Daily Comment (April 26, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Monday, the last one in April!  U.S. equity futures are mostly steady this morning as investors await a plethora of earnings reports this week.  Our coverage begins with the pandemic, and we are watching India’s caseloads rise.  International news follows, with the U.S. decision to label the 1915 Armenian situation a genocide.  An economic roundup follows (it’s all about chips), and we close with China news.

COVID-19:  The number of reported cases is 147,238,543 with 3,110,511 fatalities.  In the U.S., there are 32,077,477 confirmed cases with 572,200 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 290,692,005 doses of the vaccine have been distributed with 228,661,408 doses injected.  The number receiving at least one dose is 139,978,480, while the number of second doses, which would grant the highest level of immunity, is 94,772,329.  The FT has a page on global vaccine distribution.


International roundup:  Turkey, Iran, and Ukraine lead the news.

Economics and policy:  Inflation and financial regulation lead this morning.

  • As we have reported, the global semiconductor shortage is playing havoc with the auto industry. Now, it is spreading to the consumer appliance market.  Although the shortages may not necessarily end up in the inflation statistics, there is another worry about supply constraints.  The lack of goods can raise fears of shortages and prompt firms and consumers to stockpile goods when they start to become available.  In other words, in the 1970s, shortages were also part of the inflation psychology.[1]
    • Rents have been under pressure for most of the past year, but there are signs that the rental market is starting to firm. That news suggests that prospective tenants are starting to shop.
    • There are widespread reports that service firms are using various perks to fill job vacancies. We suspect there are several reasons for this change.  The Federal distributions are widely blamed and probably are playing a role, although research we did earlier this year suggested this was probably a minor factor.  One area we are watching is the exit of older workers.  Given that COVID-19 tended to have greater lethality for older people, there is evidence to suggest that many of these workers opted to take retirement rather than risk employment.[2]  In comparing over 65-year-old participation to a model based on the percentage of Americans of that age, participation is running well below forecast.

We doubt these workers are coming back.  If so, the pool of workers will be lower going forward, and this fact will tend to tip the balance of power toward labor.  Of course, globalization and technology will still tend to offset these factors, but only to some degree.  Over time, this factor will lead to (a) higher inflation or (b) lower profit margins.  Most likely, it will be a bit of both.

  • As we noted last week, the end of LIBOR is leading the financial industry to scramble for a replacement. Regulators are pushing SOFR, but as we noted, it is for Treasury secured repo and won’t necessarily reflect bank cost of funds. This report is a good primer on the issues involved.
  • We continue to closely monitor regulatory efforts for money markets. Money markets are the primary funding source for the non-bank (shadow) banking system.  Participants fear that protecting the funds from runs will either make them indistinguishable from bank deposits or reduce their liquidity to the point where depositors won’t use them anymore.  At the same time, the funds were “ground zero” in both the Great Financial Crisis and the March 2020 crisis.  Clearly, the current structure is unsustainable.
  • The FOMC meets this week. We don’t expect any change in policy, but we will be watching the press conference for clues about future policy.
  • With all the rhetoric about greening the economy and reducing carbon emissions, a factor that does get overlooked is that of energy density. The history of the industrial revolution has an element of consistently adopting power sources of increasing density; in other words, getting more power for less fuel.  Crude oil and its derivative products are hard to improve upon.  Batteries won’t be able to contain the same degree of power as a gallon of gasoline.  The consumption side of the equation can offset some of this problem (lighter car materials can offset some of the loss of energy efficiency), but there is a notable risk that the future will have slower growth because of the lack of energy density.  However, one way to overcome this problem is nuclear, the densest of all fuel sources.  There has been a quiet bull market in uranium and metal miners recently and there is growing optimism that, at some point, regulators will decide to accommodate nuclear power to address climate change.
  • Although there is much being written about tax increases, we do note that the current plans do include tax relief for lower-income households.

China:  EU policy tries to cope with an aggressive China, Jack Ma battles the CPC over data, and industrial policy collides with environmental policy.

 View PDF

[1] A joke by Johnny Carson led to a run on toilet paper and a subsequent shortage.

[2] Anecdotally, we note that before the pandemic, grocery baggers at my local stores were about 50% workers over the age of 60 (at least they looked like it).  Those workers have completely disappeared, replaced with younger workers.