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War Room: Fed Underwrites Economy
- 1. Fed Underwrites Economy 30 April 2020
- 2. WAR ROOM Idea Generation Macro Coaching Scenario Updates HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS
- 3. SCENARIO PROGRESS Mitigating Factors GOOD S+P 500 2200 -17% S+P 500 3150 +20% S+P 500 2875 +10% US Lockdowns Work UGLY Dysfunctional Lockdown BASELINE V-shape GOOD S+P 500 1760 -33% S+P 500 3040 +16% S+P 500 2300 -13% UGLY BAD U-shape L-shape CORONAMERICA GLOBAL RECESSION
- 4. sources: HiddenLevers, Johns Hopkins, Worldometer 14 days US + Europe = Binary Thinking • Do Nothing, then Lockdown • Deaths skyrocket, then plateau • Slow decline from plateau Taiwan = Non-Binary • Stay Open • Mandatory Mask Use • Test + Trace Italy Deaths Per Day 30 Days to drop 50% USA Deaths Per Day On plateau above 2000 deaths/day Now 18.63 (29 April) One of these is better than the other CORONAVIRUS UPDATE
- 5. ECONOMIC UPDATE ZIRP until max unemployment Half of Q1 GDP Drop = Healthcare Record Fed Balance Sheet Weekly Jobless Claims Dropping sources: FRED, WaPo, FOMC, CNBC, Dept of Labor 3.84M
- 6. sources: HiddenLevers, Fed Reserve, WSJ, CNBC Coronavirus Response $60B/month since Oct 2019 Trump on Fed’s ______ When Who What USD Mar. 3-15 Fed Cut Rates 150bps to 0% Mar. 15 Fed Unlimited Repos 1.5T Mar. 15-22 Fed New QE Purchases 700B Mar. 17 Fed Commercial Paper Buying Mar. 18 Congress Families First Coronavirus Act 192B Mar. 18 Fed Money Markets Backstop Mar. 23-Now Fed Unlimited QE 1.7T+ Mar. 23 Fed Business Lending Program 300B Mar. 27 Congress CARES Act 2T Apr. 9 Fed Expansion of Programs 2.3T April 24 Congress Paycheck Protection Act 483B Congress 2.7T Fed 2.4T QE + 4T Loans FED: Most Active Policy-Making Period in History Fed Pre-Existing Conditions When Coronavirus Hit 3 unnecessary rate cuts in 2019 TOTAL Looming shale bankruptcies
- 7. sources: HiddenLevers, Economist, Business Insider War / Societal Collapse External Debt + Trade Deficit Hungary 1946: WWII + Reparations HYPER-INFLATION Zimbabwe 2007: Societal Collapse Yugoslavia 1992: Disintegration + War Weimar Germany 1922: WWI + Reparations Peru 1990: USD Debt Argentina 1980s: USD Debt Pandemic Debt Surge US Debt/GDP Half of Japan’s level even after 2020 surge Pandemic raises risk marginally Hyper-inflation is not in the cards for USA Inflation Japan + US below 2% for most of past decade US Inflation Japan Inflation 2% Target FED: Impact on Deficits + Debt
- 8. Fed + Govt Spending: 2008 + Now Wall Street Main Street 2008 - 2011 Global Financial Crisis • 3.6T QE Asset Purchases • 500B Fair Value TARP • 400B 2009 Stimulus $4.5T Total 92% $400B 2009 Stimulus (tax cuts, UI extensions, education, health programs $400B Total 8% 2020 Coronavirus Pandemic • $2.4T New QE Purchases • 550B CARES Act Corp Support • 500B CARES Act Local Govt + Public Services Support • $230B PPP April Reload $3.7T Total 75% • 200B Initial early March UI extension + Medicaid support • 650B CARES cash, UI, food, etc • 300B Payroll Protection Act + related wage support • 250B PPP April Reload $1.4T Total 25% sources: HiddenLevers, Federal Reserve, MIT, The Balance, Visual Capitalist, Petersen Foundation Bailout split 75/25 Wall St vs Main Street today, better than 2008 QE = inherently imbalanced, pumps money straight into Wall Street FED: Beneficiaries of Cash Cannon
- 9. FED: Is Record Inequality Causing Economic Crises? sources: HiddenLevers, National Bureau of Econ Research, The Atlantic, NY Times, Vox, Value Walk Pre-Coronavirus less than 50% of wages Now more than 100% of wages Unemployment Benefits (USA average) 1 of 2 Fed UBI Experiments 100%50% 2008 subprime triggers GFC 2020 low-wage jobs most vulnerable
- 10. FED: Higher ROI on Stimulus Aimed at Working Class sources: HiddenLevers, Vox EU More assets = less propensity to consume 2X Rich putting less money to work
- 11. SCENARIO REPLACEMENT Negative Rates Fed Underwrites Economy DEFUNCT
- 12. Fed Underwrites Economy GOOD Aims at Main Street UBI already here Main Street spends Wall Street hoards
- 13. Fed Underwrites Economy BASELINE Demoralizing Inequality PRESENT socialism here, only for the rich working class suffering most bad corporates kept alive
- 14. Fed Underwrites Economy BASELINE Demoralizing Inequality FUTURE socialism here, only for the rich working class suffering most bad corporates kept alive
- 15. Fed Underwrites Economy UGLY Business Cycle Reset real recession triggered layoffs rising after re-opening pessimism not reversing
- 16. GOOD S+P 500 1800 -38% S+P 500 3500 +20% S+P 500 3000 FLAT Demoralizing Inequality UGLY Business Cycle Reset JOBLESS CLAIMS CAUSE PESSIMISM PANDEMIC THAT OVERWHELMS FED ACTIONS FED APPORTIONS QE MORE EQUITABLY BETWEEN HAVES + HAVE NOTS FED LEANS INTO ROLE AS ZOMBIE COMPANY SUGAR DADDY Fed Underwrites Economy MACRO RISK PARITY WS/MS RATIO 60/40 WS/MS RATIO 75/25 WS/MS RATIO 90/10 BASELINE Aims at Main Street US GDP -5.0% (-5.3) US GDP +2.0% (+1.7) US GDP -1% (-1.3)
- 17. Fed Underwrites Economy BLACKSWAN Runaway Inflation Fed printing since 2008 negative oil prices no external debt
- 18. Fed should kickstart GDP + productivity with more programs aimed at the working-class Inflation unlikely but Fed will be unable to stop deeper recession if job losses keeps rising Boil pricked on UBI + universal healthcare in USA Fed Underwrites Economy WHAT TO SAY Inequality at new highs, but Fed doing more for working class than in 2008 GFC
- 19. THE GREAT RE-OPENING? MAY WAR ROOM