Daily Comment (March 20, 2020)

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

[Posted: 9:30 AM EST]

Good morning and happy Friday!  “There are decades where nothing happens, and there are weeks where decades happen.”  This quote, misappropriated to Lenin, seems to capture much of how things feel right now.  It’s a “green screen day” with equity futures rebounding around the world and the dollar finally taking a pause from its recent strength.  We update COVID-19 news, including comments about global stimulus activities.  Here are the details:

COVID-19:  The world now has 246,275 reported cases of COVID-19, with 10,038 fatalities and 86,035 recoveries.  Here is a chart of infections from the FT:

The U.S. pace of infections is rising rapidly; this is probably more about increased testing.  Sadly, there is no evidence of the bend we usually see when a country is getting on top of the spread.

The virus news:

The policy news:

  • We have seen nations attempt to control the news flow about the virus. China is notable in this area.  The U.S. is engaging in some of this as well.  The White House is asking states to stop issuing early information on initial jobless claims.  We are watching this news with great interest.  As we have been working through the data, we are seeing other economists suggesting historic declines in Q2 GDP of over 10% and perhaps a 2.0 million jump in jobless claims.  If the government decides to stop the release of the data, we will all be “flying blind.”  In addition, it won’t work; organization theory suggests that if you stop the flow of real information, people simply make up their own.  Not only will it probably not be accurate, it will likely be worse.
  • The Senate leadership is putting together a fiscal package of at least $1.0 trillion. Already, there is speculation this level will fall short.  And, the chance of getting something done quickly is starting to fade.  As one would expect, there is already squabbling over the details.  The White House has suggested that companies that take aid must give the government equity.  There is strong opposition to that idea, suggesting conditions haven’t gotten bad enough yet.
  • One of the tensions in the Senate bill is where the benefits fall. The establishment (both left and right) tend to favor support for businesses first, on the idea that if businesses fail, the job losses will be even worse.  Populists counter that businesses have squandered support after 2008 and recent tax cuts by merely repurchasing stock to aid the capital-owning establishment.  As we noted yesterday, we would use the same tactic we employ when confronting a dessert table—try everything!  However, we do note a set of reports that will give the establishment a black eye: a couple of senators, briefed on COVID-19 in February, dumped their equity holdings.  These reports will tend to undermine the establishment’s case; look for aid to be tied to equity.
  • Meanwhile, Germany and the U.K. have set up fiscal expansions.
  • The central banks continue to expand their activities. The BOE has cut rates to record lows and is increasing QE.  The Fed is moving aggressively as well, buying $250 billion of the $500 billion of new QE this week.  This almost certainly looks like more will be coming.  The ECB has also indicated it will consider boosting its balance sheet
  • Oil prices rallied on a few reports. First, President Trump suggested he may intervene in the conflict between Russia and the KSA.  There is some precedent for this action.  VP Bush reportedly did the same during the 1986 oil price collapse.  However, we note his intervention came after oil prices neared $10 per barrel and the parties were already in talks to end the overproduction war.  Second, as already announced, the U.S. will increase buying for the Strategic Petroleum Reserve.  Third, Texas is apparently considering dusting off its old production allocation mechanism used from the 1930s into 1970 which regulated the amount of oil that the state would produce.  Meanwhile, U.S. production remains at record levels.  As we noted in this week’s Weekly Energy Update, due to hedging, production will likely remain near record levels for the rest of the year without intervention.  What is unclear—if the Texas Railroad Commission restricts output, how will that affect debt servicing by oil companies?
  • The PBOC surprised us by not cutting rates overnight. China’s stimulus thus far has been modest.

The economic news:

Expect continued market swings.  Policymakers are moving in the right direction but the economic impact of battling the virus has been significant.  Enjoy the weekend.  We will talk to you on Monday.

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