The Capital Note

The Capital Note: COVID’s Casualties

A farmer stands in what remains of his field of lettuce after having to plow it under due to the loss of the restaurant market in Holtville, Calif., April 15, 2020. (Mike Blake/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: No Easy Exit from High Unemployment, Trouble at CalPERS, and the Weimar Republic, plus some stories from around the Web.

No Easy Exit from High Unemployment

Despite today’s news that new jobless filings have fallen to their lowest level since the pandemic started (data which can be analyzed in different ways, not always for the good), a new survey issued by Cornell, JQI and RIWI would suggest further trouble ahead:

Of workers who were placed back on payrolls after being initially laid off/furloughed as a result of the COVID-19 Pandemic Crisis, 31% report that they have been laid off a second time, and another 26% of those placed back on payrolls report being told by their employer that they may be laid off again. These results were surprisingly higher for workers in states that have not been experiencing recent COVID-19 surges, relative to those in surging states.

It’s worth paying attention to what follows on from that “surprisingly.” It’s not pretty (my emphasis added).

The fact that there were actually more respondents reporting that they were laid off or furloughed twice in “healthy” states, versus surging states, appears to indicate that the repeat layoffs and furloughs are not directly related to resurgence of the COVID-19 virus (and renewed economic shutdowns in affected states), but are rather linked to overall economic conditions in the U.S. and – likely – the exhaustion of the PPP funds by businesses that had used such loans to place their former employees back on payroll, whether or not they had work for them. Placing workers back on payroll is a condition for forgiveness of the PPP loan advances.

This is just the latest reminder (as if one were needed) that an economy cannot just be switched off and on, as some seemed (once?) to assume. The working of the economy is infinitely more complex than that. A rather better analogy than the light switch might be that the combination of the coronavirus and the steps taken to combat it have done something equivalent to tearing a hole in a spider’s web. It can be put together again, but it is going to take time.

The fact that these layoffs appear to be unrelated to the more recent surges that we have seen in the coronavirus does not mean, of course, that these fresh blows can be shrugged off. Their consequences will be felt in due course in the economy and, of course, the unemployment numbers. By how much will depend on the official response to this surge. We now know (although it should not have come as a shock) just how destructive prolonging the lockdowns to the extent that we have seen has proved. In the absence of a widely effective vaccine (something that still seems quite some way off), we are going to have to find a way to ‘live with’ COVID-19 in a way that limits further damage to a badly battered economy. Sadly, intelligent management of the pandemic seems scarce on the ground.

Meanwhile, with the next stimulus package still being debated, it is also worth paying attention to the impact of the exhaustion of the PPP funds:

PPP supported businesses were sustained with loans equal to approximately eight weeks of payroll costs, plus 25% more for certain other fixed operating expenses. As those funds have by now been substantially exhausted many of the 4.9 million borrowers under the program may not be viable as going concerns. An additional group of companies may eventually become nonviable unless they now cut costs and jettison some portion of the workers they added back to payrolls with the PPP dollars.

The survey’s conclusion?

These findings indicate a much more significant and systemic problem that points to a much deeper and longer-lasting recession than the mainstream data suggest.

It is hard to disagree. The question now is how to mitigate the damage.

— A.S. 

Trouble at CalPERs

Last month, CalPERs CIO Ben Meng made headlines after announcing that the public-pension fund would take bigger risks to make up a $150 billion shortfall. In a Wall Street Journal Op-Ed, Meng said that increasing allocations to private equity and private credit would enable the fund to hit its 7 percent target, which it has failed to hit for two consecutive years. He also planned to lever up the portfolio by 20 percent.

This month, Meng is in the news for different reasons. He resigned as CalPERS CIO today following allegations that he had failed to report potential conflicts of interest. Yves Smith, a blogger for Naked Capitalism, wrote on August 2 that Meng had filed inaccurate financial-disclosure documents. The blog post claims that Meng neglected to fill out parts of his Form 700, a document required by public officials under the California stimulFair Political Practices Commission. Smith alleges that Meng has personal investments in private-equity funds with which CalPERS invests.

The latter point, Smith notes, is especially troublesome due to Meng’s plan to increase allocations to private funds:

Finally, this abuse by CalPERS top investment executive occurred just as CalPERS has been successfully moving forward legislation, AB 2473, to have its private debt investments, an area it intends to expand, exempt from Public Records Act disclosure. That means Meng could approve private debt deals that would benefit him or other CalPERS executives and the public would have no way of knowing.

Regardless of whether Meng engaged in any actual misconduct, public-pension funds face a reckoning in the near future. With a national shortfall as high as $4 trillion and an increasingly challenging investment environment, financial disclosures are the least of CalPERS’ troubles.


Around the Web

New York Times earnings:

The New York Times Co’s (NYT.N) second-quarter results beat Wall Street estimates, as its digital unit, which includes news, podcasts and crosswords, overtook the legacy print business for the first time.

Buyer beware:

[M]any followers of MMT have looked at the recent surge in government borrowing and concluded that there never has been – and never can be – a lack of money to pay for better healthcare, education, welfare, or a Green New Deal. Sadly, this is baloney.

Money itself may not be a “scarce resource”, but the same cannot be said of the goods and services that it is expected to buy. Otherwise, any country with its own currency could use its “magic money tree” to pay for world-leading healthcare, education, and so on.

Shale lives:

[W]hat’s problematic here is how those predicting the demise of the U.S. shale industry are yet again talking up Chapter 11 bankruptcy filings as a distress benchmark. It proved to be a mistake back in 2015-16 when U.S. crude production volume not only bounced back but exceeded pre-crisis levels.

Whether the same might happen again or not remains to be seen but talking up Chapter 11 numbers and talking down the agility of shale players often bottles down to a profound lack of understanding of U.S. bankruptcy norms. The country’s existing framework often allows companies at risk of a bankruptcy to resurface in a new restructured form in the very same space they previously occupied.

Random Walk

Adam Fergusson’s When Money Dies, first published in the 1970s as a warning in an era characterized by stagflation, remains a classic history of the Weimar Republic’s near fatal encounter with inflation, a memory that still haunts Germany monetary policy. That memory helps explain why West Germans took such pride in the Deutschmark, and the reluctance of a reunited Germany to swap what was one of the foundations of postwar recovery for a speculative new currency, the euro.

In 2010 the book was reissued for reasons that need no explanation (FWIW, I reviewed it here). Even if the fears that prompted its reissuing proved to be overdone, it remains a book worth reading, preferably with a stiff drink by your side.

An extract:

Because the Reichsbank’s printing presses and note-distribution arrangements were insufficient for the situation, a law was passed permitting, under licence and against the deposit of appropriate assets, the issue of emergency money tokens, or Notgeld, by state and local authorities and by industrial concerns when and where the Reichsbank could not satisfy employers’ needs for wage-payment. The law’s purpose was principally to regularise and regulate a practice which had gone on extensively for some years already, with the difference that authorised Notgeld would now have the Reichsbank’s guarantee behind it. Before long, as that guarantee became increasingly less esteemed, the tide of emergency money that now entered local circulation, with or without the Bank’s approval, contrived enormously to raise the level of the sea of paper by which the country was engulfed. As the ability to print money privately in a time of accelerating inflation made possible private profits only limited by people’s willingness to accept it, the process merely banked up the inflationary fire to ensure a still bigger blaze later on.

— A.S.

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