Daily Comment (June 5, 2020)

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

[Posted: 9:30 AM EDT]

Our newest podcast episode, “The Long-Term Effects of COVID-19,” is available.  In this episode, we discuss how the COVID-19 pandemic will likely accelerate the reversal of the equality/efficiency cycle toward equality.

Good morning and happy employment Friday!  We go into the details below, but the quick snapshot is that the numbers are much better than forecast and mostly confirm the ADP data from earlier in the week that was stronger than expected.  Global equities are mostly higher this morning as optimism over economic reopening and policy support continues.  China remains in the news.  As usual, we update what we know about COVID-19.  There was an Iranian prisoner swap.  This week’s Asset Allocation Weekly (AAW) is posted; this week’s report shows how the equity markets recover before the peak in unemployment.  Onward!


Foreign news: 

  • The U.S. and Iran engineered a prisoner swap. Iran released Michael White, a Navy veteran who had been detained while visiting Iran.  The U.S. deported Sirous Asgari, a scientist who was detained on charges of violating U.S. sanctions.  Although relations between Iran and the U.S. remain tense, the fact that this swap occurred does suggest backchannel contacts are operable.
  • One of our concerns with any administration is the problem of bandwidth. A government can find itself under great strain due to multiple simultaneous problems.  That is what the Trump administration is facing currently.  The deteriorating relations with China, trade issues with the EU, civil unrest at home, the pandemic—it’s a lot happening in real time.  It is under conditions of stress that foreign nations try to take advantage of the distraction in Washington.  We note that recently Iran and Venezuela jointly violated U.S. sanctions; so far, neither has seen any retaliation.  Expect more problems to develop in the coming weeks.  We are watching North Korea and Russia to see if they try to take advantage of the situation.
  • A major diesel fuel spill has occurred in Siberia.
  • When political systems fracture, fringe groups emerge. The latest in Italy is dubbed the “orange jackets,” a movement with overtures to France’s “yellow jackets.”  This new movement is so extremely populist that the League party won’t affiliate with it.  Although sympathizers with such political extremes always exist, it is during periods of turmoil that they can coalesce into political movements.

COVID-19:  The number of reported cases is 6,658,334 with 391,588 deaths and 2,886,183 recoveries.  In the U.S., there are 1,872,334 confirmed cases with 108,211 deaths and 485,002 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases between countries, scaled by various variables.

Policy news:

  • The expanded unemployment benefits of $600 per week expire at the end of July. There is a debate on whether they should be extended.  The Congressional Budget Office has weighed in on the debate.  Its research suggests that over 80% of recipients would get more in benefits than they would earn working and that extending the benefits would likely lead to lower growth this year.  However, not extending the benefits will lead to lower growth and employment in 2021, most likely because the growth and employment occurred in 2020.  Our read on the report likely means the expanded benefits probably won’t be extended.
  • Chile is asking the Fed to extend swap lines to the country and is asking the PBOC to increase the swap line with China.

Economy news: 

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