“IT’S BAD”! It will get worse…

Coronavirus Case Count The virus has reached all 50 U.S. states, sickened thousands and reached more than 100 countries

• Coronavirus Could Very Well Slow by the Summer Evidence is emerging that warmer temperatures and higher humidity can indeed affect the disease’s spread.

• ‘A ticking time bomb’: Scientists worry about coronavirus spread in Africa

(…) South Africa, which had its first case 10 days ago, now has 61. According to Ramaphosa, the virus has begun spreading inside the country. And just yesterday, Rwanda, Equatorial Guinea, and Namibia all reported their first cases, bringing the number of affected countries to 23. Some scientists believe COVID-19 is circulating silently in other countries as well. (…)

Behind the Stimulus Frenzy: the Prospect of Billions of Unpaid Bills Washington is grappling with an increasingly urgent problem along with the novel coronavirus pandemic: the growing risk that millions of businesses and households won’t be able to pay their everyday bills

(…) “Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks,” Treasury Secretary Steven Mnuchin said at a White House briefing, highlighting the urgency of the dilemma. Privately with lawmakers, however, he said checks might not be available until the end of April. (…)

Nearly four in 10 Americans don’t have the savings in hand to cover an unexpected, $400 expense with cash, according to Fed surveys.

Fed data show nonfinancial businesses had $1.53 in liquid assets like cash and securities on hand for every $1 in short-term liabilities in the fourth quarter. That is down from $1.80 when Lehman Brothers collapsed in 2008, but up from $1.34 during the September 11, 2001, terrorist attacks, according to Moody’s Analytics. The more liquid assets they hold, the better positioned they are to handle a cash crunch. (…)

The Fiscal Stimulus Panic $1,000 checks won’t help the economy, but a new Fed backstop will.

We will survive the coronavirus panic as Americans adapt, as they always do. We’re less confident of the Washington panic, as our politicians rush to throw money around without much thought or economic logic as they almost always do. At least the Federal Reserve stepped in Tuesday to address an immediate economic problem.

To take these one at a time, President Trump appeared to throw his support Tuesday for the Mitt Romney-Steven Mnuchin idea of giving every American a check for $1,000. This will help those who lose their jobs or income from government shutting down retail and other operations. But Congress is also addressing this with expanded jobless insurance, food-stamp and other income transfers, and mandated sick leave that is much better targeted at genuine hardship. Some people who will get the $1,000 won’t need it.

The politicians are again selling the Keynesian illusion that this is the best way to get cash into the pocket of consumers who will spend it. That claim has failed time and again—from the George W. Bush tax rebate of 2002, to the Nancy Pelosi-Bush rebate of 2008, to the Barack Obama-Pelosi spending spree of 2009. The cash outlay will be even less effective now with so many fewer ways to spend it as much of the economy shuts down.

The checks no doubt will be popular, which probably explains GOP support in the Senate and White House. They will also blunt Democratic criticism if businesses also receive aid. But the checks won’t come cheap, running at a cost of hundreds of billions of dollars for the first round. What happens if the pandemic lasts into summer? The clamor will be for another round, and then another.

The U.S. can borrow now at low rates to finance this, but even American resources aren’t infinite. A $2 trillion annual deficit implies a substantial future tax increase—maybe as soon as next year—that would retard the recovery. Americans should get a greater economic return for that amount of money.

Mr. Trump has also agreed to the request of U.S. airlines for a $50 billion rescue. At least this appears to be structured in the Treasury request as secured loans, rather than grants. Solvent companies need financing to get through the virus economic shutdown, and once healthy they should be able to pay it back.

One problem with industry-specific rescues is that the requests turn into political free-for-alls on Capitol Hill. The better way to do this is a new Fed facility we wrote about Tuesday that would allow all business comers that were solvent before the virus to apply for loans against good collateral. Mr. Mnuchin should lean on Fed Chairman Jerome Powell to do it. (…)

• Trump’s $1.2 Trillion Won’t Do It. Try $2.5 Trillion The coming slowdown might be so deep that nothing less will do.

By Narayana Kocherlakota, professor of economics at the University of Rochester. He was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

(…) I see this drag lasting well into next year. This recent analysis from a team of researchers in the U.K. suggests that, until a vaccine is developed, governments will have to choose between two unpalatable options:

— exponential growth in the number of Covid-19 patients, which will crush health-care systems in a matter of weeks

— or stringent social-distancing policies to keep disease transmission under control (…)

Responding to this kind of protracted slowdown will require a bigger stimulus than the 6% of gross domestic product proposed by the administration. Instead, policy makers should be planning for two years in which, in the absence of a fiscal intervention, the output gap will be significantly negative — possibly as much as 6% of GDP, or on the same scale as the recession caused by the 2008-09 financial crisis. It’s going to take a much larger fiscal infusion to make up for that shortfall — something more on the order of $2.5 trillion rather than $1.2 trillion. (…)

First, the government should pay $10,000 to every adult and child younger than 40. They are more likely to go out and spend this money, partly because Covid-19 presents much less of a health risk to them. Second, the government should pay a bonus to each person who gets tested for the coronavirus (as long as they haven’t been tested in the prior week). Finally, as was done in the Great Recession, the government should both increase and extend unemployment-insurance benefits beyond the normal 26 weeks.

We know there is going to be a downturn and, unfortunately, there are good reasons to believe that it will be both long and deep. The Federal Reserve has done what it can using monetary policy. Now we need a strong and well-designed fiscal policy response from the U.S. government.

• The Lehman Echoes Are Getting Steadily Louder The coronavirus saga is starting to follow the outlines of the 2008 credit crisis.

We are clearly in a “whatever it takes” situation. This is a cashflow crisis that needs to be addressed right away. The sooner, the better and, with politicians and partisanship, seven months before the elections, the simpler the better.

AIRLINES IN FREEFALL

A $50B rescue for airlines. Yes, we need to keep them flying, but make them, and many others, pay for their careless management:

And these guys’ totally scandalous behavior, prioritizing $ before lives, with the FAA’s help!

• Boeing calls for $60 billion lifeline for U.S. aerospace industry

(…) The U.S. planemaker has told lawmakers it needs significant government support to meet liquidity needs and it cannot raise that in current market conditions, the people said.

Boeing confirmed Monday it was in talks with the administration about short-term support, while U.S. President Donald Trump said Tuesday the U.S. government would provide support. Boeing has noted that typically 70% of its revenue flows to its 17,000 suppliers and has told lawmakers that without significant assistance the entire U.S. aviation manufacturing sector could collapse. (…)

Boeing confirmed on Tuesday that it had completed the drawdown of the rest of a $13.8 billion line of credit it had secured last month.

Boeing’s total debt nearly doubled to $27.3 billion in 2019, as it compensated airlines and grappled with additional production costs for the 737 MAX even as the grounding prevented it from delivering the aircraft to buyers.

Reuters on Tuesday reported Airbus has about 16 billion euros ($17.60 billion) in cash and needs some 5.5 billion euros a month, a person familiar with Monday’s discussions said. (…)

China lacks appetite to save world economy, analysts warn Beijing adopts more conservative approach in tackling latest crisis compared with 2009

(…) China’s total debt load amounts to about 310 per cent of GDP, one of the highest levels among emerging markets, according to the International Institute of Finance. (…)

ECB Seeks to Mend Rifts as Economic Clouds Gather For the second time in a week, the European Central Bank scrambled to clarify remarks from one of its top officials that suggested it is unlikely to do more to support the region’s struggling economy.

The move highlights divisions among top ECB officials that could hurt efforts to overcome a fast-moving global crisis whose epicenter has shifted to Europe.

In a statement early Wednesday, the ECB said its 25 rate-setting officials were united in their commitment to step up stimulus policies if needed to combat the spreading coronavirus. (…)

But so far, they are still openly quarreling about what’s needed and how to do it…

Source: @financialtimes; Read full article

• Toyota says plans to shut more plants in Europe, Asia due to coronavirus U.S. plant operations have not been affected so far

Ottawa to unveil nearly $30-billion economic aid package for struggling Canadians, businesses

Fed to Relaunch Primary Dealer Credit Facility Crisis-era facility allows large financial institutions access to short-term loans

The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 large financial institutions. Known as primary dealers, they function as the Fed’s exclusive counterparties when trading in financial markets.

The program will essentially function as an overnight loan facility for primary dealers, similar to how the Fed’s discount window provides a round-the-clock backup source of funding to banks.

The facility will offer terms as generous as those made available in late 2008. (…) Earlier Tuesday, the central bank said it would establish a facility to make loans to U.S. corporations in an effort to ease dysfunction in the $1.1 trillion market for short-term corporate IOUs called commercial paper. (…)

• How Cash-Hungry Companies Could Bite $700 Billion Out of Banks What if companies across America pull harder on credit lines during this crunch than they did in the last one?

During the depths of the 2008 financial crisis, companies served by U.S. banks bolstered themselves by drawing about 30% of their available credit, with some sectors going much further. If five industries now getting hammered by the coronavirus and oil-price slump were to, say, draw as much as 70%, all corporate clients together would extract a total of about $700 billion from the six biggest banks’ liquidity pools. That’s close to 16% of lenders’ cash-like holdings at the end of last year. (…)

A team at Goldman Sachs Group Inc. concluded last week that a 100% drawdown in several embattled sectors would bring seven of the biggest banks to the brink of breaching their regulatory minimums for liquidity ratios.

“If other industries begin to see larger draws, this will put further pressure” on the ratios, the Goldman analysts led by Richard Ramsden wrote in a March 12 report. The analysis excluded Goldman. (…)

Regulators are considering changes to leverage limits and accounting rules to free up bank capital, according to people familiar with the talks. The Fed on Sunday urged banks to use their excess capital to expand lending. That evening, eight of the nation’s largest banks promised to suspend share buybacks, stockpiling capital for loans. (…)

Surging U.S. Dollar Is Next Big Headache for World Economy Emerging markets are especially vulnerable as they try to cope with collapsing currencies and plunging demand.

Saudis to Hike Oil Export to Record 10 Million Barrels a Day

Saudi Arabia plans to boost oil exports even further from April to May, reaching a record of more than 10 million barrels a day as the kingdom taps a new field.

The increase in shipments of about 250,000 barrels a day shows the kingdom is determined to carry on with its policy of pumping flat out after its alliance with Russia collapsed. (…)

Before the price war broke out, Saudi oil exports averaged just under 7 million barrels a day from December to February, according to tanker-tracking data. (…)

• The Saudis Have a High-Stakes Plan to Win the Global Oil War The Russians may have started the price war, but Riyadh was waiting for the opportunity to jump in.

(…) what started as a price war may turn out to be a much more important strategic rethinking of Saudi oil production policy, as the kingdom seeks to monetize its giant petroleum reserves as fast as possible rather than shepherding that store of wealth through the generations. Such a shift would fundamentally change the economics of the industry, using Saudi Arabia’s ultralow cost advantages to win a race to the bottom. For Prince Abdulaziz’ younger half-brother, Crown Prince Mohammed bin Salman, it would represent a massive gamble: the world’s preeminent oil exporter choosing to live with lower long-term oil prices. (…)

Riyadh has kept mum on its motivations, but if the suspicions of many in the oil market prove true, this oil war will be a Darwinian survival of the fittest. As the world steps up the fight against climate change, the demand for oil will peak in a few decades. Saudi Arabia and Russia will likely emerge bruised but standing. Many others, including U.S. shale producers, will be in dire straits.

In the kingdom, the current thinking is to let free markets work. If officials are worried about low oil prices, they aren’t showing it. Saudi Arabia is hunkering down for one to two years of cheap oil, adjusting government spending and drafting measures to protect the vulnerable among its citizenry. “We are very comfortable with $30,” Khalid Al-Dabbagh, finance director of state-owned Saudi Arabian Oil Co., told investors on March 16, an opinion widely repeated in the ministries and royal palaces in Riyadh. “In a nutshell, Saudi Aramco can sustain very low oil prices and can sustain it for a long time, and that is especially the case compared to others in the sector.” (…)

The shock waves are still being felt. By the estimate of some traders and consultants, global oil demand is in free fall, down about 10% from the previous year—the largest drop ever. (…)

Unknown to anyone but a few royals and senior officials in Riyadh, the kingdom had been preparing precisely for that moment for several weeks. For the Saudis, Novak’s pump-at-will comment was a green light to ramp up the country’s own production. (…)

Russian President Vladimir Putin used the last few years to build a war chest of petrodollar reserves. At $577 billion, the cash pot is up 60% since 2015. Over the same period, Saudi petrodollar savings have declined 28%, to $502 billion. Moreover, Russia benefits from a floating exchange rate, which absorbs part of the blow of low oil prices. Perhaps more important, Russian society has already endured a few tough years of U.S. sanctions: It can absorb more pain.

So far, the tactics aren’t prompting the Russians to seek talks. The Kremlin has said it isn’t surprised by the fall in prices and doesn’t see a need to meet with OPEC. That’s partly because the price war is giving Moscow something it wanted: It’s prompting U.S. shale companies to announce big spending cuts. Rather than wait and see, as U.S. shale executives did when the Saudis tried to bankrupt them in 2014-16, this time spending cuts “have been swifter than expected,” says Brian Singer, a managing director at Goldman Sachs Group Inc. (…)

Riyadh is obsessed with an energy market that is being shaped by the fight against climate change. Aramco, on the prospectus for its 2019 initial public offering, warned that oil demand might peak within 20 years. The Saudis may be choosing a completely new strategy. As owners of a huge geological petroleum endowment, they could be moving to monetize their reserves more quickly to avoid being stuck with a rapidly depreciating asset. Energy scholars call it a “fast monetization strategy,” and Saudi advisers have been discussing it in private for some time.

The approach has advantages. It would secure a growing share for Saudi crude, as higher cost producers are pushed out of the market. Not just shale drillers, but even Big Oil, which is already under pressure from shareholders to boost profits, will have to cut spending on the development of new wells and, therefore, supply. Lower oil prices could also slow down the adoption of green technologies, particularly the electric cars that Tesla Inc. and others are building. And if Saudi Arabia and Russia can drive enough rivals out of business, perhaps the oil market would tighten again. ​

But the monetization strategy also carries enormous risk. Higher production, alongside weaker demand, is a certain recipe for low prices. If the kingdom follows it, others in OPEC will join, too, pushing even more crude into the market, further depressing prices. Saudi Arabia can barely afford that. According to the International Monetary Fund, Riyadh needs an oil price of about $80 a barrel to balance its budget. More important, its balance of payments only breaks even at about $50 a barrel. Without higher prices, Saudi Arabia will start to run large and sustained balance of payments deficits, putting the peg between its currency, the riyal, and the U.S. dollar at risk. Since he became de facto ruler of Saudi Arabia, Mohammed bin Salman has made a number of risky economic and political moves—the change of oil policy is one of the riskiest yet.

• An inevitable fall to cash costs

Goldman Sachs sees (hopes for) a V-shape…

We now forecast that 2020 oil demand will see the highest historical fall of 1.1mb/d yoy, with at its trough late March an expected demand hit of 8 mb/d, with refining margins set to fall further from current levels. (…) We now forecast a global surplus of 3.9 and 5.7 mb/d in 1Q and 2Q respectively, with a peak OECD inventory build of 560 mb. (…)

This is leading us to now base-case our prior downside scenario of a fall in oil prices to cash-costs. We are therefore lowering our 2Q Brent forecast to $20/bbl from $30/bbl previously. Ultimately, such a fall to cash-costs would be consistent with the prior large bear markets of 1999, 2009 and 2016, when total storage capacity was never reached but local logistical saturation proved binding. (…)

We expect lower prices and a fall to cash costs to precipitate further supply cuts, with shale production now expected down 0.75 mb/d yoy by 4Q20 and high-cost producers outside of core-OPEC/Russia/Shale also down 0.6 mb/d yoy by 4Q20. While we attempt to allocate these production declines to high-cost producers, it is important to emphasize that when local logistical capacities are reached, forced production cuts no longer line-up with production costs, as was the case in 1999/2009/2016, with inland production in particular most at risk.

We continue to expect that lower supply and normalizing demand later this year will bring the oil market back into a deficit of -1.5 mb/d by 4Q20 (vs. a seasonal deficit of 0.6 mb/d) and push prices higher. As a result, our 3Q and 4Q Brent forecast of $30 and $40/bbl remain unchanged. Even as prices recover, lower capex, higher costs of capital, curtailed service capacity and entrenched higher decline rates will all leave supply lagging the recovery in oil demand through 2021, driving spot prices even higher. (…)

SENTIMENT WATCH

The current selloff is one of the sharpest declines in history.

After The Panic Comes Resignation

The FT’s Cameron Crise draws an analogy with the Kubler-Ross stages of grief:

• Denial: the classic initial refusal to believe that anything is different from the last 20 times you successfully bought a little dip
• Anger: As losses intensify, phrases like “this market is so stupid” are heard more and more often
• Panic: liquidity evaporates, risk premia and volatility soar, and even favorite trades are sacrificed in the name of risk reduction
• Response: Policymakers offer up a response to solve the underlying issues, and despite initial hopes markets keep falling…BUT WITH LOWER VOLATILITY
• Resignation: When it feels like the terrible trend will go on forever, at last a reversal is in sight [and when all hope is lost, the smallest bit of good news can make people money]

We seem to be at the response level…

Companies Mull Suspending, Ramping Up Share Buyback Plans Amid Coronavirus Gap, DSV Panalpina and major banks said they would halt their repurchase programs

(…) Twenty-three companies in the S&P 500 announced they would suspend their programs so far this year, up from none in 2019, according to equity research firm Birinyi Associates. Companies’ authorization of future buybacks through March 17, totaling about $153 billion, marked a 39% drop from the same period a year ago, according to data from Birinyi Associates. (…)

WHEN ZOMBIES MEET A BLACK SWAN

• SoftBank Backs Away From Part of Planned WeWork Bailout SoftBank Group is backing away from part of its planned bailout of WeWork, people familiar with the matter said, privately citing several regulatory investigations of the office-sharing company.

A notice sent to WeWork shareholders Tuesday said that SoftBank believes regulatory probes into the startup’s business, including from the Securities and Exchange Commission and Justice Department, give it an out under the deal struck last fall to purchase $3 billion of WeWork shares from existing investors. (…)

The development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks. (…)

Falling share prices, which lower the value of SoftBank’s massive investment holdings, are combining with WeWork’s pricey bailout and a recently announced $4.8 billion share buyback plan to weigh on SoftBank’s balance sheet. Credit-rating firm S&P Global Inc. cited all those factors when it announced Tuesday that it was cutting SoftBank’s credit outlook to negative. S&P noted that unveiling a share buyback in the midst of a stock-market plunge raised questions about SoftBank’s commitment to financial soundness. (…)

WeWork’s basic business model—signing long-term leases with landlords and subleasing short-term to companies—leaves it vulnerable to big drops in office demand, as it is still on the hook for its own payments to landlords. It previously has said it could withstand a recession because companies would turn to shorter-term office space.