Tuesday, July 14, 2020

To Hell in a Hand Basket - By David Stockman (Text only - for charts and graphs link to website below)

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:

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  • 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.

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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.

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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.
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