncle Sam borrowed $32 billion per day, and such borrowings cumulatively amounted to 61% of GDP!
Has that been noted by any one in the Imperial City or have they been bothered in the slightest?
Not on the evidence of today’s announcement by the “conservative” party. It appears that the Donald and Senator Leader McConnell have agree to cap the next bailout at, well, just $1 trillion to cover, apparently, loose ends that were neglected in the first $3 trillion that has already been dumped into the economy.
One of these loose ends is bailouts for the state and local budgets, which have been savaged by the Lockdown orders of mayors and governors from coast-to-coast, but most especially among the states affecting a blue hue.
Based on the circulating Washington scuttlebutt, it seems likely that the minimum allocation to state/local bailouts will total upwards of $600 billion (the House Dems provided $1 trillion for starters), which will be additive to the $150 billion included in the CARES Act, thereby bringing the total infusion from Uncle Sam to three-quarters of a trillion dollars.
That is, Uncle Sam will be hoovering-up a full 25% portion of the $3.0 trillion run-rate of pre-existing state and local spending posted during Q1 2020. And it’s not as if these units of government have been on some kind of austerity kick during the last decade, given that the spending rate was just $2.0 trillion per annum on the eve of the financial crisis in Q4 2007.
As Senator Dirksen might have said, a trillion dollars of spending growth over a decade here and a decade there, and pretty soon you will be talking…..bankruptcy!
In other words, the new fiscal mantra is that Uncle Sam should borrow himself silly to fund a 100% make-whole for every segment of society—workers, business, government—no matter what caused the current distress or what the consequences may be in the longer-run.
Of course, there is a simple acid test for all parties concerned. That is, if it’s smart to take out a “bridge loan” to tide over the giant economic hole blasted into the US economy by Lockdown Nation, then why should the impacted parties—households, businesses and lower levels of government—not throw their own balance sheets into the breach?
In the old days, of course, they Keynesians would have said that Rich Uncle Sam can afford it and the job of everyone else is to spend as if their lives depended upon it.
But at the moment, everyone is broke. The $75 trillion millstone of debt sitting on the US economy is nicely divided between $20 trillion of Uncle Sam’s debt held outside the US Treasury, and $55 trillion public and private debt owed by everyone else.
Of course, if you believe in free lunches, financial magic and unicorns, the answer would be let the US Treasury function as societies fiscal agent, and then refi the trillions so incurred at the Fed’s printing press.
That process has otherwise been known over the centuries as monetization of the public debt, and if practiced long enough and intensively enough, it has always led to disaster because it’s just George Floyd’s counterfeit $20 bill raised to the Nth power.
In fact, that is exactly what has happened in the last 80 days described above. During that period the Fed’s balance sheet exploded from $4.3 trillion to $7.1 trillion, which amounts to $35 billion per day, and the monetization of 112% of Uncle Sam’s astronomical borrowings during the period.
Lunacy is truly the word for it.
In the current instance, of course, what is actually called for is not massive spending, borrowing and monetization of the debts, but belt-tightening by all segments of society. That’s because the current economic plunge was mainly ordered by the administrative fiat of elected officials. Households and business are way short of income and cash flow owing to a cessation of production, wages, and profits, not some Keynesian-style alleged malfunction in the economic plumbing and the girth of aggregate demand.
The sophistry, of course, is that the soon to be $4 trillion of Everything Bailouts is “different” than all other deficits, and is actually just some kind of grand “bridge loan” to the other side of the “V”.
Then again, it might well be asked as to what “V” they are ostensibly bridging because the only one in sight is the one defined by today’s record print on the NASDAQ-100?
NASDAQ 100, February 19 to June 4
In the real world away from the phantasmagoria of Wall Street, we have now reached the point where 48 million new unemployment claims have been filed in 11 weeks (43 million under state programs and about 5 million under PUA), which amounts to 30% of the 158 million Americans counted as “employed” by the BLS as recently as February.
The notion that this super-depression style army of the unemployed is going to be called back in their millions and tens of millions in a matter of a few months is one of the most ludicrous memes ever invented. That’s because as the debt-addled US economy plunges down the first wall of the V, ricocheting chains of cancelled orders, un-collected receivables, deferred rent payments and credit delinquencies and defaults are being kicked into motion that are just beginning to be measured and reported.
The WSJ reported today, for example, that the commercial real estate market, which ballooned in the past decade to $20 trillion on a wall of debt as investors hunted for high, yet seemingly safe, returns, has now begun to crater.
Already $32 billion in CMBS loans have gone to special servicers (aka commercial debt repo joints), with a heavy concentration in hotel and retail properties.
That’s not surprising, of course, because nearly half of commercial retail rents were not paid in May. As the WSJ noted,
Companies as big as Starbucks say the financial devastation from the shutdown has left them unable to pay their full property bills on time. Some companies warn they will not be able to pay rent for months.
The situation is especially dire for owners of hotels and malls. Such retailers as Bed Bath & Beyond, Famous Footwear, H&M, and the Gap, movie theaters AMC and Regal and gyms like 24 Hour Fitness stopped paying rent entirely in May, according to Datex Property Solutions. Starbucks paid May rent but also sent a letter to landlords requesting landlords to make concessions starting June 1 and continuing for 12 months.
Overall, Datex found that 58.6 percent of retail rents were paid in May.
“Social distancing means financial Armageddon for commercial real estate and municipalities in coming months,” warned R. Christopher Whalen, head of Whalen Global Advisors, on his blog for investors. He predicted defaults could be worse than the peak losses of the early 1990s commercial real estate bust “by a wide margin.”
Likewise, the collapse of orders in the industrial sector has just begun to ricochet through upstream suppliers, as well as support services and logistics operations which move materials, intermediate goods and finished products through today’s intricate, extended and often convoluted supply chains.
This week’s report on manufacturers’ new orders for consumer goods, for instance, showed that orders are down 27% from January, thereby dropping as much as they did during the entire first year of the Great Recession, and are now back to levels first crossed way back in May 2005.
Needless to say, back then it took more than two years to recover the order level lost during the recession, and that was when businesses were carrying for smaller debt loads than they face today; and, more importantly, before Washington had empowered a Virus Patrol that may strike again at any moment.
In Part 2 we will get to the culprits in the Eccles Building, but in the interim it is worth noting that even the day traders and robo-machines know why the stock indices are rising to the nosebleed section of history, and are now saying it out loud.
Jay’s got our back!
BMO sent out a poll to its clients where the first question showed a clear consensus for the driver behind the move; “73% offered the Fed as the inspiration behind the S&P 500’s impressive rally”, vastly more than those who cited labor market recovery/reopening optimism (6%) greater fiscal stimulus (5%), and progress on Covid-19 treatment (6%)
So the question recurs. Do these people have oatmeal for brains?
We are referring, of course, to Wall Street’s keepers—the central bankers who just keep cranking out a tsunami of Fake Money, when not a single dime of it ends up bolstering the main street economy, as we will address in Part 2.