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BarnacleBob

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JayDubya

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The latest from Simon Black:

It was barely a week ago that the federal government estimated it would borrow $3.7 trillion this fiscal year due to all the Covid bailouts.

Then, only a few days later, the Treasury Department updated the estimate and announced they would in fact be borrowing $4.5 trillion this fiscal year.

That’s an increase of $800 billion in less than a week!

Not to be outdone, the Federal Reserve has printed more than $2.5 trillion in less than 50 days, expanding its own balance sheet by 62% since the start of the pandemic.

I’ve been really hammering this theme lately, but it’s critical to understand: there is no limit to the amount of money they’ll print, or to the amount of debt they’ll take on.

And this has serious implications for the dollar.

It would be foolish to expect that you can create trillions of dollars in a matter of weeks, and take on trillions of dollars in debt, without any consequences whatsoever.

I’ve already written this a number of times, but I’ll repeat it again: if printing money were the way to achieve prosperity, then Zimbabwe would already be the wealthiest country in the world.

Prosperity requires smart, talented, hardworking people efficiently producing valuable goods and services. You can’t just click a button and create that out of thin air.

But politicians don’t seem to understand this simple point.

It’s far easier for them to print money, go into debt, and bail everyone out. And when that approach doesn’t work, they resort to dismantling capitalism, brick-by-brick.

Housing authorities have ripped up centuries of contract law and told people that it’s OK to not pay their mortgages.

Politicians are attempting to pass laws to retroactively adjust insurance policies and force insurance companies to pay for pandemic-related damages that were NOT part of the contract.

Local governments have suspended property rights and forced homeowners to leave town at the point of a gun, while police agencies raid businesses to seize legally-acquired private property.

Regulators have destroyed any hint of safety and told banks to NOT report non-performing loans, all while asking depositors to keep their savings in the banking system.

There’s a never-ending list of dirty tricks that these people have used to beat the economic system to a pulp.

You can practically hear them say, “sweep the leg,” as they come up with creative new ways to wreck the economy and devalue the currency.

Look, there’s still a tremendous amount of uncertainty about how this pandemic will play out. Will they open the economy? Will anyone show up? How long will the recovery take? How many jobs and businesses will be lost for good?

There are so many unknowns.

But one thing that’s becoming completely obvious is that they don’t give a damn about the value of the currency, and they will keep printing incomprehensible amounts of money to bail everyone out.

Consider that the $2.5 trillion they printed since March is more money than they printed in the first 95 years of the Federal Reserve’s existence. That’s astonishing.

We can keep our fingers crossed and hope this won’t create devastating, long-term consequences.

But as a practical matter it makes sense to at least consider owning some real assets, including precious metals.

History tells us that whenever governments and central banks resort to such extraordinary measures, precious metals tend to be a safe haven asset.

To your freedom,



Simon Black,
 

Scorpio

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and yet, the dollar hangs out around 100, with others in the toilet,

for 20 years we have been hearing of this 'demise of the dollar'
when in fact, it is but a 'representative dollar', meaning it is a comparison to other currencies,

leading you to the fact that the other currencies are pure rubbish, and the dollar is the leader of the fiats

does this appear as it is collapsing?

sc.png
 

JayDubya

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Yup, a lot of people keep saying it's a mess, but until there's an alternative, she's still "the prettiest horse in the glue factory".
 

BarnacleBob

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and yet, the dollar hangs out around 100, with others in the toilet,

for 20 years we have been hearing of this 'demise of the dollar'
when in fact, it is but a 'representative dollar', meaning it is a comparison to other currencies,

leading you to the fact that the other currencies are pure rubbish, and the dollar is the leader of the fiats

does this appear as it is collapsing?

View attachment 164393
The $ itself is very safe, while bank credit & debt based dollar substitutes maybe not so much.... With that said, as Scorp pointed out, the dollar denominated bank credit as measured by FOREX remains at the top of the heap. Why? DEMAND for dollar denominated credit & debt alike is greater than all the rest, as it should be. Why is that? The U.S military & intelligence agencies can & do enforce dollar denominated contract disputes anywhere in the world. If your operations are in international commerce, whether you are a buyer or seller, you want to minimize risks from contract disputes and you want an enforcer with teeth & the will to enforce the contract settlement. Therein lays the demand for $ & dollar denominated credit... CONTRACT ENFORCEMENT & SETTLEMENT.

If the U.S. terminated this function, the use of $ & dollar denominated credit & debt in international commerce would lose its demand & appeal to the merchants & nations of the world. Then maybe an arguement could be produced to support a major decline in the $$$ & dollar denominated credit & debt. Until that occurs or the credibility & ability of the U.S. military machine to function is somehow distressed or prevented, the $ & its substitutes will remain the King of the Hill. Which makes all the dollar bears wholley & totally wrong.... for the dollar & its substitutes serve as more than just a mere currency, but rather the "go to" currency for contract disputes, settlements & enforcement... Something that no other currency or nation in the world at this time can offer to the nations & their international merchants engaged in cosmopolitan commerce.
 

Scorpio

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I appreciate how BB states this is contract enforcement, and would argue in many cases it is in fact that.

Vene repatriates its gold, a contract. Then it takes a loan from Citi, fails, and Citi takes their gold, again a contract.

Yet, I did argue the point with him that this is but a piece of the puzzle, where they operate ex contracts all the time, using politics and military might all without contracts or laws.

Stated they were operating as a modern mafia at the highest level, wherein a contract may be offered, and if you refuse they don't need a contract, they just come ridin' in and do what they want anyway using politics and force.

Invading Afghanistan wasn't contractual,
Shutting down a $20T economy wasn't contractual,
etc.
 

Strawboss

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I appreciate how BB states this is contract enforcement, and would argue in many cases it is in fact that.

Vene repatriates its gold, a contract. Then it takes a loan from Citi, fails, and Citi takes their gold, again a contract.

Yet, I did argue the point with him that this is but a piece of the puzzle, where they operate ex contracts all the time, using politics and military might all without contracts or laws.

Stated they were operating as a modern mafia at the highest level, wherein a contract may be offered, and if you refuse they don't need a contract, they just come ridin' in and do what they want anyway using politics and force.

Invading Afghanistan wasn't contractual,
Shutting down a $20T economy wasn't contractual,
etc.
I think another facet of the dollars dominance is the depth of its debt markets as Martin Armstrong has stated many times...

If you are a SWF or pension fund or HNW individual...and you want to park your money for a spell...where do you put it? The Euro? Russian ruble?

The only debt market big enough and liquid enough to accomodate large transactions of these types without distorting the market and blowing out the spreads is the USD...

This may not be the only facet...but it is a significant one...
 

BarnacleBob

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I appreciate how BB states this is contract enforcement, and would argue in many cases it is in fact that.

Vene repatriates its gold, a contract. Then it takes a loan from Citi, fails, and Citi takes their gold, again a contract.

Yet, I did argue the point with him that this is but a piece of the puzzle, where they operate ex contracts all the time, using politics and military might all without contracts or laws.

Stated they were operating as a modern mafia at the highest level, wherein a contract may be offered, and if you refuse they don't need a contract, they just come ridin' in and do what they want anyway using politics and force.

Invading Afghanistan wasn't contractual,
Shutting down a $20T economy wasn't contractual,
etc.
FB_IMG_1589133853054.jpg

up
 

JayDubya

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EU could open legal case against Germany over ECB bond-purchases ruling: Commission

https://www.reuters.com/article/us-...gn=Feed:+reuters/businessNews+(Business+News)

BRUSSELS (Reuters) - The European Commission could open a legal case against Germany over a ruling by the country’s constitutional court that the European Central Bank had overstepped its mandate with bond purchases, the EU executive arm said on Sunday.

The German court in Karlsruhe last Tuesday gave the ECB three months to justify its flagship euro zone stimulus scheme or said the Bundesbank might have to quit it.

In response, the European Union’s top court - which had previously gave its green light to the ECB scheme - and the European Commission have said that EU law holds precedence over national regulations. They added that the European Court of Justice’s rulings were binding for courts in the 27 member states of the bloc.

On Sunday, Commission President Ursula von der Leyen went a step further, saying the EU executive might end up opening a legal case against Berlin.

“The recent ruling of the German Constitutional Court put under the spotlight two issues of the European Union: the euro system and the European legal system,” she said in a statement.

“We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings,” she said.

Infringements are legal cases the Commission can bring before the Luxembourg-based Court of Justice of the EU, if the Brussels-based executive deems a member state is violating EU law. The court can order a nation to make amends, or face hefty fines.
 

JayDubya

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Fed's New QE Operations Could Be 'Last Stop' Before Deep Recession

http://www.silverbearcafe.com/private/05.20/laststop.html

Last September, the Fed’s emergency liquidity operation in the repo markets signaled serious distress in the economy. The topic deserved the attention that we gave it at the time, but looking back on it now, those actions are dwarfed by those that the Fed has taken in recent months.

In March, in order to stave off market panic, Federal Reserve Chair Powell fired most of his economic “bullets”, including initiating a new round of Quantitative Easing.

As a result, the Fed’s balance sheet went vertical, potentially igniting a powder keg of inflation.

And, in just over a year, Powell has done a complete 180 on the topic of the national debt, now saying that he’s not worried about it at all.

But all of the Fed’s desperate attempts to add liquidity to the markets will eventually come up against their greatest obstacle: fundamentals.

James Altucher adds color to this point, saying:

While the Fed may be willing to step in and pump liquidity into a market that is in free fall, the Fed will NOT be able to prevent the coming recession.
While the talking heads would love for you to believe that the path forward will be smooth and painless and that we’re in for a V-shaped recovery, that’s extremely unlikely given the impact the coronavirus will continue to have on many sectors of the economy.

This sure sounds like the Fed’s recent return to Quantitative Easing could be delaying the inevitable: a potentially deep recession.

Altucher concludes, “The uncomfortable reality is we need to give the market and the economy the necessary time to find the bottom.”

This “bottom” may arrive sooner than you think.

U.S. Debt Spikes $1.5 Trillion in 6 Weeks (Fed Monetizes 90%)

One trillion dollars is an incredible amount of money. To provide some scale, the image includes a person, a semi-truck, an airplane and some buildings.

Yet to the federal government these days, $1 trillion is small beans.

According to an article on WolfStreet.com, over the last six weeks the U.S. national debt skyrocketed to $25.06 trillion.

This is an increase of $1.5 trillion since March 23, 2020.

There aren’t many other ways to think about this except calling it what it seems to be: insanity. On the chart, Wolf Richter calls it “debt out the wazoo”.

Wolf adds, “Those trillions are whizzing by so fast it’s hard to even see them. WOOSH… What was that? Oh, just another trillion. The flat spots in the chart are the periods when the debt bounced into the debt ceiling. Yeah, those were the days!”

With national debt growing trillions at a time, it sure doesn’t seem as though fundamentals are playing a primary role in decisions that are being made.

Especially when you consider that, according to the same WolfStreet article, the Fed added $1.39 billion in treasuries to its own balance sheet. This means that it effectively “monetized” about 90% of the new debt.

Bottom line, the piper will have to be paid, and fundamentals will eventually matter. No one can say for sure when that will be or what that will look like, but it sure seems like it will be historic.

Prepare Yourself in Case the Economy ‘Hits Bottom’

In the midst of all this madness in the markets, the Financial Times recently reported, “Some of the world’s largest hedge funds are raising their bets on gold.”

In addition to other ways to diversify your savings, perhaps it’s time for you to consider following the hedge funds’ lead.

Precious metals like gold and silver make for a good choice if the dollar goes sideways, inflation gets out of control, or reality sets in.
 

ErrosionOfAccord

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Been telling the coworkers to buckle up but I can’t make the concise argument for another BK this author provides. Here we go again.

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I Have Doubts That Peabody Energy Corporation Can Survive
May 07, 2020 12:44 PM ETPeabody Energy Corporation (BTU)30 Comments
Summary

Coal production and prices continue to plunge during the COVID-19 crisis.
Peabody Energy Corp. does not directly own the operations in Australia.
Australian insolvency laws are very different than the U.S. Ch.11 Bankruptcy Code.
There are over $1.26 billion in U.S. reclamation liabilities that can't be discharged in Ch.11 bankruptcy.
Investors might be mistaken thinking Elliott Management will protect the shareholders.
I doubt that Peabody Energy Corp. (BTU) can survive for even another year. While certain operations might be able to continue, the company as a whole, in my opinion, will end. Peabody did emerge from a Ch.11 bankruptcy in 2017, but the world has drastically changed and it is unlikely they can survive another bankruptcy filing. The company already had a loss of $1.33 per share in the first quarter and that was before much of the impact of Covid-19 hit the world's economy. With secured notes due in 2022 selling at about 72 and secured notes due in 2025 at 56, the market clearly expects that even secured claim holders will receive far less than a full recovery in any restructuring.

Australian Laws
The key factor in the potential liquidation of Peabody Energy Corp. is Chapter 5 of the Australian Corporations Act of 2001. I covered this issue in a 2015 article, but it is a very critical issue that needs to be looked at again. In Australia, a company "goes into administration" that is a very different process than under our Ch.11.

First, Peabody Energy Corp. does not directly own the assets in Australia. It owns equity in multiple layers of companies (mostly holding companies) in Gibraltar, The Netherlands, and Australia that eventually own the assets (and liabilities). This is an absolutely critical point.

Second, in Australia, an administrator is appointed. The board and current management do not control the insolvency process in Australia. Either the company goes into liquidation or the administrator and creditors negotiate a DOCA-Deeds of Company Arrangement. While the claim/creditor order is somewhat different in Australia than Ch.11 in the U.S., equity holders in both Australia and the U.S. are at the bottom. (There are also no DIP loans allowed in Australia.) Peabody Energy Corp. is an equity holder and is, therefore, on the bottom for any recovery. Because under either a liquidation or DOCA, I am not expecting full recovery for all creditors, I am not expecting any recovery for shareholders. Peabody Energy Corp. as an indirect shareholder of Peabody Australia Holdco Pty. Ltd. (Queensland, Australia) would not receive anything for their assets in Australia-zero recovery. (Note: PEAMCoal Pty. Ltd. was "deregistered" in 2018. This layer of Australian ownership was the focus of many SA readers during the prior bankruptcy process.)

Third, some might counter that Peabody Energy Corp. could file for Ch.11 in the U.S. and try to get all the entities included in a joint administration, including Australia entities, under the cross-border insolvency MODEL Law. I would expect a huge fight by various interested parties in Australia. Certain creditors, including workers, have a better standing in Australia than under our Ch.11. In addition, there are usually very modest legal expenses under the Australian process compared to the huge legal fees in the U.S., which means a greater potential recovery for unsecured claim holders in Australia. Local environmental groups and politicians would fight losing control to some bankruptcy judge in St. Louis. (I would not be surprised if some Australians who object to having the U.S. courts handling the case point out the appalling treatment of retail noteholders under Peabody's Ch.11 reorganization plan confirmed by Judge Barry Schermer in 2017. This mistreatment was covered by many SA writers in 2017. They may assert the U.S. courts are extremely unfair to various stakeholders.)

If this is not complicated enough, there is another issue and that is inter-company transactions between various U.S. and foreign entities. Most of these inter-company receivables and payables cancel out when reporting a consolidated balance sheet. It could be a major issue, however, for creditors seeking recovery for their claims. Just for the sake of an example: Assume the Australian operations owe U.S. entities a lot of money and the Australian operations go into administration. U.S. creditors will assert that as a creditor to the Australian operations, the U.S. Peabody is owed money regardless of the status of their equity ownership of Australian operations. This would have a positive impact on the recovery of the 1lien notes. If the reverse was true, U.S. creditors may litigate and seek recovery based on section 547 for "preferential transfers" in any payments made to Australia. The issues regarding inter-company transfers are extremely complex and I tried to explain the basics as simple as I can.

The tables below give some indication of the Australian operations and the U.S. operations. The seaborne thermal mining and most of the seaborne metallurgical mining are the Australian operations.

Revenue



EBITDA


What Happened in Australia During the Last Bankruptcy
Because of huge negative issues associated with potentially going into administration in Australia, I did not expect in 2015 that Peabody would file for bankruptcy. I thought management would fight very hard to avoid bankruptcy and try to wait it out until coal prices increased. I was wrong. Management, which I asserted in a SA article was "inept and incompetent", did almost nothing to avoid bankruptcy. (I guess they wanted a very lucrative management incentive plan under a Ch.11 reorganization plan instead.)

The Ch.11 filing in St Louis did not directly include any Australian entity but did include the Gibraltar entities. The Australian continued normal operations. After the terrible prior-year Australian results were filed with the Australian Securities and Investment Commission on May 31, 2016, some local environmentalists were developing a strategy to force the Australian operations into administrations. Local media sources were expecting them to go into administration because the Australian operations received a qualified accounting opinion in May 2016:

There is significant uncertainty whether the company and/or the consolidated entity will continue as a going concern, and therefore whether they will realise their assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report...

They were saved by soaring metallurgical coal prices. With much higher prices in Australia, it was impossible to assert that their Australian operations were insolvent. They never went into administration. There still was, however a nasty fight between various creditor groups regarding the value of equity of Australian operations, which was the majority of the collateral that secured 1lien holders. Eventually, the parties negotiated recoveries for various creditor classes under a Ch.11 reorganization plan.

Some Coal Assets May Actually Be Liabilities
In bankruptcy, a coal company's mining reclamation liabilities are not discharged and remain a liability even after the company exits Ch.11. Peabody has about $1.264 billion in reclamation liabilities. An issue that has not been firmly established by the courts is the reclamation claim priority standing compared to other creditor claims. In prior coal mining company's reorganization plans, there were negotiated settlements with various regulatory agencies. Some assert, including myself, that reclamation should be classified in the same claim class as federal tax liabilities, which is one of the highest creditor claim classes and must get full recovery before even secured bondholders get any recovery.

Last year, for example, the Kayenta mine was closed because their sole utility customer ceased operations. Peabody had a $188 million legacy liability for reclamation, but other parties associated with the closure of the power plant also are paying some of the reclamation expenses. This mine was no longer an asset and is now just a major liability. If Peabody tried to sell any coal mines, the buyer would also be getting the reclamation liability associated with that mine. This greatly diminishes the potential selling price for a coal mine. Cottage Grove, Millennium, Wildcat Hills Underground, and Somerville Central Mines have closed or are closing this year, which means reclamation expenses have to be paid.

There is also another potential problem in trying to sell a coal mine on federal land, including a section 363 sale while in Ch.11 bankruptcy, and that is the Secretary of the Interior must approve the transfer of any coal lease. As stated in 30 U.S.C. §187: "No lease issued under the authority of this Act shall be assigned or sublet, except with the consent of the Secretary of the Interior". This most likely will not be a problem over the next few years if President Trump is re-elected, but could be a huge problem if Biden is elected. Many backers of the "Green New Deal" would pressure the Secretary of the Interior under a Biden administration to block coal lease transfers in an attempt to try to close that coal mine.

Brief Summary of Peabody and Coal Industry News
*Prices have continued to plunge from the end of the first quarter. This is from the May 6 10-Q for the first quarter:


*The latest weekly U.S. coal industry production was down 39.4% from a year ago and so far this year (17 weeks), total U.S. coal production was down 20.8% from same 17 weeks last year. Since current utility stockpiles of coal have increased 22.3%, it is unlikely that there will be any increase in the near future for thermal coal even if the economy starts to regain footing.

*Elliott Management, which owns 29.8% of the shares, and Peabody reached an agreement in February. There will be 4 new board members, including the head of restructuring at Elliott. The stock price rose on this news, but I viewed this as a negative sign. I thought it indicated that Elliott was moving in the direction of some restructuring and asset sales, which to me indicates that they thought the near-term outlook was bleak. Some BTU shareholders may have thought that agreement showed Elliott was aggressively trying to "defend" their very large BTU equity position. Elliott has already lost $1.27 billion on their 28,916,201 shares that they currently own since the BTU high price in June 2018. They did sell over 6 million shares since the proxy statement in 2019.

*FTC filed a suit to block the Peabody and Arch Coal (ARCH) proposed joint venture in late February because they asserted it would eliminate competition.

*$1.3501 billion long-term debt as of March 31, 2020

Peabody also borrowed $300 million under the revolver in early April leaving $192.4 million (after factoring in the letters of credit).

*Peabody eliminated 250 jobs in PRB and Midwest operations in April.

*Based on Glenn Kellow's wording of an indirect no comment response to a question by an analyst during the recent conference call about "monetization" of the North Goonyella Mine, there could be some progress in trying to sell that mine.

Bankruptcy Recoveries For Peabody Energy Investors
First, I do not expect any recovery for BTU shareholders. The complexities due to the corporate structure and Australian laws do not have much of an impact on BTU shareholders. Since shareholders were not paid for releases under the 2017 Ch.11 reorganization plan, I doubt they will get any payment for releases under a new bankruptcy. If they file Ch.7 this time, there will definitely not be any payments-no "gifting". Shareholders can't expect a recovery since secured noteholders are most likely not going to a full recovery for their claims.

Second, secured noteholders just can't look at the consolidated annual report numbers to estimate a recovery under either Ch.11 or Ch.7 in the U.S. I suggest estimating recoveries based on a Ch.11 filing in the U.S. and going into administration in Australia. Without knowing the current inter-company transactions, the prudent approach would be just to subtract the value of the Australian operations and assume the recoveries would be from only U.S. operations.

Adding $1.3501 billion long-term debt and the $300 million recent revolver borrowing, which I would expect would be fully drawn to $492.4 million prior to any bankruptcy filing (after factoring in the letters of credit), the total is $1.8425 billion. The $1.264 billion in reclamation liabilities also have to be factored into estimating recoveries for investors. Given the current extremely uncertain world economy, it is unrealistic to estimate an enterprise value for Peabody's U.S. operations, but I am guessing it is much less than $1.8 billion. Often 1lien claim holders do a "credit bid" to get control of their collateral assets, but I would not be surprised if they tried to "shop" the assets first to see if there any interested buyers of specific assets. The current low prices for the secured notes reflect the many uncertainties mentioned in this article.

My Peabody Short Position
Briefly, I shorted BTU when the company announced last year that they were going to try to issue new notes maturing in 2026 to replace the 2022 and 2025 notes. (The new note deal was pulled because of market conditions.) Before that announcement, I was expecting Peabody would do multiple market repurchases with cash from operations to retire some or almost all of the notes prior to maturity. The company already had spent $1.34 billion to repurchase 41.5 million shares (average price about $31 per share), which I was strongly against, and I thought they would be able to use projected future cash-flow to buy notes instead. I took the announcement as an indication that management thought that they needed to extend maturities and that cash-flow over the next few years was going to be much weaker than expected.

As BTU stock price has fallen below the $3 level, I booked some profits and will most likely close my short position completely before it goes below $1.00 per share because I rarely hold penny stock short positions.

Conclusion
Investors can't just use the Peabody Energy's consolidated financial reports in determining recoveries under any future bankruptcy/insolvency filings. Australian laws and reclamation liabilities are major issues that have to be factored into the process. While the price of the Peabody secured notes looks "cheap" for secured debt issues, they are no bargain, in my opinion.

BTU shareholders are not expected to get any recovery. The Australian and reclamation issues do not directly impact shareholders because I don't expect recoveries for shareholders regardless of the Australian law issues. While Elliott may try to delay filing for bankruptcy as long as possible to protect their large BTU position, I just don't see coal prices improving enough to prevent a complete liquidation of Peabody Energy Corp. There might be some mines still operating in the future under the Peabody name, but the large entity of Peabody Energy Corp, in my opinion, will not survive.

Disclosure: I am/we are short BTU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

https://seekingalpha.com/article/4344147-i-doubts-peabody-energy-corporation-can-survive
 

Scorpio

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billions of tons of coal in the us,
and all not to be used by the market

what was once treasured is now just rock
 

BarnacleBob

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Inflationary Depression v Deflationary Depression

In real terms, an inflationary depression is indistiguishable from a deflationary depression. In both cases production and incomes decline in real terms; in both cases liquidity problems proliferate; in both cases widespread bankruptcies occur. The distinction between a deflationary and inflationary depression is this: in a deflationary depression– production, incomes,and living standards generally all decline both in real terms and in nominal money terms; in an inflationary depression– production, incomes and living standards generally also decline in real terms while at the same time all of these [categories] show increases in nominal money terms. --- “The Coming Currency Collapse, And What You Can Do About It.” by Jerome F. Smith, c.1980. Bantam printing Oct.1981.


Ludwig von Mises lays out five fundamental truths of monetary expansion (1949)

https://oll.libertyfund.org/quotes/198
 

JayDubya

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Infinite money printing: Fed now buying ETFs

Just when you thought they couldn’t come up with any more crazy ideas, the Federal Reserve announced last night that they will start buying Exchange Traded Funds, effective immediately.

Just to be clear, this means that the Fed is going to conjure money out of thin air, and then use that new money to buy ETFs.

But not just any ETF. The Fed is specifically targeting ETFs that own corporate bonds.

The key idea here is that the Fed is trying to bail out bankrupt companies across the Land of the Free.

Under normal circumstances, most medium and large businesses regularly issue corporate bonds (which is a type of debt) to help fund their companies.

This is pretty normal; even very strong and healthy businesses regularly go into debt by issuing bonds.

For example, Apple has been wildly profitable for years. But the company has about $90 billion in debt according to its most recent financial statements, plus they just issued another $8 billion in bonds last week.

Companies all over the world do this, and the total size of the global corporate bond market is absolutely enormous-- tens of trillions of dollars.

The obvious problem is that there are countless businesses around the world, both big and small, that simply aren’t going to make it through this economic crisis.

Airlines, hotels, restaurant chains, factories, shipping companies, retail stores, daycare facilities, construction companies, etc. have all been devastated by the pandemic.

Most of these companies have borrowed extensively. And without any revenue, there’s likely going to be a giant wave of defaults in the corporate bond market.

American Airlines, for example, has $21 billion in debt. There’s practically zero chance they’ll be able to make interest payments, which will trigger a default of their corporate bonds.

Thousands of other companies are in a similar position; they won’t be able to make their payments.

The even bigger problem is that, eventually, bonds mature and need to be paid back.

Unlike the mortgage on your house, whose principal balance is slowly paid down over 20-30 years, most corporate bonds are interest-only.

They pay what’s called a ‘coupon’, which is a regular interest payment, and then the entire principal balance is paid back when the bond ‘matures’ after perhaps 7-10 years.

Usually when their corporate bonds mature, most companies simply issue new bonds. It’s sort of like a refinance; so instead of paying back $1 billion worth of bonds that are about to mature, the company will issue $1 billion in new bonds for another 10 years.

In this way they keep rolling over their debt. And in normal times, that approach typically works just fine.

But these are not normal times.

Right now the bond market is frozen solid. And very few investors want to buy bonds of, say, an airline or cruise operator.

But a lot of those companies have billions of dollars worth of bonds that are about to mature.

And without a way to roll over those bonds and refinance the debt, they’ll be in default… meaning most investors who own those bonds will suffer major losses.

This is a huge problem because it can cause a chain reaction across the entire financial system.

Let’s imagine “Rude Airways” has $10 billion worth of bonds that are about to mature.

But Rude Airways is out of cash and has no hope of generating revenue while the lockdowns are in place.

So instead of paying back the $10 billion, Rude Airways defaults.

“Big Ego Capital Partners” is a hedge fund that owns billions of dollars worth of Rude’s bonds. So when Rude Airways defaults, Big Ego is also wiped out.

Big Ego owes a lot of money to “Liars Bank”. So when Big Ego goes under, Liars Bank also takes a huge hit.

You get the idea. If thousands of companies constituting trillions of dollars worth of bonds don’t pay, then the chain reaction across the entire financial system will be nothing short of cataclysmic.

This is what the Fed is trying to prevent… with the only tool they have available: PRINTING MONEY.

So, again, the Fed is going to conjure money out of thin air, and use that money to buy corporate bonds and bond ETFs.

Their plan is to help companies like Rude Airways roll over their debts, and hopefully prevent a chain reaction of defaults across the entire financial system.

According to yesterday’s press release, the Fed estimates spending $750 billion initially, though it’s clear they could easily blow past that number.

That, of course, is on top of the trillions of dollars worth of other commitments they’ve already made, the $2.6 trillion they’ve already printed, and the trillions of dollars of other facilities they’ll create in the future.

I’ve been writing about this a lot lately, but at the risk of beating this horse to death, I believe it’s worth repeating:

There is so much we don’t know about the economic consequences of this pandemic. Will we see major inflation? Depression? Stagflation?

No one really knows for sure.

But one thing that has become totally obvious is that central banks around the world are going to continue printing incomprehensible sums of money-- this is ‘whatever it takes’ monetary policy.

I won’t bother opining on whether what they’re doing is right or wrong. It doesn’t matter.

The reality is that it’s happening; they’re printing ridiculous quantities of money, and that’s that. Nothing we can do will change that fact.

Our only decision is how we choose to react.

Again, there’s no playbook here, and every possible scenario is on the table.

But historically speaking, whenever central banks devalue their currencies by printing vast amounts of money, real assets (and especially gold and silver) generally tend to be safe havens from the monetary consequences.

To your freedom,



Simon Black,
 

JayDubya

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Doug Casey on How Technology and Biological Warfare Will Impact How World War 3 Will Be Fought

International Man: With all the hysteria surrounding the coronavirus, there has been a renewed discussion on biological warfare.

How likely will some form of biological warfare happen in the near future? What could the scenario look like?

Doug Casey: It’s very likely—in fact, inevitable. There are many advantages to biological warfare over conventional warfare.

First, it doesn’t destroy materials. That’s a huge plus. What’s the point of conquering a country if all you have to show for it is a smoking radioactive ruin? That was the major advantage of the neutron bomb, of course, but bioweapons will essentially make atomic weapons obsolescent.

Second, bioweapons can be structured to attack only certain racial groups. If the US is at war with China, they could see that as an advantage. Of course, two can play that game. In any event, you can immunize your own population, or at least the military and "essential" workers, so you’re not hurt too badly.

Third, bioweapons are very cheap and easy to fabricate. If someone has access to a good high school chemistry lab, the person’s in business. There’s no need for an expensive and tricky U-235 or, for that matter, any of the junk toys the Pentagon spends hundreds of billions on.

Fourth, bioweapons don’t need sophisticated delivery systems; no need for B-2s, B-52s, cruise missiles, or any of that. A sick tourist or two, or a few packages sent in the mail will get the job done.

Fifth, bioweapons, whether they‘re viruses or bacteria, not only offer plausible deniability, but the potential to blame a third party. You can launch an attack, and nobody can really be sure who did it, or even that an attack is, in fact, being launched.

There's every advantage to biological warfare from an aggressor‘s point of view. And, the aggressor doesn’t even have to be a nation-state, which is, of course, another excuse for governments to further clamp down on their populations—but that’s another story.

It‘s well known that the US has spent tens of billions of dollars on biological weapons, mainly at Fort Detrick, Maryland, among other places, starting in the 1950s. The American government has been on this for a long time, but I‘m sure that the Chinese and other major powers have caught up.

World War 3 is going to have a substantial biological component.

International Man: Albert Einstein once said, "I know not with what weapons World War 3 will be fought, but World War 4 will be fought with sticks and stones."

What do you make of that?

Doug Casey: Like most of Einstein’s observations, it’s very astute. Warfare is all about technology, along with economics and psychology. Those three things are of equal importance.

The first people to develop the bow and arrow had a gigantic advantage over neighboring tribes that only had spears or rocks to throw.

The invention of steel made bronze obsolete. The Roman legion made the Greek phalanx obsolete. Gunpowder made everything previous obsolete, including castles and armor. Nuclear weapons also created a huge change. But there have been hundreds of critical tech innovations—just listing them would take a book.

The point I’m trying to make is that warfare is a history of technological advancement.

That said, what’s World War 3 going to look like?

I see five new technologies that are going to make World War 3 quite different from World War 2.

Number one is electronic warfare. Today, the whole world is built around computers, including utility operation, communication, aircraft, and the monetary system. Computers are critical. A major component of warfare will be trying to destroy an opponent’s electronic infrastructure, perhaps by creating nuclear bursts in the upper atmosphere to deliver electromagnetic pulses (EMPs) to fry all the circuits.

Number two, drones are going to be very big. Not just the kind of drones that we now think of, as with cruise missiles or the little four-rotor toys, but tiny insect-like drones that can be structured to attack individual people. Using visual recognition, they will be highly targeted. Perhaps thousands of them could be launched on an enemy military camp or, for that matter, an enemy city. Micro-drones are going to be very important.

The third area, related to both computers and drones, are robots. The weakest part of most war machines is the human beings that run them. Not only are they easy to damage or destroy, but they have unpredictable psychological problems.

It’s time to think in terms of an actual Terminator, as in the Arnold Schwarzenegger movie from 1985. They won’t be just bipedal robots: they will come in many shapes and flavors. It costs the US about a million dollars to train a soldier today; they’re no longer just mass-produced draftee cannon fodder. Most soldiers today are highly-trained specialists, but a lot of them are going to be replaced by robots running on artificial intelligence.

The fourth new element of World War 3 is space. There are thousands of satellites circling the earth; they not only enable communication of all types but spy on adversaries. As in the past, a military commander wants to control the high ground—to put gravity on his side. Space will be full of prepositioned weapons, waiting to rain terror downwards.

But the fifth, and probably the most important new element, is going to be biological warfare.

I’d mention the real biggie, nanotech, but that’s likely post-WW3. If we’re lucky . . .

International Man: The US government spends more on the military than the next six largest countries combined.

Aside from padding the pockets for the cronies of the Deep State, what are the implications of this?

Doug Casey: First of all, it’s unnecessary for defending US territory. In fact, it’s a positive danger because it’s so provocative. It’s terrifying because everybody knows the adage: When all you have is a hammer, everything looks like a nail. Meanwhile, it’s a major factor in bankrupting the country, so it’s not making the US stronger but weaker.

The US spends something like $1 trillion on defense annually, but nobody knows for certain. These budgets are complicated; military spending is hidden here, there, and everywhere. You don’t dare question anything they say that has to do with "national security." Who knows how many trillions of dollars are diverted to pure corruption? The Pentagon is probably better at stealing than crime syndicates in the ghetto.

Apart from the economic consequences, military spending is very dangerous, especially with rapidly expanding technology.

One of the times that the US came closest to nuclear war with Russia was in the mid-'80s when Russian generals could see that they were falling behind, and any edge they had was disappearing.

It became a question of "use it or lose it." Fortunately, they decided not to use it, so we didn’t have World War 3.

The US could very well find itself in exactly the same position—being bankrupted by wasteful, even worthless military spending. The generals might decide that it’s now or never against China and Russia.

Russia and China are the major adversary nations, but Russia really isn’t a threat. It has half the population of the US, with a GDP that’s more like that of New York state. Remember, war is about economics as much as technology.

Russia is really just a gas station with an attached gun store sitting in a wheat field. It’s actually not a threat to anybody. But it has a right to feel threatened by NATO, which should have been disbanded after the USSR collapsed, but has instead been aggressively expanded—benefitting nobody but US arms manufacturers.

American generals are one of the greatest dangers to the US. Anybody who gets a star on his shoulder in today’s US military is really more of a political operative than anything else.

I have no doubt that as problems mount in the next few years, one or both of the candidates for president in the next election will be a general.

Why?

Because the average American has been programmed to love and trust the military. That goes for the generals as well. It does not auger well.

If a general doesn’t succeed in becoming a political operative—which they really are—they become cronies, going to work for some large defense contractor so that they can retail their knowledge and connections, to become personally wealthy.

Believe it or not, 90% of the US military is not only unnecessary but is an active danger to the people of the US.

International Man: Relatively cheap equipment can be used to create billions of dollars of damage. We saw this in the Middle East, where relatively cheap drones from Yemen were able to create a substantial amount of damage to Saudi Arabia’s oil facilities.

What is asymmetric warfare, and what role will it play in the future?

Doug Casey: It will play a huge role. In Third World countries, there’s nothing cheaper than human life.

The actual cash value of a Mohammedan teenager is extremely low, measured in the hundreds of dollars. But even the cheapest weapons systems that we have, which are some of the most popular, are extremely expensive, measured in the millions or billions of dollars.

For instance, the Tomahawk cruise missile costs $1.4 million apiece. That is a pretty high price to take out a few Arab teenagers or blow up a mud hut in the middle of nowhere.

Terrorists are the ultimate in asymmetric warfare. It costs very little to send a team to an advanced country. With just a couple of high-powered rifles, they can create chaos in a city just by killing a few people a day in random places.

A couple of guys with wire cutters and sledgehammers can destroy electrical substations and likely evade capture until they’ve done many millions of dollars in damage. There’s no limit to the number of things that can be done to disrupt a high-tech society like the US. I’m just surprised that we haven’t seen a lot more of it so far. This is further proof that the War on Terror is a chimera—just like the War on Poverty, the War on Drugs, and the current War on COVID-19.

One asymmetrical weapon which will be used more is massive amounts of migrants. It shouldn’t be hard to encourage poor people coming from Africa to Europe—for that matter from Central America to the US— to simply overrun the borders.

How are you going to stop them if there are thousands, tens of thousands or hundreds of thousands of them en masse? It’s unlikely they’ll be machine-gunned. So they’ll push down the fences, land their boats, and then what are you going to do? Especially since Europe and North America have millions of leftists who want to see it happen.

This is a method of warfare that hasn’t really been considered as such. But, once again, it’s extremely low-cost and very effective. So it will be used.

The fact that the US is spending hundreds of billions on junk, like F-35s, the Littoral Combat Ship, and the Burke destroyer practically guarantees it will not only bankrupt itself, but likely lose the conflict. It’s exactly equivalent to what they did before World War 2, building battleships, or before World War 1, when the cavalry was the cream of the military. They’re doing exactly the same thing today.

International Man: What do you think the chances are of a war with a big power, like Russia or China? If a shooting war started, how do you think the US would do?

Doug Casey: As I said before, Russia is not a threat. They’re not going to do anything unless they’re attacked first. China is a different question.

I don’t think there’s much doubt that the 21st century is going to be the Chinese century.

That being said, China is really half a dozen or a dozen different countries. Xinjiang Province is full of people that are not ethnically, linguistically, or culturally Han Chinese. Tibet is a similar situation. It’s somewhat similar in Inner Mongolia.

Even within Han China itself, the people speak many different dialects and have many different cultures. China is a domestic empire, and it could easily fall apart if things get tough.

I suspect it will get tough even though the progress that China has made over the last 40 years is unique in world history. It’s completely undeniable. But on the other hand, there are indications that their financial system is on the ragged edge of collapse. They’ve created huge distortions and made huge, politically driven, misallocations of capital.

All the Chinese banks are bankrupt.

When Mrs. Wong goes to her bank and either can’t get her yuan out or the yuan are worth nothing, the place will fall apart and return to the kind of situation the Chinese had in the 1930s.

China is an unstable place. The US shouldn’t provoke the Chinese—sending aircraft and ships all around their borders, particularly to the South China Sea. It’s not our problem. We wouldn’t like it if they sent the Red Navy off the California coast or into the Gulf of Mexico.

China will probably fall apart on its own, breaking into smaller states in the future as, incidentally, the US itself might. Why? Because the US is no longer a nation bound by common traditions, language, and religion. The US has turned into a multicultural domestic empire.

But your opening question concerned World War 3. Of course, we’ll have it. Its consequences will dwarf those of WW2, and its most devastating element will be bioweapons.

That’s one more reason—there are many—why it makes sense to have a pleasant place in the country or in a small town, as opposed to the city or the suburbs. But that’s a whole other conversation. . .

Editor's Note: The amount of money the US government spends on foreign aid, wars, the so-called intelligence community, and other aspects of foreign policy is enormous and ever-growing.

It’s an established trend in motion that is accelerating, and now approaching a breaking point. At the same time, the world is facing a severe crisis on multiple fronts—including a global pandemic.
 

BarnacleBob

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Grocery store prices post highest jump in 46 years

Certain types of food aren’t just harder to find at grocery stores, but they cost more, too.

Prices surged last month, and the increases are unprecedented.

According to the U.S. Department of Labor, the prices of staples like eggs, meat and cereals recorded their highest increases in 46 years.

Eggs saw the biggest hike, up 16 percent.

But all six of the major grocery store food categories – Cereals and bakery products; meats, poultry, fish, and eggs; dairy and related products; fruits and vegetables; nonalcoholic beverages and beverage materials and other food at home – are up at least 1.5 percent.

Grocery stores seem to be alone in price increases as most industries saw declines in April.

https://kfor.com/news/national/grocery-store-prices-post-highest-jump-in-46-years/
 

JayDubya

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The Scary Truth About Living in Big Cities During the Turbulent Times Ahead

International Man: Amid the Covid-19 hysteria and global shutdown, the drawbacks of living in a big city have become more apparent.

Sure, cities can offer more career opportunities. Still, they are also more expensive, dirtier, have higher levels of crime, crowded, have fragile supply lines, and infrastructure that can get easily overwhelmed.

How do you view the value proposition of living in a big city today, given what is transpiring?

Jeff Thomas: Well, in my college years, I found cities to be very attractive. Lots of social opportunities, lots of shops, a greater variety of goods, etc. But, during that time, I was very fortunate to have experienced two city crises from which I learned valuable lessons.

The first was an oil crisis in the winter of 1973. It was bad enough that many people had to abandon their cars, some out on the highway, in the snow. Some people died from exposure.

But at that time, I seemed to be the only one who was wondering what would happen if it got just a bit worse. What if there were no fuel to heat houses? People in the country can find a way to survive, but in the city, you have no options. Many would die without heat. But first, they’d become desperate and desperate people are a threat to your well-being.

The second was a city riot. Until I was in the midst of one, I didn’t fully understand their real nature. A riot isn’t merely a crime spree; it’s random chaos, fueled by anger and desperation. They occur due to built-up tension that’s sparked off, often by a "last straw" event. Because they’re spontaneous, mini-riots tend to pop up all over the city like popcorn. And they’re uncontrollable. When the sirens are heard, rioters may disburse, but as soon as the police drive on to the next neighbourhood, the rioters start in again. Riots are similar to guerilla warfare, except that they have no organization whatsoever. They are high on anger and low on reason and, as such, are very dangerous.

For someone living in a city who’s hoping to be left in peace, there’s no chance of that in a riot. Sooner or later, you have to go out, and when you do, you may become a casualty.

Those two occurrences provided me with the important lesson that, whilst cities are very attractive in good times, you want to be well out of them in a chaotic period.

International Man: What are some risks of living in a city during a prolonged crisis?

Jeff Thomas: One of the greatest attractions of a city is that, all around you, there are small businesses that do everything for you. It’s wonderfully convenient. As long as you can pay, you can have anything. The great advantage is that a host of others have control of everything you may need. And, in a crisis, it’s that very condition that becomes your greatest danger. You can’t remove yourself from the dependency on others and suddenly become self-reliant. You have very little control over your surroundings and the services you need.

In a crisis, the first locations to be hit with food shortages are cities, and you find you have no alternate supply of food. And this is true of any city, no matter how nice it is in good times. The West End of London is a neighbourhood that I’m fond of, but if there’s a food shortage and some people are desperate, I’m not going to want to be walking home from Sainsbury’s with a loaf of bread under my arm.

And this holds true of all things in a city. You need the shops for your food. You may need a laundromat to wash your clothes. Your building has a central water supply, gas supply and electrical supply. Your ability for self-reliance is very low indeed.

In a crisis, none of the attractions of city life continue to have value. The city becomes a liability.

International Man: How important is it to have a pleasant place to go to in the countryside or a small town?

Jeff Thomas: It’s vital. Your life may depend upon it.

International Man: Do you think there will be a trend of people moving out of cities? What are the implications?

Jeff Thomas: Yes. We have literally thousands of years of history to look at when it comes to this question. Historically, a small number of people will see the writing on the wall and arrange to have a bolt-hole somewhere in a small town or in the country. But the great majority will wait until the last minute and, when it comes time to make a run for it, they may have no plan whatsoever.

So, we’ll see panic exits—large numbers of people attempting to leave as a result of some ‘last-straw’ event. It may be similar to the 1930s – the Okies loading up their Model A trucks with their possessions and driving to California. Only this time, it will be Montana, and other rural places where the existing residents are known to be self-reliant.

And there are numerous problems with this idea. First, there will need to be plenty of gas stations with ample fuel along the way, or you’ll never reach your destination. Second, there may well be marauders along the way. This, again, is historically the norm in such situations.

And, if you arrive at your destination, you’ll find that those who had settled these areas want no part of the city-dwellers, who are descending upon them in droves. Nor will they want to share the stores of food that they so carefully ferreted away in anticipation of a crisis. Just as the Okies discovered, the new arrivals will be quite unwelcome.

International Man: Do you perceive a different mindset amongst those who reside outside cities that makes them more desirable as neighbours in a crisis?

Jeff Thomas: Oh, definitely. It’s not so true in the suburbs, but those who choose to live in small towns and rural areas do, for the most part, tend to be more self-reliant than city-dwellers. And because, in those areas, neighbours are few and don’t change often, people get to know their neighbours personally, and they become mutually reliant. They form strong bonds, which may help them through harder times. People help each other in the knowledge that the help will come back to them at some later date. This, of course, is not so true in a city, where many people don’t even know the names of those in the apartment across the hall.

So, in a crisis, you want rural people around you. First, they’re unlikely to aggress against you, and second, they may even help you and share what they have with you, once they know you well. But it does mean that you’d have to start early and earn your place amongst them.

International Man: What do you look for in an ideal "bug out" location?

Jeff Thomas: Three things: stable government; good neighbours; ample food and water.

I have homes in several countries so that, if one proves to have been a poor choice as a bolt-hole, I have other options.

In assessing each of those countries, I first wanted to know that the government had a history of political stability, not undergoing dramatic change from one leadership to another. I also value governments that impose themselves as little as possible onto the lives of residents. Any country that’s already in the habit of being overly-autocratic is only likely to get worse in a crisis.

As I described, having neighbours that are unlikely to become a liability to you is another essential. In considering each of my homes, I asked myself, "How do these people treat each other?" and "How would they behave in a crisis?"

And, finally, it’s advisable to choose locations that have an abundance of food and water. If there are already farms all around you, wonderful. However, if this doesn’t exist — that is, if most food is imported — you’d want to either establish a farm or, at the very least, stockpile food that could carry you for a while.

I don’t doubt that, over the next few years, we’ll be seeing a breakdown in the availability of food in some countries, and those locations would be the worst of choices. However, even in countries where food delivery is likely to be good, there may be interruptions from time to time, so a month’s backup food storage would be advisable, no matter where you plan to be.

International Man: Any final points that should be considered?

Jeff Thomas: Only that we’ve just begun a period that will evolve into what may be the crisis of our lifetimes. There’s no guarantee that one reader out there will be luckier than another and will fare better. In such times, the likelihood of very major unrest and shortages is high enough that it would be quite unwise to just "wait and see what happens," or "hope for the best."

Those who prepare are less likely to become casualties of the coming crisis. I wouldn’t want to be locked into a city residence once the fur begins to fly.

Editor's Note: The recent global hysteria has inflicted a debilitating blow to an already fragile financial situation. It will soon cause significant economic, political, and social problems.

With a crisis brewing on multiple fronts, making the right moves right now could mean the difference between suffering crippling losses and protecting yourself and your money.
 

BackwardsEngineeer

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Posted several times about the screaming real estate market here in SC. One interesting thing that I have not been able to get a good clear definition as to the "why", is the almost total drying up of demand for repurchase of Jumbo loans. Lenders have pretty much exited that market entirely, leaving portfolio loans or cash plus the 510,400 conforming as last resort in the large purchase arena. Portfolio loans can have rates as high as 8 - 10%, so they have typically only been used as a bridge type product...

So help me out how can the market here in excess of 500k be screaming as strong as it is if the traditional loan of choice is pretty much gone? Or the other side if a buyer wants a place at say 2mil and wants to put down 50% or 1 mil, why wouldn't wall street be racing to buy that paper at 4%?

Things that you go hmmm
 

Scorpio

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BE, isn't that because of rehypothecation?

wherein that paper isn't backed by the fannie/freddie scam, which then takes away that backstop?

----------------------

Originating & Underwriting
Loan Limits
The Federal Housing Finance Agency (FHFA) publishes annual conforming loan limits that apply to all conventional mortgages delivered to Fannie Mae. These include general and high-cost area loan limits; high-cost areas vary by geographic location.
General Loan Limits for 2020
The general loan limits for 2020 has increased and apply to loans delivered to Fannie Mae in 2020 (even if originated prior to 1/1/2020). Refer to Lender Letter LL-2019-09 for specific requirements.
Supporting Tools
Resources
External Resources
Maximum Loan Amount for 2020
Units Contiguous States, District of Columbia, and Puerto Rico Alaska, Guam, Hawaii, and the U.S. Virgin Islands 1$510,400$765,6002$653,550$980,3253$789,950$1,184,9254$981,700$1,472,550
Maximum Loan Amount for High-Cost Areas for 2020
+A number of states (including Alaska and Hawaii), Guam, Puerto Rico, and the U.S. Virigin Islands do not have any high-cost areas in 2020.
Units Contiguous States, District of Columbia+ Alaska, Guam, Hawaii, and the U.S. Virgin Islands 1$765,600 2$980,325 3$1,184,925 4$1,472,550
2020 Loan Limits Overview
  • Loan limits increased for all but 43 counties across the country, including Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
  • In those 43 counties, the limits remained unchanged.
  • Loan limits did not decrease anywhere in the U.S. and its territories.

2020 High-cost Counties/Metropolitan Statistical Areas (MSA)
  • There are high-cost areas within the following states: California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Utah, Virginia, Washington, West Virginia, Wyoming.
  • The high-cost area limits published in Lender Letter-2019-09 are the statutory limits provided by FHFA, but should not be used to determine the loan amount. Lenders must find the applicable loan limit for counties/MSAs in the Loan Limit Look-up Table or on FHFA's web page.
https://singlefamily.fanniemae.com/originating-underwriting/loan-limits

Loan Limit Look-Up TableAll U.S. and Territory Counties/EquivalentThis file provides the 2020 loan limits by county (or county-equivalent) for all areas of the U.S. and eligible territories. The limits that exceed our general limits are the high-cost area loan limits established by the Federal Housing Finance Agency (FHFA). Loans subject to the high-cost area loan limits must comply with Fannie Mae's high-balance loan requirements. See links below for more details on the loan limit information issued by FHFA.

Last Update: 11/26/2019 to provide 2020 loan limit informationHigh-Balance Loan Feature informationLink to FHFA Information:FHFA Loan Limits Web PageThe 2020 base loan limit is $510,400**This is a 5.38% increase over the 2019 base limit of $484,350The 2020 ceiling limit for most high-cost areas is $765,600Loan limits are based on the average U.S. home priceThis file is provided for reference only. Sale of mortgage loans to Fannie Mae is subject to all Selling Guide provisions.The loan limit is determined by the county (or equivalent) where the property is located. This file will allow you to look up loan limits for a specific county or equivalent.How to use:1) Determine property's state and county from agent, developer, appraisal, or other means.2) Filter* this file by STATE NAME3) Filter* results by COUNTY NAME4) View current Loan Limit for appropriate location.Please note that the determination is not based on the Metropolitan Designation. Determinations should be based on the specific county or equivalent in which the property is located.*Filter: To use the filter feature in Excel, click on the small gray 'down' arrow under a field name and select the item you would like to view.**Most counties have higher loan limits for 2020 than for 2019; a few counties have no increase. See the Loan Limits tab for details.

https://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx
 

BackwardsEngineeer

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Thats the reason they always give Scorp. But several local brokers, who deal with 40 to 50 different lenders, say it doesn't pass the smell test. Many of these loans in the past, have been a great place to create return with quality collateral, outside of the controlled pension arena. But what makes it even more unusual is that the VA removed the 484k limit January 1. So now you can get the best rates going if you are eligible through the VA, up to 766k in many markets.

As much as wondering why the jumbo disappeared, I truly thought it would shut down the market at some point above 600 to 800, but it does not seem to be the case. Also had a lender tell me next year is going to be the year of the refi, people locking in sub 2.5% 30 year rates!
 

JayDubya

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Opinion piece from Seeking Alpha:

American Airlines: The First To Go Under

Bears of Wall Street



Summary
* American Airlines burns $50 million to $70 million per day, and it will continue to lose money in the foreseeable future.

* At the end of Q2, American Airlines expects to have $11 billion in liquidity, while its total debt is $25 billion.

* Considering its enormous debt burden, there’s a very high chance that American Airlines will be one of the first major airlines to declare bankruptcy in recent years.


Just like United Airlines (NASDAQ:UAL), American Airlines (NASDAQ:AAL) is in the midst of a liquidity crisis. Despite the weekly increase of air traffic, we are far away from the recovery of air travel, and it will take years before we return to pre-COVID-19 levels. The consensus now is that the traffic will be down around 50% to 80% this year, and this leaves airlines in a dire situation. American Airlines' latest earnings results for Q1 were just the beginning of what's to come in Q2. While its revenues were down nearly 20% Y/Y from January to March, the decline rate of its revenues will be considerably worse from April to June.

By burning $50 million to $70 million a day, American Airlines will not have enough resources to outlive this pandemic. With $25 billion in debt, the airline has no chances of surviving this crisis without additional state aid. However, even if the government will continue to inject more liquidity into the company, it's highly unlikely that shareholders will be able to benefit from it. Even before the pandemic, American Airlines was struggling to generate a positive free cash flow a couple of years in a row. In the current environment, it has no chances of becoming profitable and deleveraging its books anytime soon. Considering its enormous debt burden, there's a very high chance that American Airlines will be one of the first major airlines to declare bankruptcy in recent years.

Road to Chapter 11

Before the pandemic, American Airlines was already a poorly run airline. The management in the last couple of years was excessively repurchasing American Airlines stock using debt, while the company wasn't even able to generate positive free cash flow. At the same time, from January 2018 to February 2020, American Airlines stock depreciated by more than 45%, while we've experienced one of the best economic booms in history. As we're currently in the midst of a pandemic, there's no reason to believe that the same management that failed to create value in the last couple of years will finally be able to get it right this time.




Source: gurufocus

Q1 earnings results clearly showed how bad the situation really is. While the airline's business started to deteriorate only in March, when the virus started to spread outside China, one month of disruption was enough for the company to report disastrous results. In Q1, American Airlines' GAAP EPS was -$5.26, while revenue of $8.52 billion was down nearly 20% Y/Y. However, those results are nothing in comparison to the upcoming Q2 results, which will be even worse, as the airline is currently burning $50 million to 70$ million per day just to stay alive. At the same time, American Airlines has the worst margins among its peers, and it's unlikely that it will be profitable anytime soon, if ever.



Source: Capital IQ

During the latest earnings call, American Airlines' CEO clearly said that the airline expects to have $11 billion in liquidity by the end of Q2, while at the same time, it has several significant assets in place:

We expect that we will reduce our daily cash burn rate from an expected average of $70 million per day in the second quarter to approximately $50 million a day for the month of June. As a result of all that, we expect to end this quarter with approximately $11 billion of liquidity and a significant amount of unencumbered assets still in place.​

Considering that the company has $25 billion of debt on its balance sheet, there's a high chance that solvency issues will start to arise, as the airline will not be able to meet its obligations. Last week, Boeing (BA) CEO said that there's a possibility that one of the major airlines will declare bankruptcy in the upcoming months. We believe that that airline will be American Airlines, considering that it has the highest debt burden among its peers:




To improve the situation, American Airlines needs to drastically cut down its costs and pray that passengers will rush to buy its tickets and once again start to travel like they did a year ago. Unfortunately, that's not going to happen. While TSA reports a small increase in weekly traffic, it's still down 90% Y/Y. The consensus right now is that the air traffic for the rest of the year will be down 50% to 80% Y/Y, and it will take a couple of years, until we return to pre-COVID-19 levels in air traffic. At the same time, to break even, American Airlines load factor should be at least 70%, and the company is unlikely to achieve it in the current environment.

Another problem is that American Airlines management heavily relies on federal help to keep the airline afloat. Under the CARES Act, it already received $5.8 billion in grants and loans, and it plans to use its AAdvantage loyal program as collateral to receive an additional $4.75 billion loan. While there's a high chance that the Treasury will approve this loan, there's no guarantee that the airline will be able to get more money later on, as there will be no collateral left. Back in 2002, the federal panel denied a $1.8 billion loan to United Airlines and let the airline go bust. This time, history could repeat itself.

Without government help, American Airlines will not be able to survive this pandemic. Just a week ago, United Airlines was forced to increase the yield of its latest bond offering to 11% from 9%, as creditors were unimpressed with its 360 planes that were used as collateral. If United failed to raise more debt, then American Airlines with its already high debt burden has no chance of accessing capital in an open market at a reasonable yield.


Right now, American Airlines 5-year credit default swaps trade around 6000 bps, just shy of 7000 bps at which Lehman's 5Y credit default swaps were trading right before the bank declared bankruptcy in 2008.



Source: Asset Macro

If American Airlines indeed decides to file for Chapter 11 anytime soon, then it will be able to wipe out a large chunk of its outstanding debt. At the same time, the airline will also become much smaller in size, as it will be required to give a large portion of its fleet as collateral to the creditors. However, as the recovery of air travel is years away, this might seem like a right move to make. After all, to deleverage its books, American Airlines needs to become profitable, and that's not going to happen anytime soon. While, in the short term, the company's stock could appreciate on news about the recovering air traffic, its long-term future looks bleak.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
 

JayDubya

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Doug Casey on Whether You Should "Buy the Dip"

International Man: The government's reaction to the global pandemic has led to an unprecedented economic, political, and social decline.

Can you talk about the financial risks you see unfolding in the months ahead? Are we headed for a debt crisis?

Doug Casey: It’s not just a crisis. It’s a depression, and it’s just starting. This is only the first out in a nine-inning ball game. It promises to be terrifying before it’s over.

Recall that it was close to four years from the time the stock market rolled over in 1929 to its bottom in 1933. And the stock market bubble of the 20s was much smaller than today’s. The amount of debt was vastly less. The amount of regulation vastly less. The level of State involvement in the economy vastly less. The US economy itself was much more self-contained. The currency was much sounder than today’s—although currency inflation was the cause of the bubble and the main cause of the last depression.

There are scores of reasons why the current bubble had to break. All of them are much more serious than those of the 20s. The economic distress we’ll see in the next few years will be much more serious than that of the 30s.

I hope I’m wrong. I far prefer good times to hard times.

The virus was hyped into a Great Hysteria that acted as the pin to break the huge bubbles in the financial markets. It was inevitable that there would be a pin of some kind.

We’re now facing the Greater Depression. We are, as we speak, entering the trailing edge of the financial hurricane we entered in 2008. But it is more serious now, and increasing distortions have been cranked into the economy for generations. Unfortunately, the depression likely won’t be blamed on governments and central banks’ stupid policies such as inflation, taxation, and regulation. Rather, they’ll blame the Greater Depression on this rather trivial virus.

The problems we have now aren’t caused by the flu, but the insane lockdown of the world, the Great Hysteria. It’s bad news all around. Governments and the media are using the virus as an excuse to do the same kinds of things that made the depression of 1929–1946 much worse and longer-lasting than was necessary. Tariffs, protective quotas, and embargoes are bad enough. But the collapse in world trade—which is a much bigger factor now than it was then—will have the same effect as the infamous Smoot-Hawley tariffs.

Taxes skyrocketed in the 30s because the government needed money for its vast new programs. Taxes will certainly go up now, especially at the state and local levels, because they can’t print money. The Federal government also "needs" more money than ever to do things that shouldn’t be done. They’ll get it by printing money—the Fed buying their debt—which is actually far more damaging than direct taxation.

We’ll see many more rules imposed than was the case in the 30s. All of them will increase the costs of doing business. Products will be much less affordable. The profits of most businesses will collapse.

So far, almost 40 million Americans have filed for unemployment. That number is going to go up for some time despite much of the lockdown ending.


As people are kept from working, the real amount of wealth in the world decreases. Even people who can still work will findthere is less demand for their products. Nobody escapes in a depression. As Richard Russell used to say, "In a depression nobody wins. The winner is just the person who loses the least."

One thing that’s certain is that the public’s debt will not only remain but will go up. Most of the 40 million unemployed—there are actually lots more, counting gig workers and those in the "black" economy—will max out their credit cards at 20% plus interest.

Americans tend to think the whole world is just within our borders, but we must remember that we’re only 4% of the world’s population. The hysteria from this largely phony global pandemic is worldwide. It includes much poorer countries with much less capital saved than we do—even though it’s said the average American has less than $500 for emergencies.

In India, for instance, there are tens of millions of migrant workers trapped hundreds of miles from their homes, with almost zero money. Will they starve? Maybe.

Government policies and media hysteria are turning the average American into a Zimbabwean. Zim probably has 50–60% true unemployment. It wouldn’t matter how many cars and refrigerators and air conditioners we might send to Zimbabwe, for they couldn’t afford to buy them. Many unemployed Americans will find that their jobs are probably gone for good. They won’t be consuming as much because they’re not producing as much—or maybe anything.

Again, the first-order effects—health risks from the virus itself—have turned out to be trivial.

The second-order effects of the Great Hysteria regarding the economy are extremely serious.

But the third-order effects, which is to say the government’s response to the first and second-order effects, are going to be more serious yet again and much longer-lasting. The biggest is the trillions of dollars that they’re printing, cementing old distortions into the economy, making them bigger, and creating new ones. What are some examples? Many people now feel they shouldn’t pay their rent or mortgage. Many want the Federal $600 weekly unemployment benefit to continue until a guaranteed annual income is put in place.

Worst of all, it’s getting Americans used to doing as they’re told and living in a police state.

International Man: Do you think the Federal Reserve will be able to paper over this crisis and create another 10-year bull market like it did last time?

Doug Casey: No. The Fed is inculcating bad habits in corporations, workers, and society as a whole. An artificially high stock market gives everyone false signals. It makes things worse by encouraging everybody to keep living above their means.

They’re giving people a sense of false security—making them think the authorities can solve all the problems that they created by doing more of exactly the same things. It’s foolish to count on either the Fed or any level of government to solve the problem. They caused the problem.

Where’s all that money that the Fed is creating going?

Most is going to the financial markets. The money is propping up unsustainable patterns of production and consumption. This has nothing to do with creating real wealth—the Fed is just trying to maintain a bubble economy and blow it bigger.

The government wants to avoid a 1930s-style deflationary depression at all costs, but we are likely going to get a vastly worse 1920s-German-style hyperinflation in the process. It’s created a dead cat bounce in the stock markets in April and May. And suckers are buying when, instead, they should be selling. It has been said that millions of newbies are opening brokerage accounts with the PPP (Paycheck Protection Program) money. They’re bullish and buying call options.

When this thing unwinds in earnest, there will likely be deflation in a number of areas, not just the stock market, with some prices dropping catastrophically.

For instance, this will be the case in housing and autos—the two biggest consumer durables. Forget about new car sales; even used car prices are going to collapse. The bankruptcy of Hertz and the liquidation of much of its fleet is just a straw in the wind—lots of individuals are going to have their cars repossessed. Few own a vehicle for cash anymore.

Will people be put out of their houses? Yes, unless Washington pays their mortgages or rent and their utilities. There recently was an article in Barron’s, of all places, where some PhD "economist" was advising exactly that. There’s going to be deflation in housing and autos.

But there will also be much higher retail food prices, even while farmers are squeezed, and higher prices on anything imported too.

The one thing that you can absolutely plan on is a significantly lower standard of living. That, you’ll recall, is the first and most important definition of a depression.

We've had an artificially high standard of living for years for two big reasons. First, there’s all the debt—which is essentially mortgaging the future—as well as consuming the capital that lenders have saved over generations. Second, we’ve been able to export US dollars at zero cost and get imports in exchange for that paper currency.

That’s going to stop in the years to come.

International Man: The coronavirus popped the Everything Bubble, the largest financial bubble in all of human history. The Greater Depression seems just to be getting underway.

But even with the sell-off earlier this year, stocks are still near record-high valuations.

What do you say to those people and those who are looking to "buy the dip?" What do you think the impact will be on the stock market?

Doug Casey: Most people don’t understand anything about economics. Most of what they’re taught in school today is actually rubbish. Few "economists" employed by the government or the Fed understand anything about economics. They’re all Keynesians.

There’s no telling how high a tree is going grow. It’s possible the Dow could go to 50,000 with all the dollars being created. But I have no interest in stocks. In fact, I’m thinking of buying distant puts. When earnings collapse—which they will—stock prices will follow them.

Since World War II, people have gotten into the habit of buying the dips. It’s become a Pavlovian response. Especially over the last 10 years, the average person has been trained to think that stocks always go up. But the wonderful times we’ve had since 1946 are over. We’re in a new era, and it’s going to be a lot less fun.

The public thinks that the Fed is their friend and "has their back." Certainly, Trump thinks that. If they have any spare cash, they’ll put it into the market.

High stock prices equal prosperity in Trump’s mind. But he’s confusing correlation with causation. Prosperity eventually causes high stock prices—not vice-versa. The reverse is true with low stock prices. That’s why you should be out of the general market today.

But, having said that, now that we live in Bizarro World, we could have very high stock prices for a while, even as the standard of living goes down significantly.

This is actually quite a unique situation for a developed country. It’s the type of thing that happens in third-world countries, where the stock market goes up even while the society is collapsing. Why? Because they don’t want to hold currency. Where else are you going to put your money?

At least stocks represent real wealth of some type.

I have no interest in playing the scam. It’s a casino. Most stocks now are not just hot potatoes; they’re live hand grenades. Now is the time to be in gold and gold stocks.

This is a rare opportunity. This is going to be the next bubble.