Daily Comment (May 1, 2020)

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

[Posted: 9:30 AM EDT]

Good morning, happy Friday and happy May Day, the international celebration of Labor Day.  Most European financial markets will be closed, although Denmark and the U.K. remain open.  Equity futures are lower as tensions with China rise, while oil is rallying again.  We update the COVID-19 news.  Relations with China are deteriorating; we report on the latest.  Here are the details:

COVID-19:  The number of reported cases is 3,274,747 with 233,792 deaths and 1,022,331 recoveries.  In the U.S., there are 1,070,032 confirmed cases with 63,109 deaths and 153,947 recoveries.  Here is the FT chart:

Here is an updated map of all the state-level social distancing measures.

The virus news:

The policy news:

  • For the past several years, a number of states have created impediments to applying for unemployment insurance. The goal was to eliminate potential abuse of the system.  When the economy had unemployment below 4%, these changes didn’t matter all that much.  But, now that millions of Americans are filing for unemployment insurance, the rules are becoming an obstacle to households getting aid.
  • The Fed is widening potential participation in its $600 billion Main Street lending program by expanding the eligibility criteria. The Fed will now support lending to larger firms (15k employees from 10k) and the size of the loans will be lowered to $500k from $1.0 million.  Restrictions on firms held by larger companies will remain in place.
  • The Paycheck Protection Program is being panned by a larger number of businesses who find that the requirements of using 75% of the loan proceeds to pay employees is too restrictive. Many businesses, especially in large cities with high rental costs, are finding that they need more funding for rent and less for payrolls.

The economic news:

  • In a recent WGR, we examined the issue of optimization, arguing that efficiency can introduce fragility into a situation. The meatpacking crisis looks like an example of this underlying issue.
  • Colleges and universities are facing a major crisis due to COVID-19. It isn’t obvious if they can safely reopen next fall and it hardly makes sense to pay tens of thousands of dollars for online education when it can be found much cheaper.  State public colleges are being hit with budget cuts as states struggle to balance budgets, and private schools, especially small ones with limited endowments, may not survive.  International students, who had represented a source of full-tuition paying attendees, may not be able to return from abroad.
  • Rent strikes are widening which may put some mortgage-backed securities at risk.

The market news:

The foreign policy news:

(Source: Sinocism.com)

Saudi Arabia:  Reuters is reporting that the U.S. threatened to withdraw American military support from Saudi Arabia if the kingdom didn’t agree to cut output.  The Saudis, as one would expect, have not responded to this report.  We will be watching to see if MBS allows this statement to stand; if it does, it would make him look weak.  And, as we have stated all along, promising to cut is one thing, but reducing supplies is another.

Hezbollah:  Germany has banned Hezbollah from any activity in its country and is pressing the rest of Europe to adopt its measures.  The actions will weaken relations with Iran, which views Hezbollah as a client.

Iran:  Iran’s recent launch of a satellite suggests that it is mastering intercontinental ballistic missile technology.  Although it cannot reach the U.S. yet, Iran is clearly heading in a direction where it will be able to achieve that goal in a few years.  Already, Europe is at risk.  If Iran acquires a nuclear weapon, the ability to deliver a bomb would make Iran impossible to invade and overthrow.

North Korea:  The latest in the unending game of “where is Kim?” is that luxury boats are now at the Wonsan compound.  Although the appearance of these vessels doesn’t tell us much about the health of the young general, it may suggest he isn’t dead quite yet.

Venezuela:  The Maduro government is reportedly selling gold reserves (around nine tons) to Iran and the latter is using its aircraft to ferry the bars back to Tehran.  Venezuela is reportedly paying Iran for its assistance in operating PDVSA’s moribund refineries.  Iran has been using gold for some time to conduct trade and skirt U.S. sanctions.  We have no reports of how much Iran paid Maduro for the gold, but we would not be surprised if Tehran paid a premium.

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[1] Where two parties say the same thing but mean something entirely different.  This is a very effective strategy in diplomacy and marriage.