It seems the economy might be rejuvenating better than I and many others were expecting. The June jobs report was terrific at 4.8 million and especially since the temporary help jobs added were very good, suggesting companies are ramping up. With unemployment at 11.1%. April, May were revised up by 90,000. There was a big jump in construction jobs, lodging, plus manufacturing, and retail, all of which bodes well for renewed growth. Wages are up 5% over last year, and the slight decline this month is due to a lot of low end workers going back to work pulling down the average wage. Last month the press made a huge issue of black unemployment. Reality is there was a big jump in black employment this month. Black teen unemployment is 10.9% lower now than in 2016 under Obama/Biden. Crickets from the press and Dems. It is hard to know how many are “employed” due to PPP and not really fully employed, and how many more would be back at work were it not for the stupid $600 excess unemployment. There are jobs now not being filled in many areas due to that $600, so in August you are very likely to see a big jump in employment and a big decline in unemployment- right before the election. Of closed businesses, 26% of gyms are gone, 53% of restaurants that closed, and 35% of retailers that closed are gone.
There may be another big subsidy payment coming in the fall unless Pelosi screws it up again, which she is likely to do. The ISM index rose to 52.6 which was much better than forecast and is now in growth mode. Despite the surge in cases, people are anxious to get back to work and life, even if wearing a mask. Cases are way up, but in many areas of the country there is nothing special happening. Even in TX there are areas where there is no spike. Depends on the city and county. It may be that the protests created a lot of cases, especially among young people. It may also be that young people are partying and going to bars and not wearing masks. How long can twenty five year olds go without sex. Between May 4 when there had been 216,784 tests in TX with 1,0500 deaths. By July 1 there had been 2,175,000 tests-10x as many. However cases were up only 8.5x and deaths only 2.5x. So while TX has a big problem, a considerable number are from border crossers, and possibly testing has created discovery of cases that were always there, but undiscovered. The good news is the death rate is not really rising much, and there are now several therapies that seem to work. The docs have learned a lot on how to treat and prevent lot of deaths. A new study now reports that when hydroxy chlorine is given early, it materially reduces the death rate. Other research on the drug had it administered later in the infection period, and got worse results, which it is why this drug was thought to be of no help. Timing made all the difference. There are a variety of therapies that now save a lot of lives.
Thanks to the Fed acting boldly in March, investment grade bond issues hit a record in June of $840 billion, and junk issues rose to 180 billion. Given what is happening in the economy and unemployment, that is almost an oxymoron. Yields on investment grade debt went from 4.28% in March to around 2.75% now. However, what it tells us is investors are optimistic about recovery, and the Fed has done a spectacular job in saving the economy. Once the Fed announced its bond buying program and followed that with its intent to buy bond ETFs and then junk bonds, the issuance markets blew open. Corporations have now been able to raise funds they otherwise never would have been able to borrow, and that has made a huge difference this time. It means there is a lot of liquidity on balance sheets, and while that will run out for some over the next few months, the bet is the economy will revive and provide the cash flow to fill the gaps. Issuance by weak companies shows how anxious investors are for yield. Boeing raised $22 billion, and others raised large amounts despite the weak economy. The risk is there is now too much debt on corporate balance sheets and, while it can be carried at these low rates, it has to be repaid at some point, and there is, therefore maturity risk. But nobody seems to care at the moment. Yield is the issue driving a lot of this demand for lower grade bonds. Junk has recently been yielding around 6.5%, although this week it jumped up due to the rise in cases, and is expected to possibly rise to 9% over the next few months as there are more defaults. If the economy does rebound very well, then the defaults will be less and yields will rise less. Big unknown. The ability to make a big bond issuance is what saved companies like Ford from serious default. Over the next year there will be a large return of companies from China, especially if Congress passes a bill to subsidize the move, and that will add further growth to the economy.
What the crisis did do was wipe out several companies that should have been wiped out-JC Penny, Pier One and others that were poorly run or were just so far behind its competitors that there was no hope, or they were way over levered. There is nothing like a good recession to clean out the weaklings. It is unclear if Penny will survive or if Simon will buy them to retain an anchor. In my view not a smart deal for Simon. Penny is a loser in retail today. Nobody stepped up for Pier One. Hertz is still a question.
Those expecting a lot of great distressed deals will probably not see them. It is now becoming apparent that a lot of companies struggling to survive, got leeway from their banks, a bond issue, a PPP loan, and a very short duration recession. If the jobs reports of the last two months are the indicator, the recovery is on, and many of those businesses will survive. That means too much cash for distressed will chase too few deals.
A further indication of optimism in the bond markets is CLOs are back. These are bundles of weaker bonds and are risky, but demand has resumed, and that will likely relieve a lot of pressure on banks and insurance companies that hold billions in these securities. It was close, but we may have avoided a new financial crisis by having the CLO market revive and avoid potential problems at these financial institutions holding that type paper.
At the same time, as the Fed made its move in bonds, it issued dollar swap lines to 14 central banks to keep the currency markets working smoothly. This was as important as the bond buying as it kept world commerce functioning. The US dollar is the only real world currency right now, and its liquidity is critical. It rose in value during the worst in March, and is likely to retreat now by 5% or so as the world starts to recover.
CMBS is still locked down as to borrowers getting any real breaks. A lot of hotels were financed this way and so a lot of hotels are in really bad trouble. As we now know, occupancy is lower than reported by STR, so while there is recovery in some segments of the industry, that recovery is not back to break even cash flow after debt service and reserves in many cases. If it is, in some cases, it is not providing any excess cash flow to build reserves or to do any renovation in the next few years. For the large hotels it is unclear when they will ever make a justifiable return on investment. I continue to contend, unless you can buy hotels at a deep discount, and know how to really fix and operate, owning hotels is one of the least good investments when compared to a lot of alternatives for the same capital investment.
Muni bonds are beginning to default. That is likely to increase. They need to cut budgets where they have extensive payments for useless programs that supposedly attack poverty and whatever. Mostly they need to end pension for teachers and other government workers and install 401K programs, and eliminate the lifetime heal coverage. That is where the real deficit arises from. It is not the role of the rest of us taxpayers to bail out bad fiscal management of cities. If you own munis, better check their recent credit situation or you could lose a lot of money. There will be a huge battle in Congress shortly about bailing out these Dem cities and states that have no pension or budget discipline
The UK is still struggling, but Boris is taking actions to mitigate the problems. The EU remains a mess.
You may not have noticed that the House is passing one huge bill after the other now to make it appear they are trying to do a lot of good things for the economy, and then it is the Republican Senate that is stopping these things. Truth is, these bills are not real, and are filled with noxious items that Pelosi knows the Senate will not even consider. It is more stupid political games for the election and wasting valuable time.
Let’s get this right- crime is soaring in NYC, and other places. They tried no cops in CHOP in Seattle, and that did not work out so well after a few weeks. So the best way to stop spiraling crime and murder is to cut the police budget by $1 billion and stop new classes of recruits. Seattle said CHOP was a summer of love, then two black kids got murdered and three more shot. I thought black lives matter-unless they are shot by other blacks in CHOP or Chicago or NYC, then it is OK. No city official has ever contacted the family of one of the dead kids murdered in CHOP. Imagine never hearing from the cops or morgue if your kid got murdered. We all know DeBozzo has an IQ of 50, and so apparently does the city council, and the bartender from the Bronx, but you would think skyrocketing murders of young black men would suggest there is a problem, and it is not the cops. The result in NYC is there is a mass exodus now of the taxpayers, and retail is disappearing. Tourists will stop coming due to rising crime, so room tax and sales tax will drop substantially. Condo sales are the worst on record now, so the flip tax will not happen. So the city and state budgets will crash even worse than they have already, and it is a then a death spiral. Most thinking people know that we were here under Dinkins, and it was only when Giuliani came in with tough anti-crime policies and more cops and no more Let ’m Loose Bruce judges, that it got saved, and became the best city in the world. It’s all about tough law enforcement, and taking guns off the street-( now prohibited), and locking up thugs you arrest (not allowed anymore in NYC) . And so the Dems in Congress pass a bill that would end any chance of recruiting cops. This is so stupid you could not make it up. What this proves is black lives only matter if a cop shoots them, even if justified. Otherwise we know this protest and rioting is really all about money and power for the leaders, and pandering like whimpering little ninnies by corporations and governments.
The WSJ now capitalizes the B in Black, but in the same sentence it does not capitalize white. It does also capitalize A in Asian. I guess we do not count anymore as an ethnic group. Companies like Netflix are supposedly giving $100 mill to support black whatever. I think at some point white lower class people are going to ask what about me.
My friend, the dean of an elite university, sent me an email calling all of you who voted for Trump—”Nobodies.” Kinda like deplorables. This is what you get for $70,000 tuition at an elite school.
Biden reminds me of one of those miniature railroad gate houses where the man pops out as the train goes by. Every once in a while he pops up in his basement to read off the teleprompter, then he goes back behind the closing door. It will be pathetic if Trump loses to a pop out figure who can only speak if off a teleprompter.