Money-Supply Growth Hits New High for Third Month in a Row

By Ryan McMaken

n June, for the third month in a row, money supply growth surged to an all-time high, following new all-time highs in both April and May that came in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages.

The growth rate has never been higher, with the 1970s the only period that comes close. It was expected that money supply growth would surge in recent months. This usually happens in the wake of the early months of a recession or financial crisis. The magnitude of the growth rate, however, was unexpected.

During June 2020, year-over-year (YOY) growth in the money supply was at 34.5 percent. That’s up from May’s rate of 29.5 percent, and up from June 2019’s rate of 2.04 percent. Historically, this is a very large surge in growth, both month over month and year over year. It is also quite a reversal from the trend that only just ended in August of last year, when growth rates were nearly bottoming out around 2 percent. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007.

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Recovery of Collapsed Air Passenger Traffic in the US Backtracks

Confirming early warnings by United and Delta of re-declining ticket sales. V-Recovery has to wait in line. Airline shares down 3.7% intraday.

By Wolf Richter

TSA checkpoint screenings, which track how many people enter into the security zones at US airports on a daily basis, were down -72.6% yesterday (Sunday) compared to Sunday in the same week last year, according to TSA data released this morning. This was a notch worse than Sunday last week (-71.7%). And this reversal has been playing out since early July.

The seven-day moving average, which irons out the day-to-day volatility particularly around the Independence Day weekend, has edged down to -74.5%, right back where it was on July 2. The peak, so to speak – the smallest decline from the same period last year – was on July 8.

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GDP, Free Trade, and Prosperity

By Matthew Tanous

In my recent social media discussions on the subject of free trade, a certain thread of argument related to GDP has become more common. The argument, such as it goes, asserts that international trade is not very important as a component of GDP. The net impact of trade is a small impact on GDP, with imports and exports generally “balancing” each other out, leaving just a few percentage points either way. Trade (and immigration) restrictions seem like a small price to pay, economically, according to this framework.

Despite its superficial validity, this is a wholly erroneous way to look at the problem of generating prosperity and rests primarily on two economic fallacies. The first is the use of the GDP aggregate as a viable measure of national prosperity, which has been heavily criticized in other contexts.

Many criticisms of the concept of GDP focus on the concept’s formulaic assumption that government spending is inherently productive. This assumption has resulted in many errors, including economists and laymen alike in the 1970s and 80s looking at the growing GDP of the USSR and assuming the Soviets would economically overtake the West as a result. To a lesser degree, the same fallacy has driven concerns about China’s growing economy in the last couple of decades. However, in the context of international trade, the aggregate GDP fails to measure human welfare in yet another way. GDP’s focus on the supposed “net production” of a country fails to see the absolute production of a country and how much is involved in trade.

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Policing Can and Should Be Privately Provided (Video)

The U.S. is at a crossroads on the topic of policing. The usual binary has framed the debate: support the police or defund the police. There is a third and better option. I was very pleased to be invited by Reason to appear in a video about private alternatives in which the police function is part of the free enterprise system. It’s a very good video that highlights how private security is right now working better than government-based policing. This is the true American way.

Hey Congress: Here’s One Economic Stimulus Proposal That Wouldn’t Cost Taxpayers Trillions

Here’s a proposal for another kind of stimulus that would do much more good and cost much, much less.

ongress isn’t known for learning from its mistakes. So, it’s not exactly shocking that despite the many failures of their last effort, lawmakers from both parties are pushing for another massive relief bill to stimulate the economy amid COVID-19 and the continued economic fallout.

The GOP has at least expressed a desire to keep the spending package under $1 trillion. (You know, just a measly $7,000 per taxpayer). Meanwhile, the Democrats’ bill comes in at $3 trillion, a whopping $21,000 per taxpayer.

But the truth is we can’t afford either.

The federal government is already set to run an astounding $3.7 trillion deficit this year. The scale of this figure might not be immediately obvious, but consider that at the very peak of the 2008 financial crisis under President Obama we only ran a $1.4 trillion deficit. This will result in future generations, not the septuagenarians in Congress, facing higher taxes, lower economic growth, and reduced opportunity.

Indeed, the already bleak trajectory of our public finance only looks worse now due to the pandemic and Congress’s massive response bills. The federal government is now set to hit a 100 percent ratio between debt and the size of the economy—considered a red flag among economists—this fiscal year.

But what if there was a way to further stimulate the economy without compounding our debt crisis? It won’t satisfy either party’s partisan policy wishlist, but if the federal government really wanted to jump-start the economy without further burdening taxpayers it could do so by abolishing barriers to international trade en masse.

President Trump could start unilaterally by rolling back the tariffs he has imposed on goods such as washing machines, solar panels, aluminum, and steel. According to Tax Foundation estimates, eliminating these tariffs would increase the size of the economy by $58 billion, raise wages, and prevent the destruction of 180,000 jobs. This reform would decrease the federal government’s tax revenue marginally and thus cause some additional debt, but the expense certainly pales in comparison to trillion-dollar stimulus packages.

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PE market remains healthy for COVID-unaffected companies

The appetite for capital and investment remains strong, although deals require more equity now than pre-pandemic, fund managers say.

Companies not affected — or even made better — by COVID shouldn’t have any trouble attracting investment by private equity (PE) firms at relatively strong valuations. However, there is slightly less leverage available today, investment specialists said.

“We are seeing very minimal change in valuation,” Steve Rodgers, managing director of Morgan Stanley Capital Partners, said in a webcast hosted by Dechert LLP. “The only companies that were impacted that are coming to the capital markets are those that really need to raise capital. So, those are going to be at distressed valuations.”

Those that don’t have to sell, said Rodgers, are smart to wait “until there’s more clarity how [the economy] recovers.”

Global merger and acquisition (M&A) deals so far this year are down 41% by value and 16% by number, said Markus Bolsinger, a partner with Dechert, citing Refinitiv data. PE-backed buyouts are down, too, 24% by value and 8% by deals.

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The World Is Drowning In Debt

According to the International Monetary Fund (IMF), global fiscal support in response to the crisis will be more than $9 trillion, approximately 12 percent of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105 percent of GDP.

If we add government and private debt, we are talking about $200 trillion of debt, a global increase of over 35 percent of GDP, well above the 20 percent seen after the 2008 crisis, and all in a single year.

This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented toward supporting bloated government spending and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.

Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis, and to help large companies that were already in trouble in 2018 and 2019, the so-called zombie companies.

According to Bank of International Settlements, the percentage of zombie companies—those that cannot cover their debt interest payments with operating profits—has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.

That is why all this new debt is not going to boost the recovery; it will likely prolong the recession.

Debt is neither free nor irrelevant, as interventionists want us to believe, even if interest rates are low. More debt means less growth and a slower exit from the crisis, with lower productivity growth and a tepid employment improvement.

Read more of this article, by Daniel Lacalle, here…

Bailout of Trucking Company YRC, Near Bankruptcy Before Covid-19, Ripped by Congressional Watchdog

It wants to know: Why was YRC even bailed out? And why was the taxpayer put at so much risk? What’s going on here?

By Wolf Richter for WOLF STREET.
The US government’s $700-million bailout under the CARES Act of long-troubled YRC Worldwide, one of the largest less-than-truckload (LTL) carriers, has come under fire by the Congressional Oversight Commission, which is supposed to monitor how the trillions of bailout dollars are getting distributed.

The bailout gave the government a 29.6% stake in YRC in lieu of higher market-based interest rates on the loan. That trade-off also came under fire, given the iffy fate of the shares in an eventual restructuring of YRC.

Let’s put something straight first: All bailouts are primarily a bailout of stockholders and bondholders. That was the case in the YRC bailout as well. In the 10 trading days straddling the bailout announcement on July 1 and its finalization on July 8, YRC’s shares [YRCW] soared 122%, from $1.57 on June 25 to $3.49 on July 10.

The company has been wrapped up in a tangle of problems for years. It has been junk-rated for over a decade. Moody’s rates it Caa1 and S&P CCC+, both deep-junk (my cheat sheet for corporate credit ratings). Its shares have collapsed starting in January 2018, from a range of $12-$18 a share to $2.57 at the beginning of 2020, per-Covid. Shareholders weren’t exactly brimming with hope, when the pandemic hit the trucking business.

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Bessemer finance leader: You need 2 years of cash to Survive

Veteran CFO Jeff Epstein says it’s time to make a change if you can’t support yourself into 2022.

Try to have two years of cash on hand to survive COVID-19, Bessemer Venture Partners CFO Emeritus Jeff Epstein says. If you can’t come up with that, it’s time to change your plan, the long-time finance executive and former Oracle CFO said last week in a CFO Thought Leader podcast.

“Our advice the first week of the lockdown was, ‘We don’t know how long this is going to last or if there’s going to be a second wave, so you should try to get to two years worth of cash,'” said Epstein, Bessemer’s operating partner. The venture capital firm was an early investor in some of the biggest names in technology, including Pinterest, LinkedIn, Shopify, Yelp, Twillo and Twitch, and today is an early-stage investor in some 90 startups.

Epstein advises CFOs to divide the amount their company is losing each month into their cash and, if it comes out to less than 24, it’s time to call their vendors to get lower prices, stop making discretionary purchases and take a hard look at layoffs.

“The first priority has to be preserving the company,” he said.

If you make pay cuts, offer your employees an equity option in return, so when business returns to something close to normal, they can reap the benefits as a reward for their sacrifice.

“Some of my companies had to take a 20% pay cut for all of their employees,” he said. “Executives took a 30% pay cut. It’ll probably save the companies. We’ve recommended companies give equity to employees who’ve given up cash so if the company does well, they’ll actually make more money over time.”

Epstein also recommends taking advantage of favorable conditions in the stock market to raise capital if your metrics tell a good story. “The stock market’s at an all-time high in spite of COVID and investors are eager to invest and interest rates are low,” he said.

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Stimulus Alone Can’t Save Economy: J.P. Morgan’s Kelly

Don’t expect the next congressional aid package to reverse the current economic downturn.

“It is the pandemic, rather than any lack of stimulus, that is holding the economy back,” says David Kelly, chief global strategist at J.P. Morgan Asset Management, in his latest weekly note. “In a pandemic economy, stimulus alone cannot trigger a full recovery.”
Kelly likens more federal stimulus to “pumping air into a leaky tire.”

“Negotiators from the White House, Senate and House of Representatives will debate the next round of federal relief, commonly referred to as ‘stimulus,’ writes Kelly. “However, for investors, it will be important to keep an eye on the pandemic itself.”
In the U.S. the pandemic, unlike the economy, is gaining strength. The seven-day moving average of new confirmed cases in the U.S. has tripled in just six weeks, from a seven-day moving average of slightly more than 20,000 confirmed cases to just over 60,000, according to Kelly. The U.S., with just 4% of the world’s population, has about one-quarter of the world’s COVID-19 infections, at 3.8 million, and deaths, closing in on 141,000, according to Johns Hopkins University.

“This resurgence of the disease is slowing, stalling and, in some cases, reversing, the staged reopening of the economy and will likely continue to hobble the restaurant, hotel, travel, entertainment and retail industries,” writes Kelly. “Moreover, the uncertainty about when the pandemic will finally subside will slow investment, hiring and lending decisions across the economy.”

In addition, he says investors realize that money being spent to stimulate the economy today will lead to higher taxes in the future.

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