Daily Comment (July 30, 2020)

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

[Posted: 9:30 AM EDT] | PDF

It’s GDP day!  It has been well forecast for months that Q2 GDP would be an epic negative.  It turned out to be bad, but not as bad as expected.  GDP fell 32.9% on an annualized basis compared to expectations of a 34.5% decline.  See below for the details.  It’s a risk-off day so far.  We have a plethora of policy news as the Fed held its meeting, the tech giants met with Congress, and the stimulus bill is a mess.  News on China is extensive as well.  We discuss pandemic updates.  The Weekly Energy Update is available.  There is a lot to cover so let’s get to it:

Policy news: 

  • There were no major surprises from the Fed. Rates remain unchanged and QE will continue at $120 billion per month, with $80 billion to Treasuries and $40 billion to mortgages.  As we noted yesterday, the Fed has extended its backstop programs; forex swap lines were also extended.  Overall, the statement was somewhat downbeat, with comments suggesting the pandemic is continuing to weigh on economic activity.  Hence, the FOMC decided to continue its extraordinary support for the economy and financial markets.  There were no dissents to the decision.
  • CEOs of Apple (APPL, 380.16), Google (GOOGL, 1523.51), Facebook (FB, 233.29), and Amazon (AMZN, 3,033.53) all testified remotely in front of the House Antitrust Subcommittee. It would be difficult to describe the testimony as friendlyAnger at the large tech companies is bipartisan, although the reasons for the displeasure are not.  Democrats were upset with the monopolistic behaviors of the firms and their fostering of misinformation; Republicans were angered by censorship of right-wing views.  Social media firms try to hide behind algorithms to suggest their software is unbiased; in reality, the goal is eyeballs on screens, so there is a documented manipulation.
    • It would be difficult to argue that at least three of these firms (GOOGL, FB, AMZN) are not engaging in blatant anti-competitive behavior. They have purchased rivals and duplicated and engaged in predatory pricing actions of products on platforms.  Their ability to generate profits and revenues in any season is probably not possible without market dominance.  Their actions would have already been curtailed under legal standards prior to the mid-1980s.  That hasn’t happened under current standards because it is hard to argue that consumers have been hurt.  However, labor has; we offered a framework in our WGR series last year, “The Economic Triangle: Parts I and II.”  Using that framework, antitrust policy over the past 35 years has aligned the interests of capital and consumers against labor.  The well-documented rise of populism suggests that alignment is probably near an end and new (or a return to pre-1985) antitrust policy is part of that realignment.
    • At the same time, although anger is universal, complaints are not. Democrats are attacking the firms mostly on size and behavior grounds, but the GOP is divided.  The GOP establishment mostly wants social media to not censor right-wing views, while GOP populists are more aligned with Democrats over the market power of these firms.  Look for the tech firms to try to exploit this difference.  Although we do expect these firms will eventually face antitrust actions, it will probably be a while.
  • It is looking increasingly unlikely that a stimulus package will be ready before August 1, when the current measures expire. The GOP is deeply divided.  The White House mostly wants spending and lots of it (although the Chief of Staff may have misgivings), whereas GOP populists want spending too but the establishment wants to slow the rise of the deficit.  If the Senate majority leader wants a bill, he can cobble together a majority with Democrats, but that will hurt his own caucus.  Democrats have already rejected a patch measure.  Some Republicans are offering new programs, meaning consensus is not occurring.  The lack of a plan is likely weighing on market sentiment this morning.

China news:

  • Taiwan has become a flashpoint in U.S./China relations. Beijing is imposing sanctions on Lockheed Martin (LMT, 386.66) over arms sales to Taipei.  Analysts suggest the sanctions are not terribly damaging for the company, but more of a warning shot.  However, the Global Times, a CPC mouthpiece, warned that rare earths could be affected.  China has used its dominance in rare earths before, against Japan over the Senkaku Islands (also referred to as the Diaoyu Islands by China).  The warning by the Global Times suggests that Beijing may return to constraining the supply of rare earths again if tensions escalate.  Rare earths, although not all that rare, are critical to numerous high tech and defense applications.  We are seeing some production outside China, but a cutoff of supply would be a problem.
  • Unemployed graduates are a risk to stability. China is making a particular effort to expand state jobs to absorb new graduates.
  • The recent decision by the U.S. to close China’s consulate in Houston appears to be a signal to China. The U.S. has become aware of how China uses consulates not only for espionage but also for monitoring Chinese nationals and other former citizens.
  • This week’s WGR, along with Part II next week, discusses recent Chinese policy. In next week’s report, we will examine China’s policy from Beijing’s perspective.  We continue to monitor China’s position for insights into future behavior.  We note that Xi’s policy of aggressive confrontation is facing some criticism within the CPC.  In addition, two hawkish generals, Dai Xu[1] and Qiao Liang, have cautioned that the PLA is no match for the U.S. military at this juncture and prompting a war could be catastrophic.  The generals note that:
    • The U.S. has developed a profound hatred for China, which is a new development.
    • The U.S. government’s negotiating stance has changed, becoming aggressive and well beyond what China expected.
      • Although not part of the general’s comments, we note that China hawks within the administration are reported to have made contacts with members of the Biden camp. This would suggest these members of the administration are preparing for the possibility of a change in office and are attempting to establish a policy that will extend beyond 2020.
    • No nation has come to China’s defense, suggesting that either the U.S. is still powerful enough to coerce compliance or, more likely, the rest of the world sees China as a threat and supports U.S. policy.
    • A united front is developing around U.S. policy, not China’s.
    • The U.S. isn’t a paper tiger; it’s a potent one that can inflict damage.
    • The U.S. has remarkable ability to course correct and adjust (democracies are actually pretty good at this).
    • The U.S. is less interested in ideology and values and is more driven by economic interests.
    • It was bad policy to say out loud that China was going to surpass the U.S. (in Xi’s defense, Khrushchev made the same mistake in the 1960s).
    • The U.S. really doesn’t care if it offends other nations; it has lots of allies and doesn’t sacrifice its own interests.
    • China needs to understand it is not the world’s superpower; the U.S. is, and Beijing needs to admit that fact.
    • Don’t talk about “sharing information” with the U.S. Americans see that as intellectual property theft.
    • Elections don’t matter all that much as national strategy lasts beyond whomever is in the White House.
    • You don’t fight the U.S. alone.

These admissions are remarkable.  We doubt these two generals will survive these comments; as we noted, one has already tried to deny them.  But this does show that the triumphalism of President Xi is not universally held.

COVID-19:  The number of reported cases is 17,054,819 with 667,707 deaths and 9,984,590 recoveries.  In the U.S., there are 4,427,493 confirmed cases with 150,716 deaths and 1,389,425 recoveries.  For those who like to keep score at home, the FT has created a nifty 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 weekly Axios map shows an improving situation, with case growth slowing, although here in Missouri things are looking rather ugly.


  • One of the puzzles of COVID-19 has been the wide dispersion of the effects on patients. Many are completely asymptomatic.  As professional sports return and consistent testing of this population ensues, it has been interesting to note how many players test positive without symptoms or conditions so mild they mistake it for a cold.  At the same time, others are severely impaired or fail to survive in infection.  One development vexing doctors are cases where patients appear to have long-term symptoms of the disease but fail to test positive for it.
  • The Sandinista-led government in Nicaragua has been dismissive of COVID-19 and is now persecuting doctors who are calling for measures to reduce the spread of the virus.
  • China is reporting an outbreak of cases in the northeastern regions. Nine cities have reported new cases.
  • Vietnam, which appeared to have completely eradicated the virus, is seeing a return of cases.
  • Johnson & Johnson (JNJ, 146.54) began human trials for a vaccine that protected monkeys.
  • The FDA is expected to rule on convalescent plasma as a treatment.
  • The FBI is investigating claims that China attempted to steal COVID-19 research from the University of Texas.
  • One of the areas of failure has been the inability of policymakers to craft a policy mix that reduces the risk of the virus while protecting the economy. This has been a breakdown along many fronts.  Medical advice has been contradictory at times; face masks were downplayed then recommended.  Initially, there was great worry about the virus on surfaces; now we know most of the spreading is in the air.  At its heart, managing the virus is about probabilities.  What activities are high risk?  Who bears the most risk from contracting the virus?  Humans are not very good at measuring probabilities.  We often fear things that have a low probability of harming us and blithely engage in actions that are rather dangerous (the classic example is the fear of flying when the most dangerous part of the trip is getting to the airport).  Eventually, we will learn to live with this virus and it will likely require some changes in behavior until a vaccine is developed and widely adopted.

Market and Economy news:

Foreign news:

Odds and ends:  Coming to a safe near you…a new metal said to be harder than diamonds.

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[1] For the record, Dai Xu disavowed his comments on a social media post yesterday.  It’s not clear why, and doesn’t necessarily mean the comments are not a reflection of some within the PLA.