Red, White & Screwed - Countdown to Recession (Part II)

The Business-Banks-Government Cerberus

Three heads, one body, and its job is keeping your soul in hell. This threeway was never a balance of powers at arm's length, but you could at least see where the lips ended and the ass began. Then came Clinton's repealing of Glass-Steagall in 1999, allowing investment houses and banks to unite. Then the Bush administration feeding the growing tumor until the sub-prime crisis, and then the Obama administration didn't prosecute and gave Wall Street a well-deserved bonus. After all, it's not every day that you single-handedly raise the US unemployment rate by 5.5% and nearly break the world economy. And have they learned their lesson? Like Cerberus turds they have!

So there's a tidal wave of debt and market instability approaching, how stable are the banks to withstand it? In 2015 several large banks began selling billions in “Bespoke Tranche Opportunity”, the same structure as the CDOs that caused the Sub-Prime Crisis, but this time the investor got to desire which toxic assets to invest in so it’s foolproof. That was until they just straight-up brought back CDOs one year ago because if you keep practicing you’ll find the right way to eat a running chainsaw.

How about the US-based multinational conglomerates that have more rights than citizens do? Surely they will hold the line. They will, because 16% of them can’t run away on account of being dead. At the end of 2019 16% of US public companies were “zombie firms” – companies so broke they must issue new debt just to cover the interest on their current debt. Just in case you think the other 84% are clean as a whistle, the US corporates debt neared 10 trillion USD in 2019, an all-time high as a ratio of GDP.

How does the Government intend to deal with this gross negligence? By rewarding it! The Federal Reserve will now start buying junk bonds of companies whose credit rating was damaged by the crisis, many of them zombie firms. This stopgap measure further blurs the lines between the private and public sectors and increases the risk of complete economic collapse, and it can’t solve the problem. The Fed had to bail out the repo market last September just to keep the economy going, the Trump tax cuts, the yield curve has inverted, eventually, the kid will run out of fingers before the dam runs out of leaks. The only way to fight the flood is to restart the economy in a safe way and carefully balance production versus public health. This herculean task that will require a sturdy leadership that relies on the best scientific minds to build a massive federal infrastructure to manage this crisis. What do you mean they elected a reality show host that told them to drink bleach?

Restarting the Economy

Remember when candidate Covfefe said:"What do you have to lose?" and no one said, "the Katrina victims". Well, here we are. Between 2003-2011 Arnold Schwarzenegger stocked the California stockpile of protective equipment and they were ready. The rest of the US, not so much. And after 80,000 casualties and 1.35 million confirmed cases, the US is nowhere near the bare minimum of medical equipment and sufficient infrastructure for testing, isolating, and tracing, required to safely reopen.

In many states the first wave is just starting, the curve isn’t flattening, there are personal protection equipment shortages everywhere, and the number of tracers is at least 3 times below the minimum requirement. Maybe if the US federal stockpile of protective equipment wasn't empty at the beginning of April, maybe if FEMA didn't then raid hospital orders of protective equipment, maybe if the US response to the virus wasn't one of the worst in the world even a month later. But as it is, this is far from over.

To reopen the US at this state is an act of desperation, a death sentence to another 100,000 Americans at the very least. To those who have seen The Bridge on the River Kwai, this is the scene where Alec Guinness marches the sick and wounded to build the bridge, and the camp commander just stares at him in utter disbelief of: “I’m used to working POWs to death, I’m not used to them assuming working to death as their sacred duty.” or to quote Eddie Murphy: “Can you believe this Motherf*cking Sh*?”

The US economy is now a plague ship, sending the healthy to row until they are too sick to continue. An anti-vaxxer president sending the soldiers of the K-19 nuclear submarine to fix a radioactive reactor with no lead shielding.

Hard Crash Landing

The stock market investors don’t know something the rest of us don’t. Every level of the US economy and health systems is not ready for this crisis, the stopgap measures will fail, the virus will continue to spread even before the 2nd wave, the US economy has begun its recession, and by quarter 2 of 2020, it will be official.

As soon as early January 2007 the evidence was clear that the sub-prime crisis collapse was inevitable. The mirage of market health was held up until early April 2007. Lehman Brothers collapsed in September 2008. Wall Street has grown more incestuous with the rating agencies and government oversight, but not any more stable. This 3 headed hydra is good at creating and hiding bubbles until they burst, not at diffusing them. The US recessions don’t do soft landings, the market will not show it’s vulnerability until it collapses like it always does. We have seen this before, it’s all smiles and “buy some more, trust me” until the bandwagon goes off the cliff. And then you realize the hydra used your children's college fund to buy a solid gold helicopter for themselves with extra legroom to join the mile-high club, and it's still smiling.

Minimize your exposure in the US stock market now, get as much of your money out as you can. The recession is here, it's just not the front-page story yet. It will be.