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Media worth consuming - May 2020

A monthly look at dozens of local and global media articles that often do not receive mainstream coverage in Australia.

Finance

A cascade of bankruptcies is starting to hit the US economy. US auto dealers are overstocked with new cars and are having to rent space to park new arrivals. The real work for mortgage servicers will begin after the pandemic ends, when borrowers have to start repayments again. Credit markets point to more pain ahead for equities. Stanley Druckenmiller poured a bucket of cold water on asset prices and central banks.

Hertz has filed for bankruptcy with formerly AAA-rated bonds secured by its rental fleet at risk of taking a loss and its November corporate bond issue expected to default before making its first interest payment. America’s largest shopping centre skipped its last two monthly debt repayments. WeWork’s non-payment of rent is slamming CMBS transactions. A growing list of emerging market countries have their sovereign debt trading at distressed levels. Ten of the worst bond deals of the last decade. After four decades of strong real returns on bonds, history points to decades of negative real returns ahead.

Leveraged loan investors are regretting their purchases of covenant lite loans. The Federal Reserve is going to participate in leveraged loans with phony EBITDA calculations however sub-investment grade bonds are getting far less help from the Fed than the market is pricing in. UBS sees a world of pain for CLOs unless economies see a rapid recovery. Credit unions focussed on industries currently shutdown are suffering badly. Illinois pulled a bond issue after lacklustre demand. The state’s investment grade rating is likely to be lost and the existing debt is trading at emerging market yields. Deutsche Bank is going to struggle to find buyers for its bad bank assets. The US Government has gone from a deficit of $1 trillion per year to a deficit of $738 billion a month.

Bitcoin miners are getting extra income from load shedding agreements. Unicorns have done an extraordinary job of losing tons of money in industries where others were making decent profits. Bureaucracy is killing investment returns at many pension funds. The man making a small fortune betting against private equity. Michael Hintze’s credit hedge fund is down 50% in two months. There’s three parts to risk; the odds of failure, average consequences of failure and tail end consequences.

Politics and culture

The media castigated Florida’s Covid-19 response whilst lionising New York’s but the data shows Florida’s response was far superior. Nursing homes in New York acquired Covid-19 after they were forced to accept infected residents discharged from hospitals. New York’s Governor claimed they had a low level of deaths in nursing homes but the statistics had been deliberately doctored. New York City forced a hospital offering free care to close in the middle of the pandemic because of a debate over religious beliefs. New York’s Governor begged for out of state health workers to help, then he slugged them with double taxation. San Francisco provided homeless people with free hotel accommodation and free drugs as part of its Covid-19 response.

The Governor of Kentucky called out an unemployment claim by Tupac Shakur (also a dead rapper) as a fraud, but it turned out to be a legitimate claim. In many cases, citizens reacted earlier and more rationally than governments to Covid-19. A series of US courts have ruled against government lockdowns, citing a lack of evidence of their necessity. A Texas salon owner who stayed open “in order to feed her children” was jailed by a judge for a week, but received $500,000 in donations. All workers are essential and leaving politicians to decide who is allowed to work is unwise. What if all the businesses forced to close just opened at the same time? Charity works best when people give voluntarily not forced by governments.

The mainstream media has treated similar accusations against Brett Kavanaugh and Joe Biden very differently. Euthanasia is a slippery slope, with several nations starting with voluntary and now moving to forced. The US is stepping up its support for Taiwan’s involvement in the UN and other global organisations.

In the 1930’s US taxpayers revolted, we could see the same thing again in coming years. If businesses and consumers must tighten their belts, governments should have to as well. Crony capitalists are using the Covid-19 crisis to beg for more government funding. The US Supreme Court is about to reconsider the doctrine of qualified immunity. American education institutions are dealing with a deluge of complaints of systemic discrimination against men.

Economics and work

In February Jerome Powell rubbished Modern Monetary Theory, now he is implementing it. Developed economies are now openly and directly using their central banks to finance government spending. Monetising debt brings long term problems, including skewing the way government works. The Federal Reserve needs to buy trillions of dollars in debt this year to keep up with Congress’s spending plans. If the Fed didn’t buy US Treasuries the lack of willing buyers for government debt would be exposed. The government answer to too much debt is more debt, so expect a lot more zombie borrowers.

The RBA has gone from 0% to 7% ownership of government bonds in less than two months. Germany’s highest court finds part of the ECB’s quantitative easing programme is unconstitutional. The Roaring Twenties were preceded by a pandemic and deep recession, with the economic cleansing a key part of the growth that followed.

Paying workers not to work looks a lot like Weimar Germany. The minimum wage in the US has been effectively increased to $25 an hour by large welfare payments. Less than half of the US population is employed, the lowest percentage since the Second World War. Many Americans have given up their independence and savings, living paycheque to paycheque and now needing government assistance to survive. The US government is using higher welfare payments as a way to sneak through a minimum wage increase.

Half of American small businesses had less than two weeks of cash on hand before the Covid-19 crisis, now one-third of small businesses aren’t planning to reopen, citing an inability to meet rent and/or mortgage payments. The US government gave a ridiculously lavish bailout to its airlines.

Consumers are about to get some overdue price cuts. The fear of deflation by central banks is easily overcome by basic economics. Europe is facing its third financial crisis in 12 years with this one likely to be the worst of them. Italy set a cap on the price of face masks and promptly had a problem securing supplies. The Michael Jordan documentary series contains a whole bunch of economic lessons.

Miscellaneous

After criticising Sweden for its Covid-19 response, many countries are now adopting its approach treating their citizens as adults capable of making decisions for themselves. Doctors in California are seeing an unprecedented surge in suicide attempts as a result of lockdowns. A clear explanation and examples of how Covid-19 is transmitted.

A thorough dismantling of the political spin and responses of both sides to Covid-19. There’s still so much we don’t know about the virus. One man is fighting to bring balance to the lockdown debate, but Silicon Valley wants to shut him down. Prisoners in Los Angeles deliberately infected themselves with Covid-19 in an attempt to gain early release. The vastly different reaction to the 1957 pandemic shows how we have changed our view of deadly viruses.

What it is like to be stung by a 'murder hornet'. A Californian man was arrested and released three times in a day, each time released without having to post bail. The intriguing story of how a young hacker saved the internet from the WannaCry computer virus after years of black hat misdeeds.

The man who feeds a remote Alaskan town with ingenuity and a Costco card. How one retail trader went from +$77,000 to -$9,000,000 betting on oil futures. Does Michael Jordan the owner care less about winning than he did as a player? How a pizza shop owner fought back against Doordash with a pizza arbitrage. American cannonball run enthusiasts have used Covid-19 to smash records.

 

Written by Jonathan Rochford of Narrow Road Capital. Comments and criticisms are welcome.

This article has been prepared for educational purposes and is not a substitute for professional and tailored financial advice. The accuracy of the material cannot be verified in all cases. Narrow Road Capital advises on and invests in a wide range of securities, including securities linked to the performance of various companies and financial institutions.

 

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