Thoughts From The Divide – Supply Chain Pain and Credit

“Double-Whammy”

CV19 continues to wreak havoc in supply chains. As Bloomberg explains in an article on the collapse of the floral industry, people from Vermont dairy producers to Kenyan rose farmers are facing economic pain. The food supply chain, in particular, continues to make headlines. Tyson Foods went as far as placing a full-page ad in national newspapers warning that “the food supply chain is breaking”. However, there may be relief in sight for some meat processors as President Trump is planning to use the Defense Production Act to order companies to stay open, but will, in return, “provide additional protective gear”, according to a source cited by Bloomberg. Invoking the DPA will, however, likely not revive all of the supply chain, with restaurants still facing a particularly dire outlook. The National Restaurant Association warned a month ago that 11% of operators “could close in the next 30 days” and Homebase’s data still shows “Food & Drink” operating at less than 50% of comparable levels. While there may yet be cause for optimism as states continue to refine their stay at home rules, the experiences of Germany and Japan, who both saw resurgent infection rates as rules were relaxed, show that the road to recovery is not a clear-cut path.

“A Complete Waste of Money”

With the recent changes to the Municipal Liquidity Facility, the Fed continues on its merry way, providing funding through its alphabet soup of facilities and vehicles. There aren’t expected to be many changes following the FOMC meeting that concludes tomorrow, but while the Fed keeps chugging along, there are signs that they may well need a bigger boat. Banks themselves are bracing for a barrage of defaults and loan losses. US banks such as Citi, Wells Fargo, and JPMorgan have already warned of a looming wave of defaults, and now both HSBC and Santander have joined the chorus. Leveraged loans are also showing signs of problems in credit markets. As S&P Global reports, the ranks of the “Weakest Links” in leveraged loans has swelled by more than 50%, and leveraged loan defaults in the first 14 business days in April set a record monthly high for the S&P’s data. The ratio of downgrades to upgrades hit levels last seen in January 2009, which combined with other data implies “a heightened risk of default down the line”. The broader debt picture could be even more complicated. The Mortgage Bankers Association expects forbearance requests to “pick up” amid significant job losses, and there continues to be political fights over who and what gets liquidity.