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

[Posted: 9:30 AM EDT]

The 13^th episode of the Confluence of Ideas podcast is available; it is our first in a series of episodes on the November elections.  Additionally, there is something new!  As usual, we have a new Asset Allocation Weekly in today’s report (which we also post as standalone report), but we are adding two new features to this report: an associated podcast and an automated chartbook!  Check them out!

Good morning and happy Friday!  Equity futures are mostly marking time this morning.  Personal income and spending are out today; we detail the numbers below.  In the economics section, we look at the drop in global trade and the problem of college sports.  There was news on banking policy; we go over the details below, but, in short, “the Fed giveth and the Fed taketh away.”  China had something akin to a bank run.  We update the pandemic, including the “Duff’s map.”  We also take a look at tech.  Here are the details:

Economic news:

• The Netherlands Bureau for Economic Policy Analysis has developed a global trade monitor. In April, it fell an “unprecedented” 12.1% on a sequential basis.  It was down 16.2% from the prior year.  It is not surprising that trade fell in April; this was the month where nearly all the developed world was in lockdown.  What we will be watching is the speed of recovery.
• We are starting to see more commentary shifting from the recession to the recovery. We discussed this issue about a month ago in the May 29 edition of the AAW.  As we noted in that report, we expected this recession to be deep but short, with an elongated recovery.  That doesn’t necessarily bode ill for equities, as a slow recovery will tend to support continued policy stimulus.
• College sports has seen a wave of program cancellations. It’s no secret that football funds the rest of the athletic program at major universities.  Most colleges are assuming (hoping?) for a normal season with packed stadiums this fall.  If that isn’t possible, we could see a near collapse of college athletics, which would have significant effects on numerous sports.
• One of the factors that is slowing the return to work is the lack of childcare. Providers have been slow to reopen, or are doing so with less capacity; the informal system, which often includes grandma and grandpa may not be available either due to the vulnerability of the elderly.  If this issue isn’t resolved, it will further weaken the recovery.
• The pandemic has apparently prevented us from taking our coins to the bank for counting. As a result, the Fed is reporting a growing shortage of coins in the economy.
• Smaller banks have been supporting the commercial real estate industry, granting forbearance as rent payments are delayed. If this continues, the Fed may need to offer additional support to these institutions.

Policy news:

• As noted, the Fed reported on its banking stress tests yesterday. The test has variations for the recovery— “U,” “V” and “W”—and as one would expect, it did best with a “V.”  The worst case showed about $700 billon of loan losses and a decline in capital ratios of 12%.  Generally speaking, the results suggest the system would likely hold up, but to shore up capital, the Fed did announce it was restricting buybacks and dividend growth.
• On the “giveth” side, regulators have relaxed elements of the “Volcker Rule” that restricted bank’s ability to use insured deposits to buy and hold financial assets. The goal of the rule was to ensure that banks didn’t take excessive risks with government insured money; in practice, it has reduced their market making capacity and reduced market liquidity.
• Regulators have eased rules on drilling leases on Federal land. Under normal circumstances, oil companies have a time constraint on a lease.  If they don’t drill before the deadline, they lose the lease.  The Bureau of Land Management has been liberally granting drilling suspensions to avoid forcing these firms to drill on the land to avoid losing their claims.

China news:

• Chinese households, like their counterparts in Japan, Europe and the U.S., have been in search of yield for their savings. In China, trust companies have emerged to satisfy this demand.  The industry holds CNY 21.0 trillion ($3 trillion); it is estimated that around CNY 625 billion of these assets are distressed.  However, financial institutions that are sound can face liquidity problems if depositors demand liquidity simultaneously.  Small scale protests have broken out in Chengdu, Sichuan, after Sichuan Trust told investors that it would “struggle to make principal and interest payments” on about CNY 13 billion of assets.  China’s debt growth has been of concern for some time.  It has been noted that Chinese policy support from the pandemic has been modest compared to what we saw after the Financial Crisis, leading to concerns about China’s debt capacity.  This situation bears watching; if Chinese investors begin to fear the stability of the financial system, we could see purchases of bitcoin, gold and capital flight.

COVID-19:  The number of reported cases is 9,632,969 with 489,854 deaths and 4,859,744 recoveries.  In the U.S., there are 2,422,312 confirmed cases with 124,415 deaths and 663,562 recoveries.  For those who like to keep score at home, the FT has created a nifty interactive chart that allows one to compare cases across nations using similar scaling metrics.  Additionally, one way of monitoring reopening is by the number of beer taps operated relative to capacity, or as we like to call it, the “Duff’s map.”

Virology:

• Texas is suffering through a rise in COVID-19 cases, leading the governor to scale back his state’s reopening. Elective surgeries have been suspended to open up hospital capacity for COVID-19 cases in some counties.
• South America has seen a tripling of cases over the past month.
• Germany, who had seen cases fall, is now seeing a rise, as lockdown restrictions ease.
• Antibody tests are used to see if a person has been infected. If the test signals positive, it would suggest that person has some degree of immunity, and thus could return to circulation.  However, there are two problems that have emerged.  First, the tests, so far, are so inaccurate that they can’t be relied upon to determine if a person has been infected.  Second, it isn’t clear how long immunity lasts.
• The CDC indicated that the number of cases in the U.S. may be 10x higher than reported. It isn’t obvious where that figure was derived, but we suspect the government is assuming a 0.5% fatality rate, with 124,415 deaths attributed to COVID-19, a 24 MM infection rate would be consistent with that number.

Technology news:

• The DOJ is continuing to move forward on antitrust investigations. The department also opposed a tech firm cable link between Hong Kong and mainland China.  At the same time, the White House is considering Federal support to ensure American development of 5G.
• Google (GOOG, 1441.33) has agreed to pay for news content with several news providers, a significant development for content providers.
• As the U.S. restricts work visas, Canada is opening its doors to these foreign workers.

Foreign news:

• Iran is developing a capacity to make aluminum powder, a key ingredient for solid rocket fuel.
• Polish voters go to the polls on Saturday.

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