In short,
this thing smells so bad that our Capitol Hill legislators will have to wear
oxygen masks to the negotiating table, and not because of the Covid.
And yet,
and yet, the robo-machines and boys and girls on Wall Street keep buying the
dip because, apparently, all will be well if the Fed just keeps on printing,
Washington keeps on borrowing and speculators keep on pretending that the Virus
Patrol is actually battling the Covid.
We’ll
take the unders. Big Time.
The eruption of government
red ink literally defies imagination. The deficit figure topped $863 billion during the month of June alone.
Indeed, the number is so
massive that it’s hard to put it in context. But consider this: When your
editor joined the Reagan campaign in the summer of 1980, the public debt was
also $863 billion and it had taken 192 years and 39
presidents to get there.
So during
the last 30 days, the clown brigade which passes for a government in Washington
has actually borrowed nearly two centuries worth of debt!
Indeed, the numbers for June
are so bad as to give ugly an entirely new definition:
- June
receipts of $242 billion were down by 28% or –$92 billion from last year;
- June
outlays totaled $1.105 trillion, representing a +$713 billion or 182% increase from last
year;
- Leading
the charge was SBA outlays of $511 billion compared
to $80 million last year – and, yes, that’s the PPP boondoggle and it
amounts to a 4,400% gain;
- Not
far behind was unemployment benefits at $116
billion compared to $2 billion last year;
- There
was also a $70 billion increase
in the cost of student loans owing to CARES act repayment deferrals and an
adjustment for massively higher student loan defaults in the future than
had been previously assumed;
- And
the red ink total for June, which is usually a low deficit month due to
estimated tax payments, rose from $8 billion last
year to the aforementioned $863 billion.
But
the issue is far more than the humongous numbers. There is now at work a
trifecta of baleful forces that is literally destroying any semblance of fiscal
discipline in Washington.
The
first of these, of course, is the Fed. It has so completely and recklessly
monetized the ballooning public debt that Washington officialdom and
politicians are getting zero honest price signals from the bond market. In any
practical sense the Brobdingnagian amounts of money they are borrowing is
perceived as free, and rightly so.
After
all, as of this morning, 90-day, 2-year and 10-year money costs the Treasury
only 0.14%, 0.17% and 0.58%, respectively.
Secondly,
there has been what amounts to a highly improbable “doctors plot” to take down
the already debt-entombed US economy with an unprecedented regime of quarantines,
economic locksdowns and drastic social regimentation in response to a virus
that is really only an abnormal medical threat to the old and infirm.
The fact that the lockdowns
are so wildly disproportionate to the 5%-of-population threat posed by the
Covid is attributable to the rampant Trump Derangement Syndrome (TDS) among the
Dems, the MSM and the permanent Washington ruling class. They are so rabid with
TDS that they have mindlessly cheered on the health care apparatchiks, mayors
and governors in a blunderbuss attack on the US economy that pales all prior
recessions in severity.
Peak Trump: The Undrai...David
A. StockmanBest Price: $12.72Buy New $43.07(as
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And,
thirdly, the elected politicians – beginning with the Donald – have stood idly
by during this economy-wrecking campaign, deluded by the belief that Washington
has the responsibility and means to fund a virtual make-whole for every worker
and business in America that has suffered a loss of income and cash flow.
That
is to say, America has fallen under the dictatorship of an unaccountable and
unconstitutional Virus Patrol. But there has been almost zero political resistance
to its insanities such as closing schools, bars, gyms and air travel because
the fiscally incontinent policy-makers of Washington have stood up
multi-trillion coast-to-coast soup-lines to ameliorate the damage and pain.
But
for crying out loud, this jerry-built trifecta of madness cannot possibly be
sustained. Your can’t print $3 trillion of fiat credit in just four months as
the Fed has done and get away with it. Nor can you spend $7 trillion and
collect only $3 trillion as Uncle Sam will do this year and not expect dire
repercussions down the road.
And,
for that matter, you can’t run-up the NASDAQ to an all-time high in the face of
this fiscal, monetary and economic mayhem, and on the strength of just ten
stocks, and not expect that a thundering financial collapse lies just around
the corner.
Indeed, as David Rosenberg
pointed out this AM, the top 10 stocks in the NASDAQ Composite (Apple,
Microsoft, Amazon, Facebook, Google, Nvidia, Tesla, Intel, Netflix, Adobe) now
make up 48% of the index’s market
cap, and an incredible 58% of the
NASDAQ 100.
So what you see in the chart
below is an accident waiting to happen. The NASDAQ’s all-time high is being
propped up by a massive bubble in a few stocks, while what is happening down
below is more like a foretaste of things to come. To wit-MW polar Herring Fille...Buy
New $24.96 ($0.30 / Ounce)(as of 04:08 EDT - Details)
- The equal-weight S&P 500 is at the same level today as
December 18th, 2017;
- The NYSE Composite is at same level as in Sept. 15th, 2017;
- The Russell 2000 small cap index is where it was on July
14th, 2017;
More
crazy still, during the three years in which the index of America’s main street
small and mid-cap stocks has gone nowhere, the total return (price plus coupon)
on the 30-year UST has been a staggering 43%; and in the case of the
zero-coupon 30-year UST, the return has been 56%.
Now
that’s just nuts. Given the egregious fiscal breakdown and the near $80
trillion of public and private debt weighing down upon the nation’s faltering
economy, owners of long-term bonds should be facing severe capital losses, not
insanely massive capital gains on top of essentially nonexistent coupons.
Likewise, you have Tesla
trading at 288X its pittance of free
cash flow and valued more highly than Toyota for the same reason that bond
prices are soaring irrationally: Namely, unhinged speculation on Wall Street
that is being fueled by grotesque infusions of central bank liquidity.
That’s
also why in the face of a quarter in which GDP is slated to plunge by upwards
of 40%, the Dow booked its best quarter in 33 years; the S&P 500 posted its
best performance since 1998; and the NASDAQ had its biggest increase since 1999
– jumping 39 percent in just three months.
Indeed, the chart below is
truly grotesque by any other name. The 4-week moving average of continuing
unemployment claims now stands at 19 million or at 6.1X its level at the start of 2013, when the
NASDAQ composite stood at just 3,000.
Today
it closed at 10,617 or 254% higher and because, why?
- Netflix
is worth $241 billion or 111X net income or an infinite multiple of free
cash flow, of which it has generated negative $11 billion during the last
5 years?
- Amazon
is worth $1.600 trillion or 151X net income and 83X free cash flow?
- Facebook
is worth $700 billion or 33X net income and 30X free cash flow – after two
years of low single digit growth and in the face of the biggest impending
plunge in advertising revenue in modern times?
- NVIDIA
is worth $258 billion or 108X net income and 60X free cash flow?
- Microsoft
is worth $1.622 trillion or 35X net income – even though its earnings
growth rate over the last 8 years has been just 6.5% per annum?
- Apple
is worth $1.664 trillion or 29X net income – even though its earnings have
grown by just 4.5% per annum since 2012?
- Google
is worth $1.053 trillion – even though its earnings too have plateaued
during the last two years and it is now facing a brutal decline in
advertising spending?
In
fact, the above chart actually understates the case because – surprise – the
financial press doesn’t even report the correct figures for the number of US
workers on the unemployment dole at the present time.
In addition to the 18.56 million of continuing claims reported yesterday
under the standard state programs, there is another 14.36 million of so-called uncovered employees
– gig workers, free lancers, temp agency contractors etc. – now getting the
Federal pandemic unemployment assistance benefit (PUA) . That means at the time
we are supposed to be sharply ascending the other side of the “V”, there are
actually 32.92 million workers lounging
at home and collecting unemployment benefits in lieu of a paycheck.
As
Wolf Richter recently demonstrated, there are now nearly 2X more workers
getting UI checks than the 17.75 million unemployed workers the BLS reported
for June.
That’s
right. We have repeatedly reminded that the BLS does not arrive at its jobs and
unemployment numbers by counting; it generates them by modeling, and when the
economy is at a big inflection point, to say nothing of the unprecedented
turmoil of the moment, its models are not worth the digital ink they are
printed on.
Stated differently, it do
make a difference that 15.2 million workers
no longer on the job are not accounted for in the BLS ballyhooed monthly jobs
report.
In
short, the whole shebang is on a razor’s edge and there is nothing much
immediately ahead except opportunities for the whole system to go tilt.
For
instance, the SBA payroll protection program (PPP), which has already shelled
out an incredible $521 billion to nearly 5 million US businesses will expire
next month, while the $600 per week Federal supplement to average state UI
checks of $500 per week will expire at the end of July.
What
this means is that the whole economy is floating on a massive air mattress of
government subsidies and transfer payments which could suddenly evaporate if
Washington becomes politically paralyzed; and, in any event, can’t be sustained
much longer as a matter of sheer fiscal math.
For want of doubt, here again
is the craziest upheaval of income flows to the household sector in all of
economic history. To wit, paychecks (brown line) are now running $524 billion below year ago levels, while
transfer payments (purple line) are running an incredible $2.13 trillion higher.
Self-evidently,
without this massive injection of borrowed money, which in turn was 100%
monetized by the Federal Reserve, household spending and confidence would have
imploded weeks ago. In fact, it is only the likes of June’s $863 budget deficit
that has prevented the outbreak of economic and social chaos.
So
what happens next?
We’d
say nothing very pleasant. Congress will be in recess until the last week of
July, and the two parties have not yet begun to reconcile the Everything
Bailout 4.0 passed by the House Dems with a price tag of $3.0 trillion and the
GOP/White House position, where the Great Capitulator, Senate Leader McConnell,
has drawn a wobbly line in the sand at just another, well, $1.0 trillion (on
top of the $3.3 trillion that has already been approved).
But consider just one of the
thorny issues that will take until at least Labor Day to solve, if at all.
Namely, extension of the greatest incentive for unemployment ever conceived in
the form of the $600 per week Federal supplement to regular state UI benefits.
Together, the state plus
Federal dole now amounts on average to a $57,000 wage
at annualized rates.
Of
course, there are 80 million jobs in America or 50% of the total which pay
under $45,000 per year – so when we say perverse moral hazard that’s exactly
what we mean.
Apparently,
Stevie Mnuchin, the Donald’s hapless “watchdog” at the US Treasury has finally
sobered-up, recently insisting that the impending Everything Bailout 4.0 must ”
limit the UI top up”:
Any extension would ensure that
jobless benefits would be “no more than 100%” of what workers were
earning, Mnuchin said.
“We knew there was a problem
with enhanced unemployment in that certain cases people were paid more than
they made in their jobs,” he said. “We’ll fix that and we’ll figure out an extension
to it that works for companies and works for those people who will still be
unemployed.”
Well,
goodness me, yes.
A
National Bureau of Economic Research working paper by researchers at the
University of Chicago found that
- 68% of
unemployed workers who are eligible for unemployment insurance will get
benefits exceeding their lost
earnings;
- One
out of five eligible jobless workers will get at least double their lost earnings;
- The
overall median replacement rate of the enhanced benefits is 134%.
Then
you have the collapse of state and local revenues, thank you Lockdown Nation,
where the Dems want to toss $1 trillion of money Uncle Sam doesn’t have into
the kitty to help tide them over and preserve the mostly higher paying 18
million jobs dependent on state and local payrolls.
The run-rate of state and
local receipts was $1.907 trillion during Q1 2020, but is slated to drop by at
least 20% or $400 billion during the
current quarter, and continue to bleed profusely for many more quarters to
follow. Again, the Red State/Blue State mud-wrestling match over the amount of
and allocation formula for the proposed Federal bailout will be one for the
ages, which also won’t make the finish line by Labor day or even Election day.
And
then comes a food fight over extending the rottenest boondoggle ever conceived
in Washington – the PPP programs that has already showered helicopter money on
4.9 million businesses. Notable recipients include:
- The
law firm Boies Schiller Flexner, whose chairman David Boies has
represented powerful clients such as former Vice President Al Gore and
Harvey Weinstein, among notorious others, received between $5 million and
$10 million.
- Several
million went to Kanye West’s clothing brand, Yeezy, and Grover Norquist’s
anti-tax group, Americans for Tax Reform.
- Transportation
Secretary Elaine Chao’s family’s business, Foremost Maritime, got a loan
valued at between $350,000 and $1 million. Chao is the wife of Senate Majority Leader Mitch McConnell,
R-Ky.
- Perdue
Inc., a trucking company co-founded by Agriculture
Secretary Sonny Perdue, was approved for $150,000 to
$350,000 in loan money.
- Restaurant
chains P.F. Chang’s China Bistro and Chop’t received aid of between $5
million and $10 million.
TGI Fridays, which is backed by private equity firm TriArtisan Capital Advisors, received at least $5 million. - The
Archdiocese of New York got a loan valued at between $5 million and $10
million, while the Catholic Charities of the Archdioceses of San
Francisco, Washington, D.C., New Orleans and Boston, among others, all
received assistance valued at more than $2 million.
- The
Ayn Rand Institute, named for the objectivist writer cited as an influence
on libertarian thought, was approved for $350,000 to $ 1 million.
- Joseph
Kushner Hebrew Academy in New Jersey, which is named after Trump’s
son-in-law and advisor Jared Kushner’s grandfather, got a loan in the
range of $1 million to $2 million. Jared Kushner’s parents’ family
foundation supports the school, NBC News reported.
- Niche
movie theater chain Alamo Drafthouse received a loan of at least $5
million. Theaters have been closed while new film releases have been
delayed or pushed to streaming platforms.
- Numerous
news organizations received PPP loans: Forbes Media got at least $5
million; The Washington Times got at least $1 million; The Washingtonian
got at least $350,000; The Daily Caller received at least $350,000 and The
Daily Caller News Foundation got at least $150,000; The American Prospect
received at least $150,000.
- Political
organizations also received loans: The Ohio Democratic Party got at least
$150,000 and the Florida Democratic Party Building Fund got at least
$350,000, while the Women’s National Republican Club of New York got at
least $350,000, the Black Republican Caucus in Florida got at least
$150,000.
In short, this thing smells so bad that
our Capitol Hill legislators will have to wear oxygen masks to the negotiating
table, and not because of the Covid.
And yet, and yet, the robo-machines and
boys and girls on Wall Street keep buying the dip because, apparently, all will
be well if the Fed just keeps on printing, Washington keeps on borrowing and
speculators keep on pretending that the Virus Patrol is actually battling the
Covid.
We’ll take the unders. Big Time.
Reprinted with permission
from David Stockman’s Contra Corner.
Former
Congressman David A. Stockman was Reagan's OMB director, which he wrote about
in his best-selling book, The Triumph of Politics. His latest books
are The Great Deformation: The Corruption of Capitalism in
America and Peak Trump: The Undrainable Swamp And The Fantasy Of MAGA.
He's the editor and publisher of the new David Stockman's Contra Corner. He was
an original partner in the Blackstone Group, and reads LRC the first thing
every morning.
Copyright © David Stockman
