Daily Comment (May 15, 2020)

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

[Posted: 9:30 AM EDT]

Good morning and happy Friday!  Equity markets are weaker after a rather robust recovery yesterday.  Trade worries appear to be a problem.  We update the COVID-19 news.  Retail sales are out this morning—details below.  Here is what we are watching:

COVID-19: The number of reported cases is 4,444,670 with 302,493 deaths and 1,588,858 recoveries.  In the U.S., there are 1,417,889 confirmed cases with 85,906 deaths and 246,414 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.

The virus news:

  • The good news:
    • Japan has lifted its state of emergency in 39 of the nation’s 47 prefectures. The major cities, Osaka and Tokyo, remain under emergency orders, but the government is planning on ending those orders by May 21.
    • A large-scale study on the use of plasma from infected patients to others was found to be safe, passing Phase 1 of the process. The next step is to see if the process reduces symptoms in those infected.
    • The CDC has released guidelines for reopening.
  • The bad news:
    • Health care workers in Russia are dying at an alarming rate from COVID-19. PPE is generally lacking in Russia and the health care system suffers from underinvestment.
    • We have been worried that the race for a vaccine would become so politicized that it would hamper research and production. The head of Sanofi (SNY, $47.67), a French company, caused a stir when he indicated he would give preference to the U.S. for vaccine supplies because America has provided more money for research and development.  Needless to say, the Europeans were not pleased.  However, this comment raises the problem of free riding; why shouldn’t the U.S. get preferential treatment?  At the same time, there is a moral argument that suggests there should be equal access.  However, in reality, what would that mean?  Equal by what standard?  This row suggests that even when a vaccine is ready, factors for distribution will be difficult to create without triggering a political backlash.

The policy news:

  • The House will vote today on a $3.0 trillion fiscal package. Although the Democrat-sponsored bill should pass, it is meeting some resistance within the party.  The bill appears to have lots of unrelated spending and the GOP-controlled Senate has already declared it won’t pass in its current form.
    • The package includes aid for states. This is a problem for the GOP as there are some states that have created a problem for themselves by creating pension programs they can’t fund.  Thus, the GOP does not want to reward such behavior.  At the same time, in the last recovery, falling state fiscal spending more than offset federal stimulus.  States usually do their budgeting now for a June deadline.  It is almost certain that without some form of aid, state-level spending will decline precipitously due to the lack of revenue.  Because states don’t print the money they borrow in, they must balance their budgets.  If lawmakers are not careful, we could have a situation where fiscal spending is much less than advertised because states are cutting back as the federal government spends.
  • The Fed published a report on consumer finances; no surprise, lower income households have been severely hurt by the pandemic. Nearly 40% of workers earning <$40k per year have lost their jobs.
  • Seventy-five percent of small businesses have applied for government aid. So far, just under 40% have received help.  It is likely the number of those receiving aid will rise in the coming weeks, but the fear is that some may not survive long enough to get support.
  • Chair Powell and other members of the FOMC have made it abundantly clear they will not take policy rates below zero. And yet, futures markets continue to signal that such an outcome is possible.  Why is that?  One factor driving this outcome is a peculiarity of interest rate swaps.  Let’s say I have a fixed rate loan and I think rates are going to fall.  I could go to my bank and repaper the loan to a floating rate.  Or, we could do a swap.  Instead of paying my fixed rate, the bank and I make a deal where I pay the difference on some short-term interest rate compared to the current rate.  So, if rates, fall, I pay less.  However, once rates fall below zero, as the borrower, I would be required to pay the bank.  Borrowers don’t want that risk, so banks offer a downside cap that keeps the rate at zero.  To make that cap, banks go to the futures market and short the instrument so it would pay them if the rate goes negative. Thus, the rate signaling may be less about expectations and more about the mechanics of swaps.

The economic news:

The foreign news:

  • As usual, there was lots of China news:
    • Relations between the U.S. and China remain tense. In an interview yesterday, President Trump suggested that “we could cut off the whole relationship.”  The president proposed that Chinese firms may be required to meet U.S. accounting standards to acquire a U.S. exchange listing, although he did acknowledge this could simply mean Chinese firms may list elsewhere.  The president did seem to suggest that Phase 1 could be in trouble; China is stepping up farm purchases, indicating it doesn’t want to see this agreement fail.
    • Taiwan Semiconductor (TSM, 52.10) announced it will build a chip factory in Arizona. This is a significant act by the firm, which has always straddled the East and West.  By moving production to the U.S., it is signaling a greater reliance on the U.S.  This move will clearly get the attention of Beijing and may prompt greater chip self-sufficiency by China.
    • The Global Times, a tabloid in China, published an article suggesting that China should consider retaliatory measures in response to various COVID-19 lawsuits emanating from the U.S. One idea floated was to freeze U.S. assets in China.  Although this source is not considered an official mouthpiece for the Chinese leadership, it is a fount of nationalist trial balloons and may reflect a warning to Washington that Beijing is not without measures it can take.
    • The National People’s Congress (NPC) meeting starts today after a two-month delay due to the pandemic. We are watching to see:
      • What growth forecast, if any, China establishes. Even a 3% target for the year would require a robust recovery.  On the other hand, a number below that would look bad.  One of two outcomes is likely: either (a) they don’t offer a forecast, or (b) they make a 6% forecast for a two-year period.  In any case, China’s stimulus thus far has been modest and more will be needed if these sorts of numbers are going to be reached.  On the other hand, if there is no forecast, stimulus will likely remain modest.
      • We will be watching for any clues about an official response to cooling U.S. relations.
    • The U.S.S. McCampbell transited the Taiwan strait yesterday. This is a “freedom of navigation” maneuver that will clearly get the attention of Beijing.  It is also notable this occurred a week before the inauguration of Tsai Ing-wen to her second term.  China views the Taiwan leader as a separatist and thus the McCampbell sailing will be seen as a show of support for the incoming president.
    • As we noted yesterday, the head of the WTO has resigned a year before his term ended. It is apparently setting off a leadership struggle as both the U.S. and China vie to put “one of their own” in that role.
  • One of the measures of statehood is that a state holds a monopoly on violence. A country that can’t control security is one that doesn’t fully fulfill the role of a nation.  The active drug cartels in Mexico have raised this problem.  We note the cartels are using the pandemic to burnish their reputations by providing aid to the localities.

Brexit: Brexit talks are not going well.  The latest round of talks ends today.  The EU accuses the U.K. of refusing to compromise on key areas, including fisheries and the legal framework that will exist between the two sides.  The U.K. is accusing the EU of being “ideological.”  It seems unlikely the two sides will have a full deal by year’s end.  This means one of three outcomes: (a) we see an extension, although PM Johnson opposes this outcome, (b) a “mini-deal” that allows the two sides to claim that a deal was struck and then details on a broader deal will be worked out in the coming years, or (c) a hard break.  The most likely outcome is (b), although the odds of (c) are probably increasing.

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Daily Comment (May 14, 2020)

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

[Posted: 9:30 AM EDT]

Good morning!  Equity markets continue under pressure this morning.  We update the COVID-19 news.  The Weekly Energy Update is available.  Here are the details:

COVID-19:  The number of reported cases is 4,364,172 with 297,491 deaths and 1,418,656 recoveries.  In the U.S., there are 1,390,764 confirmed cases with 84,136 deaths and 243,430 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.  Here is another map from Axios, showing the growth of new cases by state.

The virus news:

  • The good news:
    • One of the tools being developed in the fight against the virus is blood antibodies. These drugs are developed either from the blood of humans who have recovered from COVID-19 or from animals who have been immunized.  This report from the FT is a primer on the process.
    • We have been reporting on new UV light processes to disinfect public areas. A robot equipped with a UV light has been able to disinfect hospital rooms.
    • Researchers at Yale say they have found that saliva is superior to nasal swabs to test for COVID-19 infection. If true, this would make the testing process much easier.
    • Border controls and social distancing measures are being relaxed.
    • The bad news:
      • Wuhan has launched a mass testing drive after a series of new infections from COVID-19 were reported.
      • South America is seeing a surge in cases without the resources to cope with the economic fallout from the virus.
      • Although children usually have mild cases of COVID-19, there are reports from New York of 100 cases of an inflammatory syndrome that comes from the virus. It is unclear if this development represents yet another mutation of the virus.
      • The medical establishment is working feverishly to create a vaccine for COVID-19. However, there is the possibility that a vaccine may not be accepted by part of the public.  This would slow herd immunity if this outcome develops.   Meanwhile, data from Spain suggests only about 5% of the population has been infected with COVID-19 and thus herd immunity is much further off (70% is considered a minimum for herd immunity).
      • The WHO’s chief scientist, Soumya Swaminathan, told a group yesterday that it may take four to five years to get COVID-19 under control, depending on medical developments and virus mutations.
        • Although one would wish for something different, it is also likely that the virus will simply need to be accommodated. Broad lockdowns do blunt the initial rise of the disease but are not a permanent solution.  After all, economic disruption and social isolation carry their own dangers.  What Swaminathan is really getting at is that society will need to learn to cope with the virus, similar to how we accommodate influenza and other infectious diseases.
        • This may mean that vulnerable populations will take greater precautions than others.
        • One of the more disturbing, but not surprising, elements of the current situation is that COVID-19 has become politized. This leads to binary thinking—either you open the economy full bore and risk rising infections or stay locked down for good and have no growth.  But, in reality, this isn’t the only set of choices.  We can build safety into our economy without complete social distancing and have vulnerable populations take additional measures without having those who are less at risk carry the same burden.  Will things be different?    Airplanes may need to build different seating arrangements.  Some things may cost more.  A generation may learn to cook at home.  Hotels are figuring out how to sanitize so patrons will return.  But, people and societies are remarkably adaptable.  This will get figured out.

The policy news:

The economic news:

The market news:

The foreign news:

WTO:  The head of the WTO has resigned a year before his term ended.  The WTO leadership has been under great strain due to rising trade tensions, and Roberto Azevedo has apparently decided to move on.

Islamic State:  Islamic State is becoming active again in the area on the Iraq/Syrian frontier.  This region is generally not controlled by either Damascus or Baghdad, and with the U.S. reducing its troop strength it appears the group is coming alive again.  One sign of activity is that Islamic State is being blamed for a series of crop fires in Iraq.

U.K.:  In anticipation of trade talks with the U.S., Westminster is planning to cut agricultural goods tariffs on U.S. farm exports.  As one would expect, there is opposition from British farmers to the news.

German courts:  Although Chancellor Merkel was (as expected) non-committal, the judges of Germany’s Constitutional Court are holding firm on their position in the fight over ECB QE.  If Germany continues on this path, the Eurozone will either (a) acquiesce to German hegemony over the Eurozone, or (b) likely accelerate the breakup of the single currency.  This is a very difficult dilemma.

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Weekly Energy Update (May 14, 2020)

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

Here is an updated crude oil price chart.  The oil market continues to show signs of recovery.

(Source: Barchart.com)

Crude oil inventories surprised the markets by falling 0.7 mb compared to the forecast rise of 5.0 mb.

In the details, U.S. crude oil production fell 0.3 mbpd to 11.6 mbpd.  Exports were unchanged, while imports fell 0.3 mbpd.  Refining activity fell 2.6%, when a modest rise was expected.

So, why the unexpected inventory draw?

Unaccounted for crude oil is a balancing item in the weekly energy balance sheet.  To make the data balance, this line item is a plug figure; but that doesn’t mean it doesn’t matter.  This week’s number of 914 kbpd is the largest negative number on record.  It may mean that in the scramble for finding storage, some oil is being inventoried outside the survey system.  In other words, over the week, some 6.4 mb of crude oil went into storage somewhere, just not where it can be recorded.  This explanation would be consistent with the build seen in the API data.  Or, production is falling much faster than the DOE estimates are capturing so there aren’t any missing barrels; simply put, production is cratering.  We are leaning toward the first explanation, but if inventories don’t rise in the coming weeks the second theory would become more plausible.  The second factor is that the SPR rose 1.9 mb as some of the oil went into the strategic reserve.

(Source: Barchart.com)

The above chart shows the annual seasonal pattern for crude oil inventories.  This week’s data, with the caveats expressed in the discussion about the unaccounted-for crude oil, suggests the worst of the inventory accumulation is behind us.

Based on our oil inventory/price model, fair value is $29.17; using the euro/price model, fair value is $44.14.  The combined model, a broader analysis of the oil price, generates a fair value of $36.98.  As we noted recently, the model output is less relevant as there is a non-linearity tied to the loss of storage capacity that cannot be fully captured with these models.  At the same time, if storage remains available, the models would suggest upside for oil prices.  We also note that the Eurozone could be roiled by German court decisions that might limit the flexibility of the ECB to support the Eurozone economy.  This outcome would be bearish for the euro and may weaken it further, which would be bearish for oil prices.

Although consumption remains depressed, gasoline data does show improvement.  Some data tracking does suggest an upswing in driving activity.

The news for the week was mixed.  On the positive side for oil prices, the UAE announced production cutbacks.  The DOE’s short-term forecast indicated that demand should start to recover and supplies should fall as the year progresses.  On the negative front, OPEC cut its crude oil demand forecast for 2020 by 2.0 mbpd.  Oil CEOs are warning that oil may be witnessing peak demand.

On the geopolitical front, Iran’s Khuzestan province is implementing social distancing to thwart a rise in COVID-19 infections.  Iran has been breaking U.S. sanctions, sending oil to Syria and oil equipment to Venezuela.  U.S. sanctions are reducing funding for Iranian proxies and forces in Syria.  Saudi Arabia is being forced to implement austerity measures to deal with the drop in oil prices.  Finally, the U.S. has pulled Patriot missile batteries from Saudi Arabia.

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Daily Comment (May 13, 2020)

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

[Posted: 9:30 AM EDT]

The general rise in today’s markets comes as multiple countries and states continue to ease their coronavirus restrictions and Democrats in the House released their proposal for another round of fiscal relief, but optimism remains tempered by health officials’ warnings against easing too quickly and signs of increasing tensions between the U.S. and China.  As always, we review the key pandemic and related news below.

COVID-19:  Official data show confirmed cases have risen to 4,283,885 worldwide, with 292,619 deaths and 1,504,429 recoveries.  In the United States, confirmed cases rose to 1,370,016, with 82,389 deaths and 230,087 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

Real Economy

U.S. Policy Response

Foreign Policy Response

Political Impact

Israel-China-United States:  Responding to U.S. concern about China’s growing influence over the Israeli economy, Israeli Prime Minister Netanyahu will force additional checks on whether a Hong Kong-based company should be allowed to bid for the construction of a $1.5 billion desalination plant in the country.

China:  Ahead of two major policy meetings in Beijing next week, Communist Party hardliners are reportedly planting criticisms in state media of January’s “Phase I” trade deal between the U.S. and China.  The criticisms likely signal an effort to push back against any further concessions to the U.S. in trade and other bilateral issues.

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Daily Comment (May 12, 2020)

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

[Posted: 9:30 AM EDT]

Investors today continue to focus on pandemic lockdowns being eased around the world, including the reopening of schools in much of Europe, but a bit of caution is rising as some countries and localities are seeing a rebound in cases.  As always, we review the key pandemic and related news below.

COVID-19:  Official data show confirmed cases have risen to 4,201,921 worldwide with 286,835 deaths and 1,467,412 recoveries.  In the United States, confirmed cases rose to 1,347,936 with 80,634 deaths and 232,733 recoveries.  Here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

Real Economy

Financial Market Impact

  • Data from the Wilshire Trust Universe Comparison Service shows public pension plans in the U.S. lost a median 13.2% in the three months ended March 31, slightly worse than the previous record decline in the fourth quarter of 2008.  Despite a partial rebound in performance since the beginning of April, the loss will likely make pension costs even more burdensome for states, counties, and cities going forward, which will probably impact their creditworthiness for years.

U.S. Policy Response

Foreign Policy Response

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Weekly Geopolitical Report – Schumann in Volgograd (May 11, 2020)

by Patrick Fearon-Hernandez, CFA

If you ever find yourself in Volgograd, Russia, you will visit Rodina Mat’ Zovyot.  It’s unavoidable.  The statue, depicting Mother Russia calling her sons to battle against her invaders, is one of the tallest in the world.  Standing almost 280 feet high, she is nearly twice as tall as the Statue of Liberty.  Her colossal height is accentuated by her position at the summit of Mamayev Kurgan, the high ground overlooking Volgograd, whose great, grassy green slopes were fertilized by the blood of a quarter-million Soviet soldiers who died defending it from the invading Nazis during World War II, when the city was still known as Stalingrad.

You never know when you’re about to have an experience that will stay in your memory, and haunt you, for the rest of your life.  Such was the moment when I first entered the glittering round chamber below the statue, where an eternal flame keeps alive the memory of the 20 million or so Russians who died in the war.  I entered just at the beginning of the ceremony marking the changing of the guard.  Young Russian soldiers in ill-fitting uniforms and black jack boots marched in painfully slow goose steps up the ramp around the perimeter of the chamber to relieve the previous sentries of their duty.  It was impressive in the extreme.  But, more than anything, I remember the haunting, plaintive choral music playing in the background (see this video).  It perfectly expressed the quiet calm and peace that all who suffer in war must yearn for, if only in death.  But when I asked my guide what the song was, I was flabbergasted by her reply: “Daydreams, by Schumann.”

What?! A Russian World War II memorial playing the music of a German composer?  How could it be?

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Daily Comment (May 11, 2020)

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

[Posted: 9:30 AM EDT]

Good morning and happy Monday!  Given the news flow of recent weeks, it was rather quiet overnight.  Risk markets are lower this morning.  We update the COVID-19 news.  Here are the details:

COVID-19:  The number of reported cases is 4,122,173 with 283,001 deaths and 1,418,656 recoveries.  In the U.S., there are 1,329,799 confirmed cases with 79,528 deaths and 216,169 recoveries.

For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.

The virus news:

  • The good news:
    • One of the early concerns as hospitalizations rose was a shortage of ventilators. There were measures taken to repurpose assembly lines to make the medical device.  As we have noted in earlier reports, there have been cases of silent hypoxia, where patients have blood/oxygen levels that are critically low yet seem to exhibit little distress.  The usual protocol in such cases is to deploy a ventilator.  However, due to the lack of distress, doctors are now using less invasive measures to raise oxygen levels, instead deploying CPAP machines, laying patients in a prone position or giving oxygen.
  • The bad news:

The policy news:

The economic news:

The market news:

The foreign policy news:

  • For years, economists have argued that China’s economy was overly dependent on investment and exports. In fact, China’s policy mix deliberately disadvantaged households, forcing them to oversave.  This saving provided funds for investment but as household saving continued to rise, it swamped the needs of domestic investment, leading to large trade surpluses.  As China prepares its 14th five-year plan, policymakers are anticipating a more hostile foreign environment that will require more domestic-driven demand.  Perhaps deglobalization will finally prompt a policy mix that boosts domestic consumption and reduces the trade surplus.
  • The U.K. has outlined its reopening process. Although most stay-at-home orders remain in place, relaxation starts in earnest on June 1, when primary schools reopen.  Additional openings are expected in early July.  The U.K. will impose a quarantine on air travelers.
  • In response to the drop in oil revenues due to lower oil prices, Saudi Arabia announced a series of measures designed to reduce the impending fiscal deficit. Spending will be cut and its VAT rate will be tripled.  Austerity is rarely popular, so we will be watching the reaction to these measures from Saudi citizens.  We note that the kingdom has announced a unilateral 1.0 mbpd cut in production, likely in a bid to lift prices and oil revenues; oil prices jumped on the news.

Iran:  At least 19 Iranian sailors died in what appears to be a friendly-fire accident during naval exercises.  Although details are sketchy, it looks like a vessel was mistakenly struck by a ship-to-ship missile.  The exercises were being held in the Gulf of Oman; there are no reports that any U.S. ship was in the vicinity.

India/China:  The border between the two nations has been in dispute for some time but, since it sits in the inhospitable Himalayan mountain range, military operations tend to be limited.  It appears that soldiers from both nations exchanged words and non-lethal blows over the weekend before officers on both sides ordered troops to disengage.

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Asset Allocation Weekly (May 8, 2020)

by Asset Allocation Committee

The U.S. economy has been hit with shelter-in-place orders that have depressed consumption and reduced production.  The economic readings on Q2 will be historically bad, perhaps even worse than the Great Depression.  However, based on the assumptions that (a) aggressive policy support will continue, and (b) the pandemic will wane over time, either due to natural herd immunity or medical intervention, financial markets are assuming the impact of COVID-19 will be severe in impact but short in duration.  Although we mostly agree with that assessment, the rebound has much to do with how GDP is reported.  The common way is to annualize the quarterly change.  Thus, if we get a large decline in Q2, a very modest rise in GDP in Q3 will tend to look quite large.  This is not the only way to measure the change in GDP.  The year-on-year change will look less onerous in Q2 but won’t look as impressive in Q3.

Another way we like to look at the GDP data is against its long-term trend.  To forecast Q2 GDP, we are taking advantage of a new high-frequency index created by the New York FRB.  The index is designed to measure the yearly change in GDP—how much GDP has changed compared to Q2 2019.  It is currently forecasting about a 12% yearly change.[1]  We can then take that number and calculate what the level of GDP looks like compared to its long-term trend.

To generate this chart, we log-transform real annual GDP and regress a time trend through the data.  The important line is the lower deviation line.  There are two periods when GDP was well below trend; the Great Depression and the post-Great Financial Crisis to the present.  The Great Depression showed a massive drop in the level of GDP that took until 1942 to return to trend.  Although fiscal and monetary policy were expanding after 1932, it took war spending to finally bring the economy back to trend.  What has been disconcerting about the past expansion is that it was much slower than the long-term trend.  And so, the level of GDP continued to fall compared to trend; our estimate for GDP in the COVID-19 recession shows a downleg in growth that is rivaling levels seen in 1935.

The point of this analysis is that the trend should represent some degree of capacity.  It is possible the trajectory for GDP that held from 1901 to 2008 is no longer possible.  But, if that trendline does represent a normal level for GDP, it would suggest the economy can absorb aggressive fiscal and monetary policy expansion before inflation becomes a problem.  If inflation starts to rise before the trendline is achieved, it would confirm that the trendline is no longer valid; however, for the political class, it would seem natural to find out if the long-term trend line remains a measure of capacity.  In other words, we would expect even more deficit spending and easy monetary policy until inflation returns.  Given how far GDP remains below trend, the return of inflation may take a rather long time.

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[1] Although this is not the focus of this report, the forecast level of decline is consistent with a 35% drop in annualized GDP in Q2.

Daily Comment (May 8, 2020)

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

[Posted: 9:30 AM EDT]

Good morning and happy Friday!  Global risk markets are rising at the same time Treasury yields are falling.  It’s employment Friday; we cover the data below but, suffice it to say, it’s historic and not in a good way.  We update the COVID-19 news.  This week’s Asset Allocation Weekly is published below.  And, podcasts are back!  Despite being unable to utilize our recording studio, our sound engineer, Dane Stole, has figured out how we can record remotely.  Check it out!  Here are the details:

COVID-19:  The number of reported cases is 3,862,174 with 269,881 deaths and 1,291,490 recoveries.  In the U.S., there are 1,256,972 confirmed cases with 75,670 deaths and 195,036 recoveries.

For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases and fatalities between nations, scaled by population.

The virus news:

The policy news:

  • House Democrats are putting together a fourth coronavirus stimulus package. Early reports suggest a number around $2.0 trillion.  However, we would not be surprised to see this number go higher.  Lobbyists realize this will probably be the last one for a while so they are trying to get the “last shot” at their goals.  We do note negotiations with the GOP, both Senate and White House, have not started.  We expect a rather frosty response from the Senate, but perhaps a more positive one from the executive branch.
  • One of the lingering concerns about the policy response to COVID-19 is that much of the funds come from the states, which mostly lack the ability to deficit spend. In the recovery from the 2007-09 recession, falling state spending mostly offset higher federal spending, blunting the policy response.  The decline in state tax revenues is widespread. A bill has been introduced to shore up state revenue.
(Data: Lucy Dadayan/The Urban Institute. Chart: Andrew Witherspoon/Axios)

(Data: Lucy Dadayan/The Urban Institute. Chart: Andrew Witherspoon/Axios)

The economic news:

The market news:

The foreign policy news:

Argentina:  The country’s biggest bondholders are balking at the restructuring deal being offered by the government.  The Kirchner government wants a 62% reduction in interest payments and a 5.4% write-off.

China:  There are reports that a new computer virus, called Aria-body, was developed by a group with ties to the Chinese military.  The virus can take control of a computer and apparently cover its tracks.  It is passed invisibly through emails.  Its primary purpose appears to be information gathering.

Middle East:  The U.S. is pulling Patriot missile batteries out of Saudi Arabia.  These were initially put in the kingdom in response to the missile attack last year.  The decision to remove the missile defense system could reflect a number of factors.  First, it is possible that the kingdom has improved its own defenses and no longer needs the U.S. support.  Second, backchannel contacts with Iran may have reached some sort of agreement not to repeat the missile attack; as we noted yesterday, Israel noted that Iran appears to be pulling back from Syria.  It may be that Iran simply lacks the resources to threaten Saudi Arabia and the U.S. is reacting to that fact.  Finally, there is a clear move to reduce the American military footprint in the Middle East and this action reflects that.  We do note that Islamic State is stepping up its activities as the U.S. and Europe reduce troop strength in Iraq.

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