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So here's a quick thread on the fallacy of the Fed saving the day.
There's a guy. Let's call him Don. Don's credit cards are maxed out, and he can barely make the minimum payment. He has no cash. He can't pay rent. He takes out a payday loan. Then, Don loses his job.
So here's a quick thread on the fallacy of the Fed saving the day.
There's a guy. Let's call him Don. Don's credit cards are maxed out, and he can barely make the minimum payment. He has no cash. He can't pay rent. He takes out a payday loan. Then, Don loses his job.
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How do you help Don get back on his feet?
The Fed believes you give banks money to give Don another loan. The problem is, Don has no cash and no income, and he already couldn't pay his debt obligations. More debt (if Don even wanted it) doesn't help.
How do you help Don get back on his feet?
The Fed believes you give banks money to give Don another loan. The problem is, Don has no cash and no income, and he already couldn't pay his debt obligations. More debt (if Don even wanted it) doesn't help.
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The second problem is even if Don wanted the loan, no bank is going to loan him the money, because they know he can't pay it back.
$JPM already tightened mortgage and HELOC standards for people with much better credit than Don.
The second problem is even if Don wanted the loan, no bank is going to loan him the money, because they know he can't pay it back.
$JPM already tightened mortgage and HELOC standards for people with much better credit than Don.
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At this point, Don's creditors own Don and they can start repossessing any assets Don has.
At this point, Don's creditors own Don and they can start repossessing any assets Don has.
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So how do we help Don?
Don needs to go bankrupt (restructure his debt) and more importantly, Don needs a job (income).
More debt only puts Don in a bigger hole that it will be harder to ever emerge from.
So how do we help Don?
Don needs to go bankrupt (restructure his debt) and more importantly, Don needs a job (income).
More debt only puts Don in a bigger hole that it will be harder to ever emerge from.
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Don is most of Corporate America, with corporate debt to GDP at an all-time high & cash flow destroyed by COVID-19. Just like more debt wouldn't help Don, it won't help here. For companies that take on more debt, the price paid will be in far slower earnings growth moving fwd.
Don is most of Corporate America, with corporate debt to GDP at an all-time high & cash flow destroyed by COVID-19. Just like more debt wouldn't help Don, it won't help here. For companies that take on more debt, the price paid will be in far slower earnings growth moving fwd.
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So how can Corporate America move forward?
First, restructuring debt. For many, this means a Chapter 11 bankruptcy.
Who owns a company in a bankruptcy? Creditors
What happens to common equity holders? They get wiped out.
So how can Corporate America move forward?
First, restructuring debt. For many, this means a Chapter 11 bankruptcy.
Who owns a company in a bankruptcy? Creditors
What happens to common equity holders? They get wiped out.
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Second, they need income. Income returns only when consumer confidence & demand return. The Fed cannot control either one. And the idea of a pent up wave of demand being peddled by Trump, Mnuchin, and Kudlow is insane. You can't go back in time and fill that vacant hotel room.
Second, they need income. Income returns only when consumer confidence & demand return. The Fed cannot control either one. And the idea of a pent up wave of demand being peddled by Trump, Mnuchin, and Kudlow is insane. You can't go back in time and fill that vacant hotel room.
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Many wonder why the recovery from 2009-2019 was so tepid. It was the Fed's fault. Easy money and rampant debt led to over indebted corporates which impacted their ability to drive profitable growth. Just like Don, more debt = a bigger hole to climb out of.
Many wonder why the recovery from 2009-2019 was so tepid. It was the Fed's fault. Easy money and rampant debt led to over indebted corporates which impacted their ability to drive profitable growth. Just like Don, more debt = a bigger hole to climb out of.
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So in closing, the Fed isn't infallible. In fact, the Fed is the reason not to get caught long. Because their current policies will ensure that there is no V-Shaped Recovery.
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So in closing, the Fed isn't infallible. In fact, the Fed is the reason not to get caught long. Because their current policies will ensure that there is no V-Shaped Recovery.
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