Jerome Powell

Sweating Bullets

Jerome Powell

Jerome Powell gave a speech on Wednesday at the Peterson Institute for International Economics that should have been called, “The Fed Is Out of Bullets”. The speech was a bit sad as the Fed is normally optimistic about about their ability to oil the gears of liquidity and lay the foundation for a recovery but not this time. The concluding paragraph of the speech carried the most weight:

..."the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending."

This speech was a message to the politicians in Washington D.C. that more stimulus bills are needed as the event horizon of the next credit cycle is unavoidable (my opinion). Companies can only survive for so long on reduced revenues before they need to restructure their debt (bankruptcy) and re-set the dais for the post coronavirus recovery. Already we are seeing an increase in debt defaults so the time decay on the option for a V-recovery is rising – the real economy needs to get going before the sugar-high from all the stimulus measures wear off.

Let’s finish off the commentary with a bar chart of the S&P 500 index (each bar is one week of price action). As you can see, in February the index tagged the 2009 multi-year trend line that kicked off a large selling wave down to the March low at 2188. Then a rebound up to the 61.8% retracement at 2935 where the S&P ran out of gas and is now treading water. Until we move through the 2935 level, we still run the risk of re-visiting the March low. The sharp rebound from the March low tells me we should have some back and fill and trend lower in the coming weeks.

Chart of the Week!

States that wear COVID-19 Masks


Economic & Central Banking Snippets 

  • UK gross domestic product fell by 5.8% in March compared with the previous month, the largest drop since the monthly series began in 1997, according to first estimates by the Office for National Statistics. (FT)
  • There were 2.98m more Americans that filed for unemployment benefits this past week, taking the number of applications to more than 36m in total over the last 8 weeks.
  • U.S. factory production plummeted in April by the most since 1919 as coronavirus-related shutdowns exacted a toll on the economy. Output slumped 13.7% from the prior month after a revised 5.5% decrease in March according to Federal Reserve data released on Friday.
  • Germany’s economy contracted 2.2% in the first quarter from Q4 2019, the biggest fall in output since 2009 (-4.7%). It’s also the second biggest drop in GDP since it became a unified country in 1990. The Federal Statistical Office lowered the previous quarter’s GDP growth to -0.1%, which means there’s been two consecutive quarters of contraction now. (Investopedia)
  • Total assets on the Federal Reserve’s balance sheet is at a record $6.98 trillion which is up from $4.2 trillion at the start of March. Most of the increase from the last week came from old mortgage-backed security purchases settling, and the PPP program assets grew by $11 billion. The latest balance sheet also revealed net portfolio holdings of Corporate Credit Facility LLC, the vehicle to buy corporate bonds which is currently $305 million. (Investopedia)
Fed Balance Sheet All Wednesday Level


Macro Snippets

  • Taiwan Semiconductor Manufacturing Co (TMSC) announced yesterday its intention to build and operate a $12 billion advanced semiconductor foundry in Arizona. A foundry is a mass manufacturer of chips that are designed, sold or used by tech giants like Apple, Qualcomm, Nvidia, AMD and even the U.S. military. Taiwan-based TSMC happens to be the largest contract semiconductor foundry in the world with market share of over 50%. Production is expected to begin in 2024. (Investopedia)
  • Avianca Holdings SA, the Colombian airline, filed for Chapter 11 bankruptcy after travel bans across the region forced it to ground its fleet. Avianca, which counts United Airlines Holdings Inc. and Kingsland Holdings as stakeholders, filed for protection from its creditors, listing as much as $10 billion in liabilities. (Investopedia)
  • Argentina edged nearer a default after being forced to extend the deadline on its offer to restructure $65 billion of foreign debt, according to Bloomberg. Creditors, who rejected the initial proposal, now have until May 22 to agree. Argentina’s terms also include a three-year grace period before any payments are made. (Investopedia)
  • Stage Stores has filed for bankruptcy after temporarily closing its department stores. “The company will simultaneously solicit bids for a going concern sale of the business or any of its assets and initiate an orderly wind-down of operations,” it said in a statement. (Investopedia)
  • Online used-car seller Vroom has filed confidentially for a initial public offering it hopes to launch in June, according to The Wall Street Journal. Founded in 2013, the company operates an e-commerce platform and delivers the cars directly to buyers’ homes, which gives it an advantage over traditional dealers in the pandemic. It was reportedly valued at $1.5 Billion during its latest funding round in December where it raised $254 million. (Investopedia)
  • Simon Property Group, the biggest mall owner in the U.S., says 50% of its locations will be reopened this week. The REIT giant has already reopened 77 of its U.S. retail properties and twelve of its Designer and international Premium Outlets properties where local and state orders have been lifted and retail restrictions have been eased. (Investopedia)
  • Toyota, one of the world’s largest automakers, predicts its operating profit will fall 80% this fiscal year, which began in April. Net revenues declined 1% and global vehicle sales declined by 18,372 in the 2020 fiscal year. (Investopedia)
  • The chief executive of the world’s largest container shipping line warned global trade would drop by a record amount this year and that the coronavirus pandemic could lead to a rise in protectionism. Soren Skou, chief executive of AP Moller-Maersk, told the Financial Times that if his prediction of a 20-25% fall in demand in the second quarter came true it would be “the biggest drop in demand on record, worse than during the global financial crisis”. (FT)
  • J.C. Penney filed for bankruptcy protection, joining other retailers squeezed by the coronavirus pandemic.

That is all for now and thank you for being a subscriber!

Paul McCarthy, President of Kisco Capital.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.