KITCO NEWS/Alan Sykora

Commerzbank: ‘gold should remain in demand as a crisis currency’

April 27, 2020

gold in crystal ball“The pullback in gold prices early Monday likely will not lead to any prolonged weakness and the metal should remain sought after by investors as a crisis currency, said Commerzbank. Sentimment in financial markets is improving as countries relax strict confinement regulations instituted during the COVID-19 pandemic, said analyst Carsten Fritsch. ‘However, we do not see this as any reason for gold to experience a prolonged phase of weakness,’ he said. ‘Even when the lockdown is lifted, the world will still be far from any kind of normality. In fact, the bigger risk then is economic collapse, as indicated by the disastrous economic indicators virtually everywhere. To counter this, governments around the globe are likely to continue spending unparalleled sums of money – most of which will be created by the central banks.’

Fritsch commented that neither the Fed nor the European Central Bank is likely to decide on any further measures for now at meetings this week. ‘That said, what they have already approved is so far-reaching that hardly any more is even possible,’ Fritsch continued. ‘Gold should remain in demand as a crisis currency in this environment, as reflected in ongoing ETF [exchange-traded-fund] inflows.’”

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CNBC/Matthew J. Belvedere

US economy could contract 30% in second quarter, warns Trump advisor

April 27, 2020

“The U.S. economy could contract at its worst rate since the Great Depression later this year due to the coronavirus crisis, warned Kevin Hassett, who recently rejoined the Trump administration as a senior economic advisor. The initial look at GDP for the first quarter, out on Wednesday, will be negative, he said. However, he said the real damage to the economy from the coronavirus will be revealed further down the road. ‘You’re looking at something like minus 20% to minus 30% in the second quarter.’

The average estimates in the CNBC economic survey showed a 5.3% decline in first-quarter GDP and about a 29% contraction in the second quarter. In a string of dismal data on economic growth as the coronavirus economic halt took hold, the government said that orders for durable goods plunged 14.4% in March. Hassett said he expects April’s unemployment rate, released a week from this Friday, to surge to 16% or 17%.”

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BLOOMBERG/Catherine Bosley

Global $6 Trillion Slump May Be Optimistic, Economists Warn

April 27, 2020

world outlook chart“The coronavirus pandemic will cause the global economy to shrink 4% in 2020, according to a Bloomberg Economics estimate that assumes a recovery starts in the second half of the year.

The economy has ‘entered a downturn of unprecedented speed and severity, with most advanced economies facing their weakest performance since the Great Depression,’ Tom Orlik and Jamie Rush wrote in a report. ‘Relative to expectations at the start of the year, the cost of lost output is more than $6 trillion,’ the wrote.

That a contraction of this magnitude is based on ‘optimistic assumptions about both the outbreak and the recovery’ underscores the challenge facing policy makers trying to cushion the blow of the pandemic. Under such scenario, U.S. gross domestic product will shrink 6.4%, while euro area GDP is set to contract 8.1%. Japan will shrink 4%, while China will expand at the slowest pace on record.

‘Downside risks are significant,’ Orlik and Rush wrote. As governments move to ease nationwide lockdowns, the risk of a second wave of infections could deepen the contraction to 5.6%. If stimulus is insufficient, output could plummet 7.2%.”

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BARRON’S/Leslie P. Norton

The Coronavirus Crisis Is Starting to Hit Muni Bonds. Why That Matters.

April 24, 2020

power plant smoke in front of city skylineDelinquencies in the municipal market—already on the rise as counties and cities get squeezed by the coronavirus crisis—are likely to worsen amid soaring unemployment, rising alarm about stressed municipalities, and Federal conflict about aid. This could lead to pernicious consequences for investors, who rely on muni bonds for safety and income, as well as for the people who rely on the multitude of city services—such as schools, hospitals, transportation, and sewers—that these bonds finance.

Sen. Majority Leader Mitch McConnell said he supports allowing states to use bankruptcy protection to reduce debts instead of more federal aid. Trouble is, most cities and states can’t operate on deficit spending and the law currently prohibits bankruptcy for states. Meanwhile, Congress approved a $484 billion coronavirus rescue package, which included no funding for state and local governments.  The past two weeks have seen three significant defaults: Terre Haute, Ind., municipal bonds tied to a tire-recycling plant; Massachusetts bonds linked to skilled-nursing facilities in Boston commuter towns; and a Topeka, Kan., bond associated with the local YMCA … ‘Issuer revenues are at risk of dramatic reductions, leading to requested extensions to pay interest and principal due later than expected,’ says R. Paul Herman, founder of HIP Investor, a ratings, data, and analytics provider. ‘If investors don’t permit extensions or renegotiated timelines, stressed muni issuers may file for bankruptcy, leading to defaults higher than experienced in the past 50 years back to 1970.’”

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Pandemic Triggers a Wave of Distress, Bankruptcy in Corporate America

April 27, 2020

calm before the storm“Practically overnight, bankers and lawyers who advise companies in distress have become some of the most in-demand workers on Wall Street, ending a long period in which rising markets and abundant capital consigned them to obscurity. Stay-at-home orders and the shutdown of nonessential business have driven broad swaths of the economy into panic mode. In industries that were already in a precarious position before the crisis, including retail and energy, the pandemic has tipped many over the edge. A host of oil companies have sought chapter 11 protection, while J.C. Penney Co. and Neiman Marcus Group Inc. are expected to file for bankruptcy soon.

Companies in areas that were previously stable, such as the automotive, travel and leisure industries—and even health care—may soon face similar pressures. U.S. corporate debt downgraded to selective default, meaning a borrower has failed to meet one or more of its obligations, totaled $64.1 billion for the 12 months ended April 17, according to S&P Global Ratings. That represents only a slight uptick over the pace at the end of January, but the numbers are about to get a lot more bleak.

In the coming months, that figure could top the roughly $340 billion reached at the height of the financial crisis, according to the worst-case scenario estimates from S&P. Even in a less grim scenario, the figure could approach levels reached after the dot-com bust in the early 2000s.”

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MARKET WATCH/Shawn Langlois

Why a ‘return to normal’ could mean disaster for the stock market

April 25, 2020

valuation versus time graph“It’s hard to deny, although some do, that the stock market, pre-coronavirus, was pushing the limits of what it means to be in a bubble. Of course, bubbles come and go, but as Hofstra University’s Jean-Paul Rodrigue suggests, this one had a particularly fierce tailwind. ‘Although manias and bubbles have taken place many times before in history…’ he once wrote, ‘central banks appear to make matters worse by providing too much credit and being unable or unwilling to stop the process when things are getting out of control.’

Rodrigue explained that bubbles unfold in stages, an observation backed by 500 years of economic history. ‘Each mania is obviously different,’ he said. ‘But there are always similarities. His concept of the bubble has been passed around finance circles for years. Most recently, John Hussman of Hussman Investment Trust used Rodrigue’s chart to warn investors of what’s to come. Hussman, who’s been very vocal about getting burned by his bearish misfires in recent years — ‘Did it take too long for me to abandon my belief in a limit to the stupidity of Wall Street? Yes it did’ — said the current position of this market is reminiscent of Rodrigue’s ‘return to normal’ stage. If that’s the case, fear’ and ‘capitulation,’ followed by ‘despair,’ are still to come.”

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