by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

The summer doldrums are upon us.  Equity markets are mostly steady, with the dollar weakening.  We detail the claims data below, but they are showing improvement.  We lead with market and economic news this morning, followed by China.  Foreign news is next, with updates on the situation in Belarus.  We close out today’s report with an update on the pandemic.  And, being Thursday, we have a new Weekly Energy Update.  Here are the details.

Market and Economic news:

• In this week’s Asset Allocation Weekly, we discuss the risk to the economy from cuts in state and local government spending (with further analysis in our podcast and chartbook).  Library systems, including St. Louis County, have announced layoffs.  Cities, strapped for revenue, are reporting job cuts.  Reports suggest that cities are suffering more in this downturn than in 2008.  Although talks on fiscal stimulus are stuck, the Fed is lowering the rates it charges to state and local government borrowers who use its emergency lending program.  We risk seeing a repeat of 2010-11, when falling state and local spending more than offset federal spending, slowing the recovery.  In the current situation, it raises the potential for either a stalled recovery or an extended recession.  Fed officials are raising concerns that the lack of stimulus is threatening the recovery.
• If working from home is now the future and perhaps remote learning is too, then the location of where you live is less important than the functionality of one’s quarters. Being in a tiny neighborhood or big city with exorbitant veterinarian costs doesn’t make sense when one can’t go outside much anyway.  And thus, we are seeing a rising flight to the suburbs for lower per square foot costs of housing and backyards.  Even proximity to shopping isn’t a feature now that home delivery is available.
• Remember “liar loans”? These were infamous during the 2007-09 recession as dodgy, no-documentation mortgages were found to be classic examples of Hyman Minsky’s third class of financing, “ponzi financing.”  At the residential level, they don’t appear to have returned.  But, interestingly enough, we are seeing reports that commercial property borrowers may have overstated their property’s income and lenders may have encouraged the practice.  If so, this could raise risks in commercial mortgage-backed security markets.
• Mortgage refinancing activity has been elevated in recent months as mortgage rates have declined. The primary guarantors of these mortgages, Fannie Mae (FNMA, 2.11) and Freddie Mac (FMCC, 2.09), are applying a new fee to newly refinanced mortgages of 50 bps.  The fee is ostensibly to protect the firms from loan losses, although mortgage lenders are viewing it in less sanguine terms.  The fee will tend to dampen refinancing activity, all else held equal.
• One of the problems with using executive orders to legislate is that Congress controls funding. Thus, if the White House wants to fund something via executive orders, it has to find the funding from some other source.  To fund the $300 per week additional boost to unemployment insurance, the government is using $44 billion from FEMA funding.  Unfortunately, that funding may only last six weeks.
• One of the key components in solar panels, polysilicon, is in short supply after a series of explosions at processing plants in China. Since the industrial mishaps in July, prices are up 50%.  China supplies two-thirds of the world’s polysilicon and nine of the top 10 solar panel manufacturers are Chinese.  This news highlights the problem of deglobalization.   When the world is perceived to be at peace, extending and concentrating supply chains is rational.  It looks less so in a fractured world.
• The gig economy firms are facing an increasingly adverse legal environment. The district attorney of San Francisco has been filing injunctions against the gig firms forcing them to treat their workers as employees.  The business model of these firms borders on regulatory arbitrage; treating their workers as independent contractors allows them to avoid much of the regulatory cost of employees.  The firms are threatening to quit California over the dispute.

China news:

• The U.S. is considering a free trade arrangement with Taiwan and Beijing is furious. After the CPC took control of mainland China in 1945, the Nationalist Chinese moved to Taiwan and established the Republic of China.  For years, both sides claimed to be the legitimate government of China.  Interestingly enough, this led to a period of stasis; the threat to this tacit agreement was if Taiwan ever decided it was a country independent of China.  The U.S. action would be similar to China making a free trade deal with California, independent of the federal government.  Polls suggest that the majority of Taiwan residents view themselves as singularly Taiwanese.  Taiwan independence would be a flashpoint for conflict.
• Despite looming restrictions on Chinese companies listing in the U.S., Chinese firms continue to flock to U.S. exchanges and Wall Street continues to collect fees for their service.
• According to reports, the Xi regime has warned its military not to fire first in standoffs with the U.S. military.
• We have been watching the fate of Taiwan Semiconductor (TSM, 79.39) for some time. The firm is a critical supplier of semiconductors; it also straddles the superpowers, providing products to both China and the U.S.  Both nations want to influence the company.  Earlier this year, it announced it was building a production facility in the U.S.  Today, we note reports that Chinese firms are poaching talent from the company.
• In our WGR series on the elections, we noted that various foreign nations were poised to try to affect the outcome of our election. China was mentioned; we commented that its methods were probably not as sophisticated as Russia’s (which are world class, IOHO).   However, that isn’t to say China’s methods are crude.  Reports indicate that China has created a network of fake social media accounts to promulgate polished videos against President Trump.  We expect more of this sort of activity as November approaches from a variety of nations.

Foreign news:

• Despite an aggressive crackdown, protests continue in Belarus. Thousands have been arrested.  Security forces have resorted to live ammunition against protestors.  At this point, we don’t think Lukashenko will be forced from power.  Unlike in Ukraine, Belarus doesn’t have a natural division.  Ukraine has been divided between a Russia-sympathizing east and a Europe-sympathizing west.  In Belarus, there is no obvious alternative to Lukashenko.  He has greater control over the security apparatus.  However, even if he survives this threat, it is unlikely the country will thrive.  The election will likely spur the young and talented to emigrate, causing a brain drain.  It is likely Lukashenko will be forced to improve ties with Russia as Western nations will be less inclined to deal with him.  This means less flexibility in dealing with Putin.  Thus, he will survive, but in a weakened state.
• There are reports that Iran seized an oil tanker in the Persian Gulf. The vessel was held for five hours, then released.  It is not clear why it was boarded or why it was allowed to leave.  Oil markets ignored the news.  The event is one in a series of provocative acts by both the U.S. and Iran over the past year.  They have raised tensions but not enough to trigger a war.
• Israel claims that North Korean hackers attempted to breach one of its defense firms.

COVID-19:  The number of reported cases is 20,648,298 with 750,030 deaths and 12,849,485 recoveries.  In the U.S., there are 5,197,749 confirmed cases with 166,038 deaths and 1,755,225 recoveries.  For illustration purposes, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The weekly Axios map shows a clear improvement in cases in the U.S.

• We have been reporting a large backlog of testing results that has rendered testing useless. If the results of a test take more than 10 days, by that time, the patient has probably recovered.  As a result of this backlog, we are seeing a drop in testing; the good news is that the backlog will likely ease, meaning those getting tested will get their results sooner.
• The most helpful testing is one that generates a rapid result. Although such tests exist, the machines that read the tests are in short supply.
• Although testing and reporting protocols in the developing world are considered weaker than in the developed world, it does appear that the rate of change is slowing in the former.  However, the caseloads seem to be plateauing at a high level, which will tend to dampen growth in the emerging world.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

The mixed-to-higher tenor of risk assets so far today is understandable given the mixed news on the coronavirus.  U.S. infections continue to moderate, but there has been little discernible progress on a new pandemic relief bill.  Separately, Joe Biden announced yesterday that Senator Kamala Harris of California will be his running mate.  We provide a brief comment on that choice below.

COVID-19:  Official data show confirmed cases have risen to 20,372,619 worldwide, with 743,344 deaths and 12,609,775 recoveries.  In the United States, confirmed cases rose to 5,141,879, with 164,545 deaths and 1,714,960 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Moderna, Inc. (MRNA, 68.97) said it has reached an agreement to provide the U.S. government 100 million doses of its experimental coronavirus vaccine in exchange for more than $1.5 billion, with an option to provide an additional 400 million doses.  With the Moderna deal, the U.S. has now agreed to spend more than $9 billion for shots from a number of different drug firms.  It has also invested in vaccine research and development, as well as supplies like vials and syringes.  The deals aim to accelerate the rollout of any vaccines that ultimately get approved, so they could help hasten an improvement in the crisis.
• Skepticism continues to roll in regarding the coronavirus vaccine approved by Russian regulators, which we discussed in yesterday’s report.  For example, German Health Minister Jens Spahn said in an interview with Deutschlandfunk radio that for people to be able to trust such a vaccine, it’s important to do extensive tests and make them public before the product is licensed, but that hasn’t been done in the Russian case.
  • According to Spahn, “It can be dangerous to start vaccinating millions, if not billions of people, too early, because that would likely kill off the [public] acceptance of vaccination if it goes wrong…And so, I’m very skeptical about what’s happening in Russia.”
  • Spahn’s concerns echo other statements that scientists have made regarding a risk that many people won’t trust the new vaccines enough to get their shots.
• Despite a continued moderation in overall U.S. infections and deaths, some states continue to see rising caseloads.  Many rural, sparsely populated localities in the Midwest are also seeing surging cases now after largely escaping the virus earlier.
• In a worrisome sign that refrigerated food could be a vector for transmitting the coronavirus, New Zealand authorities are investigating whether the country’s first locally acquired cases of COVID-19 in more than 100 days were spread by refrigerated freight imported from overseas.
  • Officials are looking into the sudden emergence of the disease in four Auckland family members.  One of the four worked at a cold storage facility that is now being tested for traces of the virus.
  • In mid-June, after a new outbreak in Beijing was traced to a large seafood and vegetable market, authorities detected the virus on cutting boards used to prepare imported salmon.  Chinese officials downplayed the risk of transmission through refrigerated food at the time, but the New Zealand experience could spawn new concerns (no pun intended).  Of course, there is also some possibility that China could have planted the New Zealand infections as a way to revive concerns about a refrigerated food vector and deflect attention from China’s poor management of the virus when it first surfaced last year.
• The Big 10 and Pac-12 Conferences have voted to postpone college football and other fall sports due to the pandemic.  With two of the five most powerful leagues punting on fall and some winter sports, the rest of college football’s major conferences will now be under pressure to postpone their seasons as well, even if that deprives schools of a major source of revenue.  The only consolation was that the leagues said they will keep open the possibility of playing the sports in the spring.

Economic Impact

• Moody’s Analytics has estimated that state and local budget shortfalls would total roughly $500 billion over the next two fiscal years if no federal relief is provided. According to the analysis, that would shave more than three percentage points off U.S. gross domestic product and cost more than four million jobs.
  • The analysis echoes our concern that sharp revenue declines could force state and local governments to slash spending so far that they would offset the fiscal stimulus provided by federal spending.  We discussed this concern in detail in our Asset Allocation Weekly from August 7, 2020.
  • As a reminder, whether to provide significant financial assistance to state and local governments remains one of the sticking points as the White House and congressional Democrats continue wrangling over the next coronavirus relief bill.
• Nursing home operator Genesis Healthcare (GEN, 0.7564) has warned it could face bankruptcy within 12 months unless the government provides more help to meet its pandemic-related losses.  According to the company, a dearth of new residents and far higher staffing costs have clouded its financial outlook and raised “substantial doubt” about its ability to operate.
  • The news shows that the industries taking the brunt of the pandemic aren’t limited to just travel, hospitality, and leisure.  Some types of healthcare firms have also been severely impacted.
  • With operators facing financial challenges, many could have trouble paying their rent.  Healthcare REITs that own senior living and nursing home properties could therefore also face weaker prospects in the near term.

U.S. Policy Response

• As the White House and congressional Democrats remain at odds over the next pandemic relief bill, a Labor Department official admitted to several shortcomings in President Trump’s order providing federal disaster relief funds to states so they can provide $300 per week in extra unemployment benefits.  According to the official, the extra money is likely to take a couple of weeks to reach workers and funding could be exhausted just a month and a half later.

United States:  As our readers probably know by now, presumptive Democratic presidential candidate Joe Biden has chosen Senator Kamala Harris of California to be his running mate.  The pick allowed Biden to fulfill his promise to choose a woman, which will likely resonate well with that key constituency.  In addition, Harris’s status as the daughter of Indian and Jamaican immigrants could well resonate with Blacks, Asians, and even Hispanics, many of whom are either immigrants or first-generation citizens.  Progressive groups have also recently been warming to Harris, though her background as a California attorney general and prosecutor will likely help Biden blunt accusations by the Trump campaign that the ticket is too left-wing.

United States-China:  As if to confirm the Trump administration’s concern about data security breaches by Chinese video-sharing app TikTok, an investigation by the Wall Street Journal found the app skirted a privacy safeguard in the Android operating system in order to collect unique identifiers from millions of mobile devices.  The data allows the app to track users online without allowing them to opt out.  The news will play into the hands of the administration’s China hawks, who have been working to cement a tough-on-China policy no matter who wins the November election (see this week’s WGR, which describes that effort in detail).

China:  Faced with growing pushback from the U.S. and other Western democracies, President Xi has delivered a series of speeches rolling out a new macroeconomic strategy focused on domestic demand.  The evolving strategy prioritizes domestic consumption, markets, and companies as China’s main growth drivers.  Investments and technologies from overseas, though still desirable, would play more of a supporting role.

Beijing is on alert for flooding as China struggles with a series of severe weather events that are driving up food prices and threatening its economic recovery from the coronavirus.

Belarus:  Mass protests against last week’s rigged reelection of President Lukashenko continued for a third straight night as news emerged that opposition candidate Svetlana Tikhanovskaya’s video calling for demonstrators to disband and accept the results was made under pressure from the Belarusian intelligence services before Tikhanovskaya fled to Lithuania yesterday.  Separately, EU Foreign Affairs Chief Josep Borrell warned that the bloc is “reassessing” its relationship with Belarus and could impose sanctions for its anti-democratic behavior.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Risk assets today are being buoyed by a continued moderation in U.S. coronavirus infections and hopes that the White House and congressional Democrats will return to the bargaining table to hash out a new pandemic relief bill.  President Trump has also floated the idea of a capital gains tax cut.  Finally, there is news that a Russian COVID-19 vaccine has received regulatory approval in Moscow, though many worry the shot has been rushed through the review process without full consideration of its safety and effectiveness.  We review all the key news below.

COVID-19:  Official data show confirmed cases have risen to 20,119,511 worldwide, with 737,022 deaths and 12,366,115 recoveries.  In the United States, confirmed cases rose to 5,095,163, with 163,473 deaths and 1,670,755 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• In the U.S., new confirmed infections totaled less than 50,000 for the second straight day, and the seven-day moving average of new cases dropped to its lowest level since early July.  Some of the decline in new cases probably reflects a drop in testing this month, but it still appears that the latest wave of infections is passing.  The seven-day moving average of deaths has pulled back to about 1,100 per day.  The figures paint a moderately positive picture of the current virology in the U.S., but investors will still be looking for a continued drop in infections, progress on vaccines and treatments, and new monetary and fiscal relief measures to tide over the economy in the short term (see below).
• Overseas, large developing countries like India and Brazil continue to struggle with high numbers of new infections, while some countries in Europe are seeing localized rebounds.  New Zealand has reported its first coronavirus cases outside of quarantine facilities in more than 100 days, prompting the government to order the lockdown of Auckland, the nation’s most populous city, for at least three days.
• Russia has become the first country to grant regulatory approval to a vaccine against COVID-19.  The vaccine, codenamed Sputnik, will enter into mass production and be administered to key workers in the next few weeks.
  • The move, the first time a COVID-19 vaccine has been approved for civilian use, comes after just two months of human trials and underscores Moscow’s desire to rush the vaccine through testing and trial procedures at breakneck speed in an attempt to beat Western pharmaceutical companies.
  • Even if the vaccine begins to be administered as soon as this month, the government plans to continue trials of the shot in parallel.
• With the pandemic appearing to remain largely under control in China, the government of Macau eased quarantine requirements for visitors from the mainland.  Authorities also said Macau would soon start issuing visas again.  At first, visas would only be available for people from the neighboring Chinese province of Zhuhai, but the news nevertheless helped spark a global buying spree in travel and leisure stocks.

U.S. Policy Response

• The White House and congressional Democrats yesterday said they were open to restarting negotiations on a new coronavirus relief bill, but there were few concrete signs of renewed talks.  The main development was that the administration clarified its memo allowing states to use federal disaster relief funds to extend supplemental unemployment benefits.
  • According to administration officials, states are merely encouraged to chip in enough funds to pay a supplemental unemployment of $400 per week.  States that can’t come up with their own funds can rely on the federal disaster funds to pay $300 per week.
  • Either way, the supplemental benefit would be far lower than the $600 per week that was paid through the end of July.  Even if the new program is put into place, the new funds would also probably not reach people for at least a couple of weeks. That alone will likely leave millions of people unable to pay their mortgage, rent, or other bills.  It’s also important to remember that while the $600 per week was more than many workers’ pre-coronavirus wage, it may not have been much higher than their combined wage plus benefits.  The new, reduced benefit and the multi-week delay in getting it to people could well produce a sharp contraction in demand that would hurt many businesses.  Reports have already popped up regarding “eviction cairns,” or evicted tenants’ belongings piled up in the streets.  Any delay in coming up with a fuller new relief package is a significant risk to the economy and is therefore potentially bearish for stocks.
• Employers are also turning increasingly against Trump’s weekend order allowing for deferred payment of payroll taxes.  The president wants employers to stop collecting the 6.2% levy that represents the employee share of Social Security taxes for many workers, starting September 1 and going through the end of the year.
  • The move doesn’t change how much tax employees and employers actually owe. Only Congress can do that.
  • Employers’ biggest worry is that if they stop withholding taxes without any guarantee that Congress will actually forgive any deferred payments, they could find themselves on the hook.  That is a particular risk in cases where employees change jobs and employers can’t withhold more taxes from later paychecks to catch up on missed payments.
• Responding to the stalled negotiations and the pushback against his executive orders, President Trump said yesterday evening that he was “very seriously” considering a cut to capital gains taxes and paring taxes for middle-income families, though it’s not clear how he would be able to implement those moves.

Foreign Policy Response

• Major bond rating firms have given the green light to the European Union’s proposed €750 billion of common, mutualized coronavirus relief bonds.  According to the rating agencies, the EU’s current AAA rating wouldn’t be immediately affected by issuance of the debt.

United States:  Political scientists are on the lookout for a “blue shift” in the days following the November election.  Because of Democratic voters’ greater propensity to use mail-in and absentee balloting, those ballots often push Democratic candidates’ tallies higher as they are slowly counted following the close of polling places.  As Democratic candidates see their tallies increase from the initial counts, some Republican candidates are likely to charge fraud.

United States-China-Hong Kong:  The U.S. government has issued a rule that Hong Kong exports to the U.S. must be labelled “Made in China” starting September 25.  The move, in accordance with the suspension of the Hong Kong Policy Act of 1992 and President Trump’s executive order on “Hong Kong Normalization,” will see Hong Kong companies subjected to the same trade war tariffs levied on mainland Chinese exporters, should they make products subject to these duties.

Lebanon:  Amid the protests and riots sparked by last week’s devastating explosion in Beirut’s port, Prime Minister Diab and his cabinet resigned.  The resignations came just ahead of reports that Lebanese security officials warned the prime minister and president in July that the 2,750 tons of ammonium nitrate stored at the port posed a security risk and could destroy the capital if it exploded.  Diab’s cabinet now becomes a caretaker government with limited powers until a new government is formed.  That will require a new power-sharing pact among the country’s rival religious and political factions, setting up a period of political instability, and likely foreign meddling, that could last for months.  (For more on the political and economic problems that have turned the Lebanese against their government, see our WGR from December 2, 2019.)

Belarus:  As protests continue against President Lukashenko’s apparently fraudulent reelection, in which he purportedly received more than 80% of the vote, popular opposition leader Svetlana Tikhanovskaya has fled the country and is now in neighboring Lithuania.  Prior to leaving Belarus, Tikhanovskaya rejected the official results of the presidential election but requested her supporters to accept them in order to avoid bloodshed.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

It’s Monday! Welcome back from the weekend.  Equity markets are mixed.  Foreign news leads off this morning as we cover the rise in unrest in Belarus, Lebanon, and Bulgaria.  Policy news comes next, where we touch on the executive orders.  China is third, economic and market news bats fourth, and we close with the pandemic.  Here are the details.

Foreign news:

• According to the Central Election Commission, Belarus President Aleksander Lukashenko captured 80.23% (yes, that degree of precision) of the vote, with the leading opposition candidate getting 9.9%. Civil unrest emerged shortly after the polls closed with over 20 cities reporting protests; riot police were dispatched.  Internet service was disrupted.  Widespread voting irregularities have been reported.  The outcome of the election was not a surprise; Lukashenko controls the voting apparatus and, in a fair vote, probably would have won.  But, the problem for dictators is legitimacy.  They crave the approval of the masses even though they won’t step down if the election results are adverse.  Thus, a 55%-45% win probably would have been accepted, whereas 80%-10% is unrealistic in almost any case.  What Lukashenko wanted was a nearly unanimous vote, which is only likely by ballot manipulation.
  • So, what happens next? Although there were rumors that Lukashenko had fled, there is no confirmation that he has departed.  Instead, it does appear various opposition leaders have left the country.  Lukashenko will likely maintain power but will be damaged by this vote.  His biggest threat will be within his own power structure.  His second biggest threat is that President Putin tires of him and supports a replacement.
• Bulgaria is seeing rising civil unrest as protestors push back against widespread corruption. It’s not that the corruption is anything new; Transparency International ranks Bulgaria as the most corrupt nation in the EU.  However, it appears the degree of corruption has reached a point where citizens are pushing back.  We will be watching to see how the EU reacts to these developments.
• There were widespread protests in Lebanon in the wake of last week’s port disaster. Key ministers resigned over the weekend and the government appears adrift.  It is not obvious how the situation in Lebanon will be resolved but it is becoming clear that (a) a power vacuum is developing, and (b) the country is in such a mess that there may not be any power center willing to take control.
• The U.K. and Japan are near a trade deal.
• As we warned in our WGR election series, the U.S. intelligence community confirmed that various nations are trying to sway our election.

Policy news: 

• After the impasse in Congress, President Trump took unilateral action over the weekend and issued a set of executive orders to maintain stimulus. The orders themselves are controversial; after all, if presidents could legislate by executive order, why bother with a legislature?  President Trump isn’t the first president to take such actions.  George W. Bush was prone to issue statements after signing bills that indicated how he would execute the law, which was often in opposition to what Congress intended.  President Obama aggressively used executive orders.  Our primary worry about executive orders is that they bring wide vacillation on policy.  The beauty of legislation is that most bills are crafted by consensus, which means the policy that emerges stays in place, allowing households and businesses to adjust.  Executive orders tend to favor a certain outcome that can easily be reversed by the next president, leading to uncertainty that could impede the investment process.  Here are the details of what the president signed:
  • The first order creates a special unemployment benefit of $400 per week. Because the president can’t fund orders (funding is done by Congress), the benefit will be paid out of the Disaster Relief Fund.  Here’s the catch—only 75% of the new benefit will be paid by the federal government.  The states will need to provide the rest.  Some states may simply not have the funding and thus won’t participate.  In addition, the new program will require some administration by the states whose budgets are already stretched.  It remains to be seen if this order will actually bring funds to the unemployed.
  • The second order defers payroll taxes until year’s end. Under disaster declarations (which we are under due to COVID-19), the Treasury can defer taxes.  This is how taxes were delayed until July this year.  This action is also controversial.  Although it does act as a potent tax cut to the lowest paid workers (Social Security payroll taxes are regressive; see the chart below), the deferral means that employers will be required to make up the tax when the order expires and thus they will be unlikely to do anything with the funds other than save them.

However, the most interesting item was that the president suggested he wants to do away with the payroll tax system altogether.  In one sense, this would address a longstanding fiction that Social Security is a pension.[1]  It’s not; it’s more like basic income for the elderly.  In the absence of a payroll tax, Social Security will be funded out of general revenue.  Franklin Roosevelt, in a political sleight-of-hand, created the payroll tax system to give the impression to Americans that they were paying into a pension fund.  Every year, we receive lists of what we paid in and our future benefits.  We will probably get the benefits, but not because we paid in.  We get them by benefit of being an older American.  By creating this mechanism, it made it impossible for subsequent administrations and Congress to get rid of Social Security, which was Roosevelt’s goal.  If workers believed that the taxes were funding their individual pensions, it would limit the ability of future governments to change the benefit.  Over the weekend, the Twittersphere went batty with comments about the end of Social Security.  This isn’t going to happen.  But, if there is a break in the payroll tax and the pension benefit, it will make it easier in the future to begin changing the benefit structure because the narrative of “I pay into the fund and get my money out” will be broken.

• There is limited deferral of student loan payment; private borrowing was not included.
• There is a limited eviction ban. The ban forbids evictions for federal guaranteed mortgages but not private ones.

China news:

• In retaliation for applying sanctions on leaders in Hong Kong and Xingang, Beijing has levied sanctions on 11 Americans. There were no specific actions tied to the sanctions.
• In Hong Kong, Jimmy Lai, a prominent media mogul and democracy activist, was arrested overnight under the new national security law. This is a very high-profile arrest and will certainly generate global reaction.
• Health and Human Services Secretary Azar visited Taiwan over the weekend. The fact that a cabinet secretary visited the island was not lost on Beijing, which greeted his visit by sending two military aircraft toward Taiwan.
• The “five-eyes” coalition of the U.S., U.K., Australia, New Zealand, and Canada are increasingly looking like the basis for an anti-China coalition. China appears to be recognizing that threat.
• Japan warned China about its naval activities in the South China Sea. Although rarely recognized, Japan has a potent navy and if its constitution relaxes restrictions on direct military activity, Beijing would have a problem.
• Flooding in China has affected rice growing regions and could lift food prices, always a politically dangerous issue for Chinese leaders.

Market and Economic news:

• All that empty mall space could be converted to fulfillment centers.
• Although price rallies in precious metals have been duly noted, industrial metals have been strong as well. Chinese stimulus efforts are a factor behind the rally, but dollar weakness plays a role too.
• The millennial generation is being scarred by economic turmoil. The oldest millennial, who is 39 years old, has seen a major bear market (2000-03), the Great Financial Crisis, and the pandemic.  The Depression generation tended to be frugal to the point of excess; if the millennials follow that path, inflation worries are probably overstated.

COVID-19:  The number of reported cases is 19,877,261 with 731,570 deaths and 12,127,638 recoveries.  In the U.S., there are 5,045,564 confirmed cases with 162,938 deaths and 1,656,864 recoveries.  For illustration purposes, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  There is evidence that infections in the U.S. are falling, which is good news.  Perhaps the best way of thinking about COVID-19 in the U.S. is that we are completing the first wave.  The wave began on the coasts and eventually moved inland and south, following the trend to move inside as summer temperatures rose.

• One of the most frustrating elements of COVID-19 is its novelty. It’s new and we don’t know exactly what we are dealing with.  But humans, being prone to inductive thinking, tend to leap to conclusions.
  • Initially, it appeared the virus spread on surfaces, so disinfecting and handwashing became the primary way to combat the spread. Now, it appears that virus aerosols are probably the primary transmission factor.  Social distancing, meeting outside, and mask-wearing are thought to be the best way to slow the spread.[2]
  • The data showed that children seemed to be mostly unaffected by the disease. That didn’t mean they couldn’t get it or get sick from it, but their morbidity was low compared to the elderly.  However, new studies suggest that children can contract the disease and may be vectors in its spread.
  • Another frustrating element of the virus is the dispersion of symptoms. Some people are deathly affected with long recoveries, while others have it and never know it.  New research is focusing on the asymptomatic carriers to see if they might be a clue to counteracting the disease.  One idea is that asymptomatic infections may reflect native immunity due to earlier coronavirus infections as this family of viruses includes common colds.
• Sweden has been a test case all along—it never implemented aggressive lockdowns or closed schools. It did have widespread nursing home deaths, but so did other countries.  It is still unclear if Sweden has achieved herd immunity, but if it has, it would suggest another path toward living with the virus.
• There is great hope that everything gets better when a vaccine is released.  However, recent polling suggests adoption may be slow.

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[1] No real pension would only allow investment in one asset class, guarantee a payment level, and offer inflation protection.  That’s not a pension, that’s basic income.

[2] As an aside, as we watch the Cardinals leadership struggle to manage the outbreak on the team, we note that European football has managed the disease rather well without a bubble, the preferred method of the NHL and NBA.  We note that substitutes in soccer are kept apart, unlike MLB dugouts.  We wonder if MLB might be better off following soccer’s protocols on substitutes.

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

It’s employment Friday!  We cover the data in detail below, but the quick view is that the data came in better than forecast.  It’s a modest risk-off morning, with weaker Chinese stocks.  Our leadoff this morning is China as tensions rise further.  Policy coverage is next as Congress looks like it won’t get a deal done.  We update the market and economic news followed by our foreign update.  The pandemic “bats ninth.”  We have a new Asset Allocation Weekly, with accompanying podcast and chart book.  Let’s get to work!

China news:

• President Trump has issued an executive order that targets Chinese social media apps. The order limits the ability of these firms to operate in the U.S. and gives Microsoft (MSFT, 216.35) 45 days to complete its purchase of the American operations of TikTok.  The order also targets Tencent Holdings (TCEHY, 72.57).
  • Microsoft is apparently considering buying all of TikToK.
• The administration is also considering measures that would force Chinese-listed firms to either comply with U.S. audit requirements or lose their listings in the U.S. It would also require any firms who want to list in the U.S. to comply before they can issue securities on U.S. markets.  The actions being considered will further weaken U.S./China relations and most likely boost Hong Kong stock markets, which would be the likely destination for Chinese firms that delist from the U.S.
• In another executive order, the U.S. is requiring the government to purchase “essential” drugs from American manufacturers.
• Interestingly enough, despite U.S. actions against Chinese companies, Beijing has mostly left American companies operating in China alone and they are benefiting from the recovery in China’s economy. Two items to consider: first, Beijing has tended to use American companies to weaken the case of the China hawks, and second, U.S. firms already face a less open environment in China.
• Google (GOOGL, 1504.95) has pulled more than 2,500 channels tied to China which were thought to be conduits of disinformation.
• Despite continued deterioration of relations, Beijing continues to try to diffuse the situation. China’s foreign minister Wang Yi indicated he is willing to restart talks.  That doesn’t apply to Canada, which continues to bear the brunt of Beijing’s anger.  A second Canadian citizen has been condemned to death for alleged drug trafficking.
• Gold is considered the safest of safe havens. However, to be safe, a holder must have it in a safe place.  Hong Kongers are increasingly moving their gold out of the former colony on confiscation fears.

Policy news: 

• It doesn’t look like a stimulus bill is going to be passed today. Both sides are at an impasse and positions have hardened.  Negotiators did meet for three hours yesterday but were unable to resolve anything.  Clearly, there are political angles being spun; we won’t go into those but there is potentially negative fallout to the economy from the lack of an agreement.  We do expect executive orders to offset some of the potential losses.

Market and Economic news:

• The U.S. has applied tariffs on Canadian aluminum. We note that the Beer Institute has criticized the decision.
• Despite Federal aid, farm bankruptcies have hit a new record. The pandemic has disrupted supply chains (processors who service restaurants saw demand plummet, while retail demand soared) and the trade conflict with China has hurt as well.
• Over the years, we have noted that coastal real estate markets have benefited from foreign capital flight. Recent data suggests this source of buying has diminished.  Not surprisingly, the largest decline in foreign buying came from China.
• That loss of foreigners isn’t hurting the housing market all that much. Lumber prices are soaring on strong building demand.
• It was expected that U.S. economic weakness would lead to a decline in foreign remittances. These are flows that foreigners working in America send home.  At least for Mexico and Central America, that has not been the case.  The most likely reason is that these workers are heavily represented in jobs considered essential and thus stayed employed during the downturn.  At the same time, outflows to Asia appear to have declined.
• As retailers enter bankruptcies, landlords are bracing for the widespread breaking of leases.
• The drop in electric vehicle sales has weakened lithium demand.

Foreign news:

• The Turkish lira has fallen to new lows. The Turkish central bank has been cutting interest rates despite elevated inflation.  Turkey’s CPI is 11.7%, while the benchmark policy rate is 8.25%, meaning the real policy rate is negative.  President Erdogan has pressed the central bank to cut rates, but it appears the financial markets are passing their judgement.
• Over the last couple of days we have discussed the tragic explosion in Lebanon. The next issue will likely be a surge in refugee flows from the country to Europe.  It should be noted that Syrians have emigrated to Lebanon to escape the Syrian civil war.  The current collapse in Lebanon will likely lead those Syrians to try to follow the Lebanese out of the country.
• A reminder—Belarus holds elections on Sunday.
• Brian Hook, the U.S. special envoy to Iran, announced his resignation. Hook has been hawkish on Iran, but his presence did offer a conduit for talks.  His exit almost guarantees that there will be no diplomatic movement on Iran before November’s election.

COVID-19:  The number of reported cases is 19,127,091 with 715,555 deaths and 11,590,138 recoveries.  In the U.S., there are 4,884,406 confirmed cases with 160,111 deaths and 1,598,624 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The R_t data shows that just over 60% of the states are >1, suggesting increasing infection rates.  Midwestern states are experiencing a rising rate of positive tests.

• The pandemic has probably had the most devastating impact on South America.  GDP is expected to contract 9.4% this year.

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