Money Market Fund No Longer Accepting New Cash Amid Panic Bid For Treasury Bills
Even before the March market meltdown, the T-Bill market was starting to exhibit symptoms of shortage which was hardly a surprise: after all, as part of its “not-QE” farce where Powell desperately tried to fool the market that he wasn’t engaging in outright QE so as not to spook investors that things are just as bad as they turned out to be (we all know how that worked out for him now that the Fed is monetizing over $ 100BN per day) the Federal Reserve was buying $ 60BN in Bills each month to bail out hedge funds somehow “fix” the repo market. It’s also why in mid-January, before anyone had heard of the Coronavirus, we said that as a result of a huge net drain in Bills (i.e., upcoming shortage) the Fed would have no choice but to expand its QE to coupon securities in just months (which it did with a bang).
And then just as questions started to swirl about an upcoming Bill shortage, the coronacrisis happened and unleashed a once in a generation scramble for the safety of cash-equivalent securities, chief among them T-Bills making the occasional shortage into the bread shelf at a Brooklyn Costco during the coronavirus quarantine. Naturally, after this surge in demand, Bill yields broke below 0% and turned negative through 3 months even though the Fed has sworn it will never go full NIRP.
It wasn’t just the Fed and institutional traders who rushed into the safety of Bills (which as we explained previously, provided a risk free guaranteed profit if purchased at the minimum auction yield of 0.000% and then sold at a negative yield in the open market) – so did retail investors, and the result was a record surge in Money Market Funds investing in government securities, i.e., Bills…
… as investors staged a furious run out of “prime” (which is a delightful misnomer) money markets.
The result was a “perfect storm” of demand for a security that – along with gold – was suddenly the world’s biggest safe haven.
And, in a bizarre twist, today fund giant Fidelity said it would stop accepting new money into three money market funds that invest in US Treasuries, as it sought to protect existing investors from the dramatic decline in interest rates since the outbreak of coronavirus.
As shown in the chart above, with assets in government money market funds exploding, assets in Fidelity’s three funds soared by more than $ 23BN to $ 85BN during this month’s clamor for safe assets, and new money has had to be invested in Bills which over the past two weeks have traded with negative yields, assuring losses for anyone who held them through maturity in a few weeks. As a result, new investments into negative yielding Bills could dilute returns for existing investors in the funds, Fidelity said.
In a note to investors seen by the Financial Times, Fidelity said that its Fidelity Treasury Only Money Market Fund, Fidelity Institutional Money Market Treasury Only Portfolio and Fidelity Institutional Money Market Treasury Portfolio would close to new investors from the end of Tuesday.
“Restricting inflows will help reduce the number of new Treasury securities that the funds will need to purchase,” the investor note said. “That’s important because the newer issues generally have lower yields than the funds’ current holdings, and as such they would affect the funds’ ability to continue to deliver positive net yields to shareholders.”
To say that this is ironic is an understatement: whereas most asset managers would kill to have too much demand for a given asset, in this case it’s just the opposite – the fact that there is a relentless surge of demand for Bills which would only push yields even more negative, has made the fund uneconomical and is forcing Fidelity to impose limits for new investors.
“The faster these funds take in new money, the faster returns head to zero,” said Pete Crane, who runs money market fund data provider Crane Data. “The only glimmer of hope is that the torrential flows into Treasury money market funds has some of them looking to shut their doors. Fidelity is doing this to protect existing investors.”
According to the FT, existing holders of the three affected funds will still be able to add more money. The closures to new investors do not affect the rest of Fidelity’s range of money market funds which invest in Treasury and other government debt.
Subadra Rajappa, SocGen’s head of US rates strategy echoed what we said on Monday, namely that an expected deluge of new issuance of Treasury bills, to fund the record $ 2tn stimulus package agreed by US legislators last week, could change behavior: “Once you start seeing the supply surge, you might start to see money funds more willing to take in extra cash.”
Which again is an understatement: if and when the realization that the Treasury is about to swamp the globe with its debt dawns on investors as they realize that helicopter money, aka Magic Money Tree has arrived for good, not only will gold be the only money-good instrument, but all those money funds that are turning down cash now will be begging for it tomorrow.
Harvard Acceptance Rates Rise As Most Ivy League Schools Become Less Selective
Ivy League schools, known for being the most selective colleges in the nation, became a little less selective this year.
Names like Harvard, Dartmouth and Penn have all posted increased acceptance rates for classes that will begin this fall, according to a new report from the Wall Street Journal.
Harvard admitted 4.9% of the 40,248 people who applied last year compared to its 4.6% acceptance rate the year prior. Dartmouth this year accepted 8.8% of applicants, up from 7.9% last year. Columbia admitted 6.1% of applicants this year, which was up from 5.3% the year prior, as applications dropped by almost 2,500 and the school simultaneously accepted 220 more students.
Yale also saw its acceptance rate move higher, to 6.5% from 6.2%. And Penn’s acceptance rate went from 7.7% to 8.1%.
Colleges, including Ivy League names, have hit an unprecedentedly challenging landscape with the ongoing pandemic shaking up enrollment projections for each university. It is still unknown what the state of the nation will be by the time fall courses are set to begin: will students be allowed on campus? Will residence halls be open? Will foreign students even be allowed to travel to the U.S.?
Some schools pulled extra candidates from their waitlist or “deny” groups in order to make sure they could enroll a full class. Reed College in Oregon saw its acceptance rate surge by 3% and Franklin & Marshall accepted 32% of applicants, which is up 2%.
Cornell said it wasn’t even going to issue public statements about its admission figures any longer. Jonathan Burdick, vice president for enrollment at Cornell said: “While metrics such as application numbers and admissions rates are an area of focus for many as they review annual activity in higher education, Cornell’s thorough and holistic review processes mean that no one applicant’s chances can be guided by ‘averages’.”
Brown and Princeton both bucked the trend with Brown dropping its admission rate to 6.9% from 7.1% and Princeton dropping its admission rate to 5.6% from 5.8%.
But at least for now, it looks as though the once exclusive Ivy League isn’t so “exclusive” anymore…
It’s Happening: Oil Producers Are Now Paying Clients As Wyoming Sour Price Turns Negative
When Goldman’s crude oil analysts wrote on Monday that “This Is The Largest Economic Shock Of Our Lifetimes“, they echoed something we said last week – nameley that the record surge in excess oil output amounting to a mindblowing 20 million barrels daily or roughly 20% of global demand…
… which is the result of the Saudi oil price war which has unleashed a record gusher in Saudi oil production, coupled with a historic crash in oil demand (which Goldman estimated at 26mmb/d), could send the price of landlocked crude oil negative: “this shock is extremely negative for oil prices and is sending landlocked crude prices into negative territory.”
We didn’t have long to wait, because while oil prices for virtually all grades have now collapsed to cash costs…
… Bloomberg points out that in a rather obscure corner of the American physical oil market, crude prices have now officially turned negative as “producers are actually paying consumers to take away the black stuff.”
The first crude stream to price below zero was Wyoming Asphalt Sour, a dense oil used mostly to produce paving bitumen. Energy trading giant Mercuria bid negative 19 cents per barrel in mid-March for the crude, effectively asking producers to pay for the luxury of getting rid of their output.
Echoing Goldman, Elisabeth Murphy, an analyst at consultant ESAI Energy said that “these are landlocked crude with just no buyers. In areas where storage is filling up quickly, prices could go negative. Shut-ins are likely to happen by then.”
While Brent and WTI are hovering just around $ 20 a barrel, in the world of physical oil where actual barrels change hands producers are getting much less according to Bloomberg as demand plunges due to the lockdown to contain the spread of the coronavirus.
Oil traders believe other crude streams are likely to see negative prices soon at the well-head as refiners reduce the amount of crude they process, leaving some landlocked crude without easy access to pipeline trapped. Goldman’s Jeffrey Currie explained this pricing divergence as follows:
Brent is a waterborne crude priced on an island in the North Sea, 500 meters from the water. In contrast, WTI is landlocked and 500 miles from the water. As I like to say, I would rather have a high-cost waterborne crude oil that can access a ship than a landlocked pipeline crude sitting behind thousands of miles of pipe, like the crude oils in the US, Russia and Canada.
As we noted last night, when we asked who would see zero dollar oil first, several grades in North America are already trading in single digit territory as the market tries to force some output to shut-in. Canadian Western Select, the benchmark price for the giant oil-sands industry in Canada, fell to $ 4 on Monday, while Midland Texas was last seen trading just around $ 10.
Southern Green Canyon in the Gulf of Mexico is worth $ 11.51 a barrel, Oklahoma Sour is changing hands at $ 5.75, Nebraska Intermediate at $ 8, while Wyoming Sweet prices at $ 3 a barrel, per Bloomberg.
While there is very little hope of a dramatic improvement in the situation, late on Tuesday, President Trump said the U.S. would meet with Saudi Arabia and Russia with the goal of halting the historic plunge in oil prices. Trump, speaking at the White House Tuesday, said he’s raised the issue with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman.
“They’re going to get together and we’re all going to get together and we’re going to see what we can do,” he said. “The two countries are discussing it. And I am joining at the appropriate time, if need be.”
It’s unclear what if anything Trump “can do” in what is effectively a collusive war between the two nations meant to crush shale oil.
Trump’s intervention comes as April shapes up to be a calamitous month for the oil market. Saudi Arabia plans to boost its supply to a record 12.3 million barrels a day, up from about 9.7 million in February. At the same time, fuel consumption is poised to plummet by 15 million to 22 million barrels as coronavirus-related lockdowns halt transit in much of the world.
There is another problem: oil demand has been so battered by government lockdowns to stop the spread of the coronavirus that any conceivable oil production cut agreement between the U.S., Canada, Russia and OPEC members would still fall well short of what’s needed to shore up the market, Goldman calculated. In fact, assuming roughly 20 million in excess supply currently, the only thing that could balance the oil market is nothing short of both Saudi Arabia and Russia halting all output together. And that will never happen.
Finally, below we put the “long history” of oil prices in context:
As the lockdowns across Europe began to bite, the U.S. Establishment began its ‘wobble’. The more elegant amongst élite circles pointed to a dangerous mis-match in timelines: The medical advice has been: ‘lockdown until the virus begins to subside’, but that advice encompassed too, the possibility of Covid-19 returning later in the year in a Phase Two, thus requiring further personal distancing.
Hands shot high in absolute horror amongst some business and Wall Street leaders: Could the U.S. economy sustain such a prospect? Might not a long shutdown inflict permanent damage? Would there even be an economy left – to resurrect – in the wake of ‘peak Coronavirus’?
The mis-match thesis then acquired a third strand: To immediate economic fears standing in contradistinction to longer term medical perspectives was added the third question: Are Americans culturally ‘built’ for lockdown (that is to say, will an individualistic, libertarian-minded – and armed society – acquiesce to being ordered to stay home over a long period)?
Not surprisingly, President Trump – with an advancing Election, and his colours pinned to the mast of sound economic management – hit on the formula that the ‘cure cannot be worse than the disease’: Let’s have the economy open by Easter (12 April – i.e. 15 days hence), he declared.
The issue of the virus is not manufactured, (though there are still many in the U.S., who regard it as an overblown scare), nor is the dilemma of the divergent timelines. Actually – a great deal hangs on how these timelines play out – our global economic and political prospects, no less.
Just about everyone and his dog now claims to have modelled Covid-19. But in truth, we still know very little on which to accurately predict the virus’ course. The ‘data’ is made unreliable: firstly, because not only does the virus have different mutations, but secondly, owing to it acting in two quite different modes: One is mild, or even asymptomatic (the 80%); and the second mode is serious (requiring hospitalisation) – and for a minority of the 20% – deadly.
But consequently, we simply do not know how much of the population is infected, or is still to be infected – precisely owing to its very mildness or, its asymptomatic characteristics amongst the 80 percent-ers. There hasn’t been enough testing – and anyway, given its mild or non-noticeable iteration, many people may have it, but don’t test.
So the data modelling is more ‘art’, than predictive, and therefore introduces economic uncertainty. The damage to the economy is obvious from the first, but the question least considered is the importance of the third strand: Is Trump right when he says that America ‘is not built for lockdown’?
He may be right, in one sense; but if he opts to prioritise a quick opening of the economy over the welfare of the American people, he may face incalculable consequences – should Covid-19 bite him in the backside: Either by mutating (as did the Spanish ‘flu in August 1918); or simply, by beginning a second phase through a resurgence of community infection later in the year.
Plainly, Trump is of the ‘fears are exaggerated’ school of thought, and seems poised to bet his Presidency on it. In this era, viral social media images of hospitals overwhelmed, and of patients fighting to breathe their last, unaided, and lying on the floor, jam-packed in corridors, or in converted gyms – can become politically toxic. The counter- response that the financial system is struggling for oxygen, under lockdown, too, may strike many people as a ‘little lacking’ in common humanity – perhaps?
The dilemma is cruel. And maybe the social timeline ‘strand’ has more substance, than is generally granted? Americans are libertarian in many ways (not least, in their determination to carry arms). This is reflected also, in their deliberate eschewing of a public health programme, and in the purposefully limited support provided to the hourly paid – who are laid off. It is the ethos of individualism, a work ethic and the consequence of a ‘libertarian’ constitution.
The St Louis Chair of the Fed has predicted 30% unemployment and 50% of the economy at standstill by the end of June. Is it sustainable to have these furloughed workers dying in the street, because they cannot afford America’s ‘boutique’ health-service for the wealthy? (we’ve seen videos of people unexpectedly falling down in the street, dying, as passers-by skirt the afflicted victim – from both China and Iran). Such videos would be inflammatory in the U.S.
What happens if ‘lockdown’ were extended, and the unemployed were to attack supermarkets for food they cannot afford; or because the supermarket shelves are empty (this has happened in Europe)? What would videos of the U.S. National Guard look like as they arrive, armed for war, to put down the ‘looters’? What happens if the rioters angry at their plight – and without money – use their right to bear weapons to fight against the National Guardsmen? Can the U.S. national fabric handle such strains? Might it not disintegrate?
Here, the U.S. differs from Europe. America has not, since the Civil War, had to experience the harsh circumstances in hospitals approximating to wartime, on its own soil.
So, is Trump right, then, to prioritise keeping the U.S. economy open? Well, firstly, the notion that bits of the economy can be opened where infection-rates are low, whilst other parts are locked down, seems odd: Covid-19 – we do know – is highly infectious. Those who show no symptoms – whether they are under 50 years, or under 40 years-old – would not preclude them from being silent ‘super-carriers’ of the disease. We have not heard there is a test for anti-bodies, which might signal that an individual enjoys immunity. But unless an area has no infections, putting even one carrier into a workplace, would be sufficient to trigger a localised community infection.
Perhaps then, Trump might be right that anything other than a short (and possibly ineffective) lockdown is not manageable in the U.S.: That it might tear apart an already polarised, armed and inegalitarian, social fabric. There is then, a substantial point here: How far, and for how long, can an U.S. or European society accept a ‘command’ or martial-law administration – before citizens rebel, and head to the beaches for summer? What then?
Is it possible that can Trump may emerge from these events as the ‘saviour of the U.S. economy’? Here, we touch on the key question of the adaptability of élites. Are the U.S. élite capable of true transformation of consciousness as circumstances alter? On the answer to this question will hang the geo-political future. It was the inability of the Soviet elites to give up on their corrupt and privileged status quo that led to the implosion of the USSR in 1987.
We are often told that Americans are great innovators and graspers of opportunity. But today, the U.S. élites are utterly intent on preserving a status quo – as the viability and even the reality of that status quo is being questioned by important insiders. For the élite majority, though, the mind-set is intransigent and adamant. The status quo suits them well. They do not wish to see to see it reformed or changed. They refuse to think differently.
Eventually, the coronavirus will subside; but what will America look like when it does? For the moment, the élites believe that America will look just as it did, in February, before the impact of the pandemic hit U.S. markets. So, we have had the Fed, the Bank of England, the Bank of Japan all doing the same thing, over and over again, hoping that the economy will snap-back to ‘normal’. But it isn’t working.
The Fed fears a collapse in credit (with due reason), but ‘normality’ is not returning from the rush of liquidity hosed across credit markets. In the 2008 crisis, the Fed responded with all sorts of easing. This time the Fed is throwing the ‘kitchen sink’ at markets, offering ‘facilities’ for almost every asset class. At the present rate of growth, the Fed balance sheet will be $ 6 Trillion in days – and reach a total equivalent to almost 50% of the U.S. GDP by June. Another, unimaginable chunk of debt.
The problem is that the Fed’s measures will fail as stimulus – because it is not a problem of demand shortfall, but of supply-shock – as the globe implements ‘shut-down’ in order to slow infection. But, with recession or depression looming, asset prices are collapsing. Bloomberg has noted that core tenets such as what constitutes a safe asset, or the expectation of returns over the next decade, are all being thrown out of the window – as Central Banks strive to avert a global recession: The latter have unleashed a money tsunami, unlike anything seen before, and the fear of inflation is rising, together with a sense that all the old metrics of what constitutes safe investments are gone for good.
Meanwhile the U.S. Congress has passed a $ 2 trillion bill to counter the effects of Covid-19. It was well received for a while in the U.S. markets, before they fell again. The bill may help keep a part of the big business status quo alive, for now, but the bottom line is that these spending bills – as Jim Rickards notes – “provide spending but they do not provide stimulus”. And all that spending – like that of the Fed – essentially will be helicopter money: i.e. monetised debt.
The essential dilemma is that the Central Bankers’ Holy Grail – stimulus – depends on consumers, who constitute 70% of the U.S. economy; and on whether they decide consume – and to what extent. And that will depend upon their psychology in the post-Covid-19 era, and not on what the Fed does, or does not, do now.
If consumers get used – during lockdown – to doing without; to economising; they may well decide that increased savings and debt reduction, are the best ways to prepare for straitened times. 83% of U.S. businesses are small or medium sized companies. Some may survive and resume work, but others will not re-open after the lockdown. It will be a different atmosphere: a different economic era.
Of course, the élites want to go ‘back to normal’ as quickly as possible, but the ‘bottom line’ emerging from the Fed’s failure to staunch market paralysis is that that which the élites had thought to be ‘normal’ is proving not to have been normal at all. It is now apparent as having been a financialised bubble – and Covid-19 happens to have been the pin that popped it. This bubble was just the biggest, in a long line of Fed-blown bubbles (NASDAQ, sub-prime mortgages, etc.) – and now, the final ‘everything-bubble’ has burst. There’s nothing now left for the Fed to ‘bubble up’. It’s probably over.
Here’s the larger – global – point. Again, it revolves around psychology: Have these events been the ‘pin’ which also pops some sort of mass psychological bubble (a sealed Cartesian, mental retort)? Will public faith in the status quo crash, along with the financialised ‘everything-bubble’? Will a momentary flash of enlightenment to the house-of-cards reality that Americans had been living, cause them to start seeing their world afresh, and in its raw, hard reality? If so, the world order stands on the cusp of change.
For some time now, a general popular disquiet has been incubating. The question is whether, in the cold post-Covid-19 reality, Americans will begin to cease their acquiescence to – and their co-operation with – the status quo.
This might mean trouble as America and some European states try to manage the pandemic through invoking the necessity of a war-time command-governance. Will people accept such a command system, if they see its principal purpose being the return to a failed status quo ante?
The coronavirus crisis has turned many Americans into amateur data scientists who are studying health data and statistics on a daily basis.
Are the rates of infections rising? Are they rising but accelerating or decelerating? Are the infections rising because of viral spread or because of more testing? How many people are dying each day? Does the data indicate that the virus is dangerous for only old people or young people as well? In many ways solving this crisis hinges on our mastery of data analytics, a subject we specialize in.
By now, the data is clear that coronavirus is dangerous for people of all ages, but it’s particularly lethal for older individuals.
In this article, the team at MastersofBusinessAnalytics.com was compelled to review just how many Americans are over the age of 65 in various places across the country. While this data analysis doesn’t show us how to solve the problem, it can show us just how large the devastation could be.
Across the country, there are over 51 million Americans that are over the age of 65, comprising 16% of the population. Maine and Florida lead the nation with the highest proportion of their population being over the age of 65. Alaska and Utah are the states with the lowest rates of elderly people. Among the largest hundred cities in America, Scottsdale, AZ and Honolulu, HI have the populations with the highest percentage of older Americans.
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It’s important to note that coronavirus is serious for all individuals, not just the elderly. The disease can be debilitating and sometimes deadly, even if you’re healthy. Even if you’re “asymptomatic” (meaning you have contracted coronavirus and might not know it because you show no symptoms) you could spread it to someone else who could experience very adverse consequences and possible death.
This is to say, it’s important to show the number of people across America that are above 65 years old because they are the most at risk, but that does not absolve younger people from the risks or responsibilities.
The chart below shows that states that have the highest percentage of their population aged 65 and above:
Across the country, Maine and Florida have the highest percentages of their populations that are over the age of 65 and the highest risk group for the virus. Alaska and Utah have the lowest rates of eldery population, with under 12% of their population being under the age of 65 years old.
But just how many older Americans are at risk in each state? While the prior chart looked at the percentage of the population that was over 65, the next chart shows the number of people in each state that are over 65 (in millions).
In California there are approximately 5.7 million people over the age of 65, followed by Florida with 4.4 million and Texas with 3.6 million. In New York, the state with currently the most known coronavirus infections, has the fourth highest population of people over the age of 65. All in all, 18 of the 50 states have more than a million people over the age of 65 that would be extremely high risk for complications due to coronavirus.
Next, let’s look at the cities with the highest percentage of inhabitants over the age of 65:
Scottsdale, AZ, an attractive retirement destination, has the highest percentage of people over the age of 65 by a significant margin. Scottsdale is followed by Honolulu, HI and Hialeah, FL, two warm locations favored by retirees. Larger cities like Miami and San Francisco also make the top ten cities with a percentage of older Americans.
On the other hand, Irving, TX has the lowest percentage of people under the age of 65, with just 7.4% of the population being in this high risk group. Santa Ana, CA and Austin, TX round out the bottom three cities with the lowest percentage of people under 65 years of age.
Lastly, let’s look at which cities have the most people over the age of 65 living there:
New York City has the most inhabitants over 65+ years old by a huge margin. Almost 1.2 million New Yorkers are over the age of 65, more than twice as many as the second place city, Los Angeles. New York City currently has the highest know number of coronavirus infections in America by a large margin and may soon exceed the total in Wuhan, China.
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In discussions about how to solve the coronavirus economics crisis, some people have suggested that high risk elderly people just need to avoid the virus or that only a small number of people are really at risk. While this sentiment is misguided on a number of different levels, it overlooks the sheer quantity of Americans that are at risk simply because of their age. In states like Florida and Maine and cities like Scottsdale, it would mean risking the health and lives of an enormous part of the population.
Economic data is likely to become increasingly unreliable as a result of the coronavirus lockdown. We know the global economy will be bad. We will not know, with much accuracy, just how bad.
Annualizing data is absurd in the current climate. What happens in the second quarter is not going to be repeated for the rest of the year. Time to stop annualizing numbers.
Most economic data is survey based. Industrial production, some unemployment numbers, inflation numbers, GDP and the various sentiment opinion polls need people to fill in surveys. If you are filling in survey forms in a lockdown you are likely to be an unusual person, and possibly not representative.
Social media spreads fear and affects sentiment. Sentiment affects answers to surveys. Data, like consumer price inflation, includes restaurant prices, but restaurants are closed. What happens when you survey something that is not there?
Online spending is likely to have increased in lockdowns. Online spending may stay higher after the lockdowns end. It may not be properly captured in official data.
Some data items are more reliable than others. Investors need to be careful about putting economic numbers into investment models, however. Garbage in means garbage out.
The global economy is going to have a very bad few months. Fear of the coronavirus has changed consumer behavior. Government policy aims to cut GDP growth in most major economies. But we may not really know what is actually going on in these economies. The quality of economic data is going to be affected by shutdowns. So where are the problems?
One problem is the US habit of “annualizing” its data. A few other economies also do this. This is never a great idea in normal times. It is an absurd thing to do now.
Annualization works by saying that what happens in one quarter will keep on happening, exactly the same way, for a year. Economic activity in the second quarter is going to be badly hit by shutdowns. No one imagines that this will be repeated for a whole year. US GDP might drop 7.5% in the second quarter. No sensible economist thinks that US GDP will drop 30% over the next year, but that is how annualization reports it.
The sensible approach is to ignore annualized numbers. Focusing on the quarterly changes is quite bad enough. There is no need to sensationalize the data.
Surveying a shutdown
Nearly all data is survey-based. That is obvious for things like sentiment opinion polls. But US unemployment is also a survey. The unemployment rate is categorized in the “household survey” part of the data. Across the world, industrial production is a survey. Retail sales numbers are surveys. Inflation data are surveys, normally weighted using the results of different surveys. GDP is a mass of surveys put together.
One of the reasons data quality has fallen in recent years is that fewer people fill in surveys. Those that do are less likely to answer all the questions. Surveys are a nuisance to do. In the age of email you can barely leave a shop or hotel without being asked to do a survey. People are fed up of answering questions.
In the current crisis, even fewer people are likely to want to fill in a survey. A business owner is not likely to want to answer detailed questions on retail sales in an economic lockdown. Anyone who does take the time to fill in a survey in the middle of this uncertainty is going to be “unusual”. Right now you probably do not want the opinion of anyone who wants to give you their opinion.
Businesses that are very busy (like food shops) will not answer government data surveys. Businesses that have shut down (like restaurants) will not answer government data surveys. There is a risk that data is based on a smaller and less representative sample of answers in an economic lockdown.
What if there isn’t anything to survey?
Measuring inflation is a problem in a shutdown. In the UK, restaurants and hotels are over 11% of the consumer price index. But restaurants are closed. What do you do about their prices? It seems pointless including the restaurant meals in consumer price inflation. People have stopped spending on various leisure activities and travel. (Unless people cancelled their subscription they will still spend on gym membership). If people are not spending, should the prices be counted?
In the United States medical care services are over 7% of the consumer price basket. A small sample of treatments are used to represent medical costs. But the medical care people used to pay for is no longer being bought. Medical care is focused on dealing with consequences of the coronavirus. So what is being paid for is now different. This will not be properly reflected in the prices.
Overall the demand shock of phase one should be disinflationary. It is unlikely to be measured properly. Producer prices may be more accurate than consumer prices. Producer prices are not affected by retail stores, or bars and restaurants closing. But some factories are closing (e.g. the auto sector). Gradually producer prices will also try to measure something that is not there.
Natural disasters, strikes and similar events sometimes mean that there is nothing to survey in part of an economy. However, this is often limited to a part of the country (for instance, US hurricanes). Alternatively only a relatively small sector is closed, as with as strike. Estimates can be made for the effect of the lost data. These estimates are often published alongside the numbers. The problem currently is that economies are shutting down nationally. Entire industries are closing. It is not going to be easy to adjust for that.
The rise of online
Economic lockdowns have increased online spending. People are shopping for the things that they need online. This is very evident in online food sales. People are also going online for gaming or films while stuck at home. This is a structural change in the way people consume. The move to online spending may continue after the lockdown. Once people start online spending, they may be more reluctant to go back to shopping in stores. However, economic data can be slow to recognize such structural breaks. Consumer spending may be under reported if the surge in importance of online spending is not properly captured. It is worth noting that consumption data generally registers the time of sale, not the time of delivery. The sale is recorded, even if there is a delay in the customer receiving their purchase.
Some larger firms are under pressure to close online sales. This is because large numbers of people work together to supply goods in large firms. For smaller firms this is less of a problem. But the fact that smaller firms may find online sales easier may also make such sales harder to capture in economic data. Some firms may also have problems finding supply. This will give an uneven change to online sales. That may also create problems with measurement. If the firms questioned are not representative of the whole sector, the data will not be correct.
There has been some evidence of under-reporting online activity in China. Online services are not generally reported in the economic data. There is also evidence that internet activity grew faster during the recent lockdown than officially reported online retail sales.
What can we look at?
What data can be relied upon in the lockdown period? As a general rule, data that avoids surveys or sentiment will be more reliable US initial jobless claims could be more reliable than US unemployment. Initial jobless claims require people to actually register. Many European unemployment numbers are based on people who file a claim. This will be reliable.
Data, like bank lending, should also be reliable. This has to be supplied for regulatory reasons, and is not done by a survey.
Investors are turning to data sources like electricity use to estimate what is happening to economies. This data needs to be used carefully. People working from home will still contribute to GDP, but electricity consumption will fall. Countries with a lot of manufacturing will tend to have larger drops in electricity use than countries that are more service sector focused, even if GDP falls equally in both places. Industries like steel use a lot of power relative to the amount of GDP they produce.
Similarly, measures of traffic or pollution in cities are only approximate measures of economic activity. Where people are able to work from home they will add to GDP without travelling. Again, the ability to work effectively from home will differ depending on what makes up an economy. A worker making cars will find it difficult to work from home. Economists often work from home.
Investors will have to realize that we do not know what is going on during the worst phases of the coronavirus crisis. The quality of economic data is going to be lower. Whole sections of data cannot be captured properly. Data is likely to be revised a lot. The fashion for “big data” also needs to be treated with care. In a period of structural upheaval, economic relationships change.
The UK Office of National Statistics has already warned of reduced quality and reduced detail in some of its data. It has also highlighted the possibility of suspending some data publication.
For a few months, investors need to be very careful about using economic data in investment models. If the data is wrong, models will be wrong. Remember the computing adage—garbage in, garbage out.
‘Texas Miracle’ “On Ice For Time Being” As Crude-Carnage & COVID-Chaos Double-Whammy Strikes Lone-Star State
West Texas Intermediate (WTI) spot prices plunged 7.5% to the 19-handle on Sunday evening, hitting lows not seen since 2002.
WTI has crashed 70% in the last 56 trading sessions amid the COVID-19 crisis triggering a demand bust across the world. As a result, an economic storm risks triggering a shale debt bomb in Texas, jeopardizing the state’s $ 1.8 trillion economy and may damage crude output from the Permian basin that has more than quadrupled in a decade.
In three weeks’ time, Saudi Arabia and Russia launched an oil price war that has sent WTI prices tumbling 57% and now risks imminent doom for US shale (and its junk bonds). More specifically, Texas accounts for 42% of US crude output and has been hit with twin shocks: one from waning crude demand, and another from the COVID-19 outbreak forcing the state to issue a “stay at home” public health order – restricting the travel of residents.
The collapse in oil prices this time around is more unique than past ones, mostly because demand has evaporated overnight due to a pandemic with no clear timetables of when it will return. A major concern for producers is that the recovery might not be V-shape…
“As much a tragedy as the coronavirus is, most states are dealing with one problem. Texas is dealing with two because we’re dealing with coronavirus and the dramatic drop in oil and gas prices,” Dale Craymer, president of the Texas Taxpayers and Research Association and a former state budget director, told Financial Times.
Plains All-American, a pipeline company, was offering WTI per barrel for $ 17.50 on Friday, a drastic discount from $ 63 in January. Drillers need about $ 49 per barrel to stay profitable, a prolonged downturn under $ 40 for several years could bankrupt 40% of all US shale.
Texas has been diversifying into other industries such as healthcare, transport, and technology, to make its economy more resilient if oil prices fall. Every $ 1 decline in WTI price equates to an $ 85 million loss in tax revenue per year, Craymer’s group estimates.
For the current budget cycle, Texas was expecting oil and gas taxes would generate $ 5.5 billion, of which $ 1.6 billion would be transferred to an emergency fund. However, the budget cycle was based on $ 58 oil prices.
The state is expected to start drawing from its emergency fund as oil and gas taxes plus sales taxes will be significantly lower as the pandemic has likely triggered a depression in the US economy for the second quarter.
To make matters worse, 155,000 Texans filed for unemployment benefits last week, the most significant increase in a given week in more than three decades.
“As far as the ‘Texas Miracle'” — the state’s oft-touted outperformance of the rest of the US economy — “it’s on ice for the time being,” Craymer said.
Texas oil output is expected to decline in the second half of the year as investments in exploration and drilling contracts are reduced or canceled.
“My outlook on the domestic oil and gas industry has never been bleaker,” one executive told the Dallas Fed. Another grimly joked: “What is the difference between a Texas oilman and a pigeon? The pigeon can put down a deposit on a new Mercedes.”
We noted that Mizuho’s Paul Sankey estimates that the global oil market is incredibly oversupply, and “crude prices could go negative as Saudi and Russian barrels enter the market.”
The Federal Reserve’s zero interest rate policy and industry bailouts threaten more than just the fragile economy. The very foundation of the social order risks permanent fracturing under this system of moral hazard.
In Human Action, Ludwig von Mises defined society as “joint action and cooperation in which each participant sees the other partner’s success as a means for the attainment of his own.” Without social trust, there is no society. Private property and the division of labor, the hallmarks of a civilization, arise out of cooperation.
In a strictly economic sense, all the malinvestment and capital destruction the Federal Reserve can muster can be overcome in the medium term. Capital gets restructured. However, in the social realm, bad economic policies can do irreversible harm under certain circumstances, especially when money creation is entrusted to a central bank. Yet the Fed is now doubling down on money creation as we see in the recent surprise decision by the Federal Reserve to not only lower interest rates to zero but also enact unlimited QE — in order to purchase immense amounts of U.S. Treasuries and mortgage-backed securities, among other assets.
The Political Fallout of the New Bailouts
Central banks, however, often work to undermine this cooperation. The latest round of social disruption is seen in the recent surprise decision by the Federal Reserve to not only lower interest rates to zero but also enact unlimited QE — in order to purchase immense amounts of U.S. Treasuries and mortgage-backed securities, among other assets.
The purchase of U.S. Treasuries and mortgage-backed securities amounts to a bailout to investment bankers and the U.S. government, while the rate drop undercuts vulnerable Americans dependent on savings.
If that sounds familiar, it should be noted that the glaring difference between this drastic move and the last comparable one in 2008, is that 12 years ago a recession was already well underway.
During the phone call news conference for the emergency announcement, Fed chairman Jerome Powell assured reporters that negative interest rates aren’t anticipated to be “appropriate” in the future. Even if that is true — which it probably isn’t — much damage has already been done in the form of asset price inflation which has made housing unaffordable to many while mostly inflating the portfolios of the wealthy.
Many see this and will also see how large influential lobbying groups and huge corporations benefit most from the bailouts.
Undermining Social Trust
Here is when social trust will get hit the hardest. If it’s already plain to see that the top of the financial food chain can’t be trusted, it can be expected that some Americans will see only degrees of difference between the ones responsible for inflation and those they perceive to be unfair beneficiaries of it.
Consider the late 2018 Pew Research Center survey that found 26 percent of American adults feel they’ve been disadvantaged compared to others their own age. The poll found that the lower the household income and education level, the more likely someone would answer that they themselves were disadvantaged compared to their peers.
While this sentiment might be founded in some truth, the survey also concluded that “low trusters,” those who exhibited low social trust levels, said they had fewer advantages in life 37 percent of the time. The higher the social trust level, the more likely the person answered that they had either equal or more advantages than their peers.
Bailouts will contribute to the disintegration of social trust, to the extent that moral hazard is institutionalized. If it weren’t for the state “rescuing” the market, bankruptcies would open up opportunities to competitors and entrepreneurs eager to serve consumers in pursuit of profits. Instead, how well will consumers be served when business losses are paid back by the force of government?
Moral hazard also extends to the individual level, and in this election year, the Trump administration is fearlessly diving headlong in that direction. It’s currently working out specifics of how to send roughly $ 2,000 to every taxpayer, as relief to the economic slowdown brought on by governments at all levels in the country. These so-called “covid checks” won’t be disseminated in accordance with new value created or any goods or services brought to market. They’ll simply encourage the behavior that preceded the giveaway: social distancing and idleness. Moreover, the covid checks will contribute to price inflation as more dollars chase a tepidly growing — or even decreasing — number of goods.
The Economics of Central-Bank Fueled Inequality
As increasing wages fail to keep up with the cost of living — whether due to asset-price inflation (i.e., housing) of consumer-price inflation — economic populism and social division will increase.
Even if everyone chose to put off their spending for the next crisis, the Fed’s zero interest rate policy will do them no favors. Those with little time to save up would be even worse off.
As conservative and safe methods of saving are closed off by ultra-low interest rates, “Society’s most vulnerable now must enter the stock market or take other kinds of risks just to hold on to their wealth,” Tom Woods writes in his book The Church and the Market.
With the institutionalized moral hazard and political favoritism created by bailouts comes a culture of division that undermines the common good and the prospects of children and their posterity.
Samuel Gregg writes at the Acton Institute blog about why culture matters for the economy, citing David C. Rose’s book “Why Culture Matters Most.”
Rose stresses the importance of “the inculcation of duty-based moral restraint” above other moralistic calls for altruism and the like, because restraint from certain behaviors is what earns social trust. “Restraint,” however is more or less the opposite of what we’ll see from central bankers and government officials in the coming years.
The United States Surgeon General used twitter to tell the public to NOT use face masks to protect against the coronavirus because they don’t work, they only work for health care workers. Now, the Centers for Disease Control and Prevention is considering a recommendation that people wear masks when in public.
We all remember this – when Surgeon General Jerome Adams tweet said it all “Stop Buying Masks!”:
Seriously people- STOP BUYING MASKS!
They are NOT effective in preventing general public from catching #Coronavirus, but if healthcare providers can’t get them to care for sick patients, it puts them and our communities at risk! https://t.co/UxZRwxxKL9
“There is no specific evidence to suggest that the wearing of masks by the mass population has any potential benefit. In fact, there’s some evidence to suggest the opposite in the misuse of wearing a mask properly or fitting it properly,” Dr. Mike Ryan, executive director of the WHO health emergencies program, said at a media briefing in Geneva, Switzerland, on Monday.
“There also is the issue that we have a massive global shortage,” Ryan said about masks and other medical supplies.
“Right now the people most at risk from this virus are frontline health workers who are exposed to the virus every second of every day. The thought of them not having masks is horrific.”
We were told that face masks weren’t effective at preventing a coronavirus infection unless we are a healthcare worker, but now the CDC is saying otherwise.
There’s still no consensus (meaning someone from the government hasn’t made a decision yet) on whether widespread use of facial coverings would make a significant difference, and some infectious disease experts worry that masks could lull people into a false sense of security and make them less disciplined about social distancing, according to a report by The Washington Post.
But studies done by doctors in the medical field have shown properly fitting N95 face masks to be about 80% effective.
They are certainly better than nothing and could be used to get people back in public and the economy on a roll again. It’s an “ongoing discussion” however, and nothing has been finalized. The official, who asked to remain anonymous, said the new guidance would make clear that the general public should not use medical masks – including surgical and N95 masks – that are in desperately short supply and needed by health-care workers. So once again, the guidelines would be to “cover your face” not use a respirator that could actually stand a chance at protecting you.
Nassim Taleb had strong feelings about the bullshit…
This is the strongest statistical association I’ve seen w/ respect to the virus. Wear a mask, mandate others to wear masks, & remember that @WHO is criminally incompetent. To repeat:@WHO is criminally incompetent.
At the daily White House briefing Monday, President Trump was asked if everyone should wear nonmedical fabric masks.
“That’s certainly something we could discuss,” Trump said, adding, “it could be something like that for a limited period of time.”
It seems like the government can’t make up their mind on just about anything. But the one thing they have been doing is expanding their power and getting the docile population in a constant state of fear.
Airbnb Bails Out Highly Leveraged Superhosts As Travel Industry Crashes
Airbnb CEO Brian Chesky wrote a letter to all hosts informing them that the company is committed to a $ 250 million bailout to cover some of the cost of COVID-19 cancellations. The canceled check-ins are for March 14 through May 31, Airbnb will pay hosts 25% of what they would’ve received via their cancellation policies, and the “payments will begin to be issued in April.”
Chesky said a separate $ 10 million Superhost Relief Fund would be designed for “Superhosts who rent out their own home and need help paying their rent or mortgage, plus long-tenured Experience hosts trying to make ends meet. Our employees started this fund with $ 1 million in donations out of their own pockets, and Joe, Nate and I are personally contributing the remaining $ 9 million. Starting in April, hosts can apply for grants for up to $ 5,000 that don’t need to be paid back.”
And here’s where the story gets interesting…
Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.
With the travel industry crashed, many of these Superhosts have seen their rental incomes plunge in March and risk missing mortgage payments in the months ahead. Chesky was forced to bailout Superhosts because some of these folks have overextended their leveraged in building an Airbnb portfolio and risk imminent deleveraging.
Highly leveraged Superhosts could be the first domino to fall that triggers a housing bust this year. Superhosts can have one property and or have an extensive portfolio, usually built with leverage. So when rental income goes to zero, that is when some have to make the difficult decision of missing a mortgage payment or having it deferred or liquidate the property to raise cash. These decessions are all happening all at once for tens of thousands of people not just across the world but all over the US and could trigger forced selling of properties into illiquid housing markets in the months ahead.
Some of the horror stories are already playing out on Twitter:
And just like in 2008, when the rent payments stopped, landlords also felt the crunch and went belly up. What’s happening with highly leveraged Airbnb Superhosts is no different than what happened a decade ago. Again, no one has learned their lesson. And we might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.
If you’re an @Airbnb Superhost and pay a mortgage on that property, you’re about to take the financial hit of a lifetime.