Since the recession ended in March 2009, the US economy has experienced the weakest recovery in the post-World War II era. Now the American people will be facing an extended period of economic contraction in which deflationary pressures lead to a sharp rise in unemployment, homelessness, and financial insecurity.
5- Gold took a beating in last week's selloff
Typically, gold is a "flight to safety" asset that does well when markets are crashing, but that rule did not apply last week. According to the Wall Street Journal: "Gold"suffered its worst week since 2011, dropping 9.3% and wiping out all its 2020 gains. Silver, a more volatile precious metal, tumbled 16% and is down 19% for the year." (WSJ)
At the same time, ultra-safe municipal bonds and risk-free US Treasuries sold off hard. The reason safe haven assets sell during periods of stress is because of margin calls, that is, when a broker demands additional capital from an investor to maintain his current position in the stocks he bought with borrowed money. When stock prices fall sharply, many investors have to sell their good stocks (gold, US Treasuries) to support the bad. That is why gold got hammered last week. It is an sign that many investors are severely over-stretched and nearing the end of their resources. Many high-stakes speculators are now in big trouble.
6-Stock buybacks have plunged
Stock buybacks have been the jet-fuel that has kept the equities markets soaring to record highs before the latest virus-driven downturn. Even before the latest ructions, buybacks had significantly slowed to 2013 levels wracking up just $14 billion in January, a 30% decline from a year before. And while there are no estimations of buyback activity during the last few weeks of March, it is impossible to imagine that cash-strapped CEOs would even dream of pumping more money into shares that are falling faster than anytime since 2008. And while there is a remote possibility that the US economy will avoid recession, there's only the slimmest chance that revenues, earnings or future expectations will give corporate bosses the wiggle-room they need to repurchase their own shares rather than stockpiling the cash they might need to maintain operations during some very tough times ahead.
Bottom line: It will be very hard for stocks to rebound in an environment in which buybacks have significantly declined or vanished altogether.
7- Stocks have already dropped sharply, but the credit crunch still lies ahead
A credit crunch refers to a decline in lending activity when funding suddenly becomes available. Currently, the markets for corporate debt have frozen due to investor skepticism that these same corporations will be able to repay the nearly $10 trillion of debt they wracked up during the "easy money" days of the last decade. Many of these corporations used the money they got from bond market to enrich themselves through executive compensation and share appreciation. In other words, CEOs sold bonds to credulous investors who thought they were buying the debt of responsible, well-managed companies when, in fact, 30% of corporate debt was deceptively used for buybacks, that is, it was used to line the pockets of executives and shareholders rather than boosting productivity, increasing worker training or R&D, or building new factories and equipment.
Corporations have been engaged in the same illicit scam mortgage lenders were involved in prior to the Crash of '08, transferring trillions of dollars to wealthy executives via financial products that public really didn't understand.
Many of these companies are presently unable to get the money they need to stay afloat because the market for corporate debt has shut down. This means, they will not be able to refinance their debts which will force them into bankruptcy triggering a cascade of defaults that will severely hurt their counterparties, their lenders and the broader economy. When credit becomes scarce, the economy contracts.
8- The IMF warned that the Fed's easy money policies would lead to another crisis
This is an excerpt from Chapter 2 of the IMF's Global Financial Stability Report:
Accommodative monetary policy supports the economy in the near term, but easy financial conditions encourage more financial risk-taking and may fuel a further buildup of vulnerabilities in some sectors and countries. "In a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk (debt owed by firms that cannot cover their interest expenses with their earnings) could rise to $19 trillion-or nearly 40 percent of total corporate debt in major economies, and above postcrisis levels."
The Fed's monetary policies ignited a corporate borrowing binge that has put the country's financial future at risk. The US is now facing a catastrophe that is entirely attributable to the "emergency rates" and the relentless meddling of the Central Bank.
9- The American people are not ready for another recession
According to Zero Hedge: "Almost 60 percent of Americans have less than $1000 in savings for a rainy day fund or an immediate emergency"."
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