The DivergenceĪ big topic in the financial media, or at least in the more critical or alternative financial media, has been the huge divergence between the stock market and the real economy. The next several years are likely to be challenging for many companies with weak balance sheets, so make sure you know what you own. Some companies, even if they can get access to money at the moment (liquidity), simply have too much debt and a structurally noncompetitive business model (solvency), and need to either liquidate or restructure. This is the beginning of the solvency portion of the crisis. Some bankruptcies have already occurred, including well-known companies like Gold’s Gym and JCPenney. Over half of that balance sheet increase involved buying Treasuries to fund the government’s aforementioned fiscal response, and it’s probably going a lot higher by the end of the year. In essence, they “print money digitally” to buy assets such as Treasuries and mortgage-backed securities, and to provide other central banks with currency swaps.
The Federal Reserve increased their balance sheet by almost $3 trillion within a couple months, which is already larger in magnitude in both absolute terms and as a percentage of GDP, than their immediate response during the 2008 crisis. On the other hand, here’s a chart that captures the liquidity response: With initial jobless claims still rolling in weekly by the millions (roughly 36 million in total so far), May is likely to see a deeper figure. It’s the nonfarm payroll number, which shows the 20 million jobs that were lost in April alone: This chart perhaps best sums up the economic shock. In addition, the Federal Reserve set up liquidity swaps with foreign central banks to provide dollars in exchange for foreign currency, which is an attempt to alleviate the global dollar shortage and prevent further foreign sector sales of Treasury securities. The Federal Reserve funded those fiscal programs by creating dollars ex nihilo and buying record amounts of Treasury securities with those new dollars, and they also bought mortgage-backed securities and set up a special purpose vehicle backed by the Treasury Department and allocations from Congress to buy corporate bonds and municipal bonds with loss protection.
As part of over $2.7 trillion in crisis aid from Congress, helicopter money checks were sent out to most American households, extra unemployment benefits were provided, small businesses received loans that can turn into grants (although that was one of the logistically problematic programs), funds were provided to various portions of the health care system, and bailouts were offered to certain industries. Then, the unprecedented magnitude of fiscal and monetary policy response to this liquidity crisis flooded global markets with liquidity. Treasury reserves to get them), tens of millions of people losing their jobs in the United States and countless more losing jobs internationally, and virtually all markets (Treasuries, credit securities, equities, oil futures, precious metals futures) becoming very illiquid as sellers overwhelmed buyers. What happened in the first quarter was mainly a liquidity storm, and the deeper into this year we get, the more solvency becomes the key issue to be concerned about.Īs the economic machine and its associated incomes came to a halt in Q1 of this year, the liquidity storm consisted of countless companies drawing on their revolving credit facilities from banks at the same time to get cash on their balance sheets (a corporate version of a bank run), the foreign sector scrambling for dollars to service dollar-denominated debts (and selling some of their U.S. Does it get better from here, or is this a big fake-out for another round of selling as we move deeper into this year?
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