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

[Posted: 9:30 AM EDT]

As March draws to a close today, we’re reminded of the old adage about the month: in like a lion, out like a lamb.  After what we’ve all gone through during the last month, we certainly hope for a day that’s as quiet and gentle as a lamb!  As always, we review all the key news on the coronavirus epidemic and related, market-relevant items.

COVID-19:  Official data show confirmed cases have risen to 801,400 worldwide, with 38,743 deaths and 172,657 recoveries.  In the United States, confirmed cases rose to 164,610, with 3,170 deaths and 5,945 recoveries (though the recovery data is lagging).  Here is the latest chart of infections from the Financial Times:

• Virology.  Two research groups affiliated with the Chinese insurance giant Ping An (2318.HK, 76.70) yesterday projected that new infections will peak no later than this weekend in key countries including the United States.  The projections seem rosy to us, especially since they show U.S. infections topping out at just 300,000.  Besides, a respected model from the University of Washington still projects the U.S. peak hospital usage will come later, on April 15.  All the same, we think the Ping An researchers’ model sensibly incorporates factors such as how late the countries started to enforce social distancing, their population density, the share of their population aged 60+, the number of intensive-care hospital beds they have available, and the level of public support for their officials’ lockdown orders.  Those markers are probably worth watching to gauge the future course of the pandemic.

• • As serious COVID-19 cases start to overwhelm the medical resources available in New York City, one of the nation’s top academic medical centers there told emergency room doctors that they have “sole discretion” to decide whether to place patients on ventilators or to “withhold futile intubations.” In other words, rationing.
  • China for the first time admitted that its official tally of cases excluded people who were infected but not showing symptoms. Officials said they will begin counting asymptomatic cases on Wednesday.
  • U.S. spy agencies have been tapped to try to figure out the true incidence and impact of the virus on China, Russia, North Korea, and Iran.
  • In a reminder that human folly, carelessness, or malintent could all be at play here, reports say U.S. customs officials in recent years have often intercepted Chinese scientists trying to transport undocumented and undeclared biological substances – including SARS and MERS samples – into the U.S.
  • While the crisis is opening up new opportunities for healthcare firms (especially in telemedicine), there are also new threats. The heads of the WHO and Unitaid, a UN-backed group funding global health innovation, are supporting a proposal that would force companies to pool their intellectual property related to coronavirus treatment, vaccines, and diagnostics and make them available at low cost to world governments.

• Real Economy.  As consumers continue to stock up on grocery staples, and as production and logistics systems continue to snarl, global grain prices have jumped 15% or more in recent weeks, in contrast with the steep price declines for many commodities facing reduced demand because of the pandemic.  However, grain stockpiles are actually relatively high, suggesting prices could quickly drop again as the crisis passes.

• • The All-England Lawn Tennis & Croquet Club meets on Wednesday to determine whether to hold this year’s Wimbledon Tennis Tournament. Observers expect the June 29 tournament to be canceled for the first time since World War II.
  • As China continues to restart its economy, its official purchasing managers’ index for manufacturing rebounded to 52.0 in March from its record low of 35.7 in February. That was a welcome surprise as the index had been expected to remain significantly below the 50 level that indicates expanding activity.  However, even the statistical agency warned not to interpret the rebound as a sign that China has had a “V-shaped” recovery and is now back to full health.
  • As if to underline that recovery from the pandemic will be a stop-and-go affair, some recent moves by Chinese local governments to reopen movie theatres, tourist attractions, and other venues have been reversed on fears of a rebound in infections.

• Financial System.  New reporting suggests U.S. and European banks are struggling with about 100 “warehouse” credit lines to collateralized loan obligation marketers.  The credit lines provide temporary funding to CLO managers as they build portfolios of lower-quality loans that are later marketed to investors.  Those assets have now plummeted in value, leaving the banks with an undisclosed amount of potentially problematic loans.
• U.S. Fiscal Policy Response.  The Treasury Department said the government will begin sending out stimulus payments to households in the next three weeks, with no action required for most people.  For people who don’t regularly file tax returns, the government will create a web portal for people to upload their direct-deposit information to the IRS.  Separately, Secretary of Labor Eugene Scalia said the federal government will release the recently approved funds to boost jobless benefits this week, but how quickly those payments reach laid-off workers depends on overburdened state unemployment systems.
• Foreign Fiscal Policy Response.  Just three weeks after the U.K. released a budget calling for £156 billion in bond sales in fiscal 2020-2021, the government issued a revised plan calling for a total of £46 billion in April alone.  Separately:

• • Klaus Regling, the managing director of the EU’s European Stability Mechanism, poured cold water on the idea of issuing EU-wide “coronabonds” to finance the bloc’s response to the pandemic. According to Regling, it would take between one and three years to set up a new European institution to issue such debt.  However, in an apparent olive branch to hard-hit Italy and Spain, he did suggest aid in the short term could be funded via existing bodies and instruments.
  • Similarly, Eurogroup President Centeno said in a letter to EU finance ministers that coronavirus aid could be raised using existing institutions and mechanisms, though “alternatives” could be considered. He also called a meeting of all 27 EU finance ministers to discuss aid next Tuesday.
  • As a reminder, our latest Weekly Geopolitical Report, published yesterday, examines how the disputes over coronavirus funding have the potential to cause a breakup of the EU.

• Political Implications.  Russia has sent military medical units to Italy in order to help it deal with the crisis, echoing China’s effort to burnish its image by sending aid abroad.  Separately, Hungary’s parliament gave Prime Minister Viktor Orbán the right to rule by decree until his government decides the coronavirus crisis has ended.

Global Oil Market:  Two major shale producers in the Permian Basin have asked Texas regulators to consider curtailing crude output in the state as the industry grapples with collapsing demand and plunging prices.  Meanwhile, poorer oil producers such as Iraq and Venezuela are being forced to consider steep budget cuts as low oil prices cut deeply into their revenues.

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

[Posted: 9:30 AM EDT]

Good morning and happy Monday!  Before we begin, we want to note a correction from our Friday comment; we erroneously reported the NHL had cancelled its season.[1]  That wasn’t true, and we apologize for any confusion.  Global equities are lower and oil prices are testing $20 per barrel.  However, U.S. equity futures are ticking higher.  We update all the COVID-19 news, including some charts on what is happening in the economy.  Here are the details:

COVID-19:  The official number of global cases is 735,560 with 34,830 fatalities and 156,380 recoveries.  There is growing skepticism over China’s numbers; this is especially pertinent given media reports that the U.S. now has more cases than China.  Here is the usual FT chart:

There is a recognizable “bend” developing in the U.S. infection rate.  That is potentially good news.

The virus news:

• President Trump has extended social distancing guidelines until the end of April. There had been rumblings of ending social distancing by mid-April, but the continued surge of cases has led the government to continue the current policy.
• There is growing speculation that China may have drastically undercounted fatalities from COVID-19. There are reports that the level of cremations is far exceeding the reported 2,500 deaths from the virus in Wuhan.  Although it may be possible that people died of something else, it is also possible that officials only reported those who were tested and died and did not perform autopsies on the others.
• Meanwhile, the world is watching China’s slow return to work to see how an economy recovers from lockdown.
• It appears that hospital workers in the Netherlands may have been asymptomatic carriers of the virus. If so, they may have been inadvertent vectors of the disease.
• Although China has tried to gain goodwill by sending medical devices to nations affected by COVID-19, it turns out much of what was sent was defective, blunting the soft-power effort. It seems that the crisis policy of retooling other factories for medical device production had flaws.
• One of the world’s largest producers of ventilators, Drägerwerk (DRWKR, $104.50), is warning of a global supply shortage even though it is rapidly increasing production. The FDA has approved the emergency use of hydroxychloroquine and chloroquine for treating COVID-19.  Virus transmission in Seattle appears to be slowing, giving hope that social distancing is working; however, without aggressive testing and serological following for immunity, we still don’t really know for sure.

The policy news:

• Congress and the White House are already preparing for “Phase 4” of the stimulus program. The general consensus is that the preceding measures will merely offer support to those affected by COVID-19 and act as a stopgap.  Restarting growth will be another matter.
• Congress is “rearming” the Fed, boosting its ability to begin lending directly to businesses and local governments. These new powers are significant; one of the problems that hampered the response in 2008 was that the Fed pushed liquidity into the banking system, where it sat idle.  That led to calls among left-wing politicians for direct central bank support; in Britain, Jeremy Corbyn called for “QE for people.”  These new powers are a step in that direction—the Fed would be simply bypassing the financial system and putting money directly into the economy, à la MMT.  This development comes in the face of a severe testing of the U.S. social safety net.
• The U.S. plans to suspend tariff collection for three months.
• The next battle brewing could be in insurance. The industry is claiming that policies it has written specifically exclude pandemics; governments beg to differ.
• Across the pond, there are a couple items of note. First, Italy’s widespread “off the books” labor market means that millions of workers will be excluded from government support measures.  And, there is a deep battle brewing in the Eurozone; a growing roster of nations, mostly in the south, are pressing for a Eurobond, a bond backed by the full faith and credit of the entire (read: Germany) Eurozone.  Needless to say, Germany and the Netherlands are opposed to such measures.  As we are reporting over the next two weeks in the WGR, the fracturing of the EU is becoming a geopolitical concern.

The economic news:

• Although the employment news is bad, we are seeing aggressive hiring in logistics, medical and large retail. This is a massive shift in the labor market.

The market news:

• Banks and other lenders are tightening lending standards as borrowing demand rises. Historically, lenders are pro-cyclical; they tend to increase lending in good times and withdraw it in bad times.  Unfortunately, this sort of behavior makes the recession worse.  Hence the entry of the Fed into direct lending.
• There are three charts we want to note this morning. First, there has been a flight-to-government money market funds (IMMK) and away from prime funds.  During the 2008 Financial Crisis there was similar activity.  The second chart updates the retail MMK and S&P 500, while the third chart shows how foreign central banks are drawing the Fed’s swap lines.

In 2016, SEC regulations changed and allowed the NAV on MMK to deviate from $1.00 per share.  This change prompted a flight into government funds.  However, we did see a modest recovery in prime MMK until recently.  As financial stress has increased, so has the exodus from prime MMK.

Second, readers will be familiar with our retail MMK/S&P 500 chart, which is updated below.

When the trade war expanded in early 2018, retail investors began building cash positions.  This positioning accelerated despite the rally in stocks from Q2 2018 into February of this year.  But, as stocks have declined, MMK has risen sharply.

Third, the Fed’s forex swap lines are being drawn aggressively.

These swap lines are used by foreign central banks to provide dollars to their borrowers who have dollar-denominated debt.  As financial stress has increased, we have seen the dollar rally.  In 2008, the dollar weakened only after the draw on foreign currency swaps declined.

• Oil prices continue to spiral lower. A couple news items of note.  First, the recently passed stimulus bill failed to include funding to purchase oil for the SPR.  Second, gasoline crack spreads, which is a rough measure of refining margins, have dipped under zero recently.  The chart below shows that a barrel of gasoline is trading below the cost of a barrel of oil.  If this continues much longer, we will likely see refining activity decline which will put additional pressure on prices.

• Compounding problems for oil is that the calendar spread, the spread between spot and deferred futures, remains wide. This allows firms to buy oil in the spot and sell it in the future, pocketing the gain.  This activity will continue until storage reaches capacity; it is at that point that oil prices will collapse.  We are seeing shipping rates for oil tankers rise as firms are starting to use tankers for storage.
• The last time the U.S. shale industry was threatened, in 2016, once prices recovered production returned even stronger. That outcome is less certain this time around—the price decline will be deeper and longer and financing may be slower to return.  We expect the price weakness to last longer because Russia is better positioned than the usual OPEC nation to take on the KSA.  There are breaking reports that President Trump will be calling President Putin to talk about oil today; we will see how that goes but would not expect much help from Moscow.
• One area we are watching with increasing interest is real estate. We know that as households and businesses lose income their ability to service mortgages or maintain rent is coming into question.  One factor we are investigating are rules that limit the liability of a commercial lessee for breaking a lease.  Section 502(b)(6) is the part of the commercial code that deals with unpaid leases in bankruptcy.  The bottom line is that the landlords of commercial firms may find their remedies in bankruptcy are rather constrained and this may explain part of the recent weakness we are seeing in REITs.
• There are rising concerns about widespread EM defaults; the rise in the dollar is probably a symptom of this worry. At the beginning of the year, four EM nations’ dollar debt was at distressed levels; that number is up to 18.  Another complication is that China has become a larger lender into the EM space.  It isn’t clear how China will deal with bad loans, but we would expect behavior more akin to the 18^th
• LIBOR’s replacement, SOFR, is failing miserably as a new rate tool in the crisis. We wonder if one of the outcomes of COVID-19 will be the resurrection of LIBOR.
• Just when we need them most, there is an apparent shortage of jigsaw puzzles.

Foreign policy news:

• Russia and China are using the crisis to sow dissention through social media by releasing disinformation and spreading unfounded conspiracy theories. And, as has been the pattern, the social media firms are failing to police these actions.
• U.S. sanctions have exacerbated the impact of COVID-19 on Iran.  The U.S. is pulling troops out of the K1 base in northern Iraq, the third pullout this month.

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[1] One of the dangers of working from home is overhearing members of the household making unsubstantiated claims.  Going forward, we will rely on Ronald Reagan’s dictum of “trust but verify.”

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

[Posted: 9:30 AM EST]

Happy Friday as we wrap up another long week.  After three days of vigorous equity rallies, we are taking a breather this morning.  We update all the COVID-19 news.  Venezuela’s president is indicted.  Israel has a new unity government.  Here are the details:

COVID-19:  The official number of global cases is 542,788 with 24,361 fatalities and 124,351 recoveries.  There is growing skepticism over China’s numbers; this is especially pertinent given media reports that the U.S. now has more cases than China.  Here is the usual FT chart:

There is a recognizable “bend” developing in the U.S. infection rate.  That is potentially good news.

The virus news:

• Boris Johnson has tested positive for the virus, the first G-7 leader to do so. So far, his symptoms have been mild, and he is continuing to work in isolation.
• There is a growing debate among epidemiologist modelers about how COVID-19 is spreading. The conventional position is that the virus is potentially dangerous because it is novel and there is no imbedded immunity in the community.  This position prescribes widespread social distancing.  However, other modelers suggest there is a significant number of cases that were asymptomatic so the level of immunity in the community may be much higher than we think.  If the latter is true, then the need for social distancing is less critical.  What we see is that the disease is overwhelming the medical capacity in several cities worldwide.  This observation bolsters the conventional position.  However, the opposing position may be the one that leads us out.  Sweden has opted for very modest restrictions; it is gambling that (a) most cases are mild and thus the costs of infection are bearable, and (b) its medical system can handle the influx of cases if it is wrong.  Sweden, Mexico and Brazil are offering natural experiments on the policies of lockdowns and social distancing.
• As we noted yesterday, Russia is postponing a referendum on extending Putin’s time in office. It also announced social distancing measures and is going to tax bank deposits to pay for them.
• Earlier this week, the U.S. Navy announced that 23 sailors aboard the U.S.S. Theodore Roosevelt tested positive for COVID-19. This vessel has been ordered to port so the remaining sailors can be tested.
• China has closed its borders to foreign travelers in an attempt to prevent a rebound in cases.

The policy news:

• The House is expected to vote on the stimulus bill, which passed the Senate yesterday. Although we expect it to pass, it will not be without drama.  The leadership is trying to ensure it can get enough members back in Washington to form a quorum.  House leadership was hoping to pass the measure with a voice vote, but it only takes one member to object which would force a physical vote; hence the rush to Washington.
• In the bill, airlines will give equity stakes to the government in return for support. Cruise lines, due to foreign ownership, won’t get aid.
• Although getting this bill passed is a significant achievement, the reality is that it only partially replaces the losses already endured. Further measures are likely, but getting them passed will become increasingly difficult.
• The ECB has started new bond purchases. We are already seeing yield spreads narrow between countries.

• The next “big thing” will be countries figuring out how to restart after social distancing restrictions are relaxed. The U.S. is considering a county-by-county  Europe is working on similar policies.  It seems to us that the key to this approach is wider testing for both current infections and immunity.  Without those elements, restarting the economy is a shot in the dark; start too soon and you risk a jump in infections, but wait too long and one suffers unnecessary pain.
• The Fed’s balance sheet has exceeded $5.0 trillion for the first time on record. The Treasury is trying to give support to mortgages on fears that homeowners will slow or stop payments.
• The EU continues to struggle with policy surrounding the virus. Border blockages are playing havoc on internal trade.  The blocks are also affecting migrant farmworkers.  Our upcoming Weekly Geopolitical Report is a two-part series on this issue.
• The U.S. is planning to approve delays to tariff payments due to the virus.

The economic news:

• The jump in initial claims, reported yesterday, was historic. And, it is quite possible that the claims data was understated.  We modeled the unemployment rate using the four-week average of claims and continuing claims.  We will likely see a massive rise in unemployment.

The March employment data will be very sensitive to the survey week, which is usually the second week of the month.  We may not get the full impact of the virus until the April data is released, which comes out in early May.

• Although we continue to lack data on the level of damage to the economy, there are high-frequency reports from new sources that suggest serious weakness. Here is one on consumer confidence.  Polling suggests widespread pain.
• With reference to our recent WGR, the Swiss have been managing their shutdown with relative ease because of government strategic stockpiles of foodstuffs.
• Companies are reporting a jump in sales of tops and shirts, but without the corresponding pants and skirts—perhaps a reflection of increased videoconferencing.

The market news:

• Despite the Fed’s efforts, short-dated T-bill yields have turned negative, a sign that liquidity issues persist.
• Insurers are scrambling to deal with expectations of incoming claims due to COVID-19.
• Ecuador may be on the brink of default.
• Casinos in Macau have reopened; crowds are thin.
• The NHL has canceled its season.
• Oil markets remain under pressure. China has been reportedly building inventory, taking advantage of low prices.  The key issue is storage; once available storage is tapped, oil prices would be vulnerable to a catastrophic decline.  Iran is facing additional pressure; the S. has limited Iraq’s waiver to buy Iranian oil to 30 days.  If the U.S. finally ends the waivers, Iran will have one less nation to buy its crude.  The KSA is reportedly struggling to find buyers for its crude oil.

Foreign policy:

• Presidents Trump and Xi held a call in a bid to ease rising tensions between the U.S. and China.

Israel:  Although Netanyahu and Gantz vowed not to form a unity government, under the stress of the virus, they have worked out a deal.

Venezuela:  The U.S. has indicted Venezuelan President Maduro for narcotics trafficking and has offered a $15 million reward for information leading to his capture and conviction.

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

[Posted: 9:30 AM EST]

The long-awaited initial claims data is out; we offer details below, but claims rose a record 3.28 mm.  After a two-day respite, equities have turned lower.  As we note below, the Senate has passed a $2.0 trillion spending package.  As usual, we update the COVID-19 data.  The Weekly Energy Update is available.  Here are the details:

COVID-19:  The official number of global cases is 487,648 with 22,030 fatalities and 117,749 recoveries.  Although we report on this data each day, readers should note that these numbers are, at best, a mere snapshot.  The number of actual cases is probably far higher.  Here is the usual FT chart:

The virus news:

• Spain has now suffered more fatalities than China. Nursing homes in Spain have suffered significant numbers of deaths.  The EU is struggling to acquire COVID-19 drugs due to the lack of airfreight capacity.
• There are some interesting developments on the testing front. The U.K. looks poised to roll out a home test for the virus.  That could dramatically increase data on the disease and help policymakers fine-tune shutdown orders.  In the U.S., a simpler test is replacing the current one.  The current test requires a special swab that is administered deep within the nasal cavity, and the associated gagging can expose health care workers administering the test.  The new test eliminates that risk.  The U.K. and Senegal are doing a trial on a 10-minute COVID-19 test.  Perhaps even more important, the U.K. is running a trial on a test that would determine if a person has immunity to COVID-19; this would be a huge breakthrough because we could tell who is no longer at risk to the disease.  These individuals could return to everyday life.  Meanwhile, the lack of testing kits in Europe is preventing medical personnel from being tested.  The search for drugs that would help victims recover from COVID-19 continues apace.
• Medical capacity limits are being hit in some cities in the U.S. As ERs fill up, doctors are being forced into triage decisions.
• Epidemiologists are watching Wuhan to see if there is a rise in infections after restrictions are lifted.
• Brazil and Mexico continue to avoid aggressive containment measures, perhaps creating a natural experiment to see how the virus spreads and how lethal it is without constraints.
• There is a patron saint for epidemics, St. Corona.

The policy news:

• The $2.0 trillion stimulus bill passed the Senate last night. The deal has five major components:
  • Income support: There will be direct payments to households of $1,200 per adult with additional payments for dependent children. The payments phase out at $75k for individuals or $150k per household.
  • Business bailouts: The bill sets aside $500 billion for loans to businesses, with $25 billion for airlines. Buybacks would be curbed for aided companies.
  • Unemployment insurance: This existing benefit is increased by $600 per week for four months. Gig economy workers are included.
  • Hospitals: This sector gets $150 billion.
  • Small businesses: The bill gives $367 billion of loans and grants to firms with less than 500 employees.
• The bill now moves to the House.
• Although this bill is a massive spending package, it may not be enough. Expect lawmakers to do more in the coming weeks.  This deal would not be a cure, but a stopgap; after all, economists are expecting a massive drop in Q2 GDP and this amount may not fill that one-quarter gap.
• Europe is opening the fiscal spigots as well:
  • Germany has released the “debt brake” and is deploying deficit spending.
  • France is promising massive medical spending.
  • Even little Malta is boosting fiscal spending.
  • The U.K. and the Netherlands are abandoning fiscal austerity.
  • Nine Eurozone nations have issued a call for “coronabonds,” which would be a common debt instrument for the currency bloc. If this single bond emerges, it would increase the viability of the Eurozone.
• At the same time, European leaders are worried that the crisis could lead to foreign investors buying vulnerable companies.

The economic news:

• Estimates for U.S. Q2 GDP are looking increasingly dire. Forecasts for China’s GDP for 2020 are falling as well.
• China has been ramping up its economy after its shutdown due to quarantine. Sadly, companies are finding that exports are falling as the rest of the world slows.
• The USPS may be on the brink of failure due to the virus.

The market news:

• Bonds have been a mixed bag. Investment grade is rebounding as the Fed measures improve liquidity.  However, high yield, which lacks similar support, remains strained.  Weekly flows data show a massive “bond dump.”  This chart shows the weekly flows into bond mutual funds and ETFs, showing the raw data with a 12-week moving average.  The chart speaks for itself.

• Corporate insiders are buying stock. Meanwhile, companies are hoarding cash.  Gold bars are in short supply.
• One measure of economic stress is the dollar; when financial stress rises, the dollar tends to rally. At some point, we do expect the U.S. will take steps to deliberately weaken the dollar.

Foreign policy:

• The G-7 was unable to issue a joint statement because the U.S. insisted that COVID-19, the official name for the virus issued by the WHO, be called the Wuhan virus. The U.S. is also pushing the U.N. to single out China as the source of the virus.  Although this may appear petty on its face, the naming fight reflects the U.S. reaction to an aggressive propaganda campaign by Beijing over the virus.  China has allowed rumors to circulate that COVID-19 originated from a U.S. bioweapons lab, or that it may have been in Italy before it was in China.  Beijing has also made numerous high-profile donations of medical equipment, designed to raise its profile.  All of this has raised tensions between the U.S. and China to high levels.
• Russia has announced it would delay a referendum on extending Putin’s presidency due to the virus.

Odds and ends:  Turkey has indicted 20 Saudis in connection with the murder of Jamal Khashoggi.  There is growing dissention within the right-wing populist AfD in Germany.

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