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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It’s Monday and there is a lot going on.  Equity markets are down sharply across the world; we suspect fears of political turmoil are adversely affecting financial markets.  We lead off with comments surrounding the death of Justice Ruth Bader Ginsburg and the political firestorm her passing has triggered.  China news is next, with the latest on TikTok.  We recap economic news, including questions about the unemployment claims data, a resignation at the NY FRB and a look at housing.  The pandemic update follows.  We close with world news.  Let’s get to the details:

Ginsburg and the election:  On Friday, Supreme Court Justice Ruth Bader Ginsburg died from cancer.  The justice was 87 and part of the court’s liberal minority.  Her passing has accentuated an already tense electoral season.  There will be a lot written in the media in the coming weeks, but here is our initial take:

• We fully expect Senate Majority Leader McConnell to lead a vote on whomever President Trump nominates for the open position. However, we lean toward a vote in the post-election “lame duck” period for a couple of reasons.  First, there are only 43 days before the election.  Getting a vote before the election would be unusually fast.  As the table below shows, the average time to confirmation is 71 days.  The last justice to be confirmed in under 43 days was Ginsburg herself.  Second, there are several vulnerable GOP senators, and being forced to vote before the election could swing the Senate to the Democrats.  By postponing the vote, those vulnerable GOP candidates and incumbents can avoid a polarizing vote.  There is a risk to this strategy, though; if the GOP loses both the White House and the Senate, pushing through a new justice would appear unseemly and would taint that new member.  In addition, it would further politicize the Supreme Court and invite a radical reaction.  McConnell will have to weigh all these risks in determining how to proceed.  But, his life’s work, to much extent, has been to reshape the judicial branch, and a commanding majority on the Supreme Court is clearly his goal.  So, one way or another, we expect him to make this happen, regardless of the consequences.

• There will be much made of applying the same policy that McConnell applied when Justice Scalia died. McConnell argued that the next president should be able to fill that position.  Of course, he is now suggesting that this time is different because both the Senate and White House are held by the same party.  Although this argument might sway GOP partisans, it is being viewed as hypocrisy by the Democrats.  In the end, this decision is all about power; for now, McConnell has it and he intends to use it.
• If McConnell and Trump do fill the vacancy, the court will have a strong 6-3 conservative majority. Chief Justice Roberts was playing the role of centrist in voting, in an attempt to keep the court above the political fray.  With a 6-3 court, he won’t be able to play that role.
• This election was already highly contentious. Now, with the Supreme Court in the balance, the stakes are much higher.  Both sides appear to believe this situation will work toward their favor.  For President Trump, this issue will overshadow the economy and the pandemic; for Vice President Biden, it will stir the populist left to support him.  Prior to this event, enthusiasm for Biden was modest at best.  But with the Supreme Court in the balance, the view that losing is catastrophic will dominate.
• The populist left is pushing for very aggressive policies to gain power, including adding members to the Supreme Court, something that Franklin Roosevelt considered. There is also talk of statehood for the District of Columbia and Puerto Rico.  Assuming these would be Democratic states, it would add four reliable Senate seats to their rosters.  Our concern is that these “scorched earth” tactics will ensure retaliation, meaning that every four to eight years, policy could shift widely when administrations or congressional power changes.  That will create a situation making it almost impossible for business to make long-term investments.  So far, Biden has not adopted these strategies, which is probably wise, but the groundswell from the populist left will be difficult to fend off indefinitely.
• There are short-term policy ramifications. The vacancy does put the ACA in jeopardy.  If the bill is killed, at some point, a replacement will likely be necessary.  Ultimately, the issue is whether health care is just another good or is critical; in other words, is it like elementary education or grocery stores?  If it’s the former, then some sort of government support is necessary.  If it’s the latter, nothing needs to be done.  It may also complicate getting a spending bill and a second stimulus package through Congress.
• In the short run, equity markets were growing increasingly skittish about political stability. The high level of money market holdings is evidence of that fear.  The passing of Ginsburg will add to these worries significantly and will likely lead to risk-off market behavior.

Ricin:  There are reports that envelopes of ricin, a poison derived from castor beans, were mailed to the White House and local law enforcement offices in Texas.  The letters were sent from Canada, and a woman has been arrested.

China news: 

• President Trump reportedly approved the combination of TikTok, Oracle (ORCL, 59.75) and Walmart (WMT 135.29). Part of the approval was an “education fund” of $5.0 billion to fund a program of “patriotic education.”  It does not appear the companies involved have approved such an arrangement.  It is also unclear if Congress will approve the plan.
• Last week, the U.S. was planning to ban WeChat (TCEHY, 67.02); a federal judge did block the executive order.
• The bigger issue is how to deal with China and technology. The lack of a consistent plan surrounding TikTok (it’s banned, it’s not, there is one buyer, there’s another buyer, what’s actually banned, etc.) suggests that the U.S. hasn’t fully fleshed out what its policy is toward China and technology.
• In addition, there doesn’t seem to be any accounting for a reaction from Beijing, but it looks like one is coming. China is signaling that a “blacklist” is coming against “unreliable” U.S. companies, with a focus on American tech firms.
• China’s reserves of frozen pork are nearly exhausted. We will likely see a surge in imports.

 COVID-19:  The number of reported cases is 31,089,558 with 961,273 deaths and 21,272,259 recoveries.  In the U.S., there are 6,812,332 confirmed cases with 199,513 deaths and 2,590,671 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.

Virology: 

• As the likelihood of a vaccine rises, the focus is now shifting to the distribution. The logistics of distribution are going to be complicated.  Several of the current candidates have to be kept at -112^o Fahrenheit until dispensed.  That will require a supply chain based on special refrigerators and lots of dry ice.  Unfortunately, the U.S. gets most of its dry ice through the CO₂ created in processing corn for ethanol.  Falling gasoline demand has reduced ethanol demand too, leading to a lack of CO₂  The shipping companies are leasing warehouse space for fridge farms to house the vaccines.  Complicating matters further is the glass vial issue; all vaccine glass is specialized but being able to handle super cold temperatures raises yet another problem.  All these issues will be resolved, but it will also slow the distribution.
• Russia is selling its vaccine outside of the country, even though adoption in Russia has been slow.
• As temperatures begin to cool in the northern areas of the U.S., there are concerns about another surge of cases.
• Getting the world to herd immunity against this virus is difficult, even with a vaccine. This article discusses the issue.
• In Europe, Spain has implemented localized lockdowns to try to contain a new round of infections. And, vaccine skepticism isn’t just an issue in the U.S.  In France, 40% polled suggest they won’t take a vaccine injection.

Economy and policy news:

• Global trade has shown an unexpected recovery. Much of this bounce is probably due to China’s improved economy.
• Since John Williams arrived at the NY FRB, there has been an exodus of senior officials. Last year, Simon Potter, leader of the bank’s markets group, and Richard Dzina, who helmed the financial services group, both left without successors in the wings.  Michael Strine, who is the COO of the bank, indicated he will leave at the end of February.  It is not clear why Mr. Strine has decided to leave.  The continued drain of senior officials at the NY FRB is troubling.  This is the part of the Federal Reserve that manages the “plumbing” of the financial system and given the number of leaks we have seen, about this time last year and in March, it does suggest that this loss of experience may be adversely affecting the Fed’s ability to manage monetary policy.
• There is growing concern that the employment data is becoming increasingly flawed. The claims system has been overwhelmed by the influx of unemployment claims due to the pandemic.  It is so bad in California that the state announced it won’t accept new claims for two weeks to clear the backlog.  State-level data is quite different from the national numbers.  Policymakers may be “flying blind” if the employment data isn’t giving them the proper signals.
• The U.S. housing market has been hot; a big reason for strong prices is a lack of supply as current homeowners are reluctant to put their homes on the market during a pandemic.

World news:

• Remember the Panama files, a dump of data that showed documents on money laundering? Well, another dump has occurred.  It appears that most of the major banks had massive levels (around $2.0 trillion) of suspicious transactions.  The file is so massive that it will take a while to see what lies beneath.  Look for more to come in the near future.
• Protests continue in Belarus despite aggressive actions by security forces.
• Protests are increasing in Thailand as well.

The U.S. is reinstituting sanctions on Iran.  The snapback provisions were initially designed to include several other nations, but this time around, the U.S. is mostly going alone, reducing some of the effectiveness.  Specifically, look for China and Russia to sell weapons to Tehran.

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