Daily Comment (March 11, 2021)

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

[Posted: 9:30 AM EST] | PDF

We have published our latest Weekly Geopolitical Report, which is Part II of our two-part series on the Western Sahara.  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is the latest Confluence of Ideas podcast.  A new Asset Allocation Weekly, chart book, and podcast are also available.  It’s Thursday, meaning a new Weekly Energy Update is available.  You can find all this research and more on our website.

Good morning.  Equity futures are moving higher this morning on the back of yesterday’s moderate inflation news.  It is ECB day, and it leads off our coverage this morning.  Up next is economics and policy, followed by technology.  China news is next as party meetings come to a close.  A pandemic update follows, and we close with a roundup of international news.

ECB:  Although the press conference is still underway at the time of this writing, the bank is planning to step up QE to offset the rise in yields, which are up in concert with U.S. yields.  Eurozone yields have declined, and equities are stronger as this action is seen as dovish.

Economics and policy:  The stimulus bill passed through Congress and is heading to the White House.

  • Although the financial markets have discounted this outcome for some time, it’s now official—the $1.9 trillion stimulus bill has passed through Congress. As the OECD outlined yesterday, the stimulus plan will boost not only U.S. growth but help the world too (especially with China slowing down).  In the short run, the plan may boost the dollar and has already lifted interest rates, which is negative for emerging market stocks.  There is a clear pattern that fiscal deficits in the U.S. are dollar bearish, especially when coupled with easy monetary policy.  Thus, any strength likely is transitory.
  • As fiscal spending translates into consumer spending, one factor that could affect GDP will be imports. Obviously, some spending will go to imports, which will depress GDP.  Another factor we continue to watch is the current problems in ports across the world.  Shipping costs are rising on shipping from China to Europe and to the U.S. as well.  Although these costs may become a factor in lifting inflation, they could also end up having the effect of delaying goods and less on higher prices.
  • Although the economy is clearly on the mend, there are rising concerns about the disruptions the pandemic has caused to the labor market. Not only did the pandemic lead to job losses, but it also appears to have accelerated the substitution of capital for labor, meaning that some job categories may be permanently lost.  In other words, low-skilled jobs may be disappearing faster than expected, leading to low employment.  At the same time, it may also cause labor shortages with higher-skilled positions.
    • Racial and gender gaps have been studied for a long time, and an emerging issue is the education gap. Anne Case and Angus Deaton, who do work in this area, have shown in a recent paper that life expectancy for those with bachelor degrees or higher has increased, whereas those who lack those degrees have seen their life expectancy fall.
    • The education gap is also apparent in consumer confidence, which shows that optimism for those with bachelor’s degrees or higher is rising much faster than for those with less schooling.
  • The House has passed a bill that protects union organizing efforts. Although we doubt it will pass the Senate, some of the populist GOP senators may decide to support it.  It is worrying the gig worker firms, raising concerns that it would make unionizing these workers easier.
  • Cash-out refinancing is surging as homeowners take advantage of low mortgage rates and rising home prices. The levels are the highest since the housing bubble, but credit scores are also much higher for borrowers, suggesting that lenders did learn some lessons from the last crisis.
  • The other policy item we are watching evolve is industrial policy. It is the idea that government should guide investment towards long-term goals.  In general, this concept was mostly a Cold War artifact, but it fell out of favor during the Reagan/Thatcher revolution.  During the Cold War, the government wanted to harness the private sector to achieve policy goals, but in the 1980s, it was seen as a ham-fisted attempt to “pick winners and losers.”  As we cycle to equality and away from efficiency and face the rising risk of conflict with China, there is renewed interest in industrial policy.  Although there is a risk the government creates malinvestment, from the perspective of a worker who lost his job to foreign trade, a policy designed to build capacity in the U.S. will be welcomed.

Technology:  Anti-trust and hacks dominate the news.

  • The technology industry has been able to concentrate by adhering to the Bork standard, which argues that the key test to antitrust is the impact on consumers. It is hard to argue that consumers have been harmed by free products and efficient distribution.  However, there is a rethink occurring among legal circles that the Bork standard is too narrow.  First, it ignores the impact on labor; part of the reason these firms are customer-friendly results from their treatment of workers.  Second, it ignores the political impact that comes with market dominance.  Large firms can pay for lobbying and can gain regulatory capture.  Third, there is evidence that large firms stifle innovation that would disrupt current business models.  The Biden administration has been adding lawyers in its administration who are developing these arguments.  Tim Wu was appointed to the National Economic Council, and Lisa Khan, whose seminal paper on the topic, has been nominated for the FTC.  A shift to the pre-Bork standard, where size alone was a key determinant of antitrust, is a serious threat to large-cap tech firms.  At the same time, history would suggest that it isn’t necessarily bad for investors.  The breakup of Standard Oil was a value-enhancing development for shareholders.
  • Be careful with those security cameras; hackers in China and Russia have exploited weak security in these “internet of things” items to break into networks. Hackers were able to observe activities in government and private firms.
  • Facebook (FB, USD, 264.90) announced it would end a plan to run fiber optic cable from the U.S. to Hong Kong. The U.S. government pressured the company to conclude the program given changes in Hong Kong.

China:  The U.S. and China will meet.

COVID-19:  The number of reported cases is 118,134,623 with 2,622,190 fatalities.  In the U.S., there are 29,155,047 confirmed cases with 529,267 deaths.  U.S. infections are over 50,000 for the second consecutive day.  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 CDC reports that 127,869,155 doses of the vaccine have been distributed with 95,721,290 doses injected.  The number receiving a first dose is 62,451,150, while the number of second doses, which would grant the highest level of immunity, is 32,904,161.  The FT has a page on global vaccine distribution.  This Axios map shows vaccine distribution in the U.S.


International news:  Technology and globalization, along with South Korea and Libya, lead the news.

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