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

[Posted: 9:30 AM EDT] | PDF

Good morning!  Global equity markets are lower this morning.  Chinese stocks fell hard overnight but have been very strong recently.  China’s GDP data came in stronger than forecast; we may be seeing a bit of “buy rumor, sell fact” behavior in Chinese equities.  Retail sales in the U.S. came in better than forecast; we cover the data below.  The ECB met this morning, and there was no change in policy.  The EU suffered a blow yesterday in its attempt to tame the U.S. tech sector.  There is much to discuss on the policy front.  We update the pandemic news.  The Weekly Energy Update is available.  Here are the details:

China news:

• China’s Q2 GDP roared back, rising 59.7% on a quarterly annualized basis, up 3.2% from last year. What is most remarkable about the bounce is that the level of GDP exceeds Q4 2019 by CNY 80MM.  Of course, this stunning recovery was engineered through the usual policy path—a massive rise in debt and forced investment.  Michael Pettis, one of our favorite China analysts, has always argued that China can have any GDP level it wants; it’s just a matter of how much debt and uneconomic investment it is willing to make.  At the same time, cross-country comparisons will look like China has fully recovered from the COVID-19 event and will be used for the full benefit by Chairman Xi to promote China’s economic model as superior to Western democracy.
• China continues to face sporadic bank runs. Although China established a system of deposit insurance in 2015, it only covers deposits up to CNY 500K ($70,400).  In addition, there is deep suspicion that Chinese banks are suffering from loan losses and depositors fear they could be at risk if a bank fails.  Finally, social media has been the platform for spreading rumors about bank instability, causing runs even against sound banks.

Foreign news:

• The EU suffered a stunning defeat yesterday when its second highest court overturned its order for Apple (APPL 390.90) to pay €14.3B in back taxes. The EU has been trying to push for harmonization of tax rates across member nations, undermining low tax regimes such as Ireland’s.  The court indicated that Ireland didn’t violate any laws because its taxing doesn’t specifically give Apple a tax break.  The decision was seen as a rebuke to Margrethe Vestager, who has campaigned against U.S. tech firms on anti-trust grounds.
• The U.S. will remove a sanctions exemption related to the Nord 2 gas pipeline. This controversial pipeline will deliver Russian natural gas directly to Germany, bypassing Ukraine and Poland in the process.  The U.S. worries the pipeline will make Germany overly dependent on Russian natural gas and deprive transit nations the usual fees they gather for hosting pipelines.  The decision to build the pipeline has always been contentious, especially after Russia’s annexation of Crimea and its interference in eastern Ukraine.
• EU leaders are meeting on Friday through the weekend to determine if a support package and the decision to fund the Eurobond will be approved. The “frugal four,” Sweden, Austria, Netherlands and Denmark, are all expressing opposition; at a minimum, they want conditions on the grants and loans.  Chancellor Merkel has thrown her support behind the measure and will meet with Greek officials before the meetings.
• There are longstanding tensions between Azerbaijan and Armenia, mainly over the disputed region of Nagorno-Karabakh (for background, see our WGR). Azerbaijan forces destroyed an Armenian military facility on the border between the two nations yesterday.  Armenia is said to have killed an Azerbaijani general.  Usually, Russia eventually brokers some sort of arrangement to bring an end to overt hostilities, but if it refuses to act, conditions could deteriorate further and may support oil prices.

Policy news:

• As several fiscal programs are set to expire, congressional leaders are laying their markers for what follows. Congress took aggressive steps earlier this year to offset the impact of the pandemic and the actions did prevent a deeper decline in growth.  Now, leaders are trying to figure out what they should do going forward, with an eye on using the crisis to promote their longer-term policy goals.  We do expect additional support, but also would not expect an agreement until the 11^th hour.
• A couple of points on Fed policy:
  • There has been some consternation among the financial media over a decline in the Fed’s balance sheet.

Worries surrounding this decline are misplaced.  The reason the balance sheet is contracting isn’t because the Fed is tightening support.  It’s declining because market participants aren’t using available facilities because they aren’t needed.  In other words, knowing the Fed is backstopping markets is keeping financial markets well behaved.  It is worth noting that a number of facilities do have expiration dates for the end of Q3.  We expect these deadlines to be extended, but even if they are not, if market participants expect the Fed to maintain low levels of financial stress then the need for actual facilities is unnecessary.  Simply put, the fact that the Fed has signaled it will provide support will tend to preclude the actual need to do so because the markets will act as if the support is in place.

• As Fed officials work through a post-mortem of the crisis, the non-bank financial system is, again, seen as the fount of the overall system’s weakness. In other words, the “shadow” banking system remains vulnerable to runs and remains a source of financial instability.  The Fed said its aggressive expansion of policy support was due to funding problems in the shadow system.  At the same time, the non-bank system can’t really be closed because the banks won’t make loans to many areas of the economy due to the inability to scale the lending.

• U.S. sanctions on Hong Kong are putting global financial banks in a difficult position; essentially, it will be impossible to satisfy both Chinese and U.S. regulations. Of course, these large institutions will try to figure out what they can do to maintain operations in both jurisdictions, but it will be an additional complication.
• The USMCA included labor regulations designed to reduce Mexico’s edge in lower labor costs. Japanese auto firms are examining the laws and are trying to determine if remaining in Mexico or moving production to the U.S. makes sense in light of the changes.

COVID-19:  The number of reported cases is 13,538,763 with 584,922 deaths and 7,600,418 recoveries.  In the U.S., there are 3,499,394 confirmed cases with 135,205 deaths and 1,075,882 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.  Axios has updated its state map.

Virology: 

• • We continue to closely watch the path of vaccine development; Bloomberg has a profile of Sarah Gilbert, who is spearheading Oxford’s program. Although we are heartened by the rapid developments on the vaccine front, there remain worries that the level of immunity may be limited.
  • Meanwhile, Chinese firms are using their employees as testing subjects for their vaccine candidates.

Market and Economy news:

• Yesterday’s Beige Book suggested the economy is improving, but at a very gradual pace.
• As of July 13, 87.6% of apartment households paid some amount of rent.

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

[Posted: 9:30 AM EDT] | PDF

Financial markets are responding to important progress in developing a coronavirus vaccine today.  You can almost hear “Happy Days Are Here Again” being played in the back of our minds, though it’s important to remember that plenty of economic and financial damage can still arise before widespread vaccinations are possible.  We review all the key news below:

COVID-19:  Official data show confirmed cases have risen to 13,349,649 worldwide, with 579,335 deaths and 7,430,243 recoveries.  In the United States, confirmed cases rose to 3,431,744, with 136,468 deaths and 1,049,098 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, 75.04) reported that its coronavirus vaccine performed well in its Phase II trial, producing the targeted antibody response in all 45 people studied and proving to be well tolerated.  Importantly, the immune response also appeared to last at least two months.  The vaccine will now enter a Phase III trial consisting of about 30,000 people starting in late July, with final results expected around the end of the year.
  • Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, hailed the results as “really quite good news.”
  • Coupled with the other vaccines currently moving through trials, the initial success of the Moderna injection could help rekindle optimism regarding control of the disease, despite the discouraging resurgence of infections in the South and West.  As reflected in the market action so far today, the improving prospect of a vaccine should be bullish for global equities and other risk assets, but negative for bonds and precious metals.
• Despite the improving prospects for a future vaccine, the current surge of infections continues in multiple states around the country, and in several large developing countries abroad.  Here in the U.S., the rise in infections is boosting absenteeism at large employers, leading to production shutdowns and signaling a potential new supply shock for some industries.  On the demand side of the economy, emerging data shows the U.S. recovery to date has been driven mostly by higher-income consumers with stable jobs who have been taking advantage of the rising financial markets to buy homes, cars, and other big-ticket items.  All the same, at least one low-cost item has seen a sustained surge in demand: canned tuna fish.
• Following Britain’s decision yesterday to require face masks in retail stores, the French government said it will require mask-wearing in enclosed public spaces within the next few weeks because of a recent slight uptick in infection rates.
• Central Asian countries that had boasted of their early success fighting the pandemic, including Kazakhstan and Uzbekistan, have reintroduced lockdowns in response to a new surge in coronavirus cases that threatens their economies.

U.S. Policy Response

• Despite the good news on vaccine research, Fed Governor Lael Brainard said difficulty suppressing the new coronavirus will pose substantial risks for the U.S. economy, including a possible double dip in economic activity.  She also warned that the nation faces a long, slow recovery even if those hazards are avoided.  On a brighter note, that’s likely to be a positive for the markets; however, she also underlined Fed Chair Powell’s call for continued monetary and fiscal accommodation.

Foreign Policy Response

• In Japan, a government effort to support the tourism industry will kick off next week by providing $10 billion in subsidies for urbanites to visit the countryside, despite concerns that doing so will help spread the virus.

United States:  Presumptive Democratic presidential candidate Joe Biden released his proposed plan to combat climate change.  Under the plan, the government would spend some $2 trillion over the course of a decade to eliminate carbon emissions from the power grid, put Americans into electric vehicles and zero-emissions mass transit, and rebuild roads, bridges, and other infrastructure.  The plan would devote spending to minority communities and bolster rules to support unions, which the Biden campaign frames as a way to ensure benefits go first to poor and working-class people and to communities hurt the most by pollution.

European Union-United States:  In another blow to the European Commission’s effort to exact more tax revenue from big, U.S. multinationals, an EU appeals court quashed a commission order for Apple (AAPL, 388.23) to pay back €14.3 billion in taxes to Ireland.  According to the court, the commission failed to prove that Ireland had provided Apple with an illegal discretionary tax deal that gave it a competitive advantage.  That echoed the reasoning behind a similar decision last year that spared Starbucks (SBUX, 72.73) from having to pay back taxes.  Taken together, the decisions suggest EU competition czar Margrethe Vestager may be facing a prohibitively high hurdle in her effort to crack down on low-tax regimes in the EU.

European Union:  As national leaders continue to negotiate over the European Commission’s proposed €750 billion coronavirus recovery plan, including the proposal to finance it with mutualized EU debt, the horse trading has kicked into high gear.  For example, in a meeting yesterday between Portuguese Prime Minister Costa and Hungarian Prime Minister Orbán, Costa said matters concerning “liberty and the rule of law” shouldn’t be a part of the EU’s negotiations.  In other words, to make sure Hungary doesn’t veto the program and to ensure Portugal gets its share, Costa doesn’t want to press Orbán on his controversial social and judicial policies.

Japan:  In its latest policy decision, the Bank of Japan kept its monetary policy unchanged.  The central bank held its benchmark overnight interest rate at -0.1%, kept 10-year bond yields capped at “around” 0.0%, and held its purchases of equity ETFs steady at a pace of ¥12 trillion per year.  The decision came even as the institution revised down its economic growth forecasts and warned of further downside risks.  GDP in the year to March 2021 is now expected to decline 4.7%.  Consumer prices are expected to fall 0.5%.

Saudi Arabia:  Despite the challenges caused by the coronavirus, low oil prices and the government’s effort to gradually wean the economy off oil, Riyadh has gone ahead with a tripling of its value-added tax this month.  The move hiked the VAT to 15% from 5% previously.

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

[Posted: 9:30 AM EDT] | PDF

Our latest Confluence of Ideas podcast episode is now available, titled “The 2020 Election: Part 2.”  In our “2020 Geopolitical Outlook,” we named the 2020 U.S. election as a key event.  Our recent five-part Weekly Geopolitical Report series examined this issue in more detail.  This is the second of three podcast episodes that will look at the 2020 election.  In this episode, we discuss the issue of inequality and the rise of populism, the impact of social media, and the current problems of extreme partisanship and political legitimacy.

As usual in recent weeks, the financial markets today reflect a tug-of-war between coronavirus optimism, and renewed outbreaks and lockdowns in a growing list of countries, states and localities.  As described below, the renewed outbreaks and lockdowns seem to be winning of late, helping reverse an initial uptrend in the stock market yesterday.  Just as important, we also review several indications that relations are continuing to worsen between China and the Western democracies, which is a further threat to global risk assets.

COVID-19:  Official data show confirmed cases have risen to 13,127,030 worldwide, with 573,664 deaths and 7,280,515 recoveries.  In the United States, confirmed cases rose to 3,364,704, with 135,615 deaths and 1,031,939 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Responding to the recent surge of infections in California, state officials ordered an immediate lockdown on indoor activities at restaurants, bars, museums, zoos and movie theaters.  In addition, the main school districts in Los Angeles and San Diego said they would start the school year solely online.  Separately, Oregon Governor Kate Brown ordered a ban on most indoor social gatherings of more than 10 people, and said the state would require people to wear masks outside when they can’t properly social distance.
  • Coupled with renewed lockdowns in other areas, these measures underscore the risk of renewed economic damage from the resurgence in infections in the South and West.  Even though this round of infections has mostly affected the younger, healthier victims that typically handle the disease better, intensive-care capacity is already being stretched to the limit in some areas and the first hints of a resurgence in deaths is already visible.
  • If those trends continue, more state and local governments are likely to reimpose their lockdowns to protect the most vulnerable – a move that would probably lead to another retreat in equity prices.
• Compounding the negative news from the U.S., the Walt Disney Company (DIS, 116.22) said it is reclosing its Hong Kong Disneyland theme park, just a month after it reopened, because of a resurgence of infections in the city.  The closure comes as Hong Kong officials said all activities such as large social gatherings, dining in at restaurants and going to the gym would be temporarily suspended.
• The British government said face masks will be required for anyone entering retail stores in England beginning on July 24, on top of the existing requirement to wear a mask on public transport.  Cabinet Office Minister Michael Gove had said on Sunday that masks should not be made mandatory, but the government overruled him on grounds that “there is growing evidence that wearing a face covering in an enclosed space helps protect individuals and those around them from coronavirus.”  The decision brings England in line with Scotland, Germany, Italy and several other European countries and locales.
• In South Africa, a sharp resurgence of coronavirus cases has forced the government to reimpose its lockdowns, including a ban on alcohol sales and a curfew.
• Economic reports from Europe and Asia today show continued deep economic scarring from the virus lockdowns (see data below), including an annualized drop of 41.2% in Singapore’s second quarter GDP.
• If you’re looking for more evidence that some things will never be the same after the virus crisis, recent polling shows that a large percentage of Japanese commuters don’t want to go back to the office and submit themselves again to the nightmare known as Japanese public transport.  The reporting highlights the risk that many office complexes around the world could end up being less utilized and less valuable going forward.

Foreign Policy Response

• Germany continues to show surprisingly strong support for the European Commission’s proposed €750 billion coronavirus recovery package, which is expected to include a large program of joint, mutualized EU debt.  Chancellor Merkel yesterday insisted the package had to be “massive.”  In fact, she insisted that, “Europe wants to stick together in this difficult time,” illustrating Germany’s fresh sense of leadership in the EU as the U.S. pulls back from its traditional role as global hegemon.

United States-China:  In a major shift away from the previous U.S. policy of not taking sides in territorial disputes where it is not involved, Secretary of State Pompeo said the United States has formally rejected a range of Chinese territorial claims against its neighbors in the South China Sea.  In his statement, Pompeo characterized the decision as an effort to uphold international law against what he called a “might makes right” campaign by China to coerce and intimidate its Southeast Asian neighbors into ceding their interests.  Although it wasn’t immediately clear what the practical implications of the policy shift will be, there is a high risk that the move will exacerbate U.S.-China tensions in trade, technology, human rights and other areas.  At the extreme, the move could also raise the risk of military confrontation with China at some point down the road, so it is a decided negative for equities and bears close watching.

China-United Kingdom:  Buckling to U.S. pressure, the U.K. did an about-face and banned Chinese telecom giant Huawei (002502.SZ, 3.07) from the country’s 5G communications network.  The company will be banned from supplying new equipment to Britain’s 5G networks from December 31, while existing Huawei equipment must be stripped from 5G networks by 2027.  The move, which aims to prevent Huawei’s equipment from being used for Chinese spying or influence operations, illustrates the growing global pushback against China’s political, economic and technological rise.  Not only does that pushback portend a potential conflict with China at some point in the future, but it also has the potential to crimp Chinese economic growth and the success of its firms as they attempt to expand overseas.  As noted above, the pushback is therefore a growing risk for global risk assets.

China-Hong Kong-United Kingdom:  The British government estimated about 200,000 residents of Hong Kong could apply for special “British National Overseas” passports and emigrate to the U.K. under Foreign Secretary Raab’s offer last month.  That’s far below the 3,000,000 or so who are eligible for the passports, but even that level of emigration would likely anger Beijing and further strain relations between China and the West.

United States:  A fire in port has caused major damage to the USS Bonhomme Richard, one of the Navy‘s few amphibious assault ships capable of conducting offensive operations like an aircraft carrier.  According to officials, the damage is so severe that it may be impractical to repair.  If the ship is lost, it would significantly reduce U.S. ability to project power around the world for an extended period.

European Union:  The European Commission is reportedly planning to clamp down on the sweetheart tax deals that some smaller countries have offered to multinational firms.  Crucially, unlike ordinary tax legislation in the EU, the initiative would only require the backing of a qualified majority of the EU’s 27 member states rather than unanimous support of all countries.  That would limit any government’s ability to wield a veto, although the measure would also need approval from the European parliament.

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday!  Global equity markets are higher this morning.  There is a good deal of foreign news today, including Poland’s election news and Turkey’s controversial move to change a museum into a mosque.  China will be next in line, followed by our update of the pandemic news.  We will close with policy and economic/market news. Here are the details:

Foreign news:

• The preliminary results from Poland’s runoff election show that the Law and Justice Party incumbent Andrzej Duda has squeezed out a narrow victory, although his opponent, Rafal Trzaskowski, has not yet conceded, saying the election is still too close to call. Final totals are expected tomorrow.  The Law and Justice Party is right-wing populist and has strained relations with the EU.  The narrowness of the victory suggests Poland is closely divided; voting distribution shows that the incumbent party dominated the eastern parts of Poland, whereas the centrist parties do better in the western areas.
• Turkish President Erdogan’s government won a court case to convert the Hagia Sophia from a museum to a mosque. The facility was originally the premier church of Eastern Orthodoxy but was converted to a mosque by the Ottoman empire.  After creating modern-secular Turkey after WWI, Ataturk made the facility a museum.  The action is not sitting well among the Orthodox.
• The EU is in preparing for critical talks over the €750 B aid package that would include a Eurobond. The frugal nations are pushing for fewer grants and reforms as part of the package; this is a non-starter.  If the EU is unable to make this work, it would be a major setback.  However, we think that Germany has too much at stake; one key problem in Europe is that export growth remains sluggish, which is hurting Berlin.  Thus, the support package will likely help Germany too, so we expect Chancellor Merkel to eventually drive the program forward.
• In Russia, widespread protests have emerged in the Far Eastern regions over Putin’s decision to oust a popular, but apparently corrupt, governor. Unlike protests in the major cities east of the Urals, these protestors are not those calling for more democracy but are, instead, tied to a particular person.
  • The Netherlands is bringing Russia to court over the downing of flight MH17.

China news:

• In retaliation for the U.S. sanctioning Chinese officials over the Uighurs, Beijing has sanctioned several U.S. officials, mostly member of Congress. This action was expected and the fact that no major members of the administration were targeted suggests this was a measured response.
• Despite the recent National Security Law crackdown, primaries held by pro-democracy parties saw a massive turnout, a snub to the Xi regime.
• The U.K. is taking steps to reduce their use of Huawei (002502, CNY 3.09) equipment in 5G networks and supporting a broader ban by the “Five-Eyes” network. The latter will almost certainly require the creating of equipment alternatives which will need government investment support.
• We are seeing improving industrial metals prices, which is attributed to expectations of Chinese stimulus. Although we do expect authorities in China to inject fiscal and monetary stimulus, it is likely that it will be much less than what we saw coming out of the 2007-09 downturn.

COVID-19:   The number of reported cases is 12,932,640 with 569,666 deaths and 7,139,672 recoveries.   In the U.S., there are 3,304,942 confirmed cases with 135,205 deaths and 1,006,326 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.  All but seven states have a reproduction rate over 1.0, meaning that the virus is spreading at an increasing rate.

Virology:

• As the number of cases in the U.S. rise, we are seeing new evidence that households are returning to earlier sheltering behavior; we are seeing a rise in canned soup and flour sales.
• In the race to develop a vaccine, a couple of concerns have emerged. First, a recent U.K. study suggests antibodies against the virus from those who have been exposed dissipate in about three months.  Thus, COVID-19 is acting much like common colds and influenza, in that a single infection doesn’t grant long term immunity.  This may mean that high-risk groups will need to be vaccinated on a regular cycle and that the disease may be a plague upon humanity until it mutates into a less virulent form.  Second, lost in the raging debate over reopening schools is how the virus affects children.  It appears that most children are only mildly affected by the disease, but there are rare cases of MIS-C, which is similar to Kawasaki disease.  MIS-C seems to be an immune response issue, meaning that (a) it isn’t the pathogen but the body’s reaction that the problem and, (b) vaccination may actually increase the risk of trigging this response.
• Researchers are not only working to create a vaccine but are also taking steps to insure it is safe. There is a response, known as “disease enhancement,” where a vaccinated person comes down with a severe case of the disease.  Given the already elevated level of vaccine fear, a vaccine that triggers cases of the disease would be a real problem, as it may discourage people from accepting the vaccine and thus reduce the odds of building herd immunity.
• One of the hopes was that COVID-19 would dissipate under warm summer weather. After fall, flu and colds have a season and that is fall and winter.  However, summer hasn’t slowed the spread of the virus and researchers have been investigating to see why.  The key reason seems to be that there simply isn’t enough herd immunity yet to allow summer to reduce infections.  A secondary reason is that the virus seems to spread best indoors; in the summer, as temps rise in the south (it’s 94^o at 5:00 am Phoenix…yes, it’s a “dry heat” but the forecast calls for 111^o today) people tend to move indoors.  Note that in northern parts of the country, cases have fallen, perhaps because it isn’t as hot, and people are not congregating inside.
• Now, some good news and some bad news.
• The good news is that Italian researchers believe that the virus may be mutating into a less virulent form, noting that more people are seeing asymptomatic infections and complex cases in Italy have declined. The debate among scientists is raging, but it would not be unusual for a coronavirus to mutate in this fashion.
• Kazakhstan is reporting an ‘unknown pneumonia’ that is deadlier than COVID-19 and appears to be spreading. It is not clear if it is a coronavirus or something else, but the country has implemented a lockdown.

Policy news:

• The Treasury and the Fed are having a disagreement about the terms and conditions of the Main Street lending program. The Fed wanted relaxed terms of conditions to encourage borrowing; the Treasury, which would be saddled with losses, has pushed for a more cautious program.  Although the differences make sense given who bears the risk, reluctance to lend is now a concern.
• On July 21, the Senate is expected to hold confirmation hearings on Christopher Waller and Judy Shelton for Fed governor. Although Waller is a shoo-in, Shelton is controversial on both sides of the aisle and may not make it through the process.
• We are again heading toward deadlines for another round of fiscal stimulus. Although the White House and Democrats appear open to more spending, Senate GOP members are less enthused.  There is a risk to the economy (and equities) if no agreement or an inadequate agreement is reached.  However, we would expect the Fed to expand lending if Congress fails to act.  It just isn’t clear how much the Fed can do to directly intervene.   The pace of recovery does appear to be slowing, which should prompt policy action.
• The U.S. is considering $1.3 B of French luxury goods with a 25% tariff in retaliation for a digital tax.

 Market and Economy news:

• OPEC appears to be easing output restrictions. We assume the cartel leadership is signaling it will live with oil prices in a $30/$40 range for the foreseeable future and gambling that this level will prevent a surge in shale production.  We tend to agree with this assessment.
• Last year, Congress passed the Small Business Reorganization Act. The law made it easier for small businesses to go bankrupt using Chapter 11, instead of the more common Chapter 8.  The latter tends to liquidate the business and pay off creditors from the proceeds; the former ends collection efforts and allows the firm to reorganize but tends to mean creditors have to accept less attractive terms.  This new law went into effect in February and we are seeing a rash of bankruptcy filings.  Although some commentators have noted the rise in bankruptcies, suggesting that there is trouble in the economy, it appears that at least some of the actions are due to more attractive terms for borrowers.  The new law gives small business borrowers leverage in negotiations and thus they can extract better terms in negotiations.
• As we have noted, one of the features of the past bull market was a higher level of buybacks and fewer new issues. That situation has changed in this recovery as firms are using “blank-check companies” to facilitate tapping the public markets for liquidity.  This action suggests that firms see the rising stock market as an opportunity, which in the past, has suggested a frothy equity market.  Of course, with the recent aggressive expansion of the Fed’s balance sheet, liquidity is looking for a “home” and equities are one place the funds can go.
• The other may be Chinese government bonds. Chinese local currency bonds are yielding 3.11% for 10-years and the PBOC has controlled the exchange rate successfully for some time.  It is a well-known fact that China’s debt load is extraordinarily large.  Tapping foreign investors may be the last frontier for China to attract funds to eventually resolve the debt overhang.  Thus, in the long run, the risk of these bonds is high, but in the short run, they are very attractive.

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