Daily Comment (August 31, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Happy Monday on this last day of August.  Risk markets are quietly higher this morning.  We begin with Japan, as leaders of the LDP jockey to replace Abe.  We update the situation in Belarus and then discuss other foreign news.  China’s update comes next. We close with the pandemic update.  Here are the details:

Abe:  After PM Abe’s sudden decision to resign, candidates are emerging to replace him.  The LDP is planning on filling the position by as early as mid-September, meaning if a MP is interested in taking the role, he (and it appears all the leading candidates are men) needs to make his intentions known.  Whoever gets the job will have a long list of tasks to address.  Although Japan has managed COVID-19 remarkably well, given the advanced age of Japan, dealing with Japan will remain a serious challenge.  In addition, the postponed Olympics are expected next summer, and there is also the issue of the U.S elections.

Belarus:  For the fourth consecutive weekend, large protests were held in Minsk.  The action didn’t ease even on Lukashenko’s birthday.  Lukashenko is exercising increasing control of the foreign media; if he is considering a major crackdown, having foreign “eyes” out of the way would make sense.  The Baltic states announced new sanctions on the country and various officials.  Although Lukashenko continues to hold power, we are starting to hear names emerge as a potential replacement.  Oleg Gaidukevich, Elivra Mirsalimova, and Viktor Babariko are seen as pro-Russia.  If Putin does need to intervene to end the protests, he probably realizes that Lukashenko’s time has passed.  Sending in security forces but ousting Lukashenko would make sense.  There are other potential replacements; however, they are not seen as all that supportive of Moscow.  So far, Russia is signaling it could intervene, but it clearly is in no great hurry to do so.  Lukashenko has been less than helpful to Moscow for some time; we suspect Putin will allow things to get bad enough that removing Lukashenko will be welcomed, giving Russia the opportunity to replace the current president with someone more compliant.

Other foreign news:

  • We should know today if Argentina has enough support from creditors to restructure $65 billion of existing foreign debt. The country has been in default since May.  The debt under negotiation is only part of the $323 billion of foreign debt Argentina has on the books.  The country is a serial defaulter.  The current event is the ninth.
  • The EU is considering sanctions on Turkey over the current tensions in the Eastern Mediterranean. We doubt these will be meaningful because Ankara could release thousands of Syrian refugees into the EU, causing another crisis.  Adding to this threat is the potential for a wave of new refugees from Lebanon.
  • In Lebanon, French President Macron is on his way to Lebanon for the second time since the port tragedy.
  • India is accusing China of “provocative military movements” on its northern border. This region has seen rising tensions this year.  The two sides did try to improve relations after a flare-up this spring and, until today, there appeared to be at least a cold peace.  But it does appear that China is prepared to escalate the situation.
  • Brexit talks are stalling. This outcome may not be all that bad for the U.K.  Financial markets have had plenty of time to digest this outcome and should have discounted a “hard Brexit.”  In the end, a U.K. compliant with EU rules but not in the EU is probably worse for Britain.  Increasingly, it looks like we will probably get a modest agreement and spend the next decade working out a more permanent solution.
  • Montenegro held elections over the weekend. The pro-Western Democratic Party of Socialists appears to have a narrow lead over the pro-Russian parties.  Neither bloc has enough seats to form a majority in the legislature, meaning that coalition talks will commence after the vote.

China news:

  • TikTok’s plan to sell its U.S. operations may run afoul of new Chinese laws that govern technology exports. Under the new regulations, TikTok’s product may be considered subject to export controls, thus requiring Beijing’s approval before a sale can occur.  If this is the case, it may make it impossible to break up the company and the popular app may be shut down for U.S. users.
  • China has offered some form of debt relief to 10 nations, half of the 20 asking for help from Beijing. The G-20 has a “standstill program” that defers debt service for 76 low-income countries.  China is using the G-20 framework.  Angola was not part of the first group. The African nation owes $49 billion of foreign debt, with China’s share being 45% of that total.  We will be watching to see what sort of aid China will offer Angola, l looking for a signal of just how helpful Beijing will be over this issue.
  • The leader of the Senate of the Czech Republic has led a 90-person delegation to Taiwan. Milos Vystrcil is the second-highest ranking person in the Czech government.  China is furious with the visit.  Czech President Zeman has seen his support decline over his policy of building close ties to China; it appears Vystrcil may be signaling a distancing from Zeman by this unofficial visit.
  • As tensions rise in the South China Sea, Taiwan is moving to boost its defenses against potential military action by China.
  • When Thomas Piketty wrote his tome on capital, it was welcomed in Beijing as a criticism of capitalism and a confirmation of socialism. Piketty followed Capital in the 21st Century with Capital and Ideology, a book that focuses on inequality.  The second book will probably not be published in China because Piketty noted the high level of inequality in China despite its socialist economy.  Beijing made censorship of those passages a requirement for Chinese distribution; Piketty refused and so the book is apparently banned.

Unemployment insurance:  It appears that only five states are planning to deploy the $300 per week boost to unemployment benefits at this time.  Forty-one have applied but implementing the benefits requires tweaks to aging state unemployment systems, and the majority of states simply aren’t ready to distribute them.

COVID-19:  The number of reported cases is 25,248,595 with 846,871 deaths and 16,634,346 recoveries.  In the U.S., there are 5,997,622 confirmed cases with 183,068 deaths and 2,153,939 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 FDA has indicated that it would consider “fast-tracking” a vaccine for COVID-19, although Stephen Hahn has indicated he would not make the decision under political duress. This means the FDA may approve a vaccine before Phase Three clinical trials are complete.  Both China and Russia have made similar decisions.  There is already a high level of vaccine skepticism in the U.S.  Any vaccine will probably have a slow path of adoption, but one that has a rushed approval could be problematic.
  • As nations live with COVID-19, we are seeing researchers rethink how to navigate the virus. Broad lockdowns are increasingly being shunned. It does appear outdoor activities are much less risky than indoor meetings.  Mask wearing seems to help curb infections. Ensuring the highest risk population take precautions while allowing younger people to circulate appears to allow the economy to recover without overburdening the medical system.  More sophisticated guidance, based on behaviors and locations, are starting to emerge.
    • One trend that has developed is that men appear more susceptible to the negative effects of COVID-19. It appears women have a stronger immune response.  This factor may also account for a greater incidence of autoimmune diseases from the virus.
    • As we await a vaccine, one of the unknowns is what sort of immunity a shot will provide. This report offers a primer on the four types of immunities.

COVID-19 and the economy:  Two items of note—first, soon after the pandemic shutdowns, companies furloughed thousands of workers.  The idea was that the workers were facing temporary layoffs and would soon return to work after the pandemic was corralled.  Sadly, it appears that more of these layoffs are turning into permanent separations.  Second, real estate finance has a history of fragility.  Building lending is rarely self-liquidating, the very definition of Hyman Minsky’s speculative finance.  Under such conditions, real estate financing is fine until there is a disruption and it suddenly becomes scarce.  We are seeing rising stress in the financing for this sector.

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