Grubstakers - Episode 149: Coronavirus disease (COVID-19), Stonks, and the Fed

Episode Date: March 17, 2020

Note: Some of what we discuss at the top of this episode is already out of date - so Steven and Andy recorded a tag at the end with the updates as of Monday night. In Grubstakers first completely remote episode we discuss the stock market response to COVID-19 and the response from the Federal Reserve.

It's the kind of thing that makes the average citizen puke. I look at this system and say, yeah, you know, what's going on? I don't know anything about this man except I've read bad stuff about him. And I don't like, you know, I don't like what I read about him. We are more than just one coin. We create the world around this coin. Cop. Invention. Cop. Cop. In 5, 4, 3, 2...

The evil has gone. Hello and remain indoors. Welcome to Grubstakers. I'm Andy Palmer and I am joined by Steve Jeffries, Yogi Poliwal, Sean P. McCarthy. And today is a very special episode of Grubstakers.

It's our first completely remote episode due to an abundance of caution and a desire not to kill old people we are all recording from each of our own different locations both uh grub stakers south uh grub stakers north and grub stakers manhattan uh i would i would like the record to show that i voted to kill old people but i was outvoted and i do respect the will of my co-hosts so we will not be doing that this week no no for the moment I do not want to kill my uh girlfriend's fragile grandmother who uh very nicely said that I look like Lionel Messi and especially very nicely did not say that I look like fat Lionel

Messi uh so she blind I'd like to keep her alive. I would like the record to show that our Dipshit Brooklyn podcast is taking more health precautions than the city of New York, which we're recording this Sunday. New York City schools will be open tomorrow. My day job, and I believe Stephen's day job as well, will also

be open. This city is really just walking off be open. So, I mean, this city is really just walking off a cliff. Yeah, I mean, this is the Grubstaker's LLC plague response right now. This is how seriously we take it. So we're actually ahead of the curve, and if it seems like we're overreacting, that's probably a good thing. I had to travel this weekend, and I have to say, coughing in the airport, now way more fr i have to say coughing in the airport now way more frond

upon than farting in the airport back in the day you fart people give you nasty looks but if you cough these days people start yelling the n-word at you it's crazy out in the streets i actually i read an article that they're investigating whether or not farts spread viruses and it turns out it turns out they don't so oh good yeah that is a load off my conscience people's uh whatever virus does go out with the fart is stopped by pants so so parting farting without pants does spread the virus because then i am at fault it could if you like if you were right up in there, it would. All right.

Well, there's an eating butt precaution on the show, ladies and gentlemen. The first one we've ever had, but not our last. Yeah, it's interesting. If you look at the, there were these two studies that were done on the, they compared the statistics coming out of both Italy and South Korea on the coronavirus. And in Italy, they were only testing people who had relatively severe symptoms. And so the infection rate kind of skewed much older. And then in the statistics from South Korea, they actually just kind of tested everyone. And the infection rate was like astronomical amongst the 20 to 29 age bracket, which is just right in the center of the eating butt age bracket. And it's kind of funny because I've been riding my bike around, like not interacting with people or touching anything but my bike.

But I was like considering whether I was going to ride to Manhattan or C or coney island the other day and i figured coney island would be less crowded and it turns out it's just full of teens just walking around spreading the virus to each other and then taking it home just bumping butts up against another rubbing butts up on the beach yeah they don't give a shit uh yeah i was just gonna say you know obviously we're gonna spend today kind of talking a bit about the coronavirus and the economy more broadly. But just as, you know, for people based in New York City, I wanted to maybe scare people a little bit as to what what might be coming here, because there's a great medium post written by Michael Donnelly. And I'll just quote a second of it. I shared it on my Twitter.

But the thing is about the United States is maybe people are right and our disgusting suburbs and all our sprawl actually kind of protects us. Our total lack of public transportation actually maybe protects a bunch of people from the virus. But obviously, those of us in New York City don't have that luxury. There is a very functional subway here that takes millions of people around the city every day. And so I just wanted to quote, at the time when Italy had 160 cases, whereas right now officially we know New York has more than 500 that's tested, we have to imagine there's significantly more than that. But so at a time when Italy only had 160 cases,

I'm quoting from Michael Donnelly's article of a write-up of the Italian precautions, quote, strict emergency measures were put in place, including a ban on public events. And the public health minister, he closed public buildings, limited transport, had the surveillance and quarantine of individuals. They asked that basically everyone come from areas stricken by the epidemic to remain under mandatory house stay. This is from CNN on February 24th, 2020. So Italy, two weeks ago, or three weeks ago, took all of the measures that New York has just taken. And it did not. I mean, I shouldn't say it did nothing, but clearly it didn't do enough to stop the problem. So we're right at the precipice. We have more cases than Italy did when they took these measures.

And anybody can turn on the news and see what's happening in Italy. So that's what's so scary to me is like they need to in New York Shut down the schools shut down every business Except food and pharmacies And just tell people like you're gonna get A fucking ticket if you go out of your house Without a permit Yeah so if you're living in New York City Hello good evening and remain indoors

I mean it's just a curfew Like it seems like such a foreign concept, but once when I was in India, the town that my dad's from got attacked, and so we had a curfew for a week. I mean, it sucks, but also it's fucking safe. Yeah, and the longer that you put it off, the worse it's going to get,

and the longer you're going to have to buckle down in your apartment. And also, the closer we're going to get to fascism, because once the hospitals start getting overloaded and the longer that people kind of don't do the work of self-quarantining and the scarier this gets, the more likely law enforcement is to start taking some much more extreme measures. Yeah, but if you want to join the National Guard, it's actually a great opportunity to shoot your enemies after you claim they violated curfew.

Just drag them out of their apartment. Anybody talking shit about you on Twitter, just drag them out of their apartment at 10 p.m and shoot them for violating curfew one good thing uh one good thing that came out of this on like the state level i believe is they put a stay like a mandatory stay on evictions so i mean you can't really quarantine if you just suddenly don't have a house so that seemed like the obvious and humane thing to do. Right, right. Yeah, yeah.

Like New York has a, just to make things worse, New York has a massive homeless population. You know, like in Stephen and I's apartment, there's a guy who sleeps on the stairs by the elevator. And like, he's a nice guy. Everyone likes him. The only thing that bothers me is that he doesn't have a home to sleep in and if he gets sick and starts coughing that's suddenly a vector for everyone in the building and it's like they're they're the homeless problem is I mean, it's hard to say homeless problem because then you start like implying fascist solutions, which is a problem. Yeah, which is not at all what I'm going for.

But like it, it's it's alarming that, you know, because everyone kicked the can so far on every basic social safety net it's probably going to be the worst in america out of the world and as we'll get into like with the some of the some of the knock-on effects from coronavirus and the shutdowns and then eventually it leads to the stock market and finally the federal reserve. We'll get to see how actually, you know, we could, you know, we can have nice things. We can do a housing policy that would get our boy next to the elevator into a house of his own. Remember when we did that episode making fun of the Italian people who had coronavirus? Wouldn't it be great if after we all die, there's an Italian podcast that does like a, hey, I'm a dying of coronavirus over here. They're just trying to do like an American accent.

Hello, I am. I am fat and dying of coronavirus. New York has the best coronavirus. It's because of the water here. They don't make the coronavirus like this other places. I mean, I got to say that as viral as the coronavirus is, I think that the paranoia of the pandemic upcoming is making the individuals that are doomsday preppers

and honestly the people that got the most guns very antsy in the pantsy, if you know what I mean. And that's a very scary thought yeah yeah that is that is uh i i mean yeah i'm in group chats where people are like yeah my fiance just made me buy a shotgun yeah that's that i i talked to a guy uh this weekend who was like i don't like guns i'm considering getting a gun and i'm like this is you know um we all know a comedian i don't know about steven but there's a comedian in seattle whose name is hennigan and he's like a 70 year old guy and when i was asking about some not coronavirus but a few things going

on he was like i've been through a couple of these and it just made me realize that the nightmare that is america it flips people constantly and this is something that will flip a person that is like no i don't think anyone should have guns to suddenly be like you know what i own four shotguns probably just stop at one yeah i mean you're probably once it gets to the point where you need a gun it's probably not going to be much help like it if if it comes to the point of like roving food gangs i'm not sure if an AR-15 is going to be that much in the face of, I don't know, drone strikes and the like. That's why I got a crossbow. That's right.

There's that dude on Twitter who's saying the world is ending. DM me if you want pictures of my penis. And I know he has guns. And I'm just thinking, like, what is the point of having red flag laws if we can't take away the guns of people tweeting things like that i'm just saying there should be some atf agents kicking in doors based on coronavirus reactions i've seen all right so let's get into uh the the timeline of what's

been going on with the economy as a result of the coronavirus um the the real tragedy the real tragedy is the stock market so uh to start to kick this off i've got a few uh headlines from the business papers uh leading up to this uh this one the first one I've got is from Forbes. It's from November 23rd, 2019. It says, bull market not over and Dow will soon hit 30,000. This next one's from Barron's, January 17th.

Dow could hit 30,000 five years ahead of schedule. It won't stop there. This next one is from Fortune, January 21st. The Dow will hit a historic 30,000 sooner than you think. And finally, from the Wall Street Journal, February 18th, forget Dow 30k, it's already hit 40k on license plates. And the tagline is nothing says stock

market bull like a vanity plate on a BMW. When the index reaches milestones, optimists post new predictions on bumpers. So that was kind of the attitude leading into the last week, let's say. Andy, are you making fun of people for not being clairvoyant? Yes. So the basic timeline, and I'll admit that I'm kind of a dumb guy. And the only thing I have to go off is these, um, uh, just articles about the stock market.

I don't know much about the fundamentals of the economy. And so I drew a lot of this from Zach's, which has a kind of daily stock market breakdowns. It says what was going on and why it happened. So the first item I have is February 12th, which is a Wednesday, which is when the Dow Jones Industrial Average, that's also my dumb guy reference point, is the Dow Jones. Because back in 2008, I have semi-fond memories of watching it crash in real time.

And so February 12th and Wednesday, the stock market hit a peak of 29,569, uh, or the, the Dow Jones hit the peak of 29,569. And then on, uh, what was it? Nice. Nice. Yeah. And, uh, after that thing started, things started to drop a little bit. On February 18th, coronavirus news started really kind of affecting the stock market. Apple actually warned that it would not meet its quarterly sales revenue targets because the coronavirus would start affecting supply chains.

That's the entire thing. So coronavirus started devastating China, and basically the entire, because of permanent normalized trade relations with China, the entire U.S. supply chain has been outsourced to quite literally slave labor, in the case of Uyghurs and all these forced student internships and stuff. So it was like the stock market started bleeding because everyone was like,

oh no, the slaves are sick. How will this affect our consumption? It works as long as we have healthy slaves. stock market started bleeding because everyone was like oh no the slaves are sick oh yeah how will this affect our consumption it works as long as we have healthy slaves it's um it it's a thing where it's like it's a very if it's a very efficient wheel um or like it's like a very like bicycles are very efficient um until you stick a stick right in the spokes, and then you fly ass overhead into the ground. And that's more or less what happened with this just-in-time economy that we've got. So on February 19th, Wednesday, the Fed announced that the economy is strong and that they're keeping rates unchanged, and the markets pretty much recouped their losses from the previous day uh and then the first big sell-off was on february 24th on monday uh which was uh the day that we recorded the uh mama mia my

coronavirus crash of the stock market that uh that was when things really started diving downhill on uh the 27th february 27th thursday um the sure we won't live to regret that one. Yeah. There's a bit of irony in there. And then, okay, so on the 24th, that was actually point-wise the largest sell-off in the history of the Dow Jones Industrial Average at 1,032 points. On February 27th, Thursday, the U.S. government announced that the fourth quarter growth rate was 2.1%, which I guess was pretty good. And also on that day, point wise, it was the largest sell off in the history of the Dow Jones Industrial Average at 1191. On March 2nd, which was a Monday, the stocks rebounded about a 5% jump on news that the central bank will

increase liquidity to cushion the coronavirus impact. They fell again on the third, jumped again on the fourth, and then fell again on Thursday and Friday. On March 9th, Monday, this last week, the coronavirus met the oil price war, where it was the biggest drop in oil prices since operation desert storm in 1991 and the cause of that was that russia refused to agree to uh price cuts or production cuts um not price cuts production cuts that uh saudi arabia suggested and so as a response saudi arabia said fuck you and ramped up their production, crashing oil prices and fucking over OPEC. And on that day, they actually had to pull the circuit breaker for a 15 minute pause on trading.

It was the first time they did that since 2008. And point wise, it was the largest sell off in the history of the Dow Jones Industrial Average at 2014 points. On March 10th, Tuesday, there was a market rally. It was nearly a 5% jump because Trump announced an emergency relief package, including a payroll tax cut and targeted assistance to the worst-hit businesses, such as airlines. And some of that appears to be materializing, but not really much of all that he promised um so march 12th uh thursday was then the worst day since black monday october 19th 1987 was gonna be black when the dow dropped 22.6 percentage points um that was in 1987 uh also uh really fun show with uh don cheadle and uh some guy from girls uh they uh have a scene where they do a pledge drive for the muja hadin and give them a giant check uh yeah and uh i at that time i was in the womb and he was lewis in the news was sweeping

the nation and the uh circuit breaker was pulled for a 15 minute pause in trading, which was the first time that they've had to do that since earlier in that week. And point wise, it was the largest sell off in the we'll get more into that, or at least we would. But then March 13th, this last Friday, the stocks jumped 9.36%, and the crisis is over. So this has been Grubstakers. I'm Andy Palmer. No, unfortunately, it didn't end there, and we're still living it. We're still living it, yeah. So that's the stock market crisis up to that point.

Between the 12th of February, when there was the high of $29,56 So nearly one third of the value in the Dow was lost over that time. So before we go into, I guess, what more or less happened, I guess, we should probably define some basic terms as to maybe like, kind of some of the terms that are flying around for what is going on with the stock market. So like the term correction, that that word's been thrown around a lot. It's not being thrown a lot. It's not being thrown around as much now because we just kind of blew right past it. But a correction is um uh it's a stock market term for when like a benchmark index like the s&p 500 or the dow jones falls about 10 or more and uh so we blew it's like 10 to 20

i think is the kind of handle yeah on average there's a market correction a fall of 10 or more every uh three or so years every three or so years. Every three or so years. But now we've gone beyond that, and we're in what's called a bear market, which you probably heard before maybe, where that's 20% or more decline from the past peak. And that's essentially, it doesn't mean there's a recession. It doesn't mean there's a financial crisis necessarily. It's often linked with those things.

But you can have one in isolation. And currently we have one and they tend to last about on average about 10 or 11 months. Right, right. So that was like, we're looking at like a potential bottoming out sometime around end of August, early September.

Potentially. If we just stuck to that norm, which again, there's a lot of volatility and you don't know these things for sure. Yes. So the definition of a recession then is, oh yeah, bear market 20% or more. Recession is when inflation adjusted GDP declines for two quarters or more. um national bureau of economics research defines it as a recession is a significant decline in economic activity spread across the economy lasting more than a few months normally visible

in real gdp real income unemployment industrial production and wholesale retail sales a recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. And on average, recessions occur every seven to nine years, which is part of the reason everyone's kind of on pins and needles about what occurring now, because we are well overdue for it. We've had 11 years of sustained growth. And that's part of the reason for the mass sell-off is that people are like well there's a recession right around the corner because no one really understands why there's been 11 months or 11 years of sustained growth like it's kind of this big gray area for everyone right now yeah definitely and i think i think you're right to like make to

make all these distinctions clear because sometimes it can get kind of muddled when people talk about, Oh, there's a recession risk. There's a risk of financial crisis. There's a risk of a bear market. Like these are all distinct things that, um, I think especially like as leftist organizers,

um, you should definitely keep a clear sort of head about what could be happening, what's on the horizon so like right now we have a bear market the 20 decline or more um with the coronavirus you have uh large sectors of the global economy are essentially shutting down and that's going to eventually start hampering trade and freight shipping statistics. Basically, my high-level view, I guess, of this current mess we're in pretty much lines up with what Andy just detailed with the market data.

But I see it as the coronavirus is causing large sectors of the global economy to be shut down in order to stop the spread of the virus. Wall Street and other powerful financial institutions are reading this news. They're digesting the statistics and initiating sell-offs on the stock market as a result of that. And one secondary response to this that we'll get into shortly is these investors want to get into safer government securities. They want to get out of stock market, out of corporate bonds, and back into safe government securities such as short-term treasury bills or like overnight funding things to get some liquidity and they go to the federal reserve to do these things and they end up like doing things like collateralizing some of their treasury securities to get some like short-term liquidity for this purpose you know the worst thing about the stock market crashing in the way it has during

this coronavirus is Andy's winning the best brokers game. And it's like, how come when the world is crumbling, Andy wins? I took all of my money out of, I wasn't doing great with stocks and the best brokers game, it turned out it trades in euros. So I just pulled all of my money out of euros and put it into dollars because I figured Brexit would crash the euro, which hasn't necessarily happened, but it did stem the bleeding. And now that the stock market's crashed, I suddenly have more money than everyone else just because I don't have my game invested in any stocks. It's true. Well, in the previous financial crisis, one of the best performing assets was the US dollar. Yeah dollar yeah yeah if everything goes to hell just buy treasuries and dollars so yeah if you are trying to hedge on the possibility of the

apocalypse like even gold is down yeah it seems just much much smarter to just buy u.s dollars and u.s treasuries if you think the the shit is hitting the fan you heard it here first start stuffing your mattress hoard dollars physical cash that's how we're gonna get out of this is just if you start hoarding dollars in your mattress stuff your pillows uh just put your life savings and and all of your clothes you know watch people get coronavirus from cash um in their mattress so uh one other distinction that we should make, because Stephen and I were talking about this a bit, is how it's not yet clear that we're in a financial crisis. And so the definition of a financial crisis, this is from the IMF, is a financial crisis is often an amalgam of events, including substantial changes in credit

volume and asset prices, severe disruptions in financial intermediation, notably the supply of external financing, large scale balance sheet problems and the need for large scale government support. While these events can be driven by a variety of factors. Financial crises often are preceded by asset and credit booms that then turn into busts. So could you explain then, because again, I want more on how this is not necessarily a financial crisis yet. Well, so we're in a bear market in the stock market. That's obvious.

You can have bear markets that don't necessarily include a financial crisis in the classic definition. So like if Don Cheadle is trying to short jeans and the guy from Girls is in on it and he's secretly gay and also the guy from How Did this get made podcast is involved um that might be and of course huey lewis in the news is is tearing up the charts that might be one of those examples it's a little bit like that like okay maybe it's not like that at all but like uh i mean a classic sort of colloquial definition anyway of a financial crisis is well there's a debt bubble somewhere that has popped right and if you like scour if you scour data on household corporate and corporate sector debt like there are some areas of corporate debt which are obviously cause for concern in that they're elevated so like unsecured credit lines for corporations that they use to buy up their own stock,

like a stock buyback. It's filled by credit. That's happening. And that's obviously cause for concern. But then at the same time, there's so much corporate cash available. So like you have to look at their, you can't look at the level of corporate debt in

isolation and conclude oh that's a dead bubble you have to look at how well that they can pay it back and currently like the g like the dow jones those 30 companies that comprise the dow jones industrial average they have substantial cash reserves still like i was just looking at boeing and they've obviously been through a lot of bullshit with like the, you know, the failed max. Yeah.

Uh, plane that doesn't work. Actually speaking, uh, travel is obviously down because the coronavirus yet still they have substantial cash available to make their debt payments. Okay. So they're,

they're not at risk of default for the time being at least. Right. So like when you're talking about a financial crisis versus a bear market, that's good to keep in mind that we have to be realistic about this. I think leftists have this thing where every single time the S&P 500 drops more than about 3%, they just claim, oh, this is it. This is the end times, folks. This is the big one.

Yeah, when in fact that volatility is quite normal. And so, but if you do it every single time, eventually you'll be right. And so they have this sort of like, the broken clock is right twice a day thing, basically. So like there's a lot of volatility right now and more importantly there's a public health crisis yeah in large like the i think what's really going to reflect back on our economy and the stock market even more is that we'll just continually be

getting news about oh look this trade statistic is much lower because of the coronavirus oh look there's another sell-off on the market. Because these Wall Street people see all the data that we do, sometimes even more. Oh, yeah, yeah. And they're digesting it just like anyone does and making decisions for their clients like, oh, you should sell this and get into U.S. Treasury debt instead for the time being.

And like, yes yes that's rational so what could be uh happening you're saying is that like you know we'll take a hit um for the next few months in the markets uh but if the coronavirus isn't as bad as everyone is saying it is, they might recover because there isn't, the bubbles haven't popped yet. I think what the big risk that could still potentially not rule out a financial crisis occurring later on, like maybe next year, is if this coronavirus really does bring us into recession

and like we just have no answer as far as the vaccine for a while more like i mean if you have like 18 months for a vaccine yeah i mean that's that's i heard that was like the average time it takes to develop one so like if that's true or if it's even longer um yeah i mean if what china if what happened in china has to happen here pretty much regardless production is going to fall unemployment will rise these these headline once the headline indicators that everybody watches including the mainstream media and everything once those begin to deteriorate then, you could see an additional pullback that does cut into these companies' sales, like these sales receipts that really drive everything,

including eventually being able to make good on your debt payments. Then you would see a financial crisis. But at the moment, it's just, it's not, it's certainly plausible, but it's not a big risk. So then I guess one thing to consider is, would you say that compared to our current position, is potentially maybe where we were at this time of year in 2008?

I feel like we're sort of in like a q3 of like 2007 right now or so okay so like there are some inklings of problems in the corporate debt markets like people are too many people are getting rather cheap loans from banks to go and do buy stock buybacks and stuff like that and on the household side um a lot of like non-home some of the non-home related consumer debt markets are getting a little bit strained like uh auto lending had like a spike in defaults really for cars oh around like this time around like q3 2007 oh i'm talking about right now oh right now okay yeah aren't all those car loans a whole bunch of car loans are securitized because that's what i'm always watching for is i know

corporate debts a lot of it's securitized and i know auto loans are now mostly securitized so it's just like once you start seeing those defaults you have to imagine there'll be cascading effects yeah so like all of that needs to be weighed against sort of like what's the overall level of indebtedness for households and we're switching the households now like and one measure i look at to keep track of that is called the household debt financial obligations ratio which um it's from it's a statistic that's kept by the federal reserve and if you go on the federal reserve economic database you can find it there and it's like okay it's ticked up like um a bit but it's still like substantially down from where you would see in like 2008 since like mortgages

really haven't come back for most of most americans yet and that's a big source of what would be an obligation to repay however other things like student debt and auto loans have ticked up so it's sort of like a moderate like elevation right now right and then one thing i'm wondering in addition to that too is like in 2008 you know before the while the mortgage crisis was happening the kind of uh the wider economy outside of i guess maybe the american southwest where it was central where where it all kicked off like the wider economy was kind of chugging along like normal up until the bubble popped and then it just kind of cascaded across the whole country and then the world. And what I'm wondering is if like instead of maybe that crisis leading into unemployment, if it might work the other way around this time where,

you know, with all of the, with all the businesses shutting down, you know, we're already seeing people are saying they're getting laid off, you know, because suddenly America's consumer economy is getting absolutely gutted and so what i'm wondering then is if then that might actually have instead of it being um kicked off by the financial crisis if instead of financial crisis uh will happen much much sooner because of all of these other factors with unemployment and everything slowing down the economy on the other side of the equation. Yeah. I mean, you definitely don't need a financial crisis in order to enter a recession. So in this case, I think i kind of agree with you that like

to me the biggest risk in all of this is continue just like most economy just gets shut down right there's no activity there's no debt but there's also no activity right so you start seeing falls in gdp and unemployment and other things that like everyone cares about right right and they that can cause further volatility in the stock markets that you know causes sell-offs and stuff and like um there's no need necessarily for there to be a big debt bubble looming although one could still be yeah that's that's that's another thing that i think about a lot is that um like a lot of the bubbles like they're bubbles because no one no one sees them um or at least no one sees the

danger and where they're lurking or else there would be a lot of shorts and they would they wouldn't form it or they wouldn't grow as big um like in order for there to be a bubble uh it it has to it has to be invisible in a way, at least for the most part. That's true, yeah. And so, you know, with the massive growth of the stock market, like it was just apparently two years ago that the Dow crossed the 20,000 threshold that we're coming right back to. And so, I don't know what would cause a bubble,

but it looks like there's a massive bubble there that maybe we just don't know about yet. I think, so the stock market, to me it seems like the stock market bubble is popping. Some of that was brought up by debt but a lot of that wasn't and it was just it was funded out of present funds like to buy that stock right and um i mean obviously if it's on the one hand you have a massive stock stock gain um that's cat that's substantial amount more cash in the hands of those big blue chip companies to um continue

their operations even if there was a downturn or something so i guess i would say that like it's good to keep this like distinction between bear market financial crisis and recession in mind and it's like these are things that often happen in concert but they needn't do so i guess if that makes sense yeah yeah that makes sense so um then i guess with the the time we have left we could probably get to the meat of what we want to talk about here which is um as this all uh came crashing down uh everyone's been talking about this federal reserve uh 1.5 trillion dollar uh injection and you you told me uh yesterday that you really don't like the word injection um or that they're pumping 1.5 trillion into it and uh i will say that i uh do not understand the distinction very well and so uh but you do and so i was wondering what what's

what's really going on here yeah i mean i was looking through twitter from those couple days and i saw um i mean admittedly it's it's a pretty confusing topic but i was just seeing dozens of takes that were kind of wrong in like a slightly different way and um but the a lot of them could be if I had to group a bunch of them together it would be like oh my god look the government's just handing 1.5 trillion to the finance sector um and I'll just start with like what's I guess what is definitely not the case and that's obviously one of them. So what was actually happening with this is, and this is sort of the short version, was swapping out one type of government IOU for another type of government IOU doesn't make a bailout. It isn't a bailout. It's unfair, but it's not what's happening.

So instead of everyone is looking at what was handed to the private sector, in this case, 1.5 trillion in liquidity, like settlement balances, stuff like that in commercial banking system. But they aren't looking at what was taken away. And so this is, I mean, they're not just handing it out they're getting short-term liquidity in exchange for collateralizing things like u.s treasuries like as part of a loan so it's better to think of this as a loan so rather than rather than him handing cash so united States is loaning out $1.5 trillion. A lot of it, yeah.

Some of it is a straight swap, and then some of it is a loan. So how does the swap work? Is it that they're maybe more or less refinancing old loans with lower interest rates? It's a little like that. So the slightly longer version of what happened, which I think covers this, I've just been thinking of this over the couple of days when I hear these takes, but basically when the Fed conducts what are called open market operations, and this is something that happens almost every day, one tactic they use is swapping out what are called bank settlement balances

for another type of government security called treasuries. And it's nothing like normal fiscal spending or a tax cut in the sense that when the government authorizes spending, it tells the Federal Reserve to credit commercial bank accounts so many dollars, and they're not purchasing some other security. This is payment for a service. So if the government wants to do Medicare for All, it will credit the bank accounts of hospitals, doctors, everyone that needs to do the work to do Medicare for All. That's not giving them a loan or something.

That's just spending. And with a tax cut, similarly, they just don't receive as much tax revenue from a designated tax program account for the Treasury. So those things, if you think of the economy as split up between the government sector and the private sector, the non-government sector in a simplified model, you can say that with spending in a tax cut, the non-governments, their books have a net increase in financial assets. Whereas with what happened just the other day, they were either exchanging one security for another for liquidity,

or they were collateralizing a government security for some liquidity. So there was no net change in the financial assets. They got a loan, which is certainly something that's valuable, but they weren't just being handed money. Does that make sense? I think so, yeah. So the net change was moot, but they got easier access to cash. Perhaps you can just run through this again,

because these are what are called overnight repo agreements, overnight repurchase agreements, which my understanding, and please correct me if I'm wrong here, is that it's like a short-term loan that functions by one party giving the other party an asset and then buying it back the next day at a higher price and then the spread between the original and the next price is the loan so i guess i was just confused as to whether or not the fed was purchasing treasuries from the banks or if it was giving the banks treasuries and then buying those treasuries back the next day.

Just, I guess, how this operation works, because I understand it as a short-term loan. I just don't understand the actual mechanisms of it. Yeah, so what they were doing, this is where companies, institutions, and households will be offering up their government securities as collateral for a loan, basically. So they're accessing cash by collateralizing these securities. And if that makes sense, does it? Yeah, but I mean, is it just treasuries or are they taking other securities too? No, these are only government securities. So it'll be like

one year treasuries and stuff like that um now in this the size of what happened the other day is what is really different but the mechanism is exactly the same so in one on one hand it's sort of normal on the other hand it's not and like but the reason that was so large is not like because the government is like oh shit we got a financial crisis on our hands but more so it's just purely a response have much relief for the stocks at the moment? liquidity to maybe to you know to meet some of their operating expenses or they uh are just they're temporarily waiting for conditions to prove and improve in the dow jones and then go back so it's more of like it's a it's more of a response to the volatility in the stock market rather than like um causing some bubbling up of some other asset.

So it's not really relief to people's 401ks unless the people investing in those 401ks are like, okay, so now I guess we'll buy some treasury securities. Yeah, I mean, these are very safe assets. And as you probably guessed, they don't earn very much as a result of that low't earn very much right as a result of that that low risk right right so um it's can be basically just assumed as a flight to safety and but to get back to like the actual mechanics of what's going on here uh so like these

collateralized short-term loans typically they're just done overnight but this time they're also extended to like one month and three month securities like maturities where you like you you get the liquidity you do whatever you do with it and then you pay it back with interest a small amount after one and three months and so that's slightly different but it's again it's the exact same funding mechanism like the federal reserve is just keystroking in money and giving it to these people and then they give all of it back and plus a little bit more right they pay back with interest yeah right you said there's kind of the analogy here to like the bailout the banks where people said oh well uh you know when they

bailed out the banks the banks paid all the money back, so the United States didn't actually lose money. Yeah, that's just fallacious reasoning for a couple different reasons. So, like, that, yeah, back in, like, the aftermath of, like, once people were looking at QE, quantitative easing, and saying, like, like wow this is really unfair that was the general reaction and it's the right one because it was only given to these

elite financial institutions and the bondholder clash etc but then other people online and the bankers themselves were being like well it was just a loan I mean we paid it back so it's fair and like well yeah okay the i'm i'm kind of comparing what's going on now some of the discourse with that because in both cases there there's like this group of liberals mostly that

is like you see it was fair because it's a loan because you see that the fact that there's no change in net assets in the private sector means that like actually this was just like a benign emergency measure and like um they're not getting any richer like the their net worth isn't increasing simply because they did this and like which is true but the fact that households and mainstream don't in Main Street don't have access to this credit facility is what's unfair. So if it were extended to, say, regular people, would that mean just it would be very easy for someone like us, like let's say Grubstakers LLCc to just take out a low interest loan from the fed i would love for that to be true so like if you have that would be great if just average people could take out a loan at federal reserve rates for their um for their car or

something right rather than having to go through the commercial system i think that's the the nut of it where you know like you're saying steve uh you see a lot of people on twitter with the the globe emojis or whatever getting mad at people for saying oh if the fed has you know 1.5 trillion why don't they have you know money for uh student loans or health care or whatever whatever have you and it's like yeah so some people maybe i guess misunderstand and think the fed is directly giving the cash to these banks instead of um giving short-term loans but from that you know misunderstanding you missed the broader point, which is, yeah, the Fed, if they wanted to, could buy, you know, all 1.5 trillion of student debt and refinance it at the

same discount window rate the banks get, you know, 1.5 or 2% interest. The Fed could do a lot of things. The Fed could buy up, you know, municipal bonds would be another great idea in this crisis. Just say we will buy all the municipal bonds at 0% interest as long as every state and local government spends a bunch of money controlling the pandemic. There's a lot of things they could do that they don't do. And I guess one other point I wanted to make was in the financial crisis, you saw the Fed buy up at least $1.25 trillion of mortgage-backed securities, which, as everybody who's watched The Big Short knows, these were just full of totally fraudulent loans.

The Fed bought up over a trillion dollars' worth of mortgages. They didn't help anybody renegotiate their principal or stay in their home. It was just to give cash to wall street and then wall street could kick everybody out on the street take the homes back and rent them as single families or resell them or whatever so you know it's it's not unfair when people call this stuff a bailout it but they should understand the mechanism of how the bailout works i guess is what i'm saying yeah and like i i really don't i mean some people might think this is nitpicking and like it's a distinction we've had a difference or something but to me it really does make a difference that you get the details right because when you do that

it's easier to see like this massive injustice of like this this proves that whenever they ask for a pay for it's bullshit because there was they the Fed just literally keystroked in $1.5 trillion to give liquidity. And yes, they got it back in plus interest. But that's not the point. The point is that they can just do this whenever they want. And there's all sorts of things that the Fed, as the fiscal agent of the U.S. government, could be told to do on behalf of working people right right and so the the easy money just isn't available to us yeah it's only like if if you if

you're on your ass if you're you know homeless um because of uh just for any reason like you can't get a two percent loan to you know help you um get an apartment uh get get things in order so that you can then like you know be able to uh kind of get your life back together like that kind of lifeline is not available to you if if you're in deep poverty in america but if you're a company that you know screwed a bunch of people over and fell out on your ass that is available to you yeah yeah so it's not about it like we could be bailing we could have bailed out detroit and they wouldn't have had to have like this authoritarian emergency financial manager like they did in the crisis we could do reparations yes we could yeah i mean you can all start talking about all sorts of cool things like a ubi or something or expanding social

security and uh what congress could that's another thing to keep in mind is that yeah the fed could do all this stuff but they can't do it just unilaterally it has to be directed by the congress and these like discrete cases that aren't in um open market operations like like this was but like i mean the fed works for congress ultimately right yeah but like uh in the 2008 crisis i believe buying up mortgage-backed securities was just uh ben bernanke's executive decision i mean i could be wrong about that but somebody made the point online that uh powell should just start buying up municipal bonds and dare congress to tell him not to because you because they would be the ones saying, hey, you can't help people in the pandemic.

Yeah, to me that falls within the purview of quantitative easing. Buying up munis versus buying up corporate debt or mortgage-backed securities, certainly. And I saw a few legal scholars on twitter that said like yeah no that's fine and like during a during a hearing with powell uh what's your name from the squad um the massachusetts one elizabeth warren no the one who supports elbians of warren you know what i'm talking about yeah ayanna presley i think it was was questioning the fed chairman powell and it's like why don't you just use this to buy up the municipal debt of struggling cities and towns so that they like you know can run their

school systems better and stuff and he's like oh he's like really frumpy and like said that wouldn't be proper or something like he he never said it wasn't allowed but he's just like that would like it'd be a break in decorum i'm like come on man you're like you're willing to keystroke in 1.5 trillion for liquidity for um like hedge funds and stuff but not cities like really so that's like i mean like i guess all of this to get to get more back on track is like you should there's it there's injustice here and it's magnified when you actually follow the details yeah and like i mean there's a couple other points i wanted to to get to like there's a i think joe weisenthal is some bloomberg guy on on twitter was saying because of all these

posts that we've been talking about he was despairing uh i'm gonna paraphrase him he said something to the effect of it seems like a lot of leftists are uh uncomfortable with the very idea of a lender of last resort resort and that's scary to me and it's like personally i have no problem with the idea of a lender of last resort what i have a problem with is the fact that in the united states the uh six major racketeering organizations that refer to themselves as banks uh jp morgan um jp morgan chase goldman sachs morgan stanley JPMorgan, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup. These are organizations that Wells Fargo, that settled for billions of dollars illegally for closing on people, stealing homes with fake paperwork. Of course, Wells Fargo had their fake account settlements.

There have been 1,000 different criminal cases against these organizations. And yet these six are the ones that are getting this, you know, lender of last resort status from the Federal Reserve. So I don't have a problem with the lender of last resort. I just have a problem with the fact that it's like these six major, too big to fail, literal criminal organizations are the ones that benefit from the lender of last resort and nobody else. I guess the other thing I wanted to just ask you, Steve, because I might have misunderstood this online, I was making the point that essentially people getting mad at people saying this is free money from the Fed. Well, I might have confused the discount window with the repo program, where I made the point that these banks get money from the Fed at a lower interest rate

than anybody could get on the open market, and then they in turn lend it back out at a higher interest rate, collecting free money on the spread between those two interest rates. So I said, oh, yeah, this is a huge difference between free money from the Fed. I guess I was just wondering, is that a misunderstanding of what the Fed is doing here? Well, commercial banks and the Fed also, who is the bank for the banks, when they lend, they literally just spend into existence a deposit. So they create a deposit, and then that's supplied for the borrower and they simultaneously create

an asset and liability of the same size as the deposit and that's basically how they make money they make money by literally making money so if you were to say it in um in one sentence that ends with an onomatopoeia and starts with the money machine how would you phrase it money machine go brr that's like i like how that phrase like that phrase is simultaneously the small brain take and also the galaxy brain take i like that symmetry but it's really true so like uh uh james james galbraith like a really famous economist said one time quote i'm well i'm paraphrasing but he's like the process by which banks make loans is so simple it repels the mind because you you envision this process of like the fractional

reserve story where like well they can only lend out 10 of their deposits or whatever like actually no so when once they're approved for credit um they just create a deposit of nothing and then they also create a liability of the person trying to like that they need to repay the money the deposit money that they need to repay the money, the deposit money that they use to go buy something, say a house over a certain period of time. So that covers all of the principal and also the interest.

And like, that's what's being securitized basically is the agreement to repay all of that. And the bank has a simultaneous agreement where it says, I promise to give you the mortgage. And so those two things cancel out, but the person is also paying back interest. And so that's like, I think people are confusing that process with banks going to the Fed to get this 1.5 trillion, which was basically using bank capital to secure so collateralizing some bank

capital in order to gain extra liquidity to deal with settling payments better can you rephrase that for dumb guys which part uh all of it the collateral starting with collateralized and ending with liquidity yeah when i when i say collateralized i'm saying they're offering up an asset that is just going to be at the fed and like in case they default on the loan the fed would get to keep this security okay so that's what collateralize is okay and then liquidity is an infusion of cash as part like the proceeds of a loan right okay so basically the bank's saying so the bank is like yeah like so on the one hand bank banks make their money by literally creating money like these deposits little by little that people pay

in interest that's one side of their business and then the interest that they receive goes into the capital base of the bank and banks don't just want to have a bunch of dollars sitting around that aren't earning much interest they would like to invest in something so they often invest in things like treasury securities mortgage-gage-backed securities. And yeah, also back in the day, mortgage-backed securities. So then the collateralization means that if the bank really fucks up, the government owns them? Well, it just means if they don't repay the short-term loan,

then they would just keep the security. And the Fed doesn't really want to do that though it would like to just um much more much more likely is that the loan would just get rolled over into yet another agreement with the bank with lower interest rates uh maybe possibly it's like the fed is not in the business of just holding treasury securities usually. What it wants to do is supply liquidity to the system when it needs it. But so I guess when the Fed says that they're going to do 1.5 trillion of repo agreements, does that mean that the banks in turn have to put up 1.5 trillion of treasuries or other securities? I mean, is it a one-to-one thing or there's probably a slight difference there?

For those agreements, it's usually they want 100% collateralized value for the short-term agreements. So they give them a bundle of treasuries worth like a million and then they get a million worth of cash. And then later on, they pay it back plus interest and then i guess the loan is just the difference between the value of a dollar today and a dollar tomorrow i would assume yeah essentially i i think the the fault is our complex financial system which has created an episode where yogogi hasn't said one word for an hour. Come on, guys. Let's get into the real shit, all right? Does it, like, the machine go burr thing, small brain, big brain thing,

Trump firing the CDC in 2018, is that premeditated? Does he know coronavirus is coming two years later? Is he doing this on purpose? Let me contextualize while we're doing this. So, like, money machine go burr burr like we're explaining the burr burr money machine right now we're explaining how it works how it goes burr yeah and so like i'm i'm i was so pleasantly surprised when i saw that meme going around because it's like some people say it's a small brain shake but actually it's like the transcendental galaxy brain take like at the same time i mean that that does seem to be the the the

shorthand for modern monetary theory yeah i mean honestly you're you're much closer to the truth if you're at the money machine go berber meme stage now on on yogi's point about uh trump firing the cdc uh my take on that is that he he was probably just doing the dumb republican thing of cutting every uh possible uh aspect of government so that they can lower uh taxes for the ultra wealthy uh at the same time uh with the trade war going on i would not be surprised if trump got caught on a hot mic saying that they told me that china thing would never make it over here i'm telling you i heard a theory that it's it's russia that's they don't want china and siberia and so what they did is

putin wants to be prime minister to 2036. So global pandemic. And no one, no one touches Putin when it comes to him wanting to be an oligarch for another fucking 16 years. Now, here's the thing on Putin, though, is I think this Putin stuff, it's all paranoia. It's, you know, it's blown out of proportion. The guy who's really pulling the strings is Yeltsin. He's still alive. He's working behind the scenes. He was never a drunk. He's going to live until he's 130. And Putin's just a puppet of Yeltsin. And I think when people talk about Putin on MSNBC, they're

really missing the bigger part of the story, which is that Yeltsin who works for the kgb because the soviet union uh never really ended is uh the mastermind behind everything that's happening in russia and by extension america i read that the only uh coronavirus cases in russia were people that went to italy it turns out crocodile drugs cure the uh the coronavirus the uh just vodka and just really dangerous uh uh substances uh but i did want to say on that cdc thing the articles about it say that it was john bolton at the national security council who killed the cdc pandemic unit so the thing is you have these guys like david from saying uh on twitter something to the effect of you know if marco rubio or jeb bush was in there this wouldn't be happening trump is an abnormal republican president well trump is like clearly not a guy who understands the deep state bureaucracy

it was john bolton who came in and killed the cdc pen and killed the cd unit. So I mean, this stuff just drives me crazy, where it's like, you have the Republicans in the Senate saying that we're going to kill, you know, sickly for 80% of US workers in the middle of a pandemic, and then the Senate goes on vacation, they're not even going to pass that bill till Monday or Tuesday, in the middle of a crisis. And you know, it just drives me nuts how much of it is Trump is just a standard Republican president and doesn't really know what's going on. And the actual and like you know what shit is going to get shut down is like honestly where the real crisis that like i think people are like sort of distracted by on one level by the fed thing and that they're looking for the crisis there but like it's really these decisions about like should we shut down like the new york city school system or not right and like that

lack of response is like where the real economic carnage could be wrought yeah like one of the things that i'm sure we're going to start hearing ad nauseum uh starting uh i don't know yesterday is that you know this isn't what would happen if hillary was in charge but if you want to see what would happen if uh if a democrat was in charge just just look at New York state where Andrew Cuomo is the, the most institutional Democrat of institutional Democrats. And he's not doing shit. Like he, he should be,

you know, shutting down everything to his ability. And he's just kind of treading water and de Blasio too. And it it's if, if like, let's say Hillary won, even if she did take the responsible actions that I'm sure all the near attendants of the world are imagining that she would take in their Earth 2 fantasy, the fundamental reality is that America, because it has a privatized health system, it cannot respond to this in any way more sophisticated than Trump bringing, you know, Jim from Walgreens up to the podium to say, hey, discount on hand sanitizer. Like the the the system isn't built to to handle coronavirus unless it can make a profit off of it. That's just the fundamentals of the American system. And so the idea that Trump's response is some exception from the norm is absolute nonsense, even when you're comparing him to a standard Democrat. Yeah.

No, I think that's right. I think they might have done some of the basics, like keep the pandemic unit around. But ultimately, when you have a privatized health care system, people are going to skip out of the doctor and they're going to skip out on tests. You know, if even if the test's free, if the treatment's not free, why would I go to the get the test? It's just going to tell me I need a $5,000 hospital bill. I'm not going to do that. It's a waste of my time. I don't have $5,000. So ultimately, yeah, this is the perfect exposure of the problem in our privatized health care system.

Plus, you know, all of the collapse of the trade system, everything there, like that would have happened under Hillary as well. I mean, she wanted to keep this machine um that relies on exploitation in china she wanted to keep that whirring and she wanted to like kick it into high gear too i mean it would have been pretty much the the same situation going into this do you guys see that cuomo is making prisoners make hand sanitizer a hundred prisoners are gonna make a hundred thousand gallons of this shit and it's like you can't give these motherfuckers heat when it's fucking freezing outside now you want to make hand sanitizers you piece of shit yeah i saw that i think as long as it's not his um his members of his family uh emphasis on family being forced to make the hand sanitizer. He doesn't have any moral qualms about prison labor.

And just like one more thing on this Clinton point, because, yes, permanent normalized trade relations with China was signed by Bill Clinton. So it's like you have a situation today where off the top of my head, it's something like 90 to 95 percent of antibiotics are made in China. So you have a pandemic there. And you know, we have all these shortages of like masks, you know, as we just mentioned, hand sanitizer, gloves, rubber gloves, you just have no capacity to make those in the United States. And so suddenly you have a global pandemic. It's like you created the conditions where we have a pandemic and cannot respond to it domestically because we outsourced our entire capacity for this this virus is really laying bare just how what what a utterly global system we have and like how concentrated our production and supply chain is has become due to these international trade agreements like just from a risk management standpoint,

like, you know, it shows we have to think globally and, you know, that we should have more of a diversified supply chain in other countries besides China, you know, Malaysia, Taiwan. And even with, like, I mean, you could say that, you know, antibiotics, they're no help with a virus. But what's, of course, going to break down is that like once you're once the infection starts really like getting into people's systems, there's going to be a bunch of concurrent a bunch of concurrent infections that are going to come out that if you don't have antibiotics, you can't treat that. And so that's going to kill way more people. Plus, you know, anything that you needed to treat with antibiotics before the heat, the pandemic, you know, you're not going to be it's it's all it's uh let's see if i could find the perfect way to phrase uh this situation hello good evening and remain indoors

i i do just want to i want to say uh because we didn't really mention it but uh we we talked about how the stock market rallied on Friday the 13th. And it was, of course, as many people know, Donald Trump called a press conference with the CEOs of Walmart, CVS, Target, Walgreens. And it was called right until the market closed. They just kept talking until the market closed. They had all these CEOs there, and they just said the word public-private partnership again and again. So they were just trying to hypnotize the market into believing, which very much might be true,

that they were just going to dump billions of federal dollars into Walmart, CVS, Target, Walgreens. Because that's what's going to happen with a public-private partnership, is these private entities are just going to get billions of dollars in federal money. And that's what caused a stock market rally, which seemed to be the entire point of this little press conference, because testing is still not available here. But it is just so funny how PR obsessed this administration is. Oh, yeah. Right after that, right after the the market

closed trump tweeted in all caps like biggest gain in dow jones history like the day immediately after the biggest loss in dow jones history and it didn't even recoup the loss of the day before yeah i haven't seen statistics on it but but I would think that might be the largest change in price in two days. Probably on the market. Well, I mean, I do know that... Because one day is the greatest drop percentage-wise. Not percentage-wise, but point-wise, yeah. I thought it was also a percentage.

No, no, percentage was Black Monday. No, no, no, I was saying since. Was it going to be Black Monday? No, no, no. No, I was saying since Black Monday. Oh, since Black Monday, yeah. It was the greatest percentage drop on Thursday, I think it was, since Black Monday. And then the very next day, it was the greatest gain since 2008. So I think no one's actually said that before. I think that's the like outright price change in two days yeah it's like crazy volatility i mean it it's definitely like a 10 jump in the dow jones

does not mean things are going well like if it was just like you know kind of steadily rising and then suddenly it jumped by 10 that is exactly as alarming as if it drops by 20%. And with that, this is Grub Stickers. I'm Yogi Poliwog. I'm Andy Palmer. I'm Steve Jeffries. I'm Sean P. McCarthy. If there's no new episode for some reason, just check the Twitter feed.

We'll tell you if one of us is dead, okay? Steven, get the... Yeah yeah i'll cut this out so Oh, coronavirus. It's gonna kill some of us. But no one seems to care in the Southeast regions. I saw people in Nashville wearing cowboy hats at some concert. Fuck them all. all right hey everyone a quick end of episode update uh we recorded this actually on sunday it is now monday evening and uh we have a a couple new developments to add. First off, the Dow Jones once again set its record for the highest point-wise drop

in the history of the Dow Jones Industrial Average with negative 2,997 points, a 12.93% dip. I think on a percentage basis, that was again the largest since 1987. Yeah, yeah. And also, I've been reading reports that the New York State unemployment website has been crashing from new unemployment claims. But a bigger development is that we just spent a whole episode talking about

how the Fed is not doing quantitative easing. And now it turns out the Fed is doing quantitative easing. Yeah, that's right. So literally an hour after we finished recording what we thought would be the whole app, the Fed released an emergency announcement saying that they are going to go back to doing quantitative easing and so how that's different is this would be like an asset purchase where it's not a repo where they collateralize some sort of security and hold it for a while and then give it back so no more no more swapping just uh this is no longer a swap this is just purchasing uh treasuries and then also they mentioned uh they're going to open up the doors for buying mortgage-backed securities agency wait mortgage-backed securities or yeah really yeah my god on a limited basis but

still that's like a fundamental shift and like that's how fluid things are right now i thought they banned or i thought dodd frank banned something regarding mortgage-backed securities but maybe i didn't understand the episode we made that well no no it's it's definitely still legal it's definitely still happening. It's definitely still happening. But yeah, so this is a bit of a paradigm shift in their attempt to deal with what they believe is like an impending liquidity crisis. So now they're going to be just purchasing and holding some securities.

Okay. Rather than swapping or repoing them. So it's looking more like there will be an actual financial crisis on the horizon or you're making a face i don't think so because i i think the general thrust of what we had to say in the episode still holds okay and that like there's a major there could be a recession coming up um there's definitely a recession coming up. There's definitely a bear market that's going to continue for a long time. For at least 10 months or something.

Yeah. And what was it? Goldman Sachs reported that they expected Q2, that the United States will have something like a 5% drop in GDP. Yeah. That's in another development. So yeah, I mean, if you have two consecutive quarters of contractions, yeah, I mean, that's by definition a recession. Yeah.

Yeah. So the Goldman Sachs report kind of ups the likelihood that we could fall into recession as early as two quarters from now cool cool i think this just underscores like this kind of reminds me of 2008 in in one sense at least that like they're just like there's just a period of time where every single day brings some new horrifying set of news about either the financial markets or economic data and the fed is just sort of like changing the rules of how it's what it's what it thinks is prudent on like almost a daily basis with varying levels of success or complete lack of success well i mean if they're i don't think their goal

is to like affect the stock market per se right right but um they have what the fed wants to do above all else i think and whether or not this is they can actually do this is an open question is ensure that there's liquidity for the system in order to not create some sort of panic basically in the the market for safer private and government securities and it's kind of like some of it is based on kind of a mistaken belief about banking and that like some of it's for reassuring. Yeah. Like the first time we did QE,

um, so there, they were buying up assets, uh, in part based on partly on the belief that if banks have more what are called reserves, then they can go and lend them out. They'll be more willing to lend and provision credit to people, and then that will help restart economic activity.

But the thing is, having worked at a bank for a while, I can tell you that never once has anyone ever told me like, Oh man, we've got this great opportunity for a loan. But the thing is we don't have reserves. No one has ever said that. And in fact, uh,

they don't, it's, it's, it's been proven that banks do not lend out reserves. So when they, when they lend, they create a deposit in the customer's account custody. And they simultaneously create a promissory note that says, we're going to give you this deposit. You're going to pay all of the deposit back plus interest at a later date and if they need to settle an outflow from their bank they

go out and find what are called settlement balances and settlement balances are what we're being exchanged for um those are what we're being traded for with treasury securities in the repurchase agreements so like those were to settle like really short term like liquidity needs of cash between banks okay yeah so then uh at this point what would you say the outlook is if anything well i mean there's been a lot of news there's every every hour seemingly the i i have less faith in our government's ability to contain the virus and like i feel like that's where that's sort of where our attention should be perhaps more so than like looking for like a you know trying to root out like a possible debt bubble or something.

Yeah, de Blasio's staffers threatened to quit if he didn't close down the schools. And then just today he went to the gym. Hey, you have to stay on a schedule. You have to do your reps and get through your set. Apparently the mayor's salary does not include enough to get a Peloton knockoff in your apartment. I'm just envisioning that ad, but it's Bill de Blasio. Actually, I mean, he's pretty tall. Maybe he needs specialized equipment.

That's only at that particular ymca so i think that they're rather rather than get rather than get bogged down looking for like oh what's going to be the next debt crisis like you know is it is it corporate debt is it auto lending you know we have a crisis right now and it doesn't have anything to do with indebtedness per se right and it's called dealing with this virus and it's just causing us to shut down entire parts of the economy that uh whether or not they were heavily indebted is sort of besides the point almost that they have no sales coming in so like if you have no if you have no revenue i mean yeah that's kind of a bigger issue than like if you happen to have um a line of credit

that you needed to pay off or something. Right. And once a, once a company goes out of business, it's not like you can just, you know, once the virus clears up, flip the switch and put them back in business.

It's, it's a whole like the damage is already done. Yeah. So, I mean, if you, if you just shut down entire sectors, yeah.

Economic activity is just by definition halting. Yeah. So, there's no sales revenue coming in. And if they did have some debt, yeah, they definitely can't pay it back then. But it may not have been, like, per se, the trigger that I think people are sort of looking for sometimes. Right. David Harvey talks a lot about how capitalism is, the definition of capitalism is value in motion. And now we're seeing what happens when basically you grab a shark by the tail. It just kind of dies. And that's what we got is a dead shark. Please do not tell me what movie that's from. Because I don't want to hear about it.

Please tell me capitalism has jumped the shark. And so with that, we'll talk to you guys later. And yeah, hang in there. Take care, everybody. Bye-bye.