History in motion driven by world’s largest economy.

If Donald Trump has any remaining issues with US Fed Chair Jerome Powell, it’s just jealousy.

Last week, Powell presided over the largest demonstration of Central Bank fire power that would make even the bravest rebel tremble.

In doing so, he has entered into the biggest deal of his career - and that must have caused a seriously high level of Presidential envy.

Today, I wanted to share a few highlights from the last two weeks, particularly some charts which record the unprecedented and incredible economic history, currently being made.

West Texas Crude gets smashed and is headed lower.

3,300,000 initial jobless claims in U.S. went off the chart, so the scale had to be increased, big time.

OMG, more than 15 times the usual initial claims level.

Interest rates forced back to GFC emergency levels.

S&P500 volatility index closes at its highest ever level.

Financial stress goes up and equities experience largest drop across three decades.

Financial stress index plotted against change in S&P500, displaying inverse relationship between the two series.

Virus stress trumps almost all prior crises, but for GFC.

Ignore the purple line which does not track daily changes in variables. Blue line in new financial stress index compiled by the St. Louis Fed.

But, a new hope appears as the Fed demonstrates the awesome power of its fully armed and operational $600 billion battle station, and the empire applauds.

Fed Balance Sheet now sits at $5.66 trillion, the highest ever.

And then, the empire strikes back with a further $6.2 trillion stimulus package.

Today, Saturday 28 March 2020, President Trump, green with envy at Powell’s Put, signed into law a circa $2 trillion consumer/corporate unemployment and bail-out package.

Some estimate that it may expand to $6.2 trillion, including up to $4.5 trillion in additional loans to support the economy while COVID-19 is fought.

If you’re game, the 880 page Act (complete with numbered five word lines) can be accessed here.

Among various unemployment benefits and disaster relief packages, it includes $350 billion for small business loans and $450 billion in guaranteed, subsidised loans for hard hit industries, to be administered by the U.S. Treasury.

It’s been estimated that these guaranteed loans will create an additional 10x in leverage, resulting in circa $4.5 trillion in loans to distressed businesses, states and municipalities.

The $450 billion comes with a quid-pro-quo prohibiting borrowers from undertaking buy-backs (and certain compensation payments to the C-suite), with a ban on buybacks to continue for a period of 12 months after the end of the loan term.

This could have a massive effect on the equities market, depending on the nature and number of quoted companies which access these loans.

You might recall that for the past 4 years, Corporations through share repurchases and buy-backs have been by far the largest net buyer of equities.

Is the cure overkill for the disease?

The U.S. response to COVID-19 will provide steroidal support for Americans and the economy, which Jerome Powell believes is probably already in recession.

And, you may recall that on 2 March I asked the question: “Can COVID-19 derail the biggest source of equities demand?”

Well, I think that part of the answer to that is that the buyback ban stapled to the $450 billion in subsidised loans, will derail a portion of the $470 billion in annual corporate buy-backs expected for 2020 - despite the rocket fuel effects of QE Infinity.

Let’s be ready for it.

Mike.

NextLevelCorporate is a leading financial & strategic corporate advisory firm with a multi-decade track record that speaks for itself. Helping clients in all industries to prepare for, respond to and deliver transformative corporate finance strategies and transactions in and out of Australia, is our passion.

A New Hope - Jay Powell hijacks Death Star, targets COVID-19