Daily Comment (August 24, 2020)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
It’s Monday and the last full week of August (that month went by fast, didn’t it?)! There is a lot going on this morning. We have twin tropical storms, one already in the Gulf of Mexico and the other on its way. California is suffering through wildfires. The GOP convention kicks off this week. Global equities are moving higher with hopes for COVID-19 treatments. Overseas news leads our coverage this morning; Belarus protests continue, and we are watching the fate of Aleksei Navalny. Economics and markets are next. The pandemic report follows. We also update the China news. Let’s get to it:
- Despite threats of a crackdown, protestors gathered in large numbers in the capital city of Minsk over the weekend. This is the 15th day of protests; the turnout remains large in spite of threats by Lukashenko to call in the military. Meanwhile, foreign support remains mostly symbolic. Lithuanians formed a human chain that stretched 21 miles, and the opposition leadership is meeting with Deputy SoS Biegun Lukashenko continues to ask for help from Russia and is arguing that foreigners are behind the protests.
- So far, Moscow appears to be cool to the idea of intervening. The likely reason being that, unlike in Ukraine, where elections were between a Russia supporter and a Western supporter, there is little evidence among the protestors that they are aligning with the West. Instead, the protests appear to be all about getting rid of Lukashenko for free elections and a less repressive regime.
- Such protests are not a threat to Putin. A Belarus without Lukashenko is still under the sway of Moscow. And, Putin has become jaded with Lukashenko. The current leader of Belarus is in trouble and we wouldn’t be surprised if he leaves, but we would not expect a major change in the country’s policies.
- Aleksei Navalny arrived in Germany over the weekend for treatment from an alleged poisoning. Reports indicate he is in stable condition. Both France and Germany are offering Navalny asylum, which is probably ok with Putin, who will be glad to have him out of the country.
- Greece has been in a standoff with its nemesis Turkey. The two are at loggerheads over offshore oil properties around Cyprus, and over border activities and Syrian refugees. So far, Greece has been underwhelmed by the support it is receiving from the EU; Germany is the focus of Greek ire.
- Brexit talks remain stalled and time is running out. It is possible that an agreement will not be reached. Although we would expect the GBP to fall on a rupture, the decline may not be long-lasting and might present an opportunity.
- PM Abe of Japan has returned to the hospital. This is his second trip in two weeks, and it raises concerns that his health may be failing. If Abe does stand down, there is a chance that his policy of keeping the JPY weak may not continue.
Economics and Markets:
- Inequality has been a growing problem for some time; the pandemic has worsened the divide. Knowledge workers have tended to manage the pandemic because they have been able to shift to working from home; customer-facing jobs and those that cannot be accomplished without access to fixed capital have suffered. Data suggests that employment is back to pre-pandemic levels for the highest earning quartile, whereas it remains 15% below mid-January for the bottom quartile.
- Beyond the obvious political problems this situation causes, it also affects how the economy functions. For example, we are seeing a surge in buying used goods—cars, clothing, furniture, etc.—where shoppers are willing to own something less than new to save money. One interesting twist is that in the GDP calculation, used items don’t add to growth.
- Money market funds are an important conduit for the non-bank financial system, the so-called “shadow banking system.” This system gets its liquidity via repo instead of deposits. Low interest rates are a serious impediment for money market fund operators; at very low rates, they struggle to earn a profit. Funds are temporarily waiving fees to prevent the generation of a negative yield; in other words, from breaking the buck. The net asset value (NAV) of money market funds is traditionally set at $1.00 per share. While there is nothing to prevent it from reducing the NAV below a dollar, it would undermine the belief that money market funds are as good as cash. Complicating matters, as we note in this week’s AAW, is that money market levels are elevated, further hampering the operators of these funds (if one is losing money on current assets, it’s hard to make up the difference with higher volume). As rates continue to fall, there will be even greater incentive to move funds into higher-yielding assets even at higher risk.
- Existing home sales are on a tear. Single-family sales now exceed pre-pandemic levels. Generational adjustments (millennials are reaching their family-building age) and pandemic-driven preference for a home of one’s own are behind the lift. The biggest constraint remains the lack of available homes. Another factor helping home buying is that the mortgage guarantee firms have been granting forbearance during the crisis, which is preserving credit ratings.
- The National Association of Business Economists suggests the recovery won’t begin until later this year. We disagree; strictly speaking, the data shows an obvious trough in June and July. At the same time, for most people, this is a difference without a distinction. The recovery is starting from such a depressed level that the difference between recession and recovery is difficult to spot.
- One of the dangers of increased government involvement in the economy is that competitors will use regulation and anti-trust laws to hurt their competition. It appears that Facebook (FB, 267.01) may have raised fears about the security of TikTok to avoid scrutiny of its own operations.
- The farm sector remains under pressure from weakening demand and low crop prices. Meanwhile, there is hope for the lobster industry; the EU and U.S. have arrived at a new agreement, reducing the former’s duties on the shellfish.
COVID-19: The number of reported cases is 23,456,597 with 809,349 deaths and 15,155,418 recoveries. In the U.S., there are 5,704,597 confirmed cases with 176,809 deaths and 1,997,761 recoveries. 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 media’s focus has remained on a vaccine. However, that is only part of the story. Antiviral therapies may offer greater hope than a vaccine. These therapies tend to make COVID-19 less deadly, reducing symptoms and improving outcomes. Even when we get a vaccine, it may be some time before we know how effective it is. The FDA has approved convalescent plasma for those affected with COVID-19. The plasma comes from persons who have survived the disease and have antibodies; giving plasma to those with COVID-19 tends to improve outcomes. But this isn’t the only therapy on the horizon. Drug makers are working to create antivirals that reduce the risk of contracting COVID-19. If these prove to be effective, they will make managing the disease much easier, even if a vaccine proves problematic.
- The U.S. is considering giving fast track approval for the U.K. vaccine for emergency use.
- Although having a vaccine would be positive, it would be less effective if people are reluctant to take it. Russia is reporting rather low acceptance rates due to fears about the vaccine’s safety. There is a tension between getting a vaccine out quickly and determining its reliability.
- Singapore researchers are reporting that there appears to be a mutation of the COVID-19 virus that is less virulent. This development isn’t a huge surprise; it is not unusual for a virus to mutate. Sometimes they become more lethal, but they also can become less so. If this mutation becomes dominant, it would be good news.
- Europe opened up this summer for vacation season, bolstered by success in bringing down infections. Unfortunately, this change has led to a resurgence of the virus in several European nations, triggering new social restrictions.
- Globally, the drop in tourism has been devastating for several emerging market economies.
- Meanwhile, cases continue to decline in the U.S.
- In the U.S., several companies were planning to reopen their offices after Labor Day. Those plans are being revisited.
- Sanctions on cotton grown in Xinjiang has led clothing firms to determine if their fabrics are using cotton from this region.
- President Trump warned he could order the U.S. economy to decouple from China.
- There is growing evidence that U.S. sanctions on Chinese 5G firms are hurting their performance. Network development in China is slowing.
- The world remains deeply dependent on China’s personal protective equipment.