Stock Market Crash: The End Game And Down The Rabbit Hole

For a stock market to crash, prices must fall. That is obvious. But what if stocks rise and the value of money falls? Is that a crash? If the value of money drops 30% but the market rises a little, is that a bull market?

Not many people would argue against the premise that it is the Federal Reserve’s liquidity actions that have levitated the U.S. stock market. Sadly, in an attempt to keep the whole economy from imploding it has inflated stock asset values to ridiculous levels. Jay Powell, the Fed Chairman, made it clear in a recent interview that they were committed to supporting the U.S. economy and to protecting it from the effects of anti-Covid measures, for as long as necessary and for as much as needed, and clearly indicated that would be for a long time.

This is the trend of that Federal Reserve support:

The Federal Reserve's total assets
The Federal Reserve’s total assets Credit: Federal Reserve

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(Chart courtesy of the Federal Reserve’s website)

This QE or however you want to brand this liquidity provision (liquidity equals cash, provision equals printing assets that turn into money) is clearly going to run and run for a long time because every time the Fed slackens its swapping of fresh government-backed quality assets for other people’s sketchier assets, down flops the stock market and then up pops more QE to keep the market from crashing Hindenburg-like in flames.

When the Fed tapered in 2019, down went the market and crash went peripheral global economies as U.S. dollars were sucked from the global economic plumbing. The U.S. and the world economy is hooked on the Federal Reserve’s money printing. By swapping golden government debt for other parties’ riskier, perhaps very risky, debt the Fed yanks the world’s dodgy assets holders out of the mire by their hair, thus avoiding a spiral of insolvency. The potential damage of that terrifying comeuppance is what sparks all bailouts, allowing broken companies and economies to stagger on, most likely towards even greater fragility.

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The weird thing is this: If these liquidity operations keep going on, the Federal Reserve will in effect own all its citizens’ homes and all its creditworthy (and not so creditworthy) corporate debt and thus have liens on most of the economic assets of its citizens and producers. It will have in effect nationalized, though probably by accident, the country, having bought it with government paper. 

However, if it brings this process to a halt the market will crash and everyone will instantly be a lot poorer, while if it carries on at some point it will glut the market for its paper, up will go interest rates and down will go the value of bonds and the reality of a much poorer economy will bite.

However, it seems that the Federal Reserve is not going to let the stock market crash whatever the outcome.

But if a dollar in 2023 or 2024 buys significantly less and the market hasn’t rocketed accordingly, you are getting your reset in a chronic way rather than through an acute event of a 30% retrenchment on your portfolio. This will be the aim, once again to smooth the process by spreading it out over a decade or two rather than take the pain in an awful three or so years of restructuring.

Yet make no mistake, the U.S. stock market is a house of cards, and as the Malaysians discovered when they propped up the price of tin, there is a finite nature to keeping a market away from its natural equilibrium and you must spend increasing amounts to do it. At some point you run out of credit and down goes the market to its correct level.

How long the U.S. can continue to debase its credit while maintaining its credibility is the key question in this ongoing drama and every country in its time has gone beyond that point and sunk into crisis. If the U.S. chooses to corner its markets, that time will approach rapidly. With continued QE the system will become more fragile still so to the catalyst needed to breach that fixed market corner will get smaller and smaller until the slightest of nudges will break the spell.

Inflation solves all these problems as it gives the flexibility for economic activity to rebalance as few can keep up with all the different developing prices. It creates impetus for people to get their money moving and crushes debt with negative real interest rates and also stealthily rebalances the actual value of those debts. Switching inflation on and off is a known, even though central banks ludicrously claim otherwise.

But will the stock market crash now? Hearing Jay Powell speak it appears they are prepared to die on the hill of QE. So the market will not be allowed to take its natural course. This means the market will crash but only when and if there is a downfall moment. There has to be a readjustment for a global economy that has lost at least 10% of its output with still more damage to come.

Some governments will aim for a chronic economic development while some will go for an acute one if they can shift its blame onto someone or something else.

As such, investors should pray that the new incoming U.S. administration doesn’t find a neat scapegoat to blame a reset on, to get that out of the way early in their term.

For anyone who is not a diehard buy and holder, the near future must be one where an investor’s fingers should stay hovering near that sell button because the tightrope walk the Fed is walking for the sake of the U.S. and world economy is going to be a precarious one.

Clem Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.

Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018. Follow me on Twitter or LinkedIn. Check out my website.

Clem Chambers

 Clem Chambers

I am the CEO of stocks and investment website ADVFN . As well as running Europe and South America’s leading financial market website I am a prolific financial writer. I wrote a stock column for WIRED – which described me as a ‘Market Maven’ – and am a regular columnist for numerous financial publications around the world. I have written for titles including: Working Money, Active Trader, SFO and Technical Analysis of Stocks & Commodities in the US and have written for pretty much every UK national newspaper. In the last few years I have become a financial thriller writer and have just had my first non-fiction title published: 101 ways to pick stock market winners. Find me here on US Amazon. You’ll also see me regularly on CNBC, CNN, SKY, Business News Network and the BBC giving my take on the markets.

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George Gammon

Stock market crashes and the 👉QUESTION ON YOUR MIND IS 👈..Are we now in the “end game?” This has been the fastest stock market crash, as measured by a 10% decline from a market high, in history. Worst week since 2008 global financial crisis. As we all know, the system now is much more levered and precarious. So what happens now? Does the stock market crash further? Is this the next 2008 style financial crisis? Will this lead to a recession or even a depression?

These are the questions everyone has, and they’re the questions I’ve been asking myself. In this video I’ll do my best to outline the systemic risks in the current system, why the federal reserve doesn’t have as much control as people think, and why this maybe the black swan event people have been expecting. If you’re interested in the future of the economy THIS IS A MUST WATCH VIDEO!

In this stock market crash end game video I’ll discuss the following: 1. The current systemic risks. 2. Jeff Snider’s work showing the Fed isn’t in control. 3. Is this the end game? I give you my opinion and what is the deciding factor for me. Link to Peter Schiff video from clip. Peter is one of my favorites, I’d strongly recommend checking out his channel and podcast! https://youtu.be/NjzYRtK6i_M For more content that’ll help you build wealth and thrive in a world of out of control central banks and big governments check out the videos below! 👇 🔴 Subscribe for more free YouTube tips: https://www.youtube.com/channel/UCpvy… Do you wanna see another video as incredible as this? Watch “Kyle Bass Predicts HSBC Collapse In 2020! (Here’s Why)”: https://youtu.be/QwjiIIht0bw Watch “Repo Market Bailout: TERRIFYING Unintended Consequences Revealed!”: https://youtu.be/-2wJWzoSjRo Watch “2008 GFC: Everything You Know Is Wrong! (Truth Revealed)”: https://youtu.be/Ku58GQ5dcKU#StocksPlummet#MarketChaos#GettingWorse?

Was Your PPP Loan Less Than $50,000? Life Just Got (A Little Bit) Easier

On March 27, 2020, Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package designed to help individuals and businesses weather the economic damage caused by the COVID-19 pandemic.

The headliner of the CARES Act was the creation of the PPP, a new loan program under Section 7(a) of the Small Business Act designed to put nearly $600 billion into the hands of small businesses for use in paying employee wages and other critical expenses throughout the pandemic.

The reason over two million businesses rushed to the bank to grab a PPP loan, however, was not because they were eager to saddle their struggling enterprises with more debt. Rather, the idea was that these PPP loans were loans in name only; once a borrower received the funds, the amount spent over the next 8 (now 24!) weeks on payroll, mortgage interest, rent and utilities would be eligible to be completely forgiven. Recommended For You

By late May, however, many borrowers were nearing the end of their 8-week periods, only to find that a number of barriers continued to prevent them from reaching full employment, and thus, achieving full forgiveness of their PPP loans. As a result, on June 5, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020, which made several dramatic changes to the legislative text of the CARES Act.

In recent weeks, as Congress has worked towards yet another round of COVID-19 stimulus, there has been talk about even more tweaks being made to the PPP process, but the reality is, at this point, borrowers don’t want more, they want less.

Allow me to explain. Many PPP borrowers are through or nearing the end of their “covered period,” as discussed more fully below. It is now time for them to apply for forgiveness. But when these borrower’s are forced to address the endless morass of poorly-defined terms, ever-changing requirements, and collection of complicated calculations that make up the forgiveness process, they are routinely left with a raging case of buyer’s remorse.

As a result, most borrower’s don’t want more changes to the PPP loan program, they just want to be told that their debt will all magically go away, as they hoped it would when they rushed to borrow it. Or stated another way, they want to hear that their debt will be forgiven without having to pay more to their accountants to compute the forgivable amount than they borrowed in the first place.

Well today, borrowers finally got some good news. Or should I say, a narrow class of PPP borrowers got some good news. The SBA released a streamlined application — Form 3508S — designed specifically for those who borrowed less than $50,000.

Form 3508S
Form 3508S Nitti

A quick perusal of the instructions to the form makes clear that for this class of borrowers, forgiveness will still not be automatic. So where’s the good news? Several of the issues that make the standard application for forgiveness so confusing and time-consuming have now been removed for these small borrowers. Specifically, a borrower of a PPP loan of less than $50,000 is no longer required to reduce the amount eligible for forgiveness if the borrower:

  1. Reduces the salary or hourly wage of an employee (who earned less than $100,000 in 2019) during the “covered period” following the borrowing relative to the first quarter of 2020, or
  2. Reduces full-time equivalent employees (FTEs) during the covered period relative to a base period.

Stated in another way, a borrower of a PPP loan of less than $50,000 may apparently slash salary and fire FTEs with impunity. And while this new reality may run completely contrary to the initial intent of the PPP, it’s welcome relief to those tasked with applying for forgiveness.

Aside from those very important changes, the application process remains largely the same. A borrower must still do the math and compute the amount eligible for forgiveness; the difference, however, is that small borrowers are no longer required to show their math. Be warned, however: the instructions make clear that the SBA may request from the borrower support for their computation at any time.

Since you’ve read this far, perhaps it’s best that we (briefly) review the process of asking for forgiveness. If you’re not eligible to file on a Form 3508S — and must instead use the Form 3508 — please read these step-by-step instructions.

Getting Started

It all begins on the date the loan was received (or does it?) The borrower must then determine the amount spent on four classes of permitted expenses — payroll costs, mortgage interest, rent, and utilities — that are paid OR incurred throughout the “covered period,” a timeframe that has only grown more confusing since the passage of the CARES Act.

Covered Period

Courtesy of the June 5 legislation, the “covered period” can now be as many as FOUR different periods. The default setting is that the covered period is the 24-week period beginning on the date you received the loan disbursement. 

If you received your loan prior to June 5, 2020, however, you may elect to use the 8-week covered period provided by the CARES Act. Presumably, you would only do this if you 1) spent all of your PPP loan on eligible costs within the 8-week window, 2) did not reduce any salary or headcount during the 8-week period, and 3) are eager to move on from the PPP process and never speak of it again.

In computing payroll costs — and ONLY payroll costs — eligible for forgiveness, you are also permitted to choose an “alternative payroll covered period,” which is the 24-week (168 day) period beginning on the first day of the first pay period following the disbursement date, allowing a business to neatly align its covered period with the beginning of a pay period. Thus, if you received your PPP loan on April 20, 2020, and the first day of your next pay period is April 26, 2020, you may elect to count the payroll costs — and only the payroll costs — for the 24-week period beginning April 26, 2020, rather than the 24-week period beginning April 20, 2020.

Obviously, if you elect to use the 8-week covered period, you simply adjust the language above to suit a 56-day period rather than a 168-day period.

Paid or Incurred

Only costs “paid or incurred” during your appropriate covered period are eligible for forgiveness. Payroll costs are paid on the day the paychecks are distributed or the borrower originates an ACH credit transaction. Thus, you could have received PPP loans on April 26 and immediately paid – as part of your regular payroll process – wages that had been earned by the employees for the previous two weeks, and now include the amounts in the forgiveness calculation because the amounts had been PAID within the covered period.

Payroll costs are incurred on the day they are earned, and will be forgivable as long as they are paid no later than the next regular payroll date after the end of the covered period. Thus, if you covered period ends on November 1st, payroll incurred prior to that date, but paid AFTER that date, will be forgiven provided it is paid on its first regular due date after November 1st.

The rules for non-payroll costs are identical, except the “alternative payroll covered period” is not available. In order for costs such as mortgage interest, rent and utilities to qualify for forgiveness, these expenses must either be: 1) paid DURING the 24-week covered period, or 2) incurred during the 24-week period, and paid by its next regular due date, even if that due date is outside the 24-week period.

Once again, it would appear that by allowing all payments made DURING the period to be eligible for forgiveness, borrowers are permitted to pay rent, interest, or utilities related to periods prior to the 24-week period and have those expenses forgiven.

Payroll Costs

Payroll costs are the first, and largest, of the four classes of forgivable costs. It is a class, however, with four subclasses of its own: cash compensation, health care costs, retirement plan costs, and certain state and local taxes on employee compensation. The forgivable amounts for each subclass depend on whether they are being paid to an employee, an “owner-employee,” or a self-employed taxpayer.

Cash Compensation

The CARES Act provides that the amounts spent on “payroll costs” during the 24-week covered period are eligible for forgiveness. Including in payroll costs are certain compensation amounts; specifically, the sum of payments of any compensation with respect to employees that is a:

  • Salary, wage, commission, or similar compensation;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical, or sick leave; or
  • Allowance for dismissal or separation.

Compensation does not include, however:

  •  The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. As a result, in no situation can you have forgiven more than $46,154 (24/52 * $100,000) in payroll costs for any one employee. If you elect to use the 8-week covered period, the compensation paid to any one employee that is eligible for forgiveness cannot exceed $15,384 (8/52 * $100,000).
  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127); or
  • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

Additional limitations apply to self-employed taxpayers and “owner-employees.”

For a self-employed taxpayer with no employees, full forgiveness should be guaranteed as a result of the mechanics governing the initial borrowing and subsequent forgiveness. A self-employed taxpayer with no employees was entitled to borrow 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Not coincidentally, after the passage of the PPP Flexibility Act, self-employed taxpayers with no employees will have forgiven 2.5/12 of the self-employment income from the taxpayer’s 2019 Form Schedule C. Because these two amounts will be the same, full forgiveness is guaranteed.

The rules are more complicated for “owner-employees,” only recently defined as one who owns 5% or more of the stock of a C or S corporation. Here, two limitations apply. First, the maximum compensation cost for 2020 is capped at 2.5 months of an annualized $100,000 salary, or $20,833 (or $15,384 for a borrower using the 8-week covered period). Compare this to the $46,152 an employee can be paid throughout the covered period.

Then, the forgivable amount is further limited to 2.5 months of the 2019 compensation of the owner-employee. This will prevent an owner from increasing their compensation during the covered period to maximize forgiveness by limiting the amount included in the forgivable amount to 10/52 of the owner’s compensation for 2019.

Non-Cash Compensation Payroll Costs

In addition to cash compensation, a borrower may have forgiven the sum of the following three expenses:

  1. Payment required for the provisions of group health care benefits, including insurance premiums;
  2. Payment of any retirement benefit; or
  3. Payment of State or local tax assessed on the compensation of employees.

For employees with no ownership interest, these amounts are in ADDITION TO the annualized compensation cap of $100,000. Thus, an employee could have up to $46,152 of compensation forgiven, as well as amounts allocable to that employee reflecting his or her share of health costs, retirement benefits, or state and local taxes.

For an owner-employee of a C corporation, all three costs are allowable in addition to the applicable cap. For an S corporation shareholder, however, no costs attributable to health care costs are forgivable, while the remaining two costs are forgivable in ADDITION TO the applicable cap. For a self-employed taxpayer, NONE of the costs are allowable.

Non-Payroll Costs

As a reminder, in addition to payroll costs, the CARES Act permits forgiveness for three other classes of expenses paid during the covered period.

  • Any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation). The term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020,
  •  Any payment on any covered rent obligation. The term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020 (recent rules were adding limiting rent expense to a related landlord), and
  • Any covered utility payment. The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

As we discussed in our “paid or incurred” section, it appears mortgage interest owed in arrears can be paid during the covered period and be forgiven, and mortgage interest incurred DURING the covered period but paid before or on the next scheduled due date will also be forgivable, even if that date is after the end of the covered period.

Putting it All Together

If you borrowed less than $50,000, you are still required to sum up the total costs outlined above and compute the amount of your forgiveness. Unlike those who borrowed MORE than that amount, however, your total amount eligible for forgiveness is not subject to reduction if you reduced salaries or headcount. So you’ve got that going for you. Which is nice.

Once you’ve summed your forgivable costs, the amount you report on the Form 3508S as your “forgiveness amount” is the lesser of three numbers:

  1. The sum of your forgivable costs,
  2. The principal of the loan, and
  3. The payroll costs — and ONLY the payroll costs — divided by 60%. This guarantees that no more than 40% of the forgiven amount will be attributable to the three classes of non-payroll costs.

Interestingly, on the standard Form 3508, the instructions provide that the final forgiveness amount is to be reduced by any Economic Injury Disaster Loan advance received by the taxpayer (up to $10,000). The instructions to Form 3508S, however, contain no such requirement.

Once you’ve gotten to this point, the application becomes MUCH less daunting than the standard Form 3508. No Schedule A. No worksheet to Schedule A. No FTE reduction quotient. Instead, you do all the math behind the scenes and drop the end result in the section titled “Forgiveness Amount.”

ibshop

The price of that brevity, however, is increased representations. You will now have to state on the application, among other representations, that:

Form 3508S reps
reps Nitti

But that’s it. Enter your general information at the top, and drop your application in the mail or send it through the ol’ interwebs. Unless the SBA decides to kick the tires, within a few months you should hear back on your forgiveness, take a deep breath, and revel in the knowledge that you’ll never have to think about the PPP again. Follow me on Twitter

Tony Nitti

Tony Nitti

I am a Tax Partner with RubinBrown in Aspen, Colorado. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. W In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

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Hindsight: Unnecessary Recession? Foresight: “Deep & Permanent Damage” (Bernanke & Yellen)

The number the media, and apparently much of the population, fixates on daily is the new virus case count in the U.S.  While cases have clearly skyrocketed, deaths from the virus continue to fall. Perhaps the case counts are a function of the level of testing. First Trust’s economists recently published some interesting statistics:

  • on Monday, July 6th, deaths were -86% below the Monday, April 20th peak.;
  • hospital capacity, nationwide, still appears manageable – albeit some specific locations may have hospital capacity issues;
  • The skew of deaths toward the elderly is also significant. The total percentage of deaths/confirmed cases (138,782/3,630,587 as of July 18) is 3.8%. Of those that have died, 33.2% were 85 years old or older, and 92.5% of deaths are in people over 55 years old.

Consider that confirmed cases represent just over 1.1% of the total U.S. population, but field tests are now showing that up to 20% of those tested are positive for the virus. While there are issues in assuming that 20% of the population have already had the virus (some think that there are a huge number of asymptomatic carriers), if that is anywhere close to reality, then the overall probability of dying from the virus is 0.04% (.0004), and if one is under 55 years old (most of the working aged population), then that probability falls to .003% (.00003, i.e. 3 per 100,000 who contract it). Even within this younger demographic, only those with compromised immune systems have any real risk. The 20% assumption may be high (there are reasons people get tested), but even at 10%, the younger demographic has little death risk.

The Economy

Market observers are now using high frequency data markers to gauge the state of the economy. Sometimes, even small deviations from expectations in the economic data results in outsized financial market reaction.

  • Retail Sales: While falling -5.5% from the week ending July 4th (holiday week) to the week ending July 11th, retail sales were still +4.7% higher than the same 2019 week, and up +7.5% M/M in June (May was still in the depths of business closures). On the surface, this looks promising. But, let’s not forget that consumer income has not yet been impacted because of government money drops. As discussed below, there are still 32 million people unemployed, and there will likely be a large negative impact when government largesse returns to “normal” (perhaps after the elections);
  • Hotel Occupancy (week ended June 27th): While up from the April lows, there is only 46.2% occupancy vs. 84.9% a year earlier;
  • Open Table (July 13): this indicator shows a -66.2% Y/Y change. The M/M change was -1.2%; looks like the daily media drumbeat on new cases has had an impact;
  • TSA checkpoint data (July 13): This shows the number of air travelers, and it was up 5.2% W/W and 61.7% M/M. But, because the denominator is so small, the percentage changes become almost meaningless. Y/Y traffic is still off -73.2%. No wonder United and American Airlines AAL are throwing in the towel and have pre-announced significant layoffs.

The conclusion here is that, after an initial pop, and especially with renewed business restrictions, the Recovery, at best, has flattened.

bestmining780

Employment

As I have maintained in this blog, employment is the most important gauge of the health of the economy. The more reliable state data from the traditional unemployment insurance programs is still showing significant Initial Claims each week (1.300 million the week of July 11th). There now is almost no downward slope, as the prior two weeks were 1.310 and 1.413 million. And, while Total Claims, as shown in the table and chart (sum of Initial Claims and Continuing Claims) have declined eight weeks in a row and in nine of the last ten, the chart shows the deceleration in the rate of decline in unemployment.

When the less reliable data on the temporary PUA program (Pandemic Unemployment Assistance – via the CARES Act) (less reliable because not all states are reporting and some states report more detail than others) is added to the state data, as shown in the next table and chart, one gets a flavor of just how deep the unemployment hole has become. Worse, beginning in June, total unemployment (or at least the claims) began to rise again. One of the emerging trends is that large companies, which had been hoping for the promised “V”-shaped recovery, have now given up and will start laying off. United and American Airlines are good examples. In addition, the approaching end of PPP may have a similar effect for mid-size and small businesses that are still alive.

Debt – The Fed Continues to be Nervous

For the banks, defaults haven’t yet become a huge issue due to forbearance. That will soon be ending. In the past week, the major banks reported Q2 results, and all significantly bolstered their loan loss reserves. In May, more than 100 million debt payments were missed. The consumer loan industry says it takes 180 days to deal with and resolve delinquent accounts, so we really won’t know the extent of consumer issues until Q4/Q1. I suspect the same is true of commercial loans.

Meanwhile, the Fed continues to worry. In recent Congressional testimony, former Fed Chairs Bernanke and Yellen warned that “the U.S. economy is facing deep and permanent economic damage” (i.e., certainly no “V,” and perhaps no “W”) without further significant fiscal and monetary stimulus including the expanded unemployment benefit program and providing aid to state and local governments.  In fact, Yellen worried out loud about probable large layoffs at the state and local levels without such aid. Bernanke, echoing those famous words of former ECB President Mario Draghi, said Congress and the Fed should do “whatever it takes.”

The Fed’s Beige Book, a report on local conditions by the 12 Regional Federal Reserve Banks (published eight times per year) emphasized “uncertainty” emanating from businesses in their purview. Here are some excerpts:

“Most Districts reported that manufacturing activity moved up, but from a very low level;”

“Outlooks remained highly uncertain…;”

“Employment increased on net in almost all Districts…However, payrolls in all Districts were well below pre-pandemic levels. Job turnover rates remained high with contacts across Districts reporting new layoffs;”

“Contacts in nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.”

Bankruptcies and Debt Concerns

As I’ve shown over the past few blogs, bankruptcies continue to trend up. It will take years for the damage done to the economy by the lockdowns to be recouped.  The lives and livelihoods of millions of citizens have been transformed (many ruined) overnight.

We are just beginning to see the early symptoms of debt destruction, and we are going to see the impacts of such debt destruction on many of the traditional sectors, including the financial ones. These impacts will have long lasting effects. Meanwhile, the Fed has convinced market participants that there is no risk, and that the Fed has their backs. The result is that yield differentials between safe and highly risky assets have all but disappeared – at least their spreads have come way in. In the table and chart below, bankruptcies (from the Bloomberg database) are trending up.

The implications for interest rates are clear. More and more debt (corporate America including the zombies and the federal government) means that future interest rates can’t rise lest interest payment burdens become unmanageable and turn the economy south.

Conclusions

  • With hindsight, the probability of death from the virus for most of the working aged population appears remote (minuscule);
  • The economy hit zero in April, and the May/June re-openings led to the early up-leg of a “v,” but this nascent recovery now appears to be stalling as governors decide to re-restrict businesses;
  • Employment numbers, too, are stalling. Companies are beginning to give up hope for a rapid recovery and are setting up for a long period of economic softness (i.e., they are starting to think about major layoffs);
  • Debt issues are just beginning to emerge and will come front and center in Q4/Q1. The Fed sees this as do former Chairs Bernanke and Yellen.
Follow me on Twitter. Check out my website.

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. http://www.fourstarwealth.com.

Source: https://www.forbes.com

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