A $10 Trillion Fed Balance Sheet Is Coming

Bill Dudley, Bloomberg
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The Fed’s balance sheet has grown by about $3 trillion since mid-March, with more easing on the way. As the Fed buys corporate bonds, municipal securities, Treasuries, and mortgage-backed securities (MBS’s), the cash generated by the sale of these assets will primarily go to bank deposits, increasing the amount of cash and deposits held by the private sector. By effectively reducing the supply of “safe” assets, the Fed encourages the private sector to seek higher-yielding assets. While the rapid growth of bank reserves has led to inflationary concerns, this is offset by the ability of the Fed to raise the interest rate it pays for bank reserves, giving banks a lesser incentive to make loans, thereby decreasing credit and dampening the inflation rate. Provided this strategy is implemented properly, the Fed can effectively increase its balance sheet ad infinitum without concern for runaway inflation.

Pinning Down Putin

Victoria Nuland, Foreign Affairs
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Few nations have so enigmatic a profile in the minds of American policymakers as Putin’s Russia. Following the collapse of the USSR and the ensuing decade of chaos in the nation, Putin took the reins to restore order internally and greatness externally. The U.S. and its allies turned a blind eye to Moscow’s increasingly Soviet methods of accomplishing these goals until the 2014 seizure of Crimea. A belt of fledgling democracies on Russia’s western border have felt the impact of the Kremlin’s neo-Soviet approach, a methodology emboldened by the U.S’s largely toothless foreign policy towards the nation.
Internally, Russia’s position is not nearly so favorable. Polling indicates that a majority of residents desire “decisive, comprehensive change;” a shocking 53% of 18- to 24-year-olds expressed a desire to emigrate. Meanwhile, rubber-stamped constitutional amendments may see Putin in power until 2036, a move supported by a little less than half the country. As the pandemic continues to ravage the world, it remains to be seen whether the nation’s $550 billion in reserves will go towards supporting the Russian people.
While modern Russia wields power nowhere near its Cold War peaks, the U.S. will nevertheless need to forge multilateral relationships to thwart Putin’s ambitions. A strengthened NATO would give the U.S. the clout it needs to address Russia’s forays into military technology, both conventional and new. As Putin has stepped up Russia’s presence in Syria and other Middle Eastern countries, the U.S. must maintain some level of control over essential infrastructure to prevent Russian dominance of the region and its crucial oil reserves. Ultimately, the success of any effort to bring Russia into the modern era of freedom and prosperity will require partnership with the people of Russia themselves by creating opportunities and conversations. While the current outlook for Russia’s future remains downcast, it is by no means set in stone.

IMF slashes economic outlook and warns of public debt burden

Aimee Williams, Financial Times
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On Wednesday, the International Monetary Fund (IMF) announced the “unprecedented” Covid-19 crisis will have a bigger negative impact on the global economy than was initially predicted. The fund has downgraded its global growth forecast 1.9 percentage points from April’s prediction – the IMF now expects the global economy to shrink 4.9% in 2020. The crisis has cost governments more than $10 trillion in lost revenues and relief measures. As a result, deficits are going to soar and global public debt is expected to hit a record high of 101% of global GDP this year which would be an increase of 19% year on year. 
The IMF believes advanced economies will experience the brunt of the damage and will shrink 8% in 2020 whereas emerging economies will only shrink by 3% (April’s predictions were 6% and 1% respectively). The downgraded expectations have been driven by the expectation for a slower, more gradual recovery in the second half of the year, and the fact that social distancing lockdowns dealt a greater blow to economic activity than thought. The fund has warned that the negative impacts of the virus will be particularly severe on low-income households which could potentially upend the significant progress that has been made in reducing extreme poverty. The contraction in developing economies is likely to exacerbate global inequality, making international cooperation and collaboration even more important. If such collaboration is not acted upon, the recession could have long-lasting effects on global output and on the world economy as a whole. 

A Tidal Wave of Bankruptcies Is Coming

Mary Williams Walsh, The New York Times
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We have already seen a small wave of bankruptcies as a result of Covid-19. Hertz, J. Crew, Diamond Offshore Drilling, and Whiting Petroleum are included in the list of companies that have recently filed for Chapter 11 bankruptcy. Bankruptcy experts are expecting a flood of petitions in the next couple of months as pandemic-relief programs expire. Many companies are too far gone for an economic rebound to save them. 
Covid-19 may be the crisis to put companies over the edge, but it is not the primary reason that companies like Hertz have filed for bankruptcy. Hertz has been struggling with debt created in a leveraged buyout years ago and battling new competitors in the rental-car industry. Others find themselves in similar situations as Covid-19 exposes the deep-seated financial challenges that have always been lurking in the background. 

The pandemic has shown that Amazon is essential—but vulnerable

The Economist
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While Amazon has certainly benefited from the pandemic (with Q1 sales up 26% year-over-year), the coronavirus’ market-shaking qualities have brought even Amazon’s foundations into question. The March-April stocking phenomenon has largely subsided, indicating online shopping has returned to semi-normal levels of demand. While the lockdowns prompted certain customer segments to increase their usage of the platform (such as a new cohort of “silver” customers in their 60’s), Amazon’s trajectory moving forward is less certain than ever. The first hurdle is public opinion – Amazon has received a reputation as a job-destroying monopoly. A bloated balance sheet has squeezed returns, forcing the company to turn to its AWS platform for a good chunk of its income. Competitors such as Walmart, Target, and Costco have seen digital sales skyrocket with the stay-at-home orders, and companies like Netflix and UPS are outperforming its other segments in their areas. Internationally, regional competitors tend to hold a higher share in their respective markets. This triple-edged sword of a deteriorating social contract, shrinking margins, and increasing competition has left Amazon with a difficult road in an already volatile era.