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:

Foreign news:

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.

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.


China news:

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