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

[Posted: 9:30 AM EDT]

The 13^th episode of the Confluence of Ideas podcast is available; it is our first in a series of reports on the November elections.

Good morning, all.  Lots going on today.  For the second consecutive day, we are starting with weaker equity markets.  In fact, almost everything is red this morning except Treasuries.  In equities, there are worries that institutional managers may try to capture Q2’s surge in equities with an aggressive rebalance and that would be bearish for stocks in the very short run.  We update the pandemic news; it appears another surge in cases is upon us, although we are noting some differences compared to the initial rise.  We update China news this morning, noting a real cold war is emerging on the India/China frontier and there is some divergence in policy direction between the White House and Congress.  The economic news includes the IMF’s downgrade of global GDP.  Poland is open to U.S. troops.  We are noting some flooding issues and there was an earthquake yesterday in Mexico; we also follow up on the arctic heatwave.  The Weekly Energy Update is available.  Here are the details:

COVID-19: The number of reported cases is 9,440,535 with 483,207 deaths and 4,754,755 recoveries.  In the U.S., there are 2,381,369 confirmed cases with 121,979 deaths and 656,161 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 Axios U.S. state map has been updated.

Virology:

• The WSJ details the rise in new cases; although increased testing is a factor, it does look like we are seeing increased spreading.
• One factor we are seeing is fewer deaths per the number of cases.

This chart looks at the rolling seven-day change in new cases and fatalities.  We are seeing a clear upswing in cases, but fatalities are continuing to decline.  It is possible that there is a lag between cases and fatalities.  In fact, the above chart suggests there is about a 10-day lag, so some increase in fatalities wouldn’t be a surprise.  But, at the same time, we are well into that 10-day window and, so far, fatalities haven’t jumped yet.  We suspect two changes have occurred that may slow the rate of deaths; first, the medical system has probably gotten better at treatment.  We know ventilator use has slowed as less invasive techniques have proven to be more effective.  Second, it is probably the case that vulnerable populations (the elderly, chronic conditions, etc.) are being more careful in public and those contracting the disease are younger and healthier.  That doesn’t mean this group can’t die from the disease, but the chances are lower.

• Therefore, we may be seeing a slow transition from avoiding the disease at all costs to learning to live with it. It is apparent that lockdowns do work in slowing the rate of infections, but the economic cost is horrific.  Being more selective in who stays home, taking other measures (distancing in social situations, mask wearing) and working on mitigation therapies are all probably in our future until widespread vaccination develops.
• Disney (DIS, 112.07) may be forced to delay reopening its theme parks as workers push back against the company’s plans. Other companies and industries are facing similar concerns.  Several states are reconsidering their plans to reopen as well.
• India is facing a massive problem in its medical system due to the pandemic.
• Genetic researchers in the U.K. have identified 68 genes associated with the risks surrounding COVID-19. One of the mysteries of the virus is the wide variation in symptoms.  Some people who are infected exhibit no symptoms, while others are seriously affected.  Their research suggests that COVID-19 is not just a respiratory illness but a cardiovascular one as well.  It has also been found that Type A blood groups are at higher risk of serious complications, while Type O groups are not.  If specific markers can be determined, genetic testing could indicate who is vulnerable and who is not and thus allow low-risk groups to reengage in social and economic activities (which could have much less attractive aspects as well).

China news: 

• As the powers between Congress and the executive branch have evolved over time, the president generally has a greater say in foreign policy. That doesn’t mean Congress has no impact, but, in the day-to-day operation of foreign policy, the White House is in charge.  Still, for better or worse, Congress reflects the broader populous and thus has exhibited swings in sentiment over various policy issues.  Accordingly, in terms of foreign policy, Congress can push for sanctions and other policy measures that the president may be reluctant to implement as they might undermine other policy goals.  This is a situation that has been part of American political history since Washington (our first president had to fend off congressional desires to join France against England in French Revolutionary Wars).
  • Currently, Congress is pushing for numerous measures to punish China over various issues. Regarding Hong Kong, the White House is trying to prevent Congress from passing mandatory sanctions.
  • Congress is pressing to ease restrictions that would allow Americans to sue China over pandemic costs.
  • There are divisions within the executive branch as well. The Pentagon has published a list of 20 Chinese companies with ties to the Chinese military; it is presumed this list was created to reduce these companies’ ability to tap U.S. financial markets and perhaps sanction trade.  The Senate is pushing for greater transparency for foreign firms listing on U.S. exchanges.  It appears the goal of the bill is to force Chinese firms to give up their ties to the security state for access to U.S. financial markets.  National Security Advisor O’Brien recently gave a speech that was sharply critical of the CPC.
  • It is often the case that a president doesn’t necessarily oppose measures brought by Congress or other members of the executive branch; what presidents oppose are measures that restrict their ability to enjoy policy flexibility.
• Although direct hostilities appear to have eased in the India/China frontier, it does appear both sides are digging in for potential future conflicts. India has blocked the importation of various Chinese goods in retaliation for the recent attacks.
• There are increasing worries about military conflicts between China and the U.S.

Trade policy news:

• If you are a fan of European wines, get busy; there is a possible jump in tariffs on EU wine coming due to the ongoing dispute over EU aircraft subsidies. Other European “goodies” might be targeted as well.
• It looks like the structure of a grand bargain over Brexit is in the works. The U.K. would be allowed to make changes to its policy that may lead to an “uneven” playing field with the EU.  In other words, if the U.K. relaxes its environmental laws, the EU could be at a disadvantage in trade.  The EU will be given the right to selectively apply tariffs on U.K. goods to offset Britain’s advantage.  The strategic ambiguity of this proposal is rather impressive; both sides can claim they got what they wanted, and a hard Brexit can be avoided.  How it would actually work in practice is another matter, but this looks like a rather elegant solution.
• The U.K. is beginning to realize that a trade deal with the U.S. may require it to simply adopt U.S. regulatory policy.

Foreign news:

• Poland could receive American soldiers who are likely to be removed from Germany, assuming Poland is willing to pay for billeting U.S. troops. Poland does want the U.S. presence to remain in Europe; given Poland’s history, this is a very reasonable request.
• Russia held its May parade yesterday; the country goes to the polls today on a referendum to extend Putin’s rule.
• Mexico suffered a massive earthquake yesterday but, so far, fatalities have been remarkably light. Mexico’s unions oppose the decision by the government to nationalize lithium mines.

Economic news:

• The IMF downgraded its economic outlook, indicating the world economy will shrink 4.9% this year compared to its earlier estimate of -3.0%. The pandemic was blamed.
• One of our concerns about the economy is that state and local governments, facing falling tax revenues and pandemic costs, will be forced to curtail services and lay off workers. There are reports that New York is facing this problem.
• The Fed is conducting bank stress tests. Governor Quarles is suggesting banks test for a second downturn in the economy.
• Yelp reports that 140K businesses remain closed due to the pandemic; around 40% of those firms may not reopen.
• Congressional leaders are criticizing the Fed for relying on the three major rating agencies in their purchases of corporate debt. If the Fed widens its buying beyond this group, the central bank may be accepting more credit risk.
• We have been monitoring the financial markets for evidence of election worries. One of the issues that is evolving is that the widespread use of absentee ballots, due to COVID-19, will delay reporting results and thus it is very possible that we may not know for certain who won on the day after the election.  That will include congressional races as well.  We are seeing a rise in JPY call option purchases for November as traders speculate that the yen would rally if uncertainty over the election were to develop.
• On a lighter note, MLB will allow mascots to return when the baseball season resumes. Fredbird has avoided a layoff.

Weather news:

• Massive, widespread flooding is being reported in China. Although this is a period of seasonal rain, this year, rain has been much greater than normal.  The Chinese party organ, the Global Times, reports that the Three Gorges Dam is ok…which, of course, begs the question: why did the CPC need to tell us that?  We are also seeing flooding in Ukraine.
• Yesterday, we reported on the arctic heat wave; it appears that the higher than normal temperatures could trigger widespread fires.

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

[Posted: 9:30 AM EDT]

Good morning!  The 13^th episode of the Confluence of Ideas podcast is available; the topic is the first in a series of episodes on the November elections.

Equity futures are lower this morning; market talk suggests it’s due to rising COVID-19 infections, but a good, old-fashioned “pause to refresh” is just as likely.  Poland’s President Duda visits the White House today just before elections in his country.  The Segway is done.  We update the news from China.  We offer some thoughts on reports that the administration is considering additional stimulus and other measures.  There is growing concern about commercial real estate.  Tech leaders are opposed to immigration restriction measures.  Our usual commentary on COVID-19 is available.  Here are the details:

China news: 

• It appears that India and China are reducing recent border tensions. This is the usual pattern; we have seen a cycle of rising tensions followed by steps to prevent a broader war.  The risk is, of course, that the border tensions, at some juncture, do lead to something worse.  One area of concern is that PM Modi has less ability to control public opinion in India, compared to Chairman Xi; it is not inconceivable that an Indian PM at some point in the future may not be able to contain the groundswell and may be forced into a conflict.  In an upcoming WGR, we will look at the history of this issue.
• For the past few days, we have been commenting on the recent EU/China videoconference. In the aftermath, it is clear that EU leaders are unhappy with China’s behavior, but are also reluctant to press too hard on Beijing for fear of hurting trade and investment relations.  The recent row over comments from Peter Navarro suggests similar sentiment exists in the U.S. as well.  The closest historical parallel, in our view, to China’s relations with the U.S., or the EU too, was between the U.K. and Germany from 1870 to 1914.  There was a growing geopolitical rivalry, but deep economic ties as well.

Economic and policy news:

• June and the end of Q2 are coming soon, and several stimulus measures are about to expire. The measures were put in place with fairly short endpoints because the expectations were that the economy would be returning to normal in short order.  It is true that there is ample evidence of the economy improving, but making new peaks in GDP will probably take until H2 2021.  As it becomes apparent that that a new expansion is going to take a while, policymakers are rethinking their ideas on allowing various measures to expire next month.
  • The first round of stimulus checks worked pretty well; renters were remarkably current on making payments and spending levels have shown signs of recovery. The president is apparently on board with another round of stimulus checks.  Although there will be opposition, we would not be surprised to see a second round soon.
  • The tax deadline may be extended again, past July 15^th.
  • President Trump would also like an infrastructure bill, to the tune of $1.0 trillion, but he doesn’t appear to be getting much support from either Congress or the rest of his administration.
  • There are growing concerns about commercial real estate; policymakers are pushing for a new Fed facility to support this market. There are reports that some mall operators are pressing small retailers for rent payments for months when the malls were closed.  This problem highlights the problems in the payment chain; as commercial rents don’t get paid, cash shortages develop to operators and eventually bondholders.
  • Overall, we do expect new measures to be forthcoming. However, as is normal with policymaking, look for there to be much “11^th hour” type brinkmanship before anything gets passed.
• The U.S. is contemplating $3.1 billion of new tariffs on the EU and U.K. if they proceed with a digital tax.  Canada is facing new tariffs on aluminum as Washington tries to cope with rising supplies.  This move is coming just before USMCA goes into effect on July 1.  Congress is planning a vote on leaving the WTO next month.  The measure appears to be jointing led by right- and left-wing populists in Congress.
• There has been a run on plexiglass as shields for COVID-19.

Foreign news:

• The EU is considering banning U.S. travelers from the bloc due to concerns about COVID-19. Interestingly enough, the ban would not exclude China.
• North Korea has engaged in a number of provocative acts recently. It appears that Kim Jong Un may be dialing back some of the tensions.  To some extent, what we have seen recently is consistent with North Korea’s behavior.  Pyongyang often takes aggressive actions and raises tensions, then promises to behave better if it gets sanctions relief, or aid.  What might be different this time is that this news may signal a reengagement of Kim Jong Un; there has been some evidence to suggest he has been sidelined and his sister, Kim Yo Jong, has been driving policy.  She appears to be much more hawkish than her brother.  Knowing what is happening in North Korea is always a challenge, but it is possible we are seeing a divided leadership.
• Russia is holding its military parades today that it usually holds on May 9. These parades were delayed due to the pandemic.  Tomorrow, Russians vote to extend Putin’s rule; we expect him to win.
• British landlords and tenants are facing an end to support, reflecting similar worries in the U.S.

Tech news:

• The S. has suspended work visas for several classes of workers due to high unemployment. The tech industry is upset by the decision as is India.
• The DOJ and states’ attorneys general are meeting to discuss antitrust action against some tech firms.

COVID-19:  The number of reported cases is 9,273,773 with 478,160 deaths and 4,645,628 recoveries.  In the U.S., there are 2,347,102 confirmed cases with 121,225 deaths and 647,548 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.

Virology:

• As lockdowns ease, there has been a rise in infections, not only in the U.S., but around the world. South America has been especially hard hit.  Nursing homes have been a particular area of risk, and Canada has been hit hard.
• There are reports some Chinese nationals in Russia are using forged COVID-19 tests showing a negative result so they can return to China.

Finally, there are reports of soaring temperatures in Siberia.  Although it hasn’t been verified, the city of Verkhoyansk reported a high temperature of just 100^o Fahrenheit on Saturday.  The Russian Arctic is also seeing higher temperatures, with temperatures rising about 0.69^o every decade, compared to world temperatures rising about 0.18^o every decade.  The rise in temperatures is thawing permafrost and contributed to a recent diesel fuel spill, as weakening permafrost damaged a storage tank.  One way this change affects U.S. weather is that it weakens the jet stream and can leave weather systems “parked” over parts of the U.S., leading to extended heat waves, or rainfall and flooding.

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

[Posted: 9:30 AM EDT]

Good morning!  The 13^th episode of the Confluence of Ideas podcast is available; the topic is the first in a series of episodes on the November elections.  U.S. equity futures are higher again this morning, with the rest of the world rising as well.  In other markets, gold is at a seven-month high, WTI is over $40 per barrel and the dollar is lower.  We did see some volatility overnight after Peter Navarro seemed to indicate that the trade agreement with China is “over.”  S&P futures quickly dropped about 50 points.  The White House moved in short order to clarify Navarro’s comments, confirming that the Phase One arrangement is still intact.  We update China and economic news.  We also cover domestic policy and foreign news.  Our usual commentary on COVID-19 is available.  Here are the details:

China news: 

• As we noted yesterday, the EU and China held a video meeting. Overall, it appears that both sides remain deeply divided; evidence of this division is the fact that no joint statement was released.  EU leaders pressed Beijing to treat European firms in China fairly.  Relations with China and the EU have been strained lately.  China has been accused of pressing officials to soften language criticizing Beijing’s handling of the pandemic and there are fears China is using its financial power to divide the EU.  EU Commission President von der Leyen criticized China for launching cyberattacks on European hospitals.  Overall, China is facing diplomatic pressure from Europe and the U.S.
• Beijing has revealed much of the new Hong Kong security law, but not all parts. The rest will be made public after it officially passes the Chinese legislature, which is expected on June 30.
• Fan Xinghai, a vice-chair of the China Securities Regulatory Commission, warned China’s leaders that it should be prepared to be cut off from the U.S. dollar system in a fashion similar to what occurred to Russia. Given China’s massive foreign reserves, such an action by the U.S. would have a significant impact on global financial markets.  Although the usual fear is that China would “dump” its Treasuries, such action would harm China more than others.  Instead, China would probably try to slowly reduce its Treasury holdings by funneling the sales through intermediaries and try to replace the Treasuries with other foreign bonds, e.g., European and Japanese.  A proposed Eurobond for funding the COVID-19 recovery in Europe could be a very attractive replacement for some of the Treasuries held by China.
• Meanwhile, China is seeing a jump in inflows as foreigners are buying Chinese sovereigns, likely to take advantage of their relatively higher yield.
• As we noted last week, the meeting between SoS Pompeo and Yang Jiechi didn’t seem to yield any immediate results. However, it appears one message did emerge; China has agreed to increase the pace of its grain purchases.  The current pace is woefully below target.  Corn and soybean prices are lower this morning despite this news, although yesterday’s rain across Iowa, Illinois and Missouri probably had more to do with the decline in prices.

Economic news:

• The WSJ notes that there has been a surge in household savings in the U.S. Much of this jump was due to the influx of fiscal support coupled with the lockdown that reduced spending.  If the savings persists, it will have an impact on economic growth.  However, it is quite possible that as the lockdowns ease, spending will accelerate, and the level of savings will decline.  What is unknown is if there will be higher levels of savings in the aftermath of the pandemic.  If there is, government dissaving, business dissaving or a smaller trade deficit will result.  Our expectation, if the change is permanent, is that the fiscal deficit will absorb most of the savings.

Policy news:

• President Trump clarified reports suggesting he was considering talking to Venezuelan President Maduro. The U.S. will only talk to Maduro about leaving office.
• The U.S., as expected, has restricted work visas; the tech industry opposes this move.
• New York state is nearing the end of its moratorium on evictions; there are worries about widespread evictions, although the mechanics of actually moving people out of apartments will probably prevent immediate actions.

Foreign news:

• Japan has given six weeks for the U.K. to make a trade agreement. The apparent “need for speed” seems to be driven by desires in Japan to be the first to strike a deal with the U.K. out of the EU.  It isn’t obvious how much can be accomplished in such a short time frame, but if it can be done, Westminster will be able to claim it has its first trade agreement after Brexit.
• The U.K. is increasing its takeover defenses from foreign buyers. Similar actions have been seen around Europe as the continent adapts to deglobalization.
• EU investors are threatening to reduce investments in Brazil if the country doesn’t address the deforestation of the Amazon region.

COVID-19:  The number of reported cases is 9,115,878 with 472,541 deaths and 4,544,196 recoveries.  In the U.S., there are 2,312,302 confirmed cases with 120,402 deaths and 640,198 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.  We are seeing a surge in the R₀ data, suggesting a rising pace of infections in the U.S.  Here is the state-by-state data.

Virology:

• Saudi Arabia announced it will sharply reduce the number of foreign visitors to the haji, the annual visit to Mecca. Worries about infections prompted the decision.
• Gilead (GILD, 75.67) will begin human testing for an inhaled version of Remdesivir; currently, the drug requires an IV, so going to an inhaled version would allow for greater distribution of the treatment.

Finally, some good news—honeybee populations saw a lower than normal winter die-off this year, after suffering a larger loss last year.  Honeybees are critical to numerous U.S. crops, so the recovery is positive.

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

[Posted: 9:30 AM EDT]

Good morning and happy Monday.  U.S. equity futures are higher this morning, while Europe is lower.  Treasuries yields are lower, as well as the dollar, while gold is up. EU leaders are talking to Chairman Xi today; the new security law passed in Beijing, meaning it has become law in Hong Kong.  We recap banking data.  President Trump says he will talk to Maduro.  Our usual commentary on COVID-19 is available.   Here are the details:

China news: 

• EU and Chinese leaders are scheduled to have a video conference today. European leaders have become increasingly alarmed by China’s behavior.  As we have discussed before, the EU has noted Beijing’s aggressive narrative control over COVID-19.  In addition, China’s investment activities in Europe has raised fears that China will use the weakness caused by the pandemic to take control of European businesses.  Expectations surrounding the talks are low, suggesting that not much will come from the conference.
• Although the news was no surprise, Beijing is moving to ratify the new security law for Hong Kong. The Standing Committee of the Politburo will convene a special session on June 28 and impose the new law on the former colony.  One part of the new law will establish a new agency to execute national security in Hong Kong, signaling it is taking concrete steps to apply the new legislation.  The decision to create this new bureaucracy quashes any hope that the law would be passed but implemented with a “light touch.” This law will effectively end Hong Kong’s “one country, two systems” approach.  We expect this decision to further undermine U.S. and U.K. relations with China.
• China has had a new surge of COVID-19 cases, with the outbreak centered on food markets in Beijing. As we noted last week, Nordic salmon was said to have tested positive for the virus, although it was generally believed the virus likely came from infected workers handling the product.  Although handling or eating food that has been found to have the virus hasn’t been reported as a vector for spreading the disease, blaming the outbreak on imported food does fit Beijing’s narrative of the virus coming from outside China.  Over the weekend, China has banned some chicken imports coming from a Tyson (TSN, 63.22) plant with a high number of COVID-19 cases.   We would not be surprised to see China use this news as an excuse for failing to meet its obligations set in the Phase One trade agreement.
• The PBOC held its loan prime rate steady, suggesting that we are probably approaching the end of the rate cutting cycle in China.

Economic news:

• The Fed has updated its May data on the banking system. There were three items that are worth noting.  First, households are being very cautious.  Consumer credit fell 1.1% from last year.

Second, deposits have soared, rising 20.7% from last year, the fastest growth for this data (which goes back to 1973.

Third, business lending has soared (and partly accounts for the jump in deposits).

What does this tell us?  Households are cutting their borrowing and increasing their cash holdings, while businesses are tapping credit lines and gathering cash too.  There is a pile of liquidity in the financial system and where it eventually ends up will be critical for financial and commodity markets.

• Rebounding industrial metals prices signal that the global economy is improving.
• As firms begin to reopen, they are struggling with the mechanics of hiring. In other words, how does one conduct a virtual job fair?  Should it be done by videoconferencing?  What about “drive by” interviews?  Although bringing back furloughed workers will be the first step, some degree of mass hiring will be necessary due to the sharp drop in employment seen before; exactly how to interview and maintain social distancing will tend to reduce the ability of interviewers to use non-verbal cues to inform the hiring decision.

Policy news:

• Is additional fiscal stimulus a good idea? One of the reasons that discretionary fiscal policy fell from favor was that the legislative process is usually protracted. By the time the stimulus is passed, the crisis is often over.  This time around, Congress has moved with unusual speed, but now members are starting to question the need for additional help.  Fiscal hawks want to curb the spending but there is a risk that if the economy stumbles, the lack of fiscal help could trigger another downturn.  However, additional spending is getting a rare nod from business; the Chamber of Commerce is calling for additional support for state and local government.
• According to Axios, President Trump has concluded that Juan Guaido isn’t going to get control of Venezuela and thus the S. may be open to talks with President Maduro.

COVID-19:   The number of reported cases is 8,975,776 with 468,724 deaths and 4,448,281 recoveries.   In the U.S., there are 2,280,969 confirmed cases with 119,977 deaths and 622,133 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.

Virology:

• After a slow start, the EU is moving quickly to support vaccine development and production.
• The S., India and South America have seen rising cases, while China and South Korea have seen case counts decline.  The U.S. south is seeing rising cases in younger Americans.  The German meatpacking industry is seeing a surge in cases, a similar problem seen in the U.S.
• One of the more troubling issues surrounding COVID-19 is just how little we know about the virus and how there has been a steady stream of surprises about how it spreads and what it does. The most recent troubling news is that the virus may spread in mammals more easily than first thought.  In Denmark, there has been an outbreak in minks that is thought to have come from humans.  Further studies suggest the virus can spread in cats, dogs, pigs and other animals.  The problem with this transmission is that once the virus infects an animal, it might mutate into a new form and move back into the human population.
• It is well known that age is an important factor in fatalities from the virus. Researchers are increasingly concerned that emerging vaccines may not provide immunity in older adults.  It is possible that older adults may receive a different vaccine than younger people based on the efficacy of the vaccine.

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

[Posted: 9:30 AM EDT]

Good morning and happy Friday! U.S. equity futures are higher this morning as optimism over the economy continues to rise.  China remains in the news.  The forbearance being offered by lenders is having an adverse impact on the industry designed to deal with bad debt—bankruptcy lawyers and trustees, repossession firms, auction houses, etc.  Our usual commentary on COVID-19 is available.  Additionally, there are a couple of interesting market items.  Here are the details:

China news: 

• SoS Pompeo met with Yang Jiechi yesterday in Hawaii. Both sides have been mostly tight-lipped about the outcome; it appears that the U.S. and China stated their positions on various issues but if there was any attempt to find commonality, it isn’t obvious.  Meanwhile, President Trump indicated the U.S. could still sever relations with China.
• Large changes create opportunities. As conditions change in Hong Kong, other nations are looking to provide a home for various businesses currently in the former colony.  Japan is attempting to bring financial firms to Tokyo, for example.  At the same time, as the U.S. considers making Chinese firms delist from U.S. stock exchanges, Hong Kong bankers are trying to get these firms to list in Hong Kong.  Although only time will tell, it is possible that China will attempt to preserve Hong Kong’s financial power; as the U.S. leans toward closing off American financial markets from China, the Xi regime may need Hong Kong’s financial expertise.  That doesn’t mean that the CPC won’t try to end democracy in Hong Kong, but it may give the financial industry wide latitude to operate.
• We continue to closely monitor the situation on the Indian/Chinese frontier. The leadership of both nations appear to be trying to contain nationalist fervor that could force escalation.  China, due to its social controls, can generally manage such issues.  India, on the other hand, has an active tabloid press and thus PM Modi will have his hands full trying to keep group emotions in check.
• One outcome from the border clash is that New Delhi may decide to join the West in dealing with China. India has traditionally avoided such arrangements.  It was a key member of the non-aligned movement during the Cold War and tried to avoid joining either the Communist Bloc or the Free World.  If the border issue leads to India joining the West, it will add to the encirclement of China and would be seen as a major loss for Beijing.

Policy news:

• One of the strengths of the U.S. system of capitalism is the ability to deal with failure. In Europe, going bankrupt could put a person in debtor’s prison; in the U.S., debts are written down and the debtor could start over.  The U.S. system isn’t perfect, but it works remarkably well compared to other nations.  An infrastructure has developed around bankruptcy and bad debt; there are law firms that specialize in bankruptcies.  Towing firms engage in repossession; banks have workout groups.  Auction houses specialize in selling off the assets that are repossessed.  Firms clean up houses after evictions to prepare for sale or lease.  All this activity forces creditors to quickly adjust the value of their loan assets and allows debtors to start over.  Additionally, the repossessed asset then gets put back into the economy, usually at an attractive price, to find a new use.
  • That process is mostly on hold. Despite rising bankruptcies on the horizon, at present, a set of policy decisions has effectively frozen the process.  In many states, evictions have been postponed.  Banks have been encouraged to offer debt service forbearance.  If the current downturn is mostly a short-term phenomenon and all will return to normal soon, these actions make sense.  However, if the recovery turns out to be long (as we expect), these policies will tend to keep debt backed by assets that have fallen in value in limbo.
  • If policy prevents the process of foreclosure, as we see in China and Japan, it can lead to slower growth. At the same time, the bankruptcy process, much like insurance, isn’t designed for systemic events.  In other words, the process works if bankruptcy is caused by poor management or bad luck for an individual; it doesn’t work as well if the bankruptcies are due to an event that causes widespread failure.  That’s what we saw in the Great Depression; the policy of the Hoover administration was to liquidate the loans aggressively, but that led to a debt/deflation spiral that collapsed the economy.
  • Policymakers seem to be leaning toward this event as systemic, so it has encouraged lenders to avoid immediate repossession and the Fed has been buying up corporate debt. The problem is that some of these loans are simply not going to get serviced and should be liquidated.  Unfortunately, it is hard to discern who is facing a solvency issue and who is facing a liquidity issue.  What we are doing works if it’s mostly the latter; it will create a Japan-like situation if it’s the former.
• There is a growing call for a better way to fund small business. Although the SBA exists, its lending doesn’t appear to be filling the need.  So, there is some speculation that the Fed’s current program may become permanent.
  • Our two cents? A better way would be to reduce consolidation in the financial system and support the expansion of small banks.  Smaller banks seemed to do a better job of managing the PPP program; large banks do a good job with (a) massive loans to large borrowers, and (b) lending that is rules-based, like mortgages.  However, larger banks can only make money on operations that they can scale up and making individual lending decisions by human loan officers isn’t in their “sweet spot.”  That is a business that smaller banks can do more effectively.
• European nations are on their way to implementing digital taxes. This will exacerbate trade tensions.

COVID-19:  The number of reported cases is 8,513,725 with 454,513 deaths and 4,181,443 recoveries.   In the U.S., there are 2,191,200 confirmed cases with 118,435 deaths and 599,115 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.

Virology:

• One of the treatments for those infected is to infuse antibodies from blood plasma from someone who has recovered from the virus. A recent study suggests that giving plasma transfusions to someone in the early stages of the disease is safe.
• Europe is attempting to secure a vaccine when one is produced. It is talking to pharmaceutical companies to gain access to supplies when they become available.
• India is seeing a surge in cases.
• Sweden’s policy toward lockdown was much more liberal that most Western nations. The government’s position was that a vaccine was years from being developed, so it was better to learn to live with the virus and allow herd immunity to develop.  This policy has been controversial.  If a vaccine is available by this time next year, the policy could be considered reckless.  There have been other issues as well; there are reports suggesting that the medical system was rather quick to allow elderly patients to be denied care for recovery.  Additionally, neighboring nations are reluctant to open their borders with Sweden for fear of rising infections.

Markets:

• Japanese investors have been aggressively buying dollar assets in an attempt to capture a positive yield.
• Advisors to the ultra-high net worth households are encouraging these investors to hold more gold.

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