Daily Comment (October 15, 2020)

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Equity markets are pointing to a lower opening; stalled stimulus and rising COVID-19 cases are the likely culprits.  We lead with China today, with a particular focus on Taiwan/U.S. relations.  Pandemic news is next.  As winter approaches, we are seeing rising infection rates and partial lockdowns.  An update on policy news and Brexit follows.  We are also watching rising unrest in Thailand and problems in Afghanistan.  Tech news is next, with an update on real estate, the economy, and odds and ends.  Please note that due to Monday’s holiday, the DOE data is delayed until today, so the Weekly Energy Update will be published tomorrow.  Here are the details:


  • Since relations were normalized with China in 1978, the U.S. has engaged in strategic ambiguity regarding Taiwan’s defense.  It didn’t want China to think we had abandoned Taipei but also didn’t want Taiwan to believe it had an ironclad security guarantee to prevent Taiwanese adventurism.  We are seeing a rising call from the foreign policy apparatus from all sides, suggesting strategic ambiguity should be replaced with a clear statement of defending Taiwan from forced unification.  The fear among analysts is that without a clear policy, the potential for miscalculation from Beijing is elevated.  Essentially, the argument is that the facts on the ground have changed; the U.S. faces little risk that Taipei will attack China.  Instead, without an overt statement of U.S. intention to defend Taiwan, Beijing may assume the U.S. won’t defend the island.  Such a policy would infuriate Beijing, but it would let China know where we stand.  Of course, if the U.S. does make such a policy, it must back it up or lose creditability.
  • As the year has progressed, China’s economic recovery has gathered momentum.  Much of this growth is coming from the industrial sector which has been boosted by goods production.  The last time we saw significant stimulus, in the wake of the Great Financial Crisis, commodity demand lifted strongly.  We are seeing something similar this time around; copper imports rose to their second highest level on record, just down from the previous record hit in July.
  • Car sales have also jumped, recording the first quarterly rise in two years.  Production is recovering too.  Households have been an important element of the recovery.  Much of the spending appears to be coming from higher debt levels.

COVID-19:  The number of reported cases is 38,574,120 with 1,093,253 deaths and 26,720,847 recoveries.  In the U.S., there are 7,917,223 confirmed cases with 216,904 deaths and 3,155,794 recoveries.  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 weekly state Axios chart is updated.


 Policy news:  Although talks continue, and it does appear both sides are close in terms of total spending, how the funds are allocated remains a sticking pointTreasury Secretary Mnuchin admitted yesterday that the odds of getting anything done before the election is unlikely.  We would agree.  In fact, it isn’t likely much will get done in the “lame duck” session either.  Even if we have a unified government after the election, we don’t expect a filibuster-proof Senate, meaning it may not be an easy task to get stimulus next year either.  Although we don’t expect a double-dip recession, we do think we are setting up the prospects for another slow recovery, which is actually fine for stocks but could be explosive socially and politically.

  • Governor Qualls suggested that the level of Treasury borrowing may require some degree of permanent QE to allow the financial markets to function.  That policy is skirting debt monetization.

 Brexit:  Negotiations are coming down to the wire, and one trend we are staring to notice is a rising level of alarm on the EU side.  EU negotiators have assumed they had the upper hand and could dictate terms.  PM Johnson has acted all along as if this wasn’t the case.  What has started to emerge is that the EU negotiating team may have forgotten an important characteristic of the union.  They have 27 nations to placate, and if one of them decides that the pain of Britain leaving without a deal is too painful, they can push for an agreement.  We still expect some sort of deal to be made and enough “fudges” provided to allow both sides to live with the outcome, with some disruption, but nothing that won’t be manageable over time.

Thailand:  Thailand has rules against criticizing the king.  It has some of the world’s lèse-majesté laws, criminalizing even casual remarks about the royal family.  Thus, it was newsworthy when the royal family, in a rare visit to Thailand (the family spends most of its time in Germany),   faced widespread protests as its motorcade passed through Bangkok.  The government has implemented state of emergency orders, limiting organized gatherings in an attempt to reduce protests.  The king is very unpopular, unlike his father, who died in 2016.  Coups are rather common in Thailand as are military governments.  However, there has been persistent unrest in the country that may become revolutionary at some point.

Afghanistan:  As the U.S. prepares to exit Afghanistan, the Taliban is becoming bolder in its bid to take control.  The exit of U.S. troops is increasing the risk that the current government will lose control.

Technology:  Tech firms are facing new regulations from the EU.  France and the Netherlands, specifically, are taking the position that the firms need to be broken up.  In the past, successive U.S. administrations have protected these firms that are overwhelmingly American.  However,  legislators and judges are becoming increasingly hostile as well.

Real estate:  One of the initial actions taken in March was to suspend evictions.  The idea was that the pandemic would be brought under control in a few months, and between enhanced unemployment benefits and the $1,200 payment to households, renters and landlords could work out accommodations.  Unfortunately, the pandemic continues, and fiscal support has waned.  Landlords and renters are at odds over who will bear the burden of adjustment.  Currently, there is an eviction moratorium in place, but recent guidance suggests that landlords, under certain conditions, can begin eviction proceedings.  These new guidelines have emerged after landlord groups pushed back against the moratorium.  If evictions become widespread, we could see a further widening of inequality and a further down leg in the “K”-shaped recovery.

Economics:  A number of papers we have noted recently state that households have shown a strong propensity to use some of the stimulus money for either saving or debt repayment.  Although saving may eventually become spending, the decision to use the funds for debt service suggests a strong desire to improve household balance sheets.  This trend would mean that the potential inflationary impact of payments to households might be less than expected.

  • Local coffee shops are closing; expect more chains to replace them.
  • Majority leader McConnell has put forth a “targeted” stimulus bill worth $1.8 trillion.  Although reaction from House leadership has been cool, the difference in total funding isn’t that great and it may be difficult for the House to reject it.  Of course, if the goal is to pass something, we would see the two current versions go to a conference committee and a unified bill would emerge.  We suspect both sides are posturing, and the odds of something getting passed before the election (or even before a new Congress is seated) is unlikely.

 Odds and ends:  Japan has an agreement to sell defense goods and technology to Vietnam.  One of the overlooked issues surrounding the U.S. and China is that America has long-time allies in the region, and they have the capacity to improve the military capability of their neighbors even without U.S. involvement.  Vietnam and China have had disputes in the South China Sea.  Newer military equipment is a potential threat to Beijing.

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