Physical Delivery (EP.141)

Episode Summary

Executive Summary: The episode focuses on the economic shock from COVID-19, including surging unemployment, negative oil prices, and the policy response through stimulus and lending programs. Michael and Ben debate market resilience, the risks of speculative trading in oil ETFs, and how the crisis is exposing weaknesses in banking, mortgage servicing, retail, education, and government distribution systems.

Main Topics: Unemployment surge and fiscal support (Priority: 5/5): The hosts open with another massive weekly jobless claims report and discuss how unprecedented unemployment is reshaping the economy, while noting that enhanced benefits are helping some households bridge the gap. Negative oil prices and USO speculation (Priority: 5/5): They unpack the collapse in oil prices below zero, explain why the futures/ETF structure makes this a dangerous trade, and criticize the idea that buying leveraged oil ETFs is an easy arbitrage. Stimulus spending and relief distribution (Priority: 4/5): They discuss evidence that stimulus checks are being spent quickly, and argue that direct cash transfers are one of the most effective ways to support demand during the shutdown. Banks, lending programs, and unequal access (Priority: 4/5): The conversation covers how relief loans flowed disproportionately to large banking clients and highlights flaws in capping programs, relationship-based lending, and the need for better digital infrastructure. Systemic stress across industries (Priority: 4/5): They examine stress in mortgage servicers, airlines, private equity, retailers, and department stores, arguing that many businesses face long-lasting damage even if markets are recovering. Market resilience and mega-cap dominance (Priority: 4/5): They debate why stocks, especially large technology companies, have held up far better than expected, and whether the market has already priced in a severe recession. Personal finance in crisis and media habits (Priority: 2/5): They answer listener questions about borrowing to invest, tax diversification in retirement accounts, and how quarantine has shifted media consumption toward Twitter, streaming, and old sports content.

Key Arguments: The unemployment crisis is enormous, but expanded benefits are providing a necessary short-term bridge for workers. Negative oil prices were driven by collapsing demand and storage constraints, not a simple bargain opportunity for retail investors. Buying leveraged oil ETFs like UCO or USO is not an arbitrage because ETF structure, futures rolls, and fund mechanics create major tracking and liquidity risks. Direct stimulus payments quickly translate into spending, especially among lower-income households, supporting the broader economy. The PPP and similar programs were flawed because capped, relationship-based distribution favored large clients and banks rather than truly needy small businesses. Mortgage servicers and non-bank lenders could face serious cash-flow problems because they are forced to keep paying bondholders and expenses even when borrowers pause payments. The market may have already priced in a severe downturn, especially since the S&P 500 and Russell 2000 had already fallen sharply before this discussion. Mega-cap tech and streaming companies are benefiting from the crisis, and their size is increasingly dominating market indexes. Risk-taking with leverage during a downturn is dangerous; borrowers should not borrow against their homes to speculate in stocks without a strong contingency plan. Diversifying between traditional and Roth accounts is preferable to trying to precisely game future tax rates.

Data Points: Weekly unemployment claims: 4.42 million - Latest weekly jobless claims discussed at the top of the episode. Four-week total unemployed: 26 million - Sum of the last four weeks of claims. Implied unemployment rate: About 20% - They estimate unemployment from the claims totals plus pre-existing unemployment. Extra unemployment benefit: $600/week - Expanded federal unemployment benefit referenced as a short-term bridge. USO decline: Down about 80% year-to-date - The oil ETF’s performance amid the collapse in crude prices. Stimulus-linked card spending change: +26% YoY - Bank of America data showing credit card spending jumped after direct deposits hit accounts. Pre-stimulus card spending trend: -23% YoY - Average spending rate for April 1–14 before stimulus payments arrived. Bank loan program demand vs. usage: $14 billion lent vs. $36 billion requested - Chase/PPP example showing loan demand exceeded funding. J.P. Morgan commercial/private clients approved: Nearly all 8,500 applicants - Illustrates preferential access for larger clients. J.P. Morgan retail small business approvals: 18,000 of more than 300,000 applicants - Shows the limited reach of retail-bank loan approvals. Bank deposits increase: $1 trillion - US banks saw a record first-quarter deposit inflow. Deposits gained by top four banks: $590 billion - More than half of new deposits went to the four largest US banks. Previous quarterly deposit record: $313 billion - Benchmark for how unusual the first-quarter surge was. Corporate borrowings drawn into deposits: 75% of $67 billion - Bank of America said most drawn credit-line money ended up back in deposit accounts. Private equity / business leverage cap: No more than 4x EBITDA for new loans; 6x for existing bank loans - Fed-imposed leverage restrictions discussed in the lending program. US mortgage originations share by non-bank lenders: Nearly 60% - Shows the importance of non-bank mortgage firms like Quicken Loans and Mr. Cooper. Netflix new subscribers: Nearly 16 million - Record quarterly subscriber growth during quarantine. Netflix prior best quarter: 9.6 million - Comparison point for the subscriber surge. Netflix quarterly earnings: $709 million - Reported earnings compared with the prior year. Netflix prior-year earnings: $344 million - Used as comparison for the current quarter. Department stores mall square footage share: 30% - Share of US mall space occupied by department stores. Sears and JCPenney share of mall square footage: 10% - Subset of department-store mall footprint. JCPenney stock drawdown from high: Down 99.4% - Illustrates long-term collapse of a struggling retailer. Macy's stock drawdown from high: Down about 91–92% - Another example of department store decline. Gap rent deferrals: $115 million - Gap suspended rent payments and drew down revolver capacity. Gap revolver draw: $500 million - Liquidity step taken by the retailer. Small-cap market decline: Russell 2000 down 45% - Used to argue that the market has already priced in severe damage. Large-cap market decline: S&P 500 down 35% - Used to discuss how much bad news may already be embedded.

Pivotal Quotes: "the broader takeaway is that the COVID-19 crisis is an extraordinary deflationary shock to the economy" — Neil Irwin (quoted by hosts): Used to frame the oil collapse and falling prices as part of a deflationary environment. "I think that this just proves how hard it is to track some of these things exactly because you're dealing in markets where you're trying to create a system where you can track the price of something that requires storage costs and it requires and is an actual commodity." — Michael Batnick: Explaining why oil ETFs and futures are difficult for retail investors to understand. "If we're helping more people than are taking advantage of us, that's something we'll have to deal with on the other side of this." — Ben Carlson: On accepting some misuse of relief programs if the broader goal is to stabilize the economy.

Implications: The crisis is accelerating structural change: more market concentration, more bankruptcies, weaker malls, and lasting stress on non-bank finance. Investors should avoid leverage and speculative shortcuts, while policymakers need better systems for direct relief distribution.