This whole Nikola phenomenon was only possible in a market gone willfully blind and nuts. By Wolf Richter for WOLF STREET. Shares of the electric truck maker Nikola that hasn’t made a single truck, not even a working prototype, started trading on June 4, 2020, through a reverse merger with special-purpose acquisition company (SPAC) VectorIQ Holdings – the boom in SPACs being another phenomenon that shows how nuts this market has gotten. By June 9, Nikola’s market capitalization had vaulted to $29 billion as day-trader fans were going nuts over it, trying to get rich quick on this supernatural phenomenon. Then the collapse began, the collapse in every aspect, including the collapse of hype. This morning, the company announced in an astounding SEC filing that CEO and founder Tevor Milton, who is immersed in fraud allegations, was out, and the way it was done, namely effective yesterday, September 20, suggests that this was an orchestrated firing over the weekend, dressed up as “voluntary.” Some excerpts from the SEC filing: The Executive hereby voluntarily hands over and otherwise relinquishes, and the Company accepts his relinquishment of, his position as Executive Chairman of the Company and all positions as an employee and officer of the Company and its subsidiaries (the “Company Group”), and his position as a Director on the Board and a director of any of the Company’s subsidiaries, including all committees thereof effective as of the Effective Date and without the need for any other action. There are some claw-back provisions in the filing: To help preserve capital and assist the Company in retaining world-class talent to succeed the Executive, the Executive hereby relinquishes each of the following: (i) 100% of the 4,859,000 performance-based stock units (the “PSUs”) granted to the Executive on August 21, 2020, (ii) any right or claim to enter into a two-year consulting agreement with an annual fee of $10,000,000 and (iii) any other right and entitlement that the Executive may have or claim pursuant to the Employment Arrangement, except as set forth in this Agreement. Milton was forced to announce his departure in the social media: Following the Effective Date, the Executive will promptly revise the Executive’s employment status on social media, including LinkedIn and other social media sites so that the Executive is no longer identified as holding any position with the Company or serving on the Board. Milton has to get approval before posting anything on the social media about the company: Prior to using any social media site, blog or other online platform to make any statements regarding the Company Group or any of their respective employees or directors (a “Statement”), the Executive agrees to consult with the Executive’s counsel and the Company’s Chief Legal Officer as may be reasonably necessary to determine that the Statement complies with the Executive’s obligations to the Company. And this is what Milton did this morning, when he tweeted – presumably with approval of said Chief Legal Officer: “I will be cheering from the sidelines with you. Your greatest fan.” Nikola’s shares [NKLA] are currently down 22%, at $26.59, with plenty of true believers still thinking that this is a buy. Shares are down 65% from their closing high of $79.73, and down 70% from their intraday high of $93.99: On September 10, Nikola got hammered by detailed allegations of short-seller Hindenburg Research that the company was “an intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career.” In explaining its short position on the stock, Hindenburg Research summarized: “We have never seen this level of deception at a public company, especially of this size.” Then Monday last week, Bloomberg, citing sources, reported that the SEC was examining Nikola “to assess the merits” of the fraud allegations of Hindenburg Research. Milton had responded to the allegations with some tweets, that made things only worse. The company, still on Monday, came out with a rebuttal, that didn’t help matters either. The deal with GM, announced on September 8 – though the media and Wall Street analysts oohed and aahed over it and caused the shares of both companies to soar briefly – raised red flags about the Nikola’s so-called industry-leading core technology upon which all the hype had been built, namely its battery and fuel cell technology that were supposed to power its trucks. In the deal with GM, however, it was revealed that GM’s own Hydrotec fuel cell technology and Ultium battery systems would power Nikola’s trucks, not Nikola’s technology, which raised further doubts about the validity of Nikola’s technology breakthrough claims. Not only would GM provide the core technology for those trucks, Nikola also disclosed that GM would “engineer, validate, homologate and build” the trucks. So that leaves just the name that GM was apparently interested in and the hype surrounding Nikola. And true to form, following the announcement of the partnership, GM’s shares jumped 10%. This morning, GM’s shares are down 7%, and below where they’d been before the announcements. And it’s uncertain what remains of the value of Nikola’s tainted name. What is certain is that this whole entire Nikola phenomenon was only possible in a market gone willfully blind and nuts. Selling classic cars during the Pandemic is hard – and even harder at the high end. Affordable Classics rise, American Muscle Cars fall, Ferraris flat, after big drops earlier this year. Beautiful machines all of them. Read… Asset Class of Vintage Cars During the Pandemic: Sales at High End on Ice, After Steep Price Drops Earlier in the Year Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Affordable Classics rise the most, American Muscle Cars fall the most. Ferraris flat, after big drops earlier. Beautiful machines all of them. By Wolf Richter for WOLF STREET. Selling these beautiful machines, from American muscle cars to rare Ferraris, got a lot tougher during the Pandemic, after it had already gotten tough before the Pandemic. Auction activity in August dropped to the lowest level since August 2010, according to vintage-auto insurer Hagerty’s September report. The big event for classic cars was Monterey Car Week in August, normally a series of auctions spread over the Monterey Peninsula, in California, where some of the rarest and most sought-after cars were sold each year. But this August, the auctions took place mostly via online or phone bidding, and some closed-room bidding, and in reduced capacity. The anchor event, the Pebble Beach Concours d’Elegance, was canceled. And the limited auctions that did take place didn’t even take place in Monterey. So maybe next year. The overall results in terms of volume and high-end sales at the Monterey Auctions were so lousy that they cannot even be compared to last year’s Monterey Auctions as such comparisons “would yield misleading results,” said Hagerty in its report on the auctions. Last year’s Monterey auctions had already been rough, crowned by the phenomenal fiasco of the now infamous non-Porsche prototype that RM Sotheby had billed as “1939 Porsche Type 64” and as “the most historically important Porsche ever publicly offered,” with a predicted selling price “in excess of $20 million,” though Porsche AG itself, which was founded a decade after this car was built, resolutely refused to claim it. In a hilarious mess, with fake displays of bids jumping to $70 million, the whole thing collapsed, the car didn’t sell, and the rest of the auctions went to heck. But two years ago, at the 2018 Monterey auctions, two records were set: a 1962 Ferrari 250 GTO sold for $48.4 million, the highest price ever paid for any car; and a 1935 Duesenberg SSJ Roadster sold for $22 million, the highest price ever paid for an American car. That was the spirit! At the Monterey auctions this year, no high-end cars were sold. Online auctions still don’t seem to cut it for cars that cost many millions of dollars. Among Hagerty’s seven primary indices, which are updated three times a year (January, May, and September), “1960s American Muscle Cars” saw the steepest price declines. And the “Affordable Classics” experienced the biggest price gains. Below are six of the seven: The Ferrari Index: “Given the name recognition, racing pedigree, and exclusivity, Ferraris tend to lead the market, so keep an eye on this group,” Hagerty says. The Ferrari Index averages the prices of 13 of the “most sought-after street Ferraris of the 1950s-70s.” In September, the average price was unchanged from May. But the May average price had dropped by about 8% from January, its “largest ever drop,” according to Hagerty, and was down 15% from the peak in January 2016 ($5.7 million), after having soared seven-fold from 2007. The May drop took the average price back to 2014 levels (chart via Hagerty). The drop in May was powered by a plunge in the price of two of the 13 components: 1958 250 California LWB 2dr Spider: $12.6 million in 2018; in 2919, ticked down 1.5%; though May 2020, plunged by 23.4% to $9.5 million, -25% in total. Unchanged in September. 1963 250 GT SWB 2dr Coupe: $9.7 million in 2018; -3% in 2019, then -18% through the May 2020 to $7.7 million, -21% in total. Unchanged in September. In September, eight of the 13 Ferraris in the index experienced no price change from May; three experienced slight price declines and two experienced slight price increases. Here are the 13 Ferraris in the index (if your smartphone clips the fifth column, hold your device in landscape position): Ferraris, prices in “good” condition Sep-2018 Sep-2019 May-2020 Sep-2020 1966 Ferrari 330 GT SII 2dr Coupe 2+2 12-cyl. 3967cc/300hp 250,000 237,000 216,000 215,000 1957 Ferrari 410 Superamerica SIII 2dr Coupe (closed headlight) 12-cyl. 4963cc/340hp 3,200,000 3,200,000 3,200,000 3,200,000 1963 Ferrari 250 LM 2dr Coupe 12-cyl. 3286cc/320hp 18,000,000 18,000,000 18,000,000 18,000,000 1968 Ferrari 330 GTC 2dr Coupe 12-cyl. 3967cc/300hp 605,000 565,000 509,000 505,000 1958 Ferrari 250 California LWB 2dr Spider (closed headlight) 12-cyl. 2953cc/240hp 12,600,000 12,400,000 9,500,000 9,500,000 1972 Ferrari Dino 246 GTS 2dr Spider 6-cyl. 2419cc/195hp 302,000 284,000 284,000 285,000 1972 Ferrari 365 GTB/4 Daytona 2dr Coupe 12-cyl. 4390cc/352hp 700,000 530,000 530,000 515,000 1963 Ferrari 250 GT Lusso 2dr Coupe 12-cyl. 2953cc/240hp 1,700,000 1,100,000 1,000,000 1,050,000 1960 Ferrari 250 GT 2dr Coupe 12-cyl. 2953cc/240hp 656,000 630,000 600,000 600,000 1972 Ferrari 365 GTS/4 Daytona 2dr Spider 12-cyl. 4390cc/352hp 2,150,000 2,000,000 2,000,000 2,000,000 1963 Ferrari 250 California SWB 2dr Spider (closed headlight) 12-cyl. 2953cc/280hp 14,100,000 14,100,000 14,100,000 14,100,000 1963 Ferrari 250 GT SWB 2dr Coupe 12-cyl. 2953cc/280hp 9,700,000 9,400,000 7,700,000 7,700,000 1968 Ferrari 275 GTB/4 2dr Coupe 12-cyl. 3286cc/320hp 2,500,000 2,250,000 1,950,000 1,950,000 For some of the Ferraris that are not in the index, the price changes were larger, Hagerty reported. Prices of Testarossas, after a “three-year slump,” jumped 13% in the September update. And 308/328s, 575Ms, and 348s had “significant gains,” but prices of 456Ms “dropped slightly” and the 355, after a sharp increase last year, “took a step back.” The Index of 1960s American muscle cars. This index, which averages the price of the 15 “rarest and most sought-after muscle cars,” fell for the fifth update in a row and for the eighth of the past nine updates, now down 18% from its peak in January 2018. But the May and September drops were only around 1% each, compared to the plunges in the prior two periods. The average price is back where it had first been in 2007 (chart via Hagerty): While the prices of 13 machines in the index remained flat since May, two cars took the blame for the drop of the index: 1969 Mustang Boss 429, at $162,000: -10% since May, and -29% since September 2018 ($229,000). 1969 Hemi Charger 500, at $128,000: -8% since May after having been unchanged for the past three years. Here are the 15 components of the index: 1960s American Muscle cars; prices in “good” condition Sep-2018 Sep-2019 May-2020 Sep-2020 1970 Plymouth Road Runner Superbird 2dr Hardtop Coupe 8-cyl. 426cid/425hp 2x4bbl Hemi 222,000 222,000 222,000 222,000 1965 Pontiac LeMans GTO 2dr Convertible 8-cyl. 389cid/360hp 62,600 62,600 62,600 62,600 1968 Mercury Cougar GT-E 2dr Hardtop Coupe 8-cyl. 428cid/335hp 79,900 79,900 79,900 79,900 1968 Chevrolet Camaro Yenko 2dr Sport Coupe 8-cyl. 427cid/425hp 351,000 309,000 315,000 309,000 1969 American Motors AMX SS 2dr Fastback 8-cyl. 390cid/340hp 67,800 67,800 67,800 67,800 1965 Shelby GT350 2dr Fastback 8-cyl. 289cid/306hp 378,000 368,000 368,000 368,000 1970 Plymouth Cuda AAR 2dr Hardtop Coupe 8-cyl. 340cid/290hp 73,300 63,000 59,200 59,200 1968 Shelby GT500 KR 2dr Convertible 8-cyl. 428cid/335hp 155,000 136,000 136,000 136,000 1970 Chevrolet Chevelle SS 454 2dr Sport Coupe 8-cyl. 454cid/450hp 99,500 88,700 86,900 86,900 1970 Plymouth Cuda 2dr Convertible 8-cyl. 426cid/425hp 1,500,000 1,300,000 1,100,000 1,100,000 1970 Buick GS 455 2dr Convertible 8-cyl. 455cid/350hp 29,500 32,200 32,200 32,200 1970 Oldsmobile 4-4-2 W-30 2dr Holiday Coupe 8-cyl. 455cid/370hp 70,800 70,800 70,800 70,800 1969 Dodge Charger 500 2dr Hardtop Coupe 8-cyl. 426cid/425hp 139,000 139,000 139,000 128,000 1964 Chevrolet Impala SS 2dr Convertible 8-cyl. 409cid/425hp 68,200 66,800 54,500 54,500 1969 Ford Mustang Boss 429 2dr SportsRoof 8-cyl. 429cid/375hp 229,000 200,000 180,000 162,000 Affordable Classics Index. Collectible cars priced under $30,000 continue to do well, inching up to an all-time high in September. Only one of the 13 components fell – the 1971 Datsun 240Z, which had hit a record of $20,000 in May, having about doubled in six years; “clean examples are now well beyond the point of affordability,” Hagerty says. Five components rose, and the remainder were unchanged: Affordable Classics, Prices in “good” condition Sep-2018 Sep-2019 May-2020 Sep-2020 1967 Volkswagen Beetle 2dr Sedan 4-cyl. 1493cc/53hp 11,600 12,900 16,100 16,100 1969 American Motors Javelin 2dr Fastback 8-cyl. 343cid/280hp 13,600 13,600 13,600 13,600 1949 Buick Roadmaster Model 76S 2dr Sedanet 8-cyl. 320cid/150hp 14,600 14,600 17,500 17,500 1967 Volkswagen Karmann Ghia 2dr Coupe 4-cyl. 1493cc/53hp 13,900 13,900 16,200 16,800 1972 Porsche 914 2.0 2dr Targa 4-cyl. 1971cc/91hp 19,300 20,000 20,000 20,000 1963 MG MGB Mk I 2dr Roadster 4-cyl. 1798cc/95hp 9,900 9,800 9,700 9,800 1971 Datsun 240Z 2dr Coupe 6-cyl. 2393cc/151hp 18,200 18,200 20,000 19,400 1965 Chevrolet Corvair Monza 2dr Convertible 6-cyl. 164cid/110hp 12,500 12,500 12,500 11,900 1965 Ford Mustang GT 2dr Coupe 8-cyl. 289cid/225hp 24,700 24,900 25,600 27,900 1972 Triumph TR6 2dr Convertible 6-cyl. 2498cc/106hp 12,900 13,100 13,200 13,300 1963 Studebaker Avanti 2dr Coupe 8-cyl. 289cid/240hp 19,700 19,700 19,700 19,700 1962 Studebaker Lark Regal 2dr Convertible 6-cyl. 170cid/112hp 14,100 14,100 14,100 14,100 1970 Chevrolet Camaro SS 2dr Sport Coupe 8-cyl. 350cid/300hp 21,300 24,400 24,400 24,400 Index of post-war German collectible cars. After the boom from 2013 to 2016, prices declined into 2018 and then mostly leveled off. In the May update, the average price ticked down a tad, and in the September update remained unchanged. Of the 22 components in the index, 17 were unchanged. Two experienced price gains: the 1970 Mercedes-Benz 600 (+5%) and the 1971 Mercedes-Benz 280SL (+15%). Four experienced price declines, the biggest decliner being the 1970 Porsche 911 Carrera Turbo (-8.4%): Post-war German Classics, prices in good condition Sep-2018 Sep-2019 May-2020 Sep-2020 1957 Mercedes-Benz 300SL Gullwing 2dr Coupe 6-cyl. 2996cc/240hp 1,300,000 1,300,000 1,200,000 1,200,000 1970 Mercedes-Benz 280SE 3.5 2dr Cabriolet 8-cyl. 3499cc/230hp 258,000 215,000 215,000 215,000 1965 Porsche 356C 1600 SC 2dr Coupe 4-cyl. 1582cc/95hp 108,000 110,000 110,000 110,000 1962 Mercedes-Benz 190SL 2dr Convertible 4-cyl. 1897cc/120h 92,500 87,100 87,100 87,100 1972 Porsche 911 S 2dr Coupe 6-cyl. 2341cc/210hp 128,000 122,000 122,000 122,000 1956 Porsche 356A 1500 GS Carrera 2dr Speedster 4-cyl. 1498cc/128hp 1,100,000 1,000,000 1,000,000 1,000,000 1959 Porsche 356A 1600 Super 2dr Coupe 4-cyl. 1582cc/88hp 119,000 119,000 97,000 97,000 1948 Porsche 356 Gmund 2dr Coupe 4-cyl. 1086cc/46hp 950,000 1,000,000 1,000,000 1,000,000 1971 Mercedes-Benz 280SL 2dr Convertible 6-cyl. 2778cc/180hp 66,100 57,900 60,200 69,200 1955 Mercedes-Benz 300Sc 2dr Cabriolet 6-cyl. 2996cc/175hp 865,000 865,000 830,000 800,000 1962 Porsche 356B S90 2dr Roadster 4-cyl. 1582cc/90hp 181,000 181,000 160,000 160,000 1963 Mercedes-Benz 300SL 2dr Roadster 6-cyl. 2996cc/250hp 1,350,000 1,350,000 1,300,000 1,250,000 1973 BMW 3.0CSL Batmobile 2dr Coupe 6-cyl. 3003cc/200hp 197,000 197,000 197,000 197,000 1967 Porsche 911 S 2dr Targa 6-cyl. 1991cc/180hp 173,000 166,000 159,000 159,000 1979 BMW M1 2dr Coupe 6-cyl. 3453cc/277hp 528,000 440,000 420,000 420,000 1973 Porsche 911 Carrera RS 2.7 2dr Coupe 6-cyl. 2687cc/210hp 489,000 425,000 365,000 360,000 1979 Porsche 911 Carrera Turbo 2dr Coupe 6-cyl. 3299cc/265hp 118,000 100,000 89,000 81,500 1958 Porsche 356A 1600 Super 2dr Speedster 4-cyl. 1582cc/88hp 305,000 305,000 288,000 288,000 1973 BMW 2002tii 2dr Sedan 4-cyl. 1990cc/130hp 28,100 30,000 32,400 32,400 1970 Mercedes-Benz 600 4dr Sedan 8-cyl. 6329cc/300hp 78,400 94,300 94,300 99,000 1959 BMW 507 2dr Roadster 8-cyl. 3168cc/150hp 2,150,000 2,000,000 2,000,000 2,000,000 Index of post-war British collectible cars. After dropping to a five-year low in the May reading, the index ticked up 1% in the September reading: The 1% rise in the index was largely a mix of two big moves in opposite directions: the 1954 Jaguar XK 120 roadster jumped 11%; and the 1956 Austin-Healey Le Mans Roadster fell 7.1%: Post-war British Classics, prices in good condition Sep-2018 Sep-2019 May-2020 Sep-2020 1963 MG MGB Mk I 2dr Roadster 4-cyl. 1798cc/95hp 9,900 9,800 9,700 9,800 1961 MG MGA 1600 Mk I 2dr Roadster 4-cyl. 1588cc/78hp 16,800 16,400 16,800 16,800 1955 MG TF 1500 2dr Roadster 4-cyl. 1466cc/63hp 28,500 26,500 25,800 25,700 1972 Triumph TR6 2dr Convertible 6-cyl. 2498cc/106hp 12,900 13,100 13,200 13,300 1956 Austin-Healey 100 M BN2 Le Mans 2dr Roadster 4-cyl. 2660cc/110hp 144,000 140,000 140,000 130,000 1967 Sunbeam Tiger Mk II 2dr Convertible 8-cyl. 4737cc/200hp 104,000 105,000 105,000 105,000 1965 Jaguar E-Type SI 4.2 2dr Roadster 6-cyl. 4235cc/265hp 118,000 138,000 98,100 98,100 1962 Triumph TR3A 2dr Roadster 4-cyl. 1991cc/100hp 19,200 18,100 18,000 17,900 1964 Austin-Healey 3000 Mk III BJ8 2dr Convertible 6-cyl. 2912cc/150hp 39,500 40,000 39,800 39,800 1954 Jaguar XK 120 2dr Roadster 6-cyl. 3442cc/160hp 89,300 89,300 71,600 79,500 The “Blue Chip” Index of the Automotive A-List. This index of the “25 of the most sought-after collectible automobiles of the post-war era,” after having plunged 7% in May, and 14% from January 2018, ticked up in the September update. But note over the 2013-2014 period, the average price doubled, and since 2007, it quadrupled! In other words, this was a red-hot asset class over the years through 2018: The index includes a few of the cars in the individual indices above, and many that are not in the above indices, such as the 1971 Lamborghini Miura, the 1967 Chevrolet Corvette, 1966 Shelby Cobra, the 1969 Toyota 2000GT, the 1959 Maserati 5000GT, to name a few. Here are the 25 components: “Blue Chip” Index of the Automotive A-List Sep-2018 Sep-2019 May-2020 Sep-2020 1967 Chevrolet Corvette 2dr Convertible 8-cyl. 427cid/435hp 126,000 117,000 111,000 111,000 1957 Mercedes-Benz 300SL Gullwing 2dr Coupe 6-cyl. 2996cc/240hp 1,300,000 1,300,000 1,200,000 1,200,000 1966 Shelby Cobra 427 (CSX3300 – CSX3360) 2dr Roadster 8-cyl. 427cid/425h 1,050,000 1,050,000 1,050,000 1,050,000 1965 Shelby GT350 2dr Fastback 8-cyl. 289cid/306hp 378,000 368,000 368,000 368,000 1969 Toyota 2000GT 2dr Coupe 6-cyl. 1988cc/150hp 660,000 550,000 550,000 550,000 1959 Maserati 5000GT Frua 2dr Coupe 8-cyl. 4941cc/380hp 2,100,000 2,100,000 2,100,000 2,100,000 1958 Ferrari 250 California LWB 2dr Spider (closed headlight) 12-cyl. 2953cc/240hp 12,600,000 12,400,000 9,500,000 9,500,000 1954 Lancia Aurelia B24 2dr Spider America 6-cyl. 2451cc/118hp 990,000 990,000 713,000 713,000 1972 Iso Grifo IR9 Can Am 2dr Coupe 8-cyl. 6998cc/400hp 389,000 403,000 407,000 407,000 1970 Plymouth Cuda 2dr Convertible 8-cyl. 426cid/425hp 1,500,000 1,300,000 1,100,000 1,100,000 1958 Bentley S1 Continental Coachbuilt 2dr Drophead Coupe 6-cyl. 4887cc/178hp 975,000 975,000 975,000 975,000 1964 Alfa Romeo TZ-2 2dr Coupe 4-cyl. 1570cc/112hp 2,600,000 2,600,000 2,600,000 2,600,000 1963 Mercedes-Benz 300SL 2dr Roadster 6-cyl. 2996cc/250hp 1,350,000 1,350,000 1,300,000 1,250,000 1953 Chevrolet Corvette 2dr Roadster 6-cyl. 235cid/150hp 206,000 189,000 166,000 166,000 1965 Aston Martin DB5 2dr Saloon 6-cyl. 3995cc/282hp 825,000 820,000 736,000 726,000 1973 Porsche 911 Carrera RS 2.7 2dr Coupe 6-cyl. 2687cc/210hp 489,000 425,000 365,000 360,000 1948 Tucker 48 4dr Sedan 6-cyl. 335cid/166hp 1,400,000 1,250,000 1,250,000 1,250,000 1963 Shelby Cobra 289 R&P 2dr Roadster 8-cyl. 289cid/271hp 950,000 950,000 902,000 902,000 1954 Jaguar D-Type 2dr Roadster 6-cyl. 3442cc/250hp 4,400,000 3,800,000 3,600,000 4,000,000 1958 Porsche 356A 1600 Super 2dr Speedster 4-cyl. 1582cc/88hp 305,000 305,000 288,000 288,000 1963 Ferrari 250 California SWB 2dr Spider (closed headlight) 12-cyl. 2953cc/280hp 14,100,000 14,100,000 14,100,000 14,100,000 1957 Rolls-Royce Silver Cloud I HJ Mulliner 2dr Drophead Coupe 6-cyl. 4887cc/NA 401,000 397,000 397,000 397,000 1968 Ferrari 275 GTB/4 2dr Coupe 12-cyl. 3286cc/320hp 2,500,000 2,250,000 1,950,000 1,950,000 1959 BMW 507 2dr Roadster 8-cyl. 3168cc/150hpl 2,150,000 2,000,000 2,000,000 2,000,000 1971 Lamborghini Miura P400 SV 2dr Coupe 12-cyl. 3929cc/385hp 1,750,000 1,750,000 1,750,000 1,750,000 The lack of sales provides stability for classic cars. Classic cars are not a day-trading thing. Most owners keep their beautiful machines for a long time. So even in the Good Times, trading volume in each car, for each model year, is small. Some rare cars are sold only every now and then. So when live auction volume dries up, as it has now done due to the Pandemic, and as auctions are shifted online but the top end still hasn’t sold anything online, and when private sales are reduced, then a picture emerges of a market that has been put partially on ice. Most owners can hang on to their cars for a while in hopes of waiting out the Pandemic. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Trillions flying by so fast, it’s hard to even count them. But somebody had to buy these Treasury securities. And it wasn’t just the Fed. Here’s who. By Wolf Richter for WOLF STREET. In the 12 months through February, before the Pandemic started – those were the Good Times when a government shouldn’t have to borrow heavily – the US government added a breath-taking $1.4 trillion to its already huge pile of debt. And then came the Pandemic and the bailouts and the stimulus payments and all the other stuff, and over the six months since then, the US government added another $3.3 trillion to the Incredibly Spiking US Gross National Debt that now amounts to $26.8 trillion: With the release yesterday afternoon of the Treasury Department’s Treasury International Capital data through July 31, Fed balance sheet data, bank balance sheet data from the Federal Reserve, and the Treasury Department’s data on Treasury securities, we can sort out who bought those trillions of dollars in Treasury Securities over the past 12 months. Foreign investors: Foreign investors all combined – central banks, government entities, companies, commercial banks, bond funds, other funds, and individuals – added $287 billion to their holdings in July compared to July last year, including $48 billion during the month of July. This brought their holdings to a record of $7.087 trillion (blue line, right scale in the chart below). But due to the Incredibly Spiking US National Debt ($26.5 trillion on July 31), their share of this debt (red line, right scale), after plunging in June to the lowest since 2008, only held steady in July, at 26.7%: America’s biggest foreign creditors, Japan and China: Japan increased its holdings in July by $32 billion, to a total of $1.29 trillion. Over the 12 months, its holdings increased by $162 billion. China whittled down its holdings further in July. Over the 12-month period, its holdings fell by $37 billion, to $1.07 trillion, following the trend (green line) since 2015, with exception of the plunge and recovery around its capital-flight phase. Combined, Japan and China held 8.9% of the Incredibly Spiking US debt, the second-lowest share in many years, with the lowest having been in June (8.8%): The next 10 largest foreign holders (in parenthesis their holdings as of July 2019): UK (“City of London” financial center): $425 billion ($406 billion) Ireland: $330 billion ($257 billion) Hong Kong: $267 billion ($235 billion) Brazil: $265 billion ($309 billion) Luxembourg: $265 billion ($229 billion) Switzerland: $251 billion ($228 billion) Cayman Islands: $213 billion ($233 billion) Belgium: $211 billion ($203 billion) Taiwan: $210 billion ($179 billion) India: $195 billion ($160 billion) This list is studded with tax havens and financial centers, including those where US corporations have mailbox entities that hold assets in an effort to dodge US taxes. So some of these “foreign” holders are US entities, such as Apple in Ireland, with accounts registered in their mailbox operations there. Missing from this list are Germany and Mexico, which hold only $78 billion and $48 billion respectively in Treasuries, despite their mega-trade surpluses with the US. US government funds The Social Security Trust Fund, pension funds for federal civilian employees, pension funds for the US military, and other government funds shed $15 billion in July and $21 billion over the 12-month period, which whittled down their holdings to $5.89 trillion (blue line, left scale), amounting to 22.2% of total US debt (red line, right scale). Even though the Treasury holdings of these government pension funds have more than doubled over the past 20 years, their share, given the Incredibly Spiking US National Debt, has dropped from over 45% in 2008 to 22.2% in July: These Treasury securities, often called “debt held internally,” are assets that belong to the beneficiaries of those funds. They’re an actual debt of the US government, despite the old nonsensical saw that “it doesn’t count because we owe this to ourselves.” These are funds that the US government owes American beneficiaries, just like the funds that the US government owes Japan and China. The Federal Reserve. In July, the Fed added $89 billion to its Treasury holdings, bringing its total holdings at the end of July to $4.29 trillion (blue line, left scale), amounting to a record of 16.2% of the Incredibly Spiking US National Debt (red line, right scale) – that’s the portion of the US debt that is has monetized. Over the 12-month period through July, the Fed added $2.18 trillion in Treasuries to its holdings, most of it since March, doubling its pile: US Commercial Banks. US commercial banks added $66 billion in Treasury securities to their holdings in July, and $228 billion over the 12-month period, to a total of $1.14 trillion, according to the Federal Reserve’s data release on bank balance sheets, amounting to 4.3% of the total US debt. Other US entities & individuals Above, we covered all foreign investors, plus US government funds, the Fed, and US banks. What’s left are other US investors – both individuals and institutions such as US bond funds, US pension funds, US insurers, cash-rich US corporations, private equity firms to park cash, hedge funds to use them in complex trades, etc. During the market tumult, they all piled into Treasury securities, some possibly in panic, others to engage in or get out of risky trades, adding $1.8 trillion over the three-month period through June. But in July, they shed $93 billion, bringing the holdings down to $8.1 trillion (blue line, left scale), amounting to 30.6% of total US debt (red line right scale). The surge in holdings was followed by the spike in the US debt, and the percentage that these investors held in July (30.6%) was roughly level with their share at the end of the year (30.5%): The chart below shows Treasury holdings by category of holder combined into one chart, with the US debt piled up in all its majesty: Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
It just looks so tempting. By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube or download it at Apple Podcasts and others. We are in the miraculous process of borrowing and printing ourselves to prosperity or whatever. Short-term interest rates on essentially risk-free money, such as US Treasury bills or insured bank deposits, are near zero. For folks in many countries in Europe, they’re below zero. Long term risk-free interest rates are below 1% in the US and below zero in some other countries. With the Federal Reserve leading the charge, central banks have jumped with both feet into the “let-inflation-run-hot” dogma. Inflation means the destruction of purchasing power of the currency, and thereby the destruction of purchasing power of labor paid in that currency. This is no biggie at the top, where folks get raises to the tunes of millions of dollars. But it’s a biggie for the lower 50% on the income scale. For them, the dogma of letting inflation run hot is going to be very tough. And as inflation saps the purchasing power of their incomes, they’ll cut back. And for investors, the thin income streams from low-risk investments are not nearly enough to compensate for the loss of purchasing power of that investment due to inflation. So, to dodge these issues, let’s put or keep our hard-earned nest egg in the stock market? The US stock market is ridiculously overvalued, though it has recently been through a little bit of a selloff, particularly among the biggest names in tech, or so-called tech, that are down between 8% and 13%, and in Tesla’s case by about 25%, from their peaks just a few days ago. They’re very fragile – after the enormous run-up they’ve had. Many of those stocks, if they dropped 50%, would still be enormously overvalued. If Tesla dropped 90% from its all-time peak, it would still be overvalued. The idea that stocks can only go up is nonsense. The US stock market has been the target of global buyers that have pushed US stocks higher because people around the globe believed that it can only go up, after their own stock markets have never gotten anywhere near their highs of many years or even decades ago. In fact, the US stock market has been the exception among major stock markets. Let’s look what other stock markets have done, right now, even after the blistering run-up in share prices since March. These are the biggest global stock markets, and every single one of them is down by a big margin from the peak many years ago. So let’s see… The Japanese Nikkei is still down 40% from 1989. That was 31 years ago. The Shanghai Composite index is down 45% from 2007. That was 13 years ago. Hong Kong’s Hang Seng Index is down 10% from the peak in 2007 The German DAX is a “total return” index that includes dividends. So it cannot be compared to the other indices here, or to the S&P 500. The German index that is not a total return index and therefore can be compared to the S&P 500 is the DAXK. Despite its red-hot surge in recent months, it’s still down 8% from the peak in the year 2000. That was twenty years ago. The early months of the year 2000 in Europe was the peak of the combined euro bubble and tech bubble. You see that year cropping up a lot here. The London stock exchange index FTSE is down 13% from 1999. 21 years ago. The Italian stock index, the FTSE MIB, is down about 60% from the year 2000. 20 years ago. The French stock index, the CAC40, is down 24% from its peak in the year 2000. 20 years ago. The Spanish stock index IBEX 35 is down 58% from its peak in 2007, which was the peak of the Spanish housing bubble that collapsed with devastating results. 12 years ago. So yes, the hopes that stock markets always go up has proven to be a very bad deal for believers in those markets. Buy-and-hold has been costly for these investors – unless they got the market timing right, buying low and selling high, but that’s trading not buy-and-hold. And the other traders that didn’t get the timing right got run over by an endless freight train. Those markets dove after a huge ridiculous bubble, and they never recovered. The US markets are now in the same kind of huge ridiculous bubble. And as we want to put money into the stock market, or keep our nest egg in the stock market, we need to keep in mind what happened in the other big stock markets around the world after huge ridiculous bubbles. And yes, in all those countries, with the exception of China, central banks have repressed interest rates to zero or even below zero. And in all those countries, including in China, central banks have engaged in money-printing policies, such as asset purchases or similar strategies. As you can see, whatever those policies did, we know one thing they didn’t do: take stocks back to their old highs. So maybe we don’t want to lose 20% or 50% or 60% of our nest egg. So we think we might put it in secure instruments, such as insured bank deposits or Treasury bills or high-grade corporate bonds or similar. So we might be earning 0.5% or 0.8% at the bank if we’re lucky. Short-term Treasury bill yields are near 0% now. If we buy a 10-year Treasury note, we’ll only get 0.7% in interest for the next 10 years. So-called risk-free investments – they’re called risk free because you have essentially no risk of losing your principal – just don’t pay much in interest. This wouldn’t be a huge issue, if inflation were 0%. But that’s not the case. The Fed has promised to let inflation run hot. Inflation has been rising for the past few months, and the Fed has given us to understand that it won’t even think about thinking about doing anything about inflation when it begins to overshoot its target. The Fed’s target is another thing. The Fed’s inflation target is 2% as measured by the core PCE inflation indicator. This core PCE indicator nearly always runs lower than the core Consumer Price Index. So 2% core PCE might be 2.7% CPI inflation. And if the Fed lets it run hot and it gets to 4% based on core PCE, inflation as measured by CPI will be over 5%. Meanwhile, we’re sitting on our just-bought 10-year Treasury securities that will pay 0.7% for the next ten years. And short-term interest rates will still be near 0%. High-grade corporate bonds are not much better. So if that sounds like a rip-off, it’s because that’s precisely what it is – designed and executed by the Federal Reserve. So we say, OK, I’m not going for that rip-off. And the riskier assets beckon. We want to get the 4% dividend yield that a company offers on its stock. We buy the shares to earn that yield, and two months later, the company eliminates its dividend, and our yield is now zero, and the shares plunge. We got whacked twice. That’s the risk. If you invest in a stock index fund, your nest egg might drop 20% or 50%. Nearly all asset prices rose in lockstep over the past few years — stocks, bonds, housing, commercial real estate, and the like. There was no diversification possible because they all did the same thing. And now they threaten to remain in lockstep, but in the other direction. In this environment, diversification has proven to not exist. Even precious metals have surged recently has stocks and bonds and real estate surged. For a diversified portfolio, part of it must go down while another part goes up. If everything goes up together, we’re not diversified. We’re just fooling ourselves. Then there’s real estate as an investment. So let me say this first: if you’re ready to buy a home that you want to live in, and you have your reasons to buy it, and you understand that a home is an expense, and you can afford to buy that home, by all means buy it. Don’t put your life on hold, waiting for the right moment. But it’s important to understand that a home is an investment only during housing bubbles. And they cannot go on forever. The other times, a home is an expense. But if you’re comfortable with the mortgage payments, and you love your home, and you’ll intend to stay there over the long term, by all means, buy it. But if you’re looking at housing as an investment, because you don’t want to lose money fast in the stock market, and because you don’t want to lose money slowly to inflation with low-risk investments, well then, good luck, because you may need luck. Housing bubbles when they blow up are really rough because housing as an investment is highly leveraged. And housing bubbles have blown up plenty of times before. We can also try to put our money to work day-trading stocks and options. And that’s a lot of fun and excitement. A real adrenaline trip. But during the past stock market downturns, most day traders took huge hits, day after day, and it turned into the most frustrating nerve-wracking activity ever, and very expensive, until they finally threw in the towel and tried to get their old jobs back. Anyone can day-trade a relentless bull market. But when it turns on us, it gets really rough. And before we know it, much of our play-money is gone. So I’ve listed some of the choices and possible outcomes that investors have to struggle with. And there are no simple answers. This is the most treacherous investment environment I’ve ever seen. There is a good chance that the US stock market ten years from now will look like some of the stock markets I listed earlier, meaning way down from its peak in 2020. There is nothing easier, in this environment, than turning your hard-earned nest egg into scrambled eggs. You can listen and subscribe to THE WOLF STREET REPORT on YouTube or download it at Apple Podcasts and others. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
“Rapid growth is no longer possible” and “inflation is not going to be tolerated” in societies with slow wage growth: head of central bank of Singapore. It has been said out loud. By Wolf Richter for WOLF STREET. The solution now to the enormously ballooning debts in developed economies: Firing up consumer price inflation and let it run hot, according to the newest dogma trotted out incessantly by the Fed and other central banks, and hope that rapid economic growth will take care of the rest. The US federal government debt alone has ballooned by $3.5 trillion in just eight months, and by $4.2 trillion in 12 months, to a breath-taking $26.7 trillion today: Rising inflation and high economic growth worked during the decades after the Second World War in bringing down debt levels in highly indebted countries, such as the US, but it won’t work this time, said Tharman Shanmugaratnam, a Senior Minister in the Singapore Cabinet, Chairman of the Monetary Authority of Singapore (Singapore’s central bank), and Deputy Chairman of the Government of Singapore Investment Corporation (Singapore’s sovereign wealth fund). He was speaking at the opening day of the virtual Singapore Summit. “I think the big issue in the next decade is how to ensure that debts are sustainable,” he said. “First, it’s obvious that you can’t just keep increasing your debts. I don’t believe that the new high levels of debt that many countries are now moving towards are going to be sustainable without imposing a significant cost on growth as well as on equity within their societies.” The question of “equity” is how these costs are being distributed over society. In other words, who’s going to get slammed by those costs, and who benefits. “It’s not like the post-war period,” he said. “In fact, after the Second World War, many of the advanced countries started at very high levels of debt – the United States, the UK, many European countries – but they brought it down dramatically over 30 years. How did they do it? Rapid growth and inflation. And both of those are not possible anymore.” “Rapid growth is no longer possible; these are now aging societies; productivity growth is much lower than before,” he said. “And inflation is not going to be tolerated by older societies,” he said. “They may be tolerated when societies are young and everyone’s incomes are going up, but it’s not going to be tolerated now. So that option isn’t there.” “Neither can we assume that today’s low interest rates remain low forever.” Interest rates will rise to more normal levels at some point, and this will raise the costs of this debt, she said. Governments must find a way to grow their economies without simply expanding the deficit. “It’s a very serious issue,” he said. “You’re going to need fiscal reforms – not simply cutting down on spending. But you need quality spending and ways of raising revenue that don’t dent growth,” he said. So there you have it. What everyone already knew has now been said out loud at an official event. The new dogma won’t work. There are solutions, as Tharman Shanmugaratnam pointed out, but they’re more complex to implement and don’t involve the ever so convenient printing press. But borrowing and printing money forever, and hoping for consumer price inflation to reduce the debt burden, aren’t going to work in creating a healthy economy and prosperity. What consumer price inflation does in today’s developed economies is destroy the purchasing power of the currency, and thereby the purchasing power of already struggling labor paid in that currency, and thereby dent consumption and create more social frustrations and inequities, that would then be addressed with even more borrowing and printing and inflation? Still a lot of fawning coverage, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Powell into telling obvious nonsense. Read... Have You Noticed How Push-Back Against Powell-Fed’s Actions Is Getting Louder in the Mainstream Media, from NPR to CNBC? Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
The formerly hot asset class was already troubled by a multiyear decline in student enrollment and a surge in upscale supply. By Wolf Richter for WOLF STREET. “Student housing,” a subcategory of multifamily housing (apartments) in commercial real estate, is now dealing with an existential crisis – similar to retail and lodging. The mortgages backed by this once a hot asset class have been packaged into commercial mortgage-backed securities (CMBS) and sold to investors. Students aren’t exactly stable tenants. And the risks are high even in the Good Times. Delinquency rates of 30-plus-days on the student-housing mortgages that back $4.7 billion in “private label” CMBS (not backed by Fannie Mae or Freddie Mac) started surging in 2019, and by January 2020 hit 10%, under the impact of oversupply of student housing, particularly the trend to “luxury student housing,” that came along with the eight-year trend of declining student enrollment. And then the Pandemic washed over student housing. The 30-plus-day delinquency rate by loan balance hit an all-time record of 13.7% in July, according to Trepp which tracks CMBS. Then in August, the delinquency rate ticked down to 13.1% (blue line), the 2nd highest ever, in part because some of the delinquencies were “cured” by entering the delinquent loans into forbearance agreements. For now, all other apartment property types (red line in the chart below) – despite the eviction bans – have shown relatively little stress, with a 30-plus-day delinquency rate at just 1.9% in August (chart via Trepp): The straight-down plunge in the delinquency rates of all other multifamily housing types in early 2016 was in part the result of the $3-billion delinquent loan, backed by Stuyvesant/Peter Cooper Village in New York City, being resolved after Blackstone and Ivanhoe Cambridge purchased the property. In addition, in August, the rate of student housing mortgages in “special servicing” – when a special servicer is put in charge of the loan – was 11.2%. And the rate of student housing mortgages on the servicer watchlist rose to 19.4%. By August, $1.6 billion in mortgages backed by 101 student housing properties have requested or were already granted COVID-19 financial assistance. Student housing is built on the foundation that students live on or near campus, and not at their parents’ place. For many people, it’s the first time living away from the parental umbrella, and it’s a blast. Or was a blast. Now colleges are struggling with the pandemic. Some colleges are still doing remote learning only. Others have opened their campuses at reduced capacity. Some that have opened their classrooms have had new outbreaks on campus and closed their classrooms again and switched back to remote learning. For students, this is a hugely frustrating and expensive mess. For example, one of the largest mortgages among these troubled student-housing mortgages that was granted forbearance, according to Trepp, is the $82.6-million loan, secured by The View at Montgomery, near Temple University, in Philadelphia, PA. In addition, the property secures a $9.8-million Agency mortgage that was packaged into a government-backed CMBS. On September 3, Temple University announced that “in-person course instruction” has been suspended for the fall semester. This is what a now largely useless apartment at The View at Montgomery looks like: And student-housing property prices are falling too. According to the Green Street Commercial Property Price Index, prices in August for student housing properties across the US have dropped by 11% since the onset of the Pandemic and by 12% over the past 12 months. This was behind only the 28% year-over-year plunge in prices of malls, the 25% plunge in prices of hotel properties, and the 14% drop in prices of strip-mall properties. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
It just looks so tempting (You can also download THE WOLF STREET REPORT at Apple Podcasts and many others). [embedded content] Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
The Fed stepped away from the market after its jawboning created the biggest bond bubble ever. By Wolf Richter for WOLF STREET. The Fed started buying corporate bond ETFs for the first time ever in May and corporate bonds for the first time ever in June. These programs had been ballyhooed with enormous fanfare in the media – that the Fed would load up its Special Purpose Vehicles (SPVs) with $750 billion of corporate bonds and bond ETFs, including junk-bond ETFs. These pre-announcements and announcements and announcements of expansions of prior announcements triggered the biggest corporate bond bubble and junk bond bubble in history before the Fed even started buying. Bond prices surged and yields plunged and ETFs soared, and junk bonds soared and their yields plunged, and junk-bond ETFs soared as everyone was trying to front-run the Fed’s massive purchases. So the Fed accomplished its handiwork – creating a bond bubble and bailing out asset holders during the worst economy of in a lifetime – mostly by jawboning, and actually bought very small amounts of bonds and bond ETFs through July. It really just dabbled in them. But then Tuesday afternoon, the Fed disclosed that over the period of July 31 through August 31: 1. It bought no bond ETFs – and I mean, zero, none, zilch, nada, null. And its spreadsheet was devoid of the usual entries of names, tickers, CUSIP numbers, dates, and mounts. Instead, it said, “No purchases were made over the current reporting period.” The Fed had not bought a single share of anything, not even symbolically. Screenshot of the spreadsheet: 2. Its bond ETF holdings actually fell by $64 million, or by 0.7%, over the period through August 31, to a total of $8.67 billion, as the market value of these ETFs ticked down a smidgen. This ETF debacle comes after the Fed had only bought $520 million in bond ETFs in July, in a sign that it was already winding down this operation. 3. It bought almost no corporate bonds – and I mean, just a minuscule $456 million with an M, of corporate bonds, which by Fed standards – having tossed out the number $750 billion with a B and measuring its balance sheet in Trillions with a T – is not even a rounding error. 4. Its holdings of corporate bonds ticked up even less because about $21 million of previously purchased bonds matured and were redeemed by the companies, and the total balance of its corporate bond holdings increased over the period by only $435 million, to a total of $3.99 billion. The Fed’s total corporate bond and bond ETF holdings rose by only $370 million over the period, to $12.66 billion – a far cry from the hoped for $750 billion. The Fed’s jawboning had done all the heavy lifting. It created enthusiasm for even risky bonds, and the Fed, by just using its “communication tools,” as it likes to say, was able to manipulate the entire bond market into a frenzy. For example, the junk-rated Ford Motor Co. bonds show how little the Fed bought, inconsequential amounts essentially, but those bonds soared anyway, and the yields plunged, thanks to jawboning. The Fed holds $15.5 million in bonds issued by Ford Motor Co., spread over two bonds, a two-year note and a five-year note, that Ford issued on April 22, 2020. The Fed accumulated its position in various smallish trades over time. Ford is junk rated because it had enormous problems and huge losses before the Pandemic, and then the Pandemic made everything a whole lot worse. The Ford five-year 9.0% notes, CUSIP number 345370CW8, traded at a yield of 10.2% shortly after being issued on April 22. Then, amid announcements and hope-mongering about the Fed’s entry into the corporate bond market, the price began to surge and the yield began to drop. One of those trades in the five-year 9.0% notes, according to the Fed’s data disclosed a month ago, took place on July 2 for $2.2 million. The Fed paid 109.2 cents on the dollar. The bonds then soared to 119 cents on the dollar by August 10, for a yield of 4.3%. That’s less than half of the yield in April! Since then, the bond has backtracked and on Tuesday closed at 114 cents on the dollar, for a yield of 5.39%. (Chart via Finra-Morningstar): This shows how powerful the Fed’s tool of jawboning is. And it also shows that the Fed doesn’t think it’s necessary to drive the credit market bubble any further. Fed Chair Jerome Powell has explained this many times – that the Fed has succeeded in achieving its objective of creating loose credit market conditions. It has in fact succeeded in blowing this bubble in the shortest amount of time, and the Fed itself is perhaps stunned by the magnitude of the bubble and its own success. And it stopped buying ETFs in July, and it trimmed it corporate-bond purchases to near nothing. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Still a lot of fawning coverage, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Powell into telling obvious nonsense. By Wolf Richter for WOLF STREET. This is an interesting turn of events, in a world of Fed-fawning mainstream media. In one version, the push-back takes the form of loaded questions about asset bubbles and wealth inequality caused by the Fed’s asset purchases. Fed Chair Jerome Powell then answers, following what looks like a script because these loaded questions are now being thrown at him regularly. He admits that the Fed’s policies have increased asset prices, then says the Fed as a matter of policy doesn’t comment on asset prices, and hence cannot comment on asset bubbles, but then assiduously denies that this increased wealth of the asset holders, which he admits the Fed has engineered, widened the wealth inequality to the majority of Americans who hold no or nearly no assets, and who got shafted by the Fed. It’s like getting pushed on live TV into saying that, yes, indeed, two plus two equals three! This happened many times, most notably during the July 29 FOMC press conference when a Bloomberg reporter pushed Powell on that (transcript of my podcast on the Fed’s role in wealth inequality); and during the interview with NPR which aired on September 4, when he was pushed on both, asset bubbles and wealth inequality. In another version, the push-back in the mainstream media takes more accusatory forms expressed with exasperation and dotted with exclamation marks. In early August, notable push-backers were former president of the New York Fed William Dudley and Bloomberg News which carried and promoted his editorial. Dudley said that the Fed purchased these huge amounts of Treasury securities and mortgage-backed securities in March to bail out hedge funds, mortgage REITs, and others through the backdoor as the Treasury market went haywire. Hedge funds, he wrote, “were caught in an untenable trade of being long cash Treasuries and short Treasury futures,” and those highly leveraged huge trades began to blow up (transcript of my podcast). And this, Dudley wrote in the editorial, “brings us back to moral-hazard problem: investors win during good times (they can assume more risk and earn higher returns) while the Fed and the U.S. Treasury (ultimately taxpayers) assume part of the downside risks when there is trouble in financial markets. This is likely to encourage even greater risk-taking down the road, making it more likely that investors and markets will need to be rescued in the future,” he said, adding, “This doesn’t seem to be a good road to stay on.” And this morning it was CNBC, which interviewed hedge-fund founder-manager Stanley Druckenmiller on Squawk Box, which has a large audience, and the video spread across the internet, and most financial publications covered it, multiplying the reach of the message. And by airing the concerns of a famous investor, like Druckenmiller, on the show, CNBC spread the word far and wide. Druckenmmiller didn’t get into wealth inequality, but he got into asset bubbles and the “massive, massive raging mania in financial assets,” as he said, that the Fed has caused, the “de facto MMT,” and how this was “dangerous.” Here is my transcript of portions of his take: “I think the merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got their independence. And it’s obviously creating a massive, massive raging mania in financial assets, and as you just pointed out, Joe, it has not spilled over to Main Street.” “I would just say that I hear a lot of people on the air lauding Jay Powell, saying he saved the world. And I do think that he did a great job in March. But I think the follow up has been excessive.” “And I just want all you guys cheering him on to remember the Maestro in 2005, and how that worked out. Look, everybody loves a party,” he said, “but inevitably, after a big party, there’s a hangover, and right now we are in an absolutely raging mania.” He then goes on to explain just how crazy markets have gotten. “And what the Fed has done, in my opinion, if you listen to the Jackson Hole speech on the framework, it’s quite amazing. It sounded like an apology because inflation has been 1.6% instead of 2% the last 10 years. Well, their mandate is price stability, where I think 1.6% is. They hit a home run. But they actually sound like they’ve been too tight the last 10 years.” “And look what they’re risking in terms of financial stability to hit that 2% mark. My own sort of central case is that for the first time in a long time, I am actually worried about inflation.” “De facto MMT, which is what we are doing right now, because we actually have the Chairman of the Federal Reserve – with a three-and-half-trillion-dollar deficit – out lobbying Congress to do more spending, and guaranteeing to those of us on Wall Street that he’ll underwrite it.” “I think it’s dangerous. I think we could easily see 5% to 10% inflation in the next four or five years. Ironically, I think he has also raised the risk of deflation…. Every [deflation event] was proceeded by an asset bubble, and he has created this massive asset bubble.” “So ironically, he has raised the two tails: The risk of inflation is much higher, I’d say, than it was 12 or 24 months ago; and the risk of deflation, I’m talking like minus 3 or 4%, because if things don’t work out, and we get a bust here, that is a…” He didn’t complete the sentence, and maybe that was a good thing. “I think the odds here of us hitting the sweet spot – which I would say is around the 2% area, which is where we’ve been – have actually gone way down with the Fed activity.” Whether it is due to these forms of high-profile push-back, or whether it’s because the Fed actually has come to see on its own what it is fabricating with its policies, the Fed has effectively backed off already with its asset purchases. Its total assets peaked in June and have declined since then. And yesterday it disclosed that it had stopped buying corporate bond ETFs entirely back in July, and that it has almost wound down its corporate bond purchases. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Continued unemployment claims rise for second week, to 29.6 million, worst since Aug 1, meaning 18.4% of labor force is on unemployment insurance. State & federal initial claims jumped to 1.7 million in the week (not seasonally adjusted). By Wolf Richter for WOLF STREET. Total continued claims for unemployment insurance (UI) under all state and federal programs rose by 380,000, to 29.6 million people (not seasonally adjusted), the highest since August 1, according to the Department of Labor this morning. This was the second weekly increase in a row, after the 2.2-million jump last week. These 29.6 million people who continued to claim UI under all programs translate into 18.4% of the civilian labor force of 161 million: Blue columns – continued claims under state programs: +54k The number of people who continued claiming UI under state programs rose by 54k to 13.2 million (not seasonally adjusted), the first increase after five decreases in a row. Red columns – continued claims, federal & other programs: +326k The number of people on UI under all federal programs established by the CARES Act and some other programs rose by 326k to 16.4 million (not seasonally adjusted): Federal PUA claims jumped by 1.0 million to 14.59 million. The Pandemic Unemployment Assistance program, established under the CARES Act, covers contract workers, the self-employed, gig workers, etc. This was driven by a jump of 1.55 million continued claims in California. Federal PEUC claims rose by 29k to 1.42 million. The Pandemic Emergency Unemployment Compensation program, established under the CARES Act, covers workers not covered by other programs. State Extended Benefits jumped by 72k to 241k. State STC / Workshare claims fell by 16k to 253k. Federal Employees: 13.6k continued claims. Newly Discharged Veterans: 13.0k continued claims. Newly-laid off workers: state & federal UI initial claims: Initial claims under the federal PUA program for contract workers jumped to 839k in the week ended September 5, from 748k in the prior week (not seasonally adjusted). Initial claims under state programs rose by 20k to 857k (not seasonally adjusted) in the week ended September 5, remaining in the same range now for five weeks, and there has been no improvement: State plus federal PUA initial claims combined jumped to 1.70 million (not seasonally adjusted). These are people who’d newly lost their work and filed for UI during the week ended September 5, translating into a monthly rate of over 7 million people who are still losing their work and file for UI. Labor Department corrected calculations that had gone rogue. Two weeks ago, the Labor Department announced that it would correct “seasonally adjusted” unemployment-claims calculations because they’d gone rogue during this crisis. I stopped reporting “seasonally adjusted” claims in May for that reason, and reported exclusively “not seasonally adjusted” claims, and continue to do so, and none of the data I have reported since late May was impacted by that correction in calculation methods (here is my explanation of those changes and my chart that shows just how rogue these “seasonally adjusted” claims had gone; in the linked article, scroll down to “Data Chaos, Part 2”) . The picture that emerges. That 1.7 million people getting newly laid off and filing for UI in the last week is a deterioration of similar terrible numbers over the four prior weeks. This means that these companies are still shedding massive numbers of people. At the same time, a smaller number of people that had received UI have gotten a job, and continued claims deteriorated further to 29.7 million claims. This is a huge number of people on UI, and it has gone in the wrong direction for the second week in a row. There is a churn and a shift going on, with some companies and sectors hiring large numbers of people – retailers, ecommerce operations of all kinds including fulfillment and shipping, restaurants, the lodging industry, etc. – while other industries are now shedding jobs. This includes small and medium-size businesses that have received PPP loans whose effective data range has now expired. And it includes large companies, including tech companies, where wages are higher. After having vowed during the early phases of the crisis not to do so, they’re now laying off staff. It’s a sort of sector rotation of layoffs. Read… The Second Wave of Layoffs is Here, Now Hitting Well-Paid Jobs Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
In the bizarre machinery of an economy that depends on consumer spending funded by stimulus and “extend and pretend.” By Wolf Richter for WOLF STREET. OK, get this: At a time when there are 29.6 million people claiming state or federal unemployment insurance because they lost their work in the worst economy of a lifetime, subprime auto-loan delinquencies, which in the past had spiked during much smaller labor market downturns, are doing the opposite: they’re dropping. Meaning, since April, people with subprime credit ratings are defaulting a lot less on their auto loans than they did during the Good Times. In August, delinquencies of 60 days and over of subprime auto loans that have been securitized into auto-loan Asset-Backed Securities dropped to 3.49% of total auto loans (prime and subprime), the lowest delinquency rate for any August in seven years, according to the Auto Loan Delinquency Index by Fitch Ratings. That was down 2.44 percentage points from August 2019, when the delinquency rate was 5.93%: The 60-day-plus delinquencies started dropping in May. And given that May’s 60-day delinquencies were 30-day delinquencies in April, when tens of millions of people lost their jobs, it makes for a curious phenomenon. This is particularly curious because from 2014 on, private-equity firms piled into the subprime auto-loan space, the lending became very aggressive, underwriting standards went to heck, and delinquencies surged as a result. But interest rates charged on those loans were so high – well into the double digits – that the game could go on, with defaults ballooning to levels far higher than during the peak of the Great Recession, and those were the Good Times. Then we get the biggest unemployment crisis in a lifetime, and the delinquency rates should have spiked from these highs into the sky. But the opposite happened – as shown by the three red columns in the chart below, marking the change in percentage points of the delinquency rate compared to the same month in a year earlier: So what’s going on here. Stimulus payments and the extra $600 a week in unemployment insurance. With these funds, many strapped households had more money than they did while working. A study by the Becker Friedman Institute for Economics at the University of Chicago found that two-thirds of the people who received unemployment insurance, including the extra $600 a week, made more from UI than from working, with about 20% of them doubling their pay. And they could make their car payments, even if they had trouble making them before. The extra $600 a week expired in July, but these are 60-day delinquencies as of the end of August – so they were 30-day delinquencies in July and transitioned into delinquency in June. And during those months, the $600 was still available. And the stimulus payments of $1,200 per adult, or $2,400 per household of two adults – and more when they’re are kids in the household – started going out in April and went a long way in helping make car payments over the next few months. The $600-a-week program has now been replaced by $300 a week, and the first lump-sum catch-up checks, covering several weeks, already went out. This program is going to run out of funds in September. But for now, it’s doing its magic. Loan deferrals – no payment, no problem. When a borrower cannot make the car payment and becomes delinquent, a lender has a choice: Either work with the customer, or repossess the car, sell it at auction, use the proceeds to cover part of the outstanding loan, and write off the rest of the loan. That can get costly. The cheaper-for-now route is to work with the customer by putting the loan – whether it’s already delinquent or getting ready to be delinquent – into a deferral program. This kicks the can down the road. Deferral means that borrowers are allowed to not make payments for now, but will have to make payments later, including those payments that had been missed. It’s not a free ride. But for now, it doesn’t matter how impossible it will be for the borrower to catch up later. Because the loan is in a deferral program, the lender can mark it as “performing,” and accrue the interest income though the borrower is not making payments, and the lender can thereby “cure” a delinquency already on its books, or avoid one. The customer doesn’t have to make payments while the loan is in deferral. And everyone is happy. Bank regulators normally frown on deferral programs, but this is a pandemic, and now regulators encourage deferral programs. The finance divisions of the automakers, such as Ford Motor Credit or Chrysler Capital, most banks and credit unions, and specialized auto lenders with a big percentage of subprime customers, such as Ally and Santander Consumer USA, have been offering large-scale deferral programs to existing borrowers. If a borrower falls behind on a payment, there is now a lender on the other side, eager to kick that can down the road and move this loan from the delinquency basket into the deferral basket – and thereby “curing” the delinquency and turning it into a performing loan. And then what? Well, OK, that’s a little bit of a problem. When these policies were implemented in March and April, the expectation was that by summer most of those people would be back at work, that this was a temporary blip. Many people were in fact able to go back to work, but other people have since lost their jobs, and the number of people claiming state and federal unemployment insurance has hovered near 30 million for months: In other words, this unemployment crisis has settled in. Most of those initial deferral programs were for three months. But they can be extended to six months or whatever – the classic “extend and pretend,” but on a massive national scale. The only thing that’s hard about “extend and pretend?” Getting out of it. But this is now an essential cog in the bizarre machinery of an economy that depends on consumer spending funded by stimulus money and by consumer debt that is not being paid. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? 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SPVs to nowhere. By Wolf Richter for WOLF STREET. Total assets on the Fed’s balance sheet for the week ended September 9, released this afternoon, fell by $7 billion from the prior week, to $7.01 trillion. Since the peak on June 10, total assets have declined by $158 billion: The Fed has numerous asset accounts on its balance sheet that are unrelated to QE. Some of them fluctuate from week to week. Others, such as its holdings of gold or SDRs (IMF’s Special Drawing Rights) do not fluctuate. But to see where the Fed is going with QE, we look at the five major QE-related categories on the Fed’s balance sheet: Repurchase Agreements (repos), Special Purpose Vehicles (SPVs), central bank liquidity swaps, mortgage-backed securities (MBS), and Treasury securities. In total, balances of the five categories combined fell by $11 billion on today’s balance sheet compared to last week: Repos: unchanged (at $0) SPVs: -$2 billion Central Bank Liquidity Swaps: -$17 billion MBS: unchanged Treasury securities: + $7 billion Repos: at $0 for the 10th week: Central-bank dollar liquidity-swaps: -$17 billion. The Fed provided dollars to a few other central banks with these swap lines, but they are falling out of use and balances declined by $17 billion during the week, to $72 billion, from a peak of $449 billion in May. The Bank of Japan accounts for 79% ($56 billion) of the remaining total. Swaps with the ECB fell to $6.5 billion. Swaps with the Bank of Mexico have been at $4.9 billion since July. The central banks of Switzerland, Singapore, and Denmark had small balances left. The rest are gone: SPVs: -$2 billion, to $198 billion; -$16 billion since July 1. The Treasury Department provides the equity capital to the SPVs, and the Fed lends to them. The SPVs then buy assets. The amounts shown on the Fed’s balance sheet include the loans the Fed made to the SPVs and the equity capital contributed by the US Treasury: PDCF: Primary Dealer Credit Facility MMLF: Money Market Mutual Fund Liquidity Facility PPPLF: Paycheck Protection Program Liquidity Facility, with which the Fed buys PPP loans from banks CPFF: Commercial Paper Funding Facility CCF: Corporate Credit Facilities: Buy corporate bonds, bond ETFs, and corporate loans. MSLP: Main Street Lending Program MLF: Municipal Liquidity Facility TALF: Term Asset-Backed Securities Loan Facility SPVs to nowhere. For example, the CCF (yellow) with which the Fed buys corporate bonds and bond ETFs, is showing a balance so of $44.8 billion, essentially unchanged for weeks. On September 9, the Fed disclosed that it had bought not a single ETF in August, and that ETF balances actually ticked down, and that its balance of corporate bonds edged up by only $435 million with an M. This is an indication that the Fed has essentially stepped away from the corporate bond market. Its total holdings of corporate bonds and bond ETFs amounted to $12.7 billion at the end of August. The remaining funds in the CCF account are unused. MBS: unchanged at $1.95 trillion, level with June 24. The balance of MBS shows an erratic pattern due to two factors that push it in opposite directions: One, holders of MBS receive pass-through principal payments when mortgages are paid off, and in today’s refinancing boom, this torrent of principal payments reduces the MBS balance by large amounts every month. And two, the Fed’s MBS purchases take 1-3 months to settle, which is when the Fed books the trades. Since June 24, the Fed’s MBS balance has essentially remained flat at $1.95 trillion, as the Fed’s purchases just replaced the declines from the pass-through principal payments: Treasury securities: +$7 billion, to $4.39 trillion. Since late May, the Fed has increased its Treasury holdings at an average pace of $14 billion a week. This is the net of purchases minus maturing securities that the Treasury Dept. redeems. This week’s increase of $7 billion was within but at the low end of the range: So it seems the Fed has pulled back from bond-buying. Its Treasury purchases would amount to QE of similar magnitude as seen during QE-3. But the government is issuing so much debt so rapidly to raise the funds for is various stimulus efforts – counted in the trillions – that the Fed is essentially just funding a slice of that spending by buying Treasuries. And that seems to be a signal that the Fed is letting the markets fend for themselves for now. How does that old saw go? Don’t fight the Fed? There is still a lot of fawning coverage of the Fed in the media, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Jerome Powell into telling obvious nonsense. Read… Have You Noticed How Push-Back Against Powell-Fed’s Actions Is Getting Louder in the Mainstream Media, from NPR to CNBC? Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.