Keller Quarterly (April 2020)

Posted on April 21, 2020 by Rebekah Stovall

Letter to Investors

Today I write this quarterly client letter in the midst of a recession, one that three months ago I did not see coming. As noted in our January letter (and even italicized): We cannot predict the future. I suspect we have proved that by now. Successful long-term investing does not depend on successful forecasts of the future (which is impossible), but on accurate analyses of the present (which is possible). What we have before us, as described by Jim Bullard, president of the St. Louis Federal Reserve Bank, is a government-induced recession. Why would the government induce a recession? Don’t governments obsess over preventing recessions? Democratic governments must face the voters every few years. Recessions don’t usually lead to election victories. Even autocratic governments worry about legitimacy and the potential for revolution; they don’t want recessions either.

A government-induced recession does seem like an oxymoron, until one observes the unique threat that a highly contagious pandemic represents. Our leaders, with surprising unanimity, determined that shutting down the economy, by forcing us to shelter at home, was a preferable outcome to the potential deaths of hundreds of thousands of citizens and overwhelming the health care system. People will second-guess those decisions for generations, but that is the hand we’re dealt. We will leave it to others to assess the wisdom of policymakers’ decisions as we must invest according to the world that is, not in the world we would want.

This is a recession unlike any that we have experienced or studied. In searching for analogs, we find two other types of historical economic events to be instructive. The first is that of a mass-mobilization war, such as World War II. In that event, the government needed to redirect the productive power of the economy toward a purpose greater than normal business: winning a world-wide conflict. The government quite literally told American businesses to stop what they were doing and do something else. Auto manufacturers were told to stop making cars and trucks and start making tanks, troop carriers, and even airplanes. Consumers were told to stop normal behavior. “Stop buying tires and silk stockings, the government needs the rubber and silk; stop your usual jobs, join the military or go to work producing military equipment.” Normal economic activity was stopped by the government, while new economic activity (of the military kind) was created by the government.

Now imagine what would happen if the government told us to stop normal economic activity, but then didn’t create any new economic activity to replace it. That is what we have lived with for about five weeks in late February through late March. Government instructions to combat the coronavirus halted economic activity, but we didn’t get any action from the government to “fill the gap” until March 24. That is why the market fell 35% over the preceding five weeks (basis the S&P 500). (In fairness, one arm of the government, the Federal Reserve, has provided extraordinarily positive support to the financial system. We give them an A+.) Since then, the government has made several sizeable actions to fill the gap, and the stock market has responded positively. I’ve taken many questions about the market in the last few months, and my response has been largely the same: a cyclical low and recovery in the market will require two things – a peaking of infections and a massive response from the government to support the economy.

Mistakes by policymakers have been made and will be made. This is normal. The market will respond, not so much to the mistakes but to the effort. Since this recession was largely induced by government action (a reaction to the pandemic), honest and substantial efforts by the government to support the economy will be appreciated by investors. Thus, I believe it’s probable that the March 23 low in the market will hold. As an older (and wiser) friend and market analyst once told me, the stock market will always bottom at the point of maximum fear. On that fourth Monday in March, we were staring at an exploding health crisis while Congress dithered. Fear maxed out. When Congress got its act together in the next 24 hours, fear abated. That 35% decline in stock prices over five weeks was the fastest such decline on record, but the size of the sell-off was typical for a recession. We still can’t predict the future, but if progress is made going forward against the coronavirus and the government doesn’t ignore the economy, then we should work our way back.

I mentioned above that this unique recession is analogous to two historical economic events. In addition to a mass-mobilization war, this event is reminiscent of the effects of a natural disaster, such as a major hurricane or tornado. The difference is that a hurricane is regional, while this disaster is global. Hurricanes are devastating to the regions affected, but they have a conclusion, after which reconstruction begins. While this crisis doesn’t have the crisp endpoint of a weather disaster, it will end. And when it does end, we expect the American people will quickly go back to work to repair the damage just like they do after a tornado. Such relief and recovery usually require government assistance and support, and this disaster will be no different. But anyone who has seen a community rebuild after a hurricane or tornado has been impressed by the American spirit, and by how quickly the effects of the disaster are erased. I don’t doubt that the recovery from this disaster will be similarly impressive.

We appreciate your confidence in us.

Gratefully,

Mark A. Keller, CFA
CEO and Chief Investment Officer

View the PDF

Daily Comment (April 21, 2020)

Posted on April 21, 2020April 21, 2020 by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Happy Tuesday! Or if not “happy,” at least things are “interesting.” U.S. oil prices yesterday not only went negative, but deeply negative. As always, we discuss the coronavirus crisis and its latest implications below, along with reports of a new government in Israel and indications that North Korean leader Kim Jong Un may be dying.

COVID-19: Official data show confirmed cases have risen to 2,495,994 worldwide, with 171,652 deaths and 658,802 recoveries. In the United States, confirmed cases rose to 787,960, with 42,364 deaths and 73,527 recoveries. Here is the chart of infections now being published by the Financial Times:

As shown, many major countries have passed the “bend in the curve” and are seeing slower case growth, but few are exhibiting sharp declines in the number of new infections.

Real Economy

Crude oil futures prices did something never seen before yesterday: prices fell below zero!

- We have seen below-zero prices in some commodity cash markets in the past. Last summer, cash natural gas prices fell below zero in some Texas markets. This situation can occur in the cash markets when it costs more to “haul the stuff away” than it is worth.
  - So, what happened here? Strange things can occur at contract expiration. For nearly 16 years, I^[1] worked in the futures department of A.G. Edwards, analyzing oil, foreign exchange, and fixed income futures markets from 1989 to 2005. Our policy was that if a client was in an expiring month contract five days before expiration date, they had to prove they could make or take delivery of the commodity. If the trader could not do so, the firm forced the trader to liquidate the position five days before the contract expired. We did that because it is almost impossible to know what could shift a price at expiration.
  - The most obvious answer to yesterday is that there was forced selling. The most likely candidate was the United States Oil Fund ETF (USO, 3.75 -0.46). This ETF buys the nearby contract of crude oil on a rolling basis. The value of the fund comes from three sources—the interest rate from margin (they fully fund their oil purchases), the price of oil and the “roll yield.” The roll yield is the price paid on the next contract. So, if the term structure of oil futures is backward, where the nearby price is above the deferred price, at the roll when one contract expires and the next contract is purchased, there is a gain because the contract being purchased is cheaper than the one being sold. Under conditions of contango, when the deferred price is above the nearby, there is a loss on the roll yield. Needless to say, the roll yield losses will be large this time around. USO started staggering its positions; it doesn’t just hold the nearby contract alone, so its losses were not as great as nearby futures. But, it still held 25% of the nearby long open interest going into today. And so, it was likely liquidating positions into a market with no buyers.
  - Could a person take advantage of this situation? In other words, “buy” May crude at -$40 per barrel and deliver it to a deferred month, let’s say, June, at +$21 per barrel. Yes, you could, IF you could (a) find storage, and (b) deliver it to the Cushing oil hub. The fact that this isn’t happening reflects the likelihood that neither of these conditions can occur with certainty or at a reasonable cost.
- Is the price real? If one were long May futures, the margin call would certainly be “real.” But it doesn’t reflect the economic value of oil. The June contract is a better reflection of the actual price. However, the debacle in the May contract clearly shows that oil demand is weak and supplies are excessive, and without outside action to either boost the former or curtail the latter, the June futures are likely destined to decline into the low teens. We always had doubts about OPEC and others actually curtailing output. Today will likely encourage the government to take steps to prevent a complete collapse of the U.S. oil industry. It remains to be seen what may happen, but here are some possibilities:
  - If Congress approves funding, 70 mb or so could go into the Strategic Petroleum Reserve (SPR). A twist on this plan—the government could sell oil out of the SPR for export, capturing the higher price for Brent and punishing OPEC+ for not actually reducing output aggressively. The increased storage (from selling oil in the SPR now) could be used to support the domestic industry.
  - The government pays oil companies to not produce oil.
  - The government does nothing and the market forces production to fall to where the market clears.
- Of course, the other side of this issue is whether this is a buying opportunity in energy? It is, but not in the immediate term. At some point, enough production will be removed and demand will recover. But, if the government acts to protect producers, this process will make it more difficult to determine winners and losers. So, for now, patience is recommended.
- On a related note, Saudi Arabia and other OPEC members are reportedly considering reducing their oil output as soon as possible, rather than waiting until next month when the group’s recent production-cutting agreement with the U.S. and Russia is set to begin. The move would aim to help shore up prices, but the report quotes a Saudi official as admitting that, “it might be a little bit too late” (ya think?).
- In the meantime, global oil prices remain under intense pressure today, with Brent dropping below $20 per barrel for the first time in 18 years and the June WTI contract approaching $10 per barrel. Producing countries’ currencies, such as the Russian ruble and the Mexican peso, are likewise weakening.
The Chinese government has reportedly approached several Asia-Pacific countries to discuss the possibility of easing border controls and allowing some “essential” business travel to resume.
As Germany allowed some smaller retail shops to re-open yesterday, reports said visits were significantly higher than expected. The reports suggest pent-up demand could be strong when restrictions are lifted in other countries, but mass shopping could also raise the risk of reaccelerating infections.
Separately, we continue to see signs of financial stress building up for state governments, as virus lockdowns decimate their tax revenues, while unemployment and healthcare expenses surge.
- New York and Massachusetts have already burned through more than half their unemployment trust funds, and several other states are approaching that marker.
- As provided for in federal law, New York yesterday requested a $4 billion loan from the U.S. Treasury to make sure it can keep paying benefits.

U.S. Policy Responses

An analysis by the Financial Times shows dozens of large, publicly traded companies borrowed under the Payment Protection Program (PPP) of small business loans before its initial $350 billion in appropriations ran out last week. Public anger over the big firms crowding out needier small companies could have important political repercussions.
Meanwhile, congressional leaders and the Trump administration are closing in on a more than $450 billion agreement that would replenish the PPP with an additional $310 billion, provide $75 billion in new funding for hospitals, and appropriate $25 billion for expanded virus testing.
To help ease the strain on mortgage companies, the Federal Housing Finance Agency is weighing whether to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance giants, to buy home loans that recently entered forbearance.

International Policy Responses

Ahead of an EU summit on Thursday, leaders from the harder-hit, poorer countries continue to push for aid and deference from the richer creditor countries:
- Spanish Economy Minister Calviño called on the EU to create a €1.5 trillion coronavirus recovery fund. The fund would award grants to the bloc’s weaker countries to help them remain competitive versus states in better financial positions to fund business rescues and stimulus packages.
- Polish Finance Minister Kościński insisted that any new fiscal support program should be funded by new taxes, including a crackdown on tax havens, digital taxes, and financial transaction taxes.
- Italian Prime Minister Conte continues to push for mutual EU “corona-bonds” to fund bloc-wide recovery efforts.
In China, even though the central bank has cut interest rates and reduced required reserve ratios, reports show banks are still reluctant to provide enough credit to small and medium firms, keeping their recovery well behind that of larger firms.

Israel: Prime Minister Netanyahu and his rival, Benny Gantz, have agreed to form a unity government, averting the prospect of a fourth election in the last year.

North Korea: Citing a U.S. official with direct knowledge, press reports say North Korean leader Kim Jong Un is in critical condition after undergoing emergency heart surgery at a private villa in Pyongan Province.

View the complete PDF

[1] This is Bill “speaking” here.

Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part I (April 20, 2020)

Posted on April 20, 2020 by Rebekah Stovall

by Bill O’Grady

Although we do cover current events in the Weekly Geopolitical Report, we also try to anticipate changes that may be a consequence of current situations. The COVID-19 crisis is just such an occasion. We regularly update the current path of the virus in our Daily Comment, but we will consider the longer-term ramifications of COVID-19 in this report. We have recently discussed the pandemic, in general, in our weekly reports, and in the previous two installments we discussed how the virus has frayed relations in the EU.

This week, we frame the impact of the pandemic using Walter Scheidel’s book on inequality, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century.[1] We reviewed this book in a previous WGR published in 2017. In Part I, we will examine Scheidel’s thesis that says inequality tends to be resolved by violent or extreme events. Simply put, history shows little evidence that periods of high inequality are reversed without tragedy. Using this thesis, we will examine how the COVID-19 pandemic best fits into Scheidel’s framework. In Part II, we will discuss the equality/efficiency cycle and introduce one of five problems that could be resolved by the pandemic. In Part III, we will examine the other four problems, discuss the impact of inflation and conclude with market ramifications.

View the full report

[1] Scheidel, Walter. (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton, NJ: Princeton University Press.

Daily Comment (April 20, 2020)

Posted on April 20, 2020April 20, 2020 by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning and happy Monday! Equities are lower this morning, but the market catching most of the attention is oil. In equities, there is a large short position developing against the S&P 500. We update the COVID-19 news. Here are the details:

COVID-19: The number of reported cases is 2,416,135 with 165,939 deaths and 632,983 recoveries. Here is the FT chart:

The U.S. data is showing a flattening. We continue to note the data because it is the best we have, but data collection is problematic. The anecdotal reports strongly suggest serious undercounting of infections and fatalities, especially in emerging economies.

The virus news:

The reopening after lockdown is the next phase of the virus.
- In the U.S., there are growing tensions against state orders. And, tensions are not unique to America. There are protests to government lockdowns around the world. Protests have emerged in Lebanon, Iraq, India and Israel.
- We are starting to see halting measures to reopen economies.
  - In Denmark, schools have reopened.
  - Other European nations are slowly reopening; the common theme is to open up previously restricted businesses.
- The problem with reopening is confidence. For example, even if restaurants reopen, patrons have to feel confident that if they venture out they won’t get sick. That confidence is tied to testing.
  - Sadly, the testing apparatus is still a problem in the U.S. Backlogs are up. The testing companies are finding that the only tests they are processing are COVID-19, which is reducing their earnings. Test reliability varies widely. The regents necessary to conduct the tests are in short supply and often come from China. Until these bottlenecks are resolved, policies to open up the economies will not be all that effective in lifting growth.
  - The other element of testing is the serological studies. These are anti-body tests to determine who has been exposed to the disease. New York is starting these tests; so is Germany. However, as with confirmation testing, problems with this type of testing continue as well.
  - The bigger problem with serological testing is that if a person has anti-bodies for the virus, what sort of immunity does it confer? Although immunity follows most viral infections, it isn’t clear how long it lasts with COVID-19. There has been talk of using a system similar to China’s in which a previously infected person gets a “passport” making them eligible to work and circulate in the population. That in and of itself could lead to all sorts of issues. We could see the young and desperate having “COVID-19 parties,” similar to the old “chickenpox parties” before there was a vaccine, because having the passport would likely bring a wage premium. Of course, as anyone who has visited a college town knows, the potential for fraudulent passports could become a serious problem as well.
  - One strength of the U.S. federal system is that a good deal of authority is devolved to state and local governments, allowing these smaller government entities to tailor policies to their specific needs. At the same time, it can create differences that can be somewhat difficult to discern. In other words, one state’s non-essential business can be another state’s essential one. This can lead to cross-border activity and other issues.
- Surveys suggest Americans are still unsure of how much they should circulate, so even if stay-at-home orders are relaxed, a rapid rebound in traffic isn’t likely. This isn’t just a U.S. issue, either. Europe has similar concerns.
One of the problems with creating policy to deal with the pandemic is that we don’t have complete data. In the absence of certitude, we are left with models. Modeling outcomes is perfectly normal; in economics and finance, we use them all the time. But, anyone familiar with modeling knows its weaknesses; the outcome will not only be affected by the variables included and excluded, but also assumptions must be made about relationships. Although models can help guide decisions, problems develop when decisionmakers are not the modelers. A decisionmaker wants to know the future so he can make good decisions; if a model offers an outcome, the modeler should know the impact of the outcome if assumptions are changed. But, the decisionmaker probably doesn’t. With regard to the pandemic, we have seen forecasts very wide of the actual. For example, if fatalities are lower than expected, it might be that the model underestimated the degree or impact of social distancing. Or, it might be that the virus isn’t as virulent as assumed. But, when decisionmakers are not aware of this nuance, the inaccuracy of forecasts may lead them to assume modeling is a worthless exercise. In our experience, modeling isn’t worthless, but it is important that the modeler explain to the decisionmaker where the best estimate might lead astray. And, of course, once the media gets ahold of a model estimate, nuance is almost always lost.

The policy news:

Although a deal to expand funding for small businesses hasn’t been passed yet, it does appear a deal is in the offing.
The U.S. is giving businesses a partial tariff holiday.
The Fed’s aggressive expansion of its backstop is starting to raise concerns—where does it stop? In other words, the Fed is venturing into dangerous territory politically because it may become hard to justify why some borrowers are supported while others are left to their own devices. Our view is that, so far, the Fed has mostly expanded its backstop to prevent systemic risk. But, once this path is taken, it will become increasingly difficult to maintain a “bright line” between systemic risk and economic support. It isn’t hard to imagine the Fed buying up student debt to extinguish it due to the support it would give the economy. And that might be a reasonable policy. But, in the absence of price controls on tuition, which would come from legislation, this sort of policy would simply be a green light for higher college costs.

The economic news:

One of the areas we continue to watch is behavior after the pandemic. There is a rising chance that the millennial generation will end up behaving like the silent generation, who came to adulthood under the scars of the Great Depression and WWII.

The market news:

S&P earnings releases will ramp up this week. It’s probably going to be a bit ugly, but that isn’t really a surprise.
As we noted above, oil prices are getting hammered this morning. Much of this is tied to the futures expiration but the longer-term worry is the lack of storage. Exacerbating this problem is the deep contango in the futures market. For example, the spread between June futures and September futures is over $8 per barrel. Thus, if one can find storage, a producer could sell into September and use the spread to defray the cost of storage. Tank storage costs vary but are well below $8 per barrel. But, once that storage is filled, costs rise rapidly. Once that occurs, the front-month prices are at risk of falling even further. The only solution is to shut in production; unfortunately, some of that production will never return. Therefore, as long as firms have hedges in place, they will continue to produce oil, putting further downside pressure on prices.
The entire airline industry, from manufacturing to airlines themselves, has been rocked by the COVID-19 crisis.
We have been watching the dividend/buyback issue for the past several weeks. The core to the issue is the tension between return to capital versus return to labor. Recent news from Disney (DIS, 106.63) will add to tensions.
Another area of tension is between insurers and the insured. Companies are making claims for business interruption; insurers are arguing that they never intended to insure against pandemic risk (which they really couldn’t—the insurance model can’t handle systemic risk).
COVID-19 has crippled the drug cartels.
Australia is mandating that news aggregators pay originators for content.
The lockdown of people has done the same for bees. Commercial beekeepers, who usually transport bees to pollinate crops, have been less able to do so due to shut-in orders. As a result, various crops are at risk.
U.S. strip mall owners paid less than half April’s rent.

The foreign policy news:

China is dealing with the shortages of debt payments with widespread forbearance. The regime can do this because it has near-complete control of the banking system.
When COVID-19 hit the West there was a run on personal paper products. In Russia, there was a massive move to cash.

Odds and ends: Bondholders are not impressed with Argentina’s restructuring proposal. North Korea disputes reports of correspondence between Kim and President Trump.

View the complete PDF

Asset Allocation Weekly (April 17, 2020)

Posted on April 17, 2020 by Rebekah Stovall

by Asset Allocation Committee

The Federal Reserve’s aggressive expansion of its balance sheet has been in response to fears of systemic risk. The experience of the 2008 Great Financial Crisis has made it clear that systemic risk can occur from a myriad of different parts of the financial system, so the Fed has broadened its support to include a significant expansion of credit risk, including corporate credit, both investment-grade and below-investment-grade, municipal debt, commercial paper along with mortgage and Treasuries. Although the Fed did similar actions in the depths of the 2008 Great Financial Crisis, the current policy actions are far more aggressive than what was seen in the last decade, both in the level of the balance sheet expansion and the breadth of assets being purchased. The Fed’s balance sheet is currently $6.083 trillion, a new record high.

Although the FOMC’s actions have been in response to concerns over systemic risk, there is a structural backdrop as well. Private sector debt in the U.S. is elevated and is probably unsustainable at current levels. The sustainability of debt levels is more art than science. Although there are obvious ways to measure debt service costs and one can compare historical levels, there is a psychological element to the lending and borrowing process. If confidence is high, lenders are anxious to “put money to work” and borrowers have high hopes that their borrowing will be beneficial. For example, Americans believed that home prices would continue to rise from 1995 to 2005 and lending that now looks reckless seemed reasonable at the time. But, once confidence in home prices waned, there was a scramble to reduce exposure to the sector that culminated in the 2008 Great Financial Crisis.

We have seen a decline in private sector debt[1] since 2007; however, the slow growth seen during this expansion likely reflects the fact that we haven’t seen enough debt liquidation. We saw a similar situation in the 1930s.

When private sector debt becomes excessive, there are two paths of resolution. The first is to allow the debt to be liquidated through bankruptcy. At a microlevel, this path is perfectly reasonable. After all, if a borrower and a lender took risks, they should bear the burden of their mistakes. However, at a macrolevel, this path of resolution tends to create systemic risk.[2] One party’s debt is another party’s asset. If the debt is resolved at a loss, the asset falls in value too. The process can lead to deep and widespread collateral damage. For example, in 1928 there were 26,401 commercial banks in the U.S.; by 1934, this number had declined to 15,913. The decline in asset values and the loss of bank deposits tend to lead to bank failures and the hoarding of cash that can cause a deflationary spiral. Politically, allowing a debt restructuring to occur “naturally” has become a non-starter.

Therefore, if the private sector debt overhang isn’t resolved by liquidation and asset price declines, the other option is to socialize the debt. The debt is shifted to the public sector balance sheet and resolved over time. Referring to the above chart, the Fed’s balance sheet began to rise aggressively after 1932, with only a modest increase in the government’s debt. Although the expansion of the Fed’s balance sheet helped end the initial phase of the Great Depression, private sector debt continued to decline, which we would argue shows a continued lack of confidence by borrowers and lenders.

This chart shows real annual log-transformed GDP starting in 1901. We regress a time trend through the data. Despite the Fed’s efforts, GDP remained below trend, suggesting the full impact of the debt liquidation tied to the Great Depression had not been resolved. The full resolution wasn’t accomplished until the rise of government spending for WWII, along with the further expansion of the Fed’s balance sheet. The combination led to a decline in private sector debt to below 40% of GDP. The decline in private sector debt laid the groundwork for the postwar recovery. It took nearly 15 years, a massive expansion of the Fed’s balance sheet and WWII spending to fully resolve the private sector debt overhang that developed prior to the 1930s.

However, the private sector debt didn’t disappear—it was transformed into public sector debt and that debt overhang needed to be resolved. That resolution was executed by financial repression and regulation. It is important to note that government debt issued in the currency that government controls is different that private sector debt. The former doesn’t actually need to be paid off; it merely needs to be serviced. Servicing government debt is a function of the relative size of that debt to the economy. The formal process is called the Net Fiscal Effect. This process is a formula:

Net Fiscal Effect = (y/y% nominal GDP – government interest rate) + primary balance as % of GDP

If nominal GDP rises faster than the rate of interest the government pays on the debt plus primary balance,[3] then the overall government debt/GDP ratio will fall. Here is a chart:

This chart shows the net fiscal effect on the upper line (we use the 10-year T-note yield as a proxy for borrowing costs). From the end of WWII into the early 1980s, the net fiscal effect was positive, and the government debt/GDP ratio steadily declined.

If policymakers follow the Great Depression/WWII path, we would expect a gradual rise in long-term interest rates.

This chart shows the 10-year T-note yield, the yearly change in nominal GDP and the difference between the two series. The postwar period to the early 1980s was a secular bear market for bonds. That may not happen this time around, or it may be slower to evolve. The Fed may engage in yield curve control, preventing Treasury rates from rising. The aging population could reduce inflation fears; it is important to note that the Millennial generation may be scarred by the last two decades and may behave like the Depression/War generation. That would mean less spending and risk taking. But it would be reasonable to expect that a gradual reflation is likely; after all, it supports the net fiscal effect.

What should investors do in this environment? We will discuss this issue at much greater length in an upcoming WGR series but here is how we are dealing with this development in our Asset Allocation strategies:

We have deployed bond ladders using ETFs. Bond laddering is an effective way to deal with gradually rising interest rates. We use a mix of corporate and Treasuries in the ladders.
We have added allocations to precious metals across all portfolios.
Historically, equities have been a good inflation hedge; however, we may see a period of adjustment in the next decade as investors deal with rising inflation. This may entail multiple contraction. Although it is too early to reduce equity exposure for this event, we are cognizant of future development.

Addressing the private sector debt overhang through socializing it to the public balance sheet is a rare event. This one will be a challenge for investors, but it can be managed. However, what has worked for the past 40 years (equity investing via blind indexing, holding long duration bonds, etc.) probably won’t work for the next four decades.

View the PDF

[1] We define private sector debt as household debt plus non-financial corporate debt; the financial system debt is excluded because much of that debt is to the non-financial components and thus including it would be double counting.

[2] This process was described by Irving Fisher in 1933.

[3] The primary balance = government revenue/GDP – (government spending – interest paid)/GDP. In other words, it’s net government spending less interest payments.

Daily Comment (April 17, 2020)

Posted on April 17, 2020April 17, 2020 by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning and happy Friday! Equities are rebounding this morning on a positive drug trial. China’s GDP turns negative. We update the COVID-19 news. Here are the details:

COVID-19: The number of reported cases is 2,169,022 with 146,071 deaths and 522,264 (yes, that’s down from yesterday) recoveries. Here is the FT chart:

There is a clear bend in the U.S. curve, which is good news.

The virus news:

U.S. equity futures rallied overnight on reports that a clinical trial for Gilead’s (GILD, 76.54) remdesivir was effective in treating COVID-19 patients.
- The reports came from a Chicago hospital. Remdesivir was initially developed to combat Ebola; it is an anti-viral, meaning it attacks the virus itself.
- First, it is always good news when some drug works. Second, we are still a long way from remdesivir becoming a widespread treatment. The Chicago report was a clinical trial; it was used alone. The gold standard for drug testing is the double-blind study, where sick patients are either given the drug or a placebo. Neither the patient nor the doctors administering the drug know what a patient is receiving.
- The reports on what occurred in Chicago are glowing (hence the nearly 3% jump in equity futures), but without a double-blind study we may be merely observing a fluke.
- It is also worth noting that remdesivir won’t prevent one from being infected by COVID-19; however, if it works, it may reduce the severity of the infection and save lives. A rough comparison is with Tamiflu; it doesn’t prevent one from getting the flu but it can make the symptoms less severe. Remdesivir appears to be much more potent than Tamiflu but the usage is similar.
There is a myriad of treatment options being investigated. The U.S. is helping fund the vaccine effort.
The counting effort has become a source of uncertainty as well:
- Spain’s death toll will likely be revised higher due to undercounting of nursing home resident deaths. The death count is having a political impact in Spain and Italy.
- New York raised its total as well, counting more who died outside of hospitals.
- Wuhan doubled its death toll after reviewing the data. There have been growing doubts about the death toll (cremations seemed to far exceed death reporting) and even this increase is likely an undercount.
As we noted yesterday, we still don’t know enough about the virus. In Wuhan, serological testing has begun. The initial reports suggest the city, which was hard hit, is still well below herd immunity levels. Meanwhile, the U.S. Navy is nearly finished testing the sailors on the U.S.S. Theodore Roosevelt. About 13% have tested positive and of those 60% were asymptomatic. This would suggest a very wide dispersion in how people are affected and that silent carriers can spread the disease outside of social distancing.
The U.K. has extended social distancing measures for another three weeks.

The policy news:

The U.S. has unveiled its plan for reopening the economy after the shutdown. There were no huge surprises. It’s a standard issue set of guidelines that gives state and local governments the authority to make their own plans.
- In California, some of the larger cities and counties are preparing to slowly reopen.
- Another development we continue to watch is that groups of states are planning their reopening in concert.
- The EU unveiled its plan for reopening; it is similar to the U.S., except it uses nations instead of states.
- There is a growing backlash against the sheltering orders. If this grows and governors cannot enforce them, there is a risk of a second wave of infections and deaths during the summer.
It is looking like the mortgage servicers will be the next to need a bailout. As borrowers are unable to pay either their mortgage or rent, the servicers are required to pay the bondholders. Many of them lack the capital to do this for very long. If the bailout is coming, the quasigovernment firms may not be the source of funds.
The small business bailout program has exhausted its funds. Replenishment is caught in a political figh

The economic news:

Although it comes as no great surprise, China’s Q1 GDP fell 6.8% from last year, and -9.8% from Q4, for an annualized decline of 34%. This is the first decline in China’s GDP since it began reporting on a quarterly basis. During the “Great Leap Forward,” which ran from 1958 to 1960, China experienced a -27.3% drop in GDP in 1961.

One interesting tidbit; excavator sales are jumping in China on expectations that there will be a jump in stimulus spending on public works.
As we reported yesterday, there is a looming bottleneck developing in the meat industry as the processors close due to worker infections. This is leading to shortages in stores and involuntary herd expansion for farmers and ranchers.
There has been a remarkable adjustment by manufacturers to repurpose assembly lines for medical supplies.

The market news:

Airlines who took bailout funds are being forced to maintain routes even as passenger counts dwindle. And, there is a chance that we have seen the end of the airlines’ ability to put more passengers on planes.

The foreign policy news:

The origin narrative of COVID-19 is increasingly looking like it may have escaped from a Chinese bioweapons lab. Initial reporting pointed at China’s “wet markets,” where wildlife is sold for food, but that idea is becoming increasingly suspect. U.S. intelligence agencies have been investigating the lab origin for a while. It does not appear that COVID-19 is a bioweapon; genetic reports indicate that a weapon designer would have made it differently. Instead, the idea is that poor security practices led to a leak of a bat virus that crossed the species barrier. China has had problems with biosecurity before—it was evident in the SARS epidemic. At this point, the intelligence agencies have not been able to determine with confidence that a leak caused this pandemic. They may never be able to reach a high standard of proof. But the standards of proof in the court of global public opinion are lower. U.S./China relations were already on tenterhooks; COVID-19 is likely to further freeze the relationship.
- China’s standing is even suffering in Africa, where it has been a large investor and lender.
There are reports within China of a surge of xenophobia; it appears the relationship tensions flow both directions.
We reported yesterday that Japan was helping fund companies that wanted to leave China. There is increasing evidence of Japan’s withdrawal from the Chinese economy.
How bad is it? It’s so bad that Venezuelans who have fled the country are going back! At the same time, oil-rich Venezuela is running out of gasoline.
French President Marcon warns that the EU may unravel if it doesn’t work together to help nations hit hard by the virus.
Brazil’s President Bolsonaro has fired his health minister. The president has strongly opposed social distancing, while Luiz Henrique Mandetta, his health minister, had been pushing for such measures.
Drug smugglers have apparently been hiding shipments in medical imports.

Odds and ends: Argentina has made a restructuring offer for its debt. It is looking for a three-year grace period from lenders. The Navy is accusing Iran of harassing Persian Gulf shipping. Russian oil firms are fighting over the allocation of production cuts. Despite everything, the Johnson government in the U.K. refuses to ask for a Brexit extension.

View the complete PDF

Daily Comment (April 16, 2020)

Posted on April 16, 2020April 16, 2020 by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Good morning! Equities are rebounding this morning. We update the COVID-19 news and initial claims. The Weekly Energy Update is available. Here are the details:

COVID-19: The number of reported cases is 2,076,015 with 138,000 deaths and 522,881 recoveries. Here is the FT chart:

There is a clear bend in the U.S. curve, which is good news.

The virus news:

The focus for governments is moving from mitigation of the virus spread to relaxing social distancing to foster economic recovery. These actions are occurring across the developed world:
- The White House is expected to release guidelines for relaxing social distancing later today. The administration’s hastily created council for opening the country has suggested that testing needs to be stepped up for confidence to return. Given the broad geography of the U.S., urban areas in California and New York appear to be on the right side of the bell curve; however, rural America may just be starting the process.
- Germany is preparing plans to reopen; its approach appears to be quite cautious.
- In effect, we are seeing a number of nations try different tactics for returning to normal. The fact is that there are no specific guidelines and every government is feeling their way through this issue.
Meanwhile, other nations remain on the left side of the bell curve and are coping with rising infections and fatalities.
- Britain is planning to extend its lockdown into early May.
- Sweden has rejected stringent social distancing measures, instead allowing restaurants and schools to remain open. Thus, the country has become a natural experiment of sorts for the rest of the world. Its death toll is rising, at 1,203, and is not expected to peak until early May. The country’s leadership is suggesting that stringent measures can’t be maintained (and there is growing evidence that this is the case), so a milder form of social distancing maintained for longer is better. In other words, if COVID-19 is going to become endemic, it is better to learn to live with it. One interesting trend—the average age of those dying from the disease is higher in Sweden than in other Nordic nations, suggesting the more stringent social distancing measures are most effective at sparing the elderly.
- Portugal, which would seem to be at great risk (older population, weak health care system), has done rather well due to aggressive social distancing.
- Japan, which had avoided rising cases earlier, has faced a rise in infections recently and today announced a national state of emergency.
- Russia is facing a rise in cases just as President Putin seeks approval to remain in office.
As the U.S. and others try to figure out how to emerge from lockdown, much of the decision process is dependent on immunity. There is much we still don’t know about COVID-19. There is an assumption that once a person contracts and survives the disease, they have some degree of immunity. That is a reasonable assumption that may or may not be true. Or it may be more complicated than it seems. A recent paper in Science raises the possibility that COVID-19 may be with us in one form or another for a while; we may cycle through flare-ups and occasional lockdowns in the future. In other words, this may not be a “one and done” type disease.
- Testing woes are exacerbating the lack of knowledge.
- Blood tests in Germany suggest the levels of natural immunity remain surprisingly low.
- Even Singapore, which has been lauded for its quick response and containment policies, was forced to reimplement measures as cases increased.
- China is blocking its border with Russia in the wake of new infections thought to have come from its northern neighbor.
- Getting economies back up and running will require people to trust that they won’t get infected by others. Until a reliable vaccine is available, that will be accomplished through persistent testing, both for infections and immunity. Contact tracing is part of that, but this process is fraught with privacy concerns.
- Although there is great hope that a vaccine may be available by early next year for the general public, progress depends on the virus not mutating. There are reports that a strain in India may have mutated in such a way as to make current vaccine efforts futile.
There are reports that the virus not only attacks the respiratory system, but that it may have lingering neurological effects as well.
There are reports Iran is dramatically undercounting COVID-19 fatalities. Accurate data on this virus has been a problem. According to today’s report, Iran has 182,436 cases with 6,771 fatalities. If this claim of undercounting is correct, the number dead could be two times higher, or nearly 14k.
Political tensions between the U.S. and China are elevated. For example, Chinese export controls are preventing the export of medical supplies. At the same time, doctors in both nations are continuing to cooperate. China is launching studies into immunity and asymptomatic cases, and also examining if air conditioning airflows can spread the virus.

The policy news:

One of the challenges for the Fed from its policy of expanding the balance sheet is what assets are included. In a sense, what gets included is a political decision. For example, when the Fed decided to start buying some levels of high yield, where does the bank draw the line? In other words, who gets excluded and why?
- The Fed has expanded its purchases of muni paper but is limiting its purchases to large cities and states. Which, of course, is leading smaller government entities to complain. We suspect the Fed is expecting states to come to the aid of smaller cities.
- We also suspect the Fed’s reason for this type of support was to avoid systemic risk in the muni market. However, avoiding systemic risk may not mean that all participants are saved. Given the political nature of this decision, we would not be shocked to see the Fed expand to buy a broader swath in this market.
There are reports that lenders can seize stimulus checks to address delinquent debt. If the practice becomes widespread, the negative public relations from such actions will be grim.
The small business lending program either has, or nearly has, exhausted its funding. Additional funding is being held up due to partisan divisions.
The stimulus checks are starting to hit household accounts. Early reports suggest the money is mostly going to food.
Reports of rent relief requests, even from large tenants, are rising.

The economic news:

Related to the muni comments above and yesterday’s retail sales data, cities and states are reeling from the loss of revenue. Many states and municipalities rely on sales taxes for the bulk of their revenue and these flows are declining as consumption falls or goes online.
Even in the midst of a long expansion, nearly 60% of American households had little to no saving. The sudden increase in unemployment is leading to severe strain for the majority of households. There are also growing concerns that firms are about to unleash another wave of layoffs for workers who were initially spared. It appears that firms were anticipating a short downturn, but wider layoffs are emerging as evidence increases that the recovery may be slower than initially thought.
The small business bailout program was established with great speed. However, it does have some issues. And, for some businesses, the bailout doesn’t matter; they probably wouldn’t have survived a normal recession and this downturn is deep enough that continuing to operate has become impossible.
The best estimate we have seen for unemployment comes from Alexander Bick and Adam Blandin. Their forecast? The unemployment rate will reach 20.2% in April.
Economic recovery is going to require more than just stimulus, bailout money and Fed support. Confidence among consumers is critical. This recent poll highlights the issue—nearly 70% of respondents would not resume pre-COVID-19 activities:

Finally, yesterday’s retail sales data confirms the shift caused by the lockdown:

The market news:

For the past few years, LIBOR has been scheduled to be replaced with the Secured Overnight Financing Rate, or SOFR. This rate is a representative interest rate for repo transactions using Treasuries for collateral. However, market turmoil caused by COVID-19 is apparently slowing the adoption of the new rate.
Private equity firms are snapping up discounted public shares of companies struggling to acquire cash. Some of this new money is in the form of convertible shares.
Pork processors are shutting down facilities due to rising virus infections. We may see depleted supplies in the coming weeks.

The foreign policy news:

The tussle over the WHO is really all about controlling the narrative. The U.S. fears that China has excessive influence over the WHO leadership. The U.S. isn’t alone on this concern; Japan has expressed apprehension over China’s influence on the body. Petitions to remove the WHO’s leader have been conducted. This issue comes as reports indicate China didn’t warn the public for six days when a pandemic was imminent.
The U.S. is resisting developed country efforts to boost the IMF’s funding; we suspect America fears it will be forced to provide the largest share of the new funding.
There is great fear that COVID-19 will accelerate a growing trend toward deglobalization. We note two reports. First, Japan is paying Japanese firms to leave China and relocate elsewhere. Second, Australia is taking measures to bring manufacturing “back home” (read: out of China).
Worries over emerging market debt have been on the rise; the IMF has been working for forbearance for some borrowers. Two other issues have emerged. First, we may not have a full picture of the level of EM debt because some of it has been issued through financial havens. Second, China, which has issued debt to EM nations through its “one belt, one road” project, is not part of any developed nation debt system, e.g., Paris Club. It is not clear how China will behave as a creditor.
Australia is warning that the non-China rare earths supply chain could be in trouble.

Odds and ends: An Islamic State cell operating in Germany was planning attacks on U.S. bases there. Their plans were thwarted when the group was arrested. China may be testing low-power nuclear weapons in violation of nuclear testing treaties.

View the complete PDF

Weekly Energy Update (April 16, 2020)

Posted on April 16, 2020April 15, 2020 by Rebekah Stovall

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

Crude oil inventories rose 19.2 mb compared to the forecast rise of 11.6 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.3 mbpd. Exports rose 0.6 mbpd, while imports declined 0.2 mbpd. Refining activity fell 6.5%, well more than the 2.2% decline forecast. The inventory build was mostly due to the continued collapse in refinery operations.

The above chart shows the annual seasonal pattern for crude oil inventories. The last three weeks have pushed stockpiles almost “off the charts.” Although not totally unexpected, this is the first week where the impact of COVID-19 and the oil war have started to affect the weekly data.

Based on our oil inventory/price model, fair value is $38.75; using the euro/price model, fair value is $44.90. The combined model, a broader analysis of the oil price, generates a fair value of $41.04. 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. If storage capacity is fully utilized, a catastrophic decline in prices, which we would define as low teens, is possible.

As promised, here are a couple charts that look at U.S. oil demand. The chart below shows the four-week average of gasoline supplied to the distribution system. As the chart shows, shipments have cratered. Distillate demand is holding up better, reflecting the increases in delivery of goods.

Total fuel consumption is plunging.

This is a longer-term view of refinery activity.

The last time we saw a drop of this magnitude was during the depths of the Great Financial Crisis. Over the past four weeks, refineries have reduced their oil consumption by 3.2 mbpd, far exceeding the drop of 0.5 mbpd in production. The underlying fundamentals for crude oil continue to deteriorate. The DOE reduced its forecast for U.S. production this year to 11.8 mbpd. This means that production can be expected to decline further.

The Trump administration did patch together a broad OPEC+ deal; in total, the participants agreed to reduce oil output by 9.7 mbpd. However, as is usually the case with these sorts of agreements, the details tend to underwhelm. Some of the nations involved used higher baselines to make their announced cuts. Our take is that the OPEC+ cuts are probably more in the neighborhood of 7.0 mbpd. And, that relies on Russia actually cutting output, which is something of a rarity; the Russians usually promise but tend not to deliver. The OPEC+ group and the G-20 have promised production cuts of up to 20.0 mbpd. Although that cut would help stabilize the market, there is a high degree of skepticism surrounding the deal. One element of skepticism is that the KSA has cut its posted prices to Asia, while increasing them to the U.S. Part of the share war was over the Chinese market and Saudi Aramco’s (2222, SAR 30.70) decision to lower prices to the Asian market suggests the KSA isn’t really backing down. At the same time, raising the U.S. price will likely mollify the Trump administration.

Making the U.S. happy is critical to the KSA. The kingdom relies heavily on the U.S. military for protection and it needs the U.S. financial markets to recycle its dollar balances from oil. President Trump had numerous levers to pull to elicit Saudi cooperation. The U.S. could have implemented tariffs or quotas on Saudi oil imports. Military support could have been reduced. Perhaps the most potent threat would have been to deny the KSA access to U.S. financial markets. The Saudis were going to make a deal with the U.S.; the bigger issue is whether the deal will be effective.

Market conditions are better with the arrangement than without. If negotiations would have failed, it would have led to catastrophic market conditions. A plunge in prices to single digits would have been likely. Such a decline may have triggered political instability in the Middle East and triggered a corresponding spike in prices. A deal does avoid massive market volatility.

However, as the steady decline in prices this week suggests, the deal doesn’t solve the low-price problem either. That’s because we are seeing a massive drop in demand. The IEA projects that oil demand will fall by 23.1 mbpd in Q2 compared to the previous year. The proposed output cuts simply can’t offset declines of such magnitude.

Our expectation is that oil prices will fall steadily into the low teens. Markets without interference will eventually clear. They will clear by higher cost producers ceasing production. In the private sector for oil, this will mean bankruptcies and buyouts. Some production that gets shut-in probably never comes back. In Texas, some producers are calling for the Texas Railroad Commission to step into the market and allocate production, something this body did from 1932 to 1970. Companies operating in the state are divided on this action as is the commission itself. The legality is on somewhat thin ice (production allocation violates U.S. antitrust laws). Our read is that conditions will need to get much worse before there is a unified response for such action. That scenario may occur in the coming weeks.

A new solution has emerged—paying oil companies not to produce. The U.S. has a long history of intervening in commodity markets. The grain markets have deep government involvement. The USDA has bought grain from farmers at set prices, paid farmers not to grow crops on marginal fields, and simply paid farmers money (as we saw last summer due to the trade war with China). We think we are still some distance from this outcome but, for the first time, direct aid to oil companies is being considered. We will see how Congress handles that appropriation. Perhaps this could be a bargaining point for the stalled small business aid boost.

There are reports that Iran is interfering with Persian Gulf shipping. Although we don’t expect Tehran to precipitate a conflict, conditions are fluid and there is always the possibility that a mistake could be made.

View the PDF

Daily Comment (April 15, 2020)

Posted on April 15, 2020April 15, 2020 by Rebekah Stovall

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

[Posted: 9:30 AM EDT]

Today’s risk-off stance in the markets comes as we’re finally getting earnings and economic data that more fully reflect the impact of the coronavirus crisis. Several figures have come in worse than anticipated (see below), tempering the recent positive vibe from government planning for an economic reopening.

COVID-19: Official data show confirmed cases have risen to 1,997,321 worldwide, with 128,011 deaths and 500,996 recoveries. In the U.S., confirmed cases rose to 609,685, with 26,059 deaths and 49,966 recoveries. Here is the chart of infections from the Financial Times:

Virology

New York City yesterday raised its estimated death toll from the virus to more than 10,000 from the previous estimate of about 6,600, mostly because it is now counting those who had COVID-19 listed as a probable cause of death on their death certificate even if they hadn’t tested positive for the virus. The revision highlights the continuing problem of undercounted cases and deaths, which has also been extensive in countries like the U.K., Italy, and probably China.
New reports say many of the “imported” coronavirus cases reported by China represent travelers crossing from Russia into the northern province of Heilongjiang.
- Despite official data showing only a limited number of cases, epidemiologists suspect the outbreak is now spreading rapidly in Russia.
- In recent days, China has sealed off parts of its border with Russia and established a field hospital at the once-bustling border city of Suifenhe.

Real Economy

In its latest World Economic Outlook, the IMF estimated the coronavirus crisis will reduce global economic output by 3.0% in 2020, followed by a rebound of 5.8% in 2021. U.S. output is projected to fall 5.9%, followed by a rebound of 4.7% next year.
- The declines this year would dwarf the global pullbacks in 2009, during the Global Financial Crisis, making this the worst global recession since the 1930s.
- As if that weren’t bad enough, analysts see the balance of risks as being weighted to the downside.
San Francisco FRB President Daly warned that the recovery from the coronavirus crisis is unlikely to be swift, even if the threat of illness is contained quickly.
The International Energy Agency issued an updated forecast that global demand for crude oil will fall by 29 million barrels per day in April and by 9.3 million bpd for all of 2020.
- The figures equal 29% and 9% of demand, respectively, in the same periods of 2019.
- The news is driving oil prices sharply lower so far today.
Although the crisis has undercut prices for most commodities other than gold, it’s now proving positive for coffee prices, which are up 18% since their most recent low in late January.
Despite the gloomy news on the economic impact of the crisis, plans for gradually reopening the economy continue to solidify, with President Trump saying yesterday that his administration will soon start working with each state to develop its own individualized program for reopening. Some would open before the administration’s voluntary social distancing guidelines lapse at the end of April.
- California Gov. Gavin Newsom laid out six indicators that he said would help determine when he begins to modify his stay-at-home order. The indicators include expanding virus testing, meeting the needs of hospitals in case of additional surges, and offering guidelines for businesses and schools to practice physical distancing.
- Oregon Democratic Gov. Kate Brown announced similar steps.
- A draft FEMA and CDC plan would prioritize reopening “community settings where children are cared for, including K-12 schools, daycares, and locally attended summer camps, to allow the workforce to return to work.”

U.S. Policy Responses

Ten of the 12 largest U.S. airlines have reached an “agreement in principle” with the federal government to accept financial aid aimed at preventing layoffs as provided in the $2.2 trillion CARES economic support act. In return, it appears that each airline will have to eventually return 30% of the money, with interest (boosting its debt load), and also offer the government warrants for about 1% of its stock.

International Policy Responses

Responding to IMF and World Bank requests, the G-7 group of large, advanced countries approved allowing poor countries to postpone their debt payments for up to 14 months to free up funds for their fight against the coronavirus. However, the deal is conditioned on the participation of all G-20 countries.
In contrast with the wide support for the debt relief measures mentioned above, the U.S. and some other countries are resisting an IMF proposal to create additional reserve assets (“special drawing rights,” or SDRs) in order to help low-income emerging economies cope with the pandemic.
The People’s Bank of China today cut its key one-year medium-term lending facility rate to a record-low of 2.95% from 3.15% previously.
- Cutting the MLF rate, which is the benchmark against which the PBOC lends to commercial banks, should reduce funding costs for Chinese banks and encourage them to lend at lower rates.
- State media have been reporting in recent days that more economic support measures could also be coming.
Faced with shortages of ventilators and other medical equipment to fight the pandemic, the Australian government has promised to nurture local manufacturing to ensure it is less reliant on global supply chains (and China, in particular). The new policy marks another step away from the globalization trend of recent decades.

Political Fallout

President Trump announced that U.S. funding for the WHO (amounting to approximately $450 million, or about one-quarter of the organization’s budget) will be suspended while a review is conducted to assess its role in “severely mismanaging and covering up the spread of the coronavirus.”
- He specifically called out the WHO for being too beholden to China, even though Beijing only provides about $40 million per year to the group.
- Other observers have also criticized the WHO for not pressing China to clean up its wildlife markets, for not being fully transparent about Chinese coronavirus infections, and for being late to declare a global pandemic.

Iran: Iranian naval forces seized a Hong Kong-flagged tanker and redirected the vessel into Iranian waters before releasing it, prompting a warning to ships along the Persian Gulf’s key oil export route. The ship was reportedly searched on suspicion of smuggling, but the incident is consistent with Iran’s recent shipping harassment. If this signals greater Iranian aggressiveness in the region, it could help provide a boost to global oil prices, although the market is still likely to be driven by the massive problem of oversupply.

View the complete PDF