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

[Posted: 9:30 AM EST] | PDF

The fifth and final part in our recent Weekly Geopolitical Report series, “The U.S.-China Balance of Power,” is now published.  We also have several other recent multimedia offerings.  There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is the latest Confluence of Ideas podcast.  The most recent Asset Allocation Weekly, chart book, and podcast are also available.  You can find all this research and more on our website.

Today’s Comment opens with the latest developments regarding bond yields, which continue to unsettle some investors.  While we think yields could continue to rise for a while, we are currently more sanguine than many observers and maintain our favorable attitude toward equities.  We next turn to various sector, domestic, and international news, before finishing up with the latest on the coronavirus pandemic.

Bond Market:  As longer-term bond yields continue to march higher, investors are becoming more concerned about their impact on the economy and stocks.  In addition, investors are keenly watching the narrowing spread between the 2-Year Treasury yield and the interest rate paid by the Federal Reserve on banks’ excess reserves (the so-called IOER).  Traders are concerned that the shrinking spread reflects a rising appetite for short-term debt as investors gobble up safe assets and park their cash.  It also highlights two key questions for investors: To what extent is Fed support for markets taking asset prices to unsustainable levels, and how vulnerable does that leave bond markets and other areas exposed to sudden reversals?  With that in mind, all eyes will be on Fed Chairman Powell today as he begins his semiannual testimony before Congress.  European Central Bank President Lagarde yesterday said the ECB was closely monitoring bond yields, which was taken as a sign of discomfort with their recent rise, but Powell is expected to be more sanguine.

• Powell is again likely to signal that easy-money policies will remain in place for the foreseeable future.  He will also probably face questions on the size of the next fiscal stimulus package, interest rates, the Fed’s bond purchases, and the potential for inflation to heat up alongside accelerating economic growth.
• As we will show in our upcoming Asset Allocation Weekly, even if the benchmark 10-Year Treasury yield rises to 2%, we suspect the negative impact on the housing market would be relatively modest, as would the impact on stock valuations.  Overall, we maintain our favorable attitude towards equities simply due to the outstanding level of liquidity available to financial markets.

Technology Industry:  Facebook (FB, 260.33) reached a deal with the Australian government to restore news pages to the social media company’s platform, following a five-day suspension because of a disagreement over payment for content.  Under the deal, the Australian government will modify legislation moving through parliament to better protect deals that a social media firm makes directly with traditional media companies for news feeds.  It will also provide for an additional round of negotiations between social media firms and news outlets before arbitration kicks in.  While the deal may resolve this particular issue within Australia, it probably won’t ease concerns about the broader rise of regulatory risks for technology companies.  In addition to the recent rise in bond yields, rising regulatory risks are probably another reason for the recent headwinds facing technology stocks.

Texas Storms:  The Internal Revenue Service extended the April 15 tax-filing and payment deadline to June 15 for all residents and businesses in Texas, citing the damage caused by the recent winter storms and power outages in the state.

United States-Russia:  National Security Advisor Sullivan has warned that the U.S. will respond within “weeks, not months” to the massive SolarWinds cyberattack discovered in December and attributed to the Russian government.  According to Sullivan, the response is likely to include both overt and covert tools and will not be limited to just sanctions.  In his words, “We will ensure that Russia understands where the United States draws the line on this kind of activity.”

European Union-Russia:  EU foreign ministers agreed in principle yesterday to impose travel bans, asset freezes, and other sanctions on at least four Russian officials involved in the jailing of opposition activist Alexei Navalny.  U.S. Secretary of State Blinken, who held a separate meeting with the EU foreign ministers, signaled his support for the move as a way to help defend human rights in Russia.

Taiwan-China:  Former Taiwanese justice minister Chiu Tai-san has taken charge of the Mainland Affairs Council as part of a government reshuffle that seems to be an effort to ease tensions with Beijing.  Chiu has taken a relatively moderate stand on relations with mainland China compared to other politicians in the pro-independence camp.  Analysts say the change could signal a move by President Tsai Ing-wen’s government to adjust its confrontational cross-strait policy.

Brazil:  In a bad sign of renewed political meddling in Brazil’s key state-owned oil company, Petrobras (PBR, 7.94), President Bolsonaro has ousted the company’s U.S.-trained CEO and looks likely to replace him with a 71-year-old reserve army general who has no experience in oil and gas.  In U.S. trading yesterday, the firm’s ADRs traded down 21.0%.  The move also raises concerns about political meddling in the wider Brazilian economy, so it is likely to be a headwind for Brazilian equities going forward.

COVID-19:  Official data show confirmed cases have risen to 111,824,687 worldwide, with 2,476,668 deaths.  In the United States, confirmed cases rose to 28,191,213, with 500,443 deaths.  Vaccine doses delivered in the U.S. now total 75,205,940, while the number of people who have received at least their first shot totals 44,138,118 .  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections totaled only about 54,000 yesterday, while the number of hospitalizations related to the virus fell to 55,400, and the number in intensive care declined to 11,500.
• State and local vaccination officials across the U.S. are working to make up for lost time after last week’s massive winter storm disrupted vaccine deliveries and closed vaccination centers.
• Some of the world’s biggest pharmaceutical companies are joining forces with rivals to help produce COVID-19 vaccines, forging unusual alliances that promise to substantially increase supplies by this summer.  As firms team up to boost production, another positive effect in the longer term could be that expertise and knowledge about new vaccine technologies will be more widely and rapidly dispersed.
• In new guidance for vaccine manufacturers, the FDA said it will quickly analyze any booster shots against COVID-19 variants such as those from South Africa and the U.K. and won’t require further large clinical trials of the new shots’ effectiveness.  The announcement is positive because it suggests vaccine makers will have the flexibility to roll out new versions of their shots in order to quickly address emerging mutations.  However, one downside is the risk that modified vaccines could have some adverse effects that wouldn’t be detected before they’re administered.
• Greece’s tourism minister has called on EU leaders to “move more quickly” to embrace vaccine certificates, also known as “vaccine passports,” that could allow mass travel to resume.  Athens is especially concerned to repair its large holiday industry, which has been battered by the pandemic.
• In Japan, the government vaccination program has already hit at least one hiccup.  After discovering the number of healthcare workers who have been made the first priority to receive shots was greater than expected, it now looks like the next priority cohort, older individuals, won’t start getting their injections until April at the earliest.
• A U.K. study of more than 4,000 hospitalized patients showed that people who received the rheumatoid arthritis drug tocilizumab plus steroids had a 20% lower risk of death after 28 days compared with patients who received only steroids and standard care, according to preliminary results posted online.  If confirmed, the findings could open up a new treatment strategy for those who still contract the disease despite mass vaccination campaigns.

 Economic and Financial Market Impacts

• With consumers buying more physical goods resulting from their reduced ability to buy services, manufacturers have been caught flat-footed and are struggling to produce enough.  As we predicted in our Asset Allocation Weekly of last October 16, rebounding demand for consumer goods and retail inventory building has driven down stockpiles at the factory level, creating bottlenecks and making it easier for firms to hike prices.  Here is the updated chart from that report, showing the ratio of inventories to sales at the manufacturing, wholesale, and retail levels.

• The problem is also evident in Europe.  For example, thousands of European manufacturers have been hit by a surge in the price of polymer resins used to make plastic, reflecting a strong demand and a slump in supplies.
• For workers, the bright side of the rebound in manufacturing and the ongoing surge in the housing industry is that blue-collar job growth is booming.  That should hold out hope for a quicker fall in unemployment and a rise in wages for many people who lost their jobs in the service sector during the pandemic.  Any rise in wages will probably also feed into concerns about inflation.

 U.S. Policy Response

• The House Budget Committee yesterday approved President Biden’s $1.9 trillion pandemic relief package.  It officially fused together and passed the different portions of the legislation that advanced earlier this month in nine different House committees. A full House vote is expected Friday or Saturday, after which the legislation will go to the Senate.  Remaining as passed by the Budget Committee, the bill would:
  • Provide $400-a-week unemployment benefits through August 29.
  • Send $1,400 per-person payments to most households.
  • Provide billions in funding for schools and vaccine distribution.
  • Expand the child tax credit.
  • Broaden child-care assistance.
  • Bolster tax credits for health insurance.
  • Increase the federal minimum wage to $15 per hour over four years.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have several recent multimedia offerings.  We have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  Here is the latest Confluence of Ideas podcast.  The most recent Asset Allocation Weekly, chart book, and podcast are also available.  You can find all this research and more on our website.

Good morning and happy Monday!  The southern reaches of the middle of the country are finally seeing a thaw as temperatures moderate.  Equity futures are falling again this morning, mostly due to rising long-duration bond yields.  Although the rise in yields reflects an improving economy, there are concerns that the lift in rates will pressure multiples and depress equity prices.  We note that some of the index weakness is a function of pressure on the highest-flying names from the past year.  Over the past 12 months, the S&P ETF (SPY, USD, 390.03) is up 17.2% compared to the equal weight S&P ETF (RSP, USD, 135.60), which is up 15.3%.  However, over the past six months, the latter is outpacing the former, 24.1% to 15.1%.  This outperformance suggests rotation within the index; stocks that lagged during the downturn are playing “catch up.”  With the U.S. COVID-19 death toll approaching 500,000, we start today with pandemic news.  China news comes next.  A look at the U.S. economy follows along with political developments, and we close with an international news roundup.

 COVID-19:  The number of reported cases is 111,434,139 with 2,467,481 fatalities.  In the U.S., there are 28,134,803 confirmed cases with 498,901 deaths.  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 CDC reports that 75,204,965 doses of the vaccine have been distributed, with 63,090,634 doses injected.  The number receiving a first dose is 43,628,092, while the number of second doses, which would grant the highest level of immunity, is 18,865,319.

Virology

• Although we will likely cross the 500,000 fatality mark this week, trends are improving. New cases are falling rapidly.  Fatalities and hospitalizations, perhaps the best measure, are as well.  The steady increase in vaccinations, coupled with enough Americans who have survived an infection, is likely getting the U.S. closer to some degree of herd immunity.
• One of the questions surrounding the virus and vaccination is whether the latter grants sterilizing immunity or if it merely protects the recipient from infection. If the latter is true, vaccination is still important, but it does mean that a vaccinated person could be an asymptomatic carrier.  An Israeli study of the Pfizer (PFE, USD, 34.44) vaccine seems to indicate that it grants near sterilizing immunity by reducing virus transmission.
  • In Europe, health workers are rejecting the AstraZeneca (AZN, USD, 50.59) vaccine because of concerns that it is less effective than other vaccines.
  • Border restrictions in the EU have returned due to virus transmission concerns. Although the EU continues to hold the dream of creating conditions of a single state, the reality is that nationalism tends to return during periods of stress.
• Most researchers expect COVID-19 to become endemic over time. Much like influenza, it will be with us for good, but with vaccines and potential mutation to less virulent forms, it will not pose the same degree of disruption in future years.
• China led a massive disinformation campaign on COVID-19, blaming a U.S. bioweapons lab for the disease. Chinese pushed this prevarication through the web.  In reality, there is growing evidence that the virus not only started in China but was spreading undetected in Wuhan in November 2019.

China:  Washington and Beijing continue to circle warily; China admits fatalities regarding border clashes with India, and stirrings of democracy are seen with local government.

• Diplomats from both China and the U.S. have been making public statements recently. Today, Senior diplomat Wang Yi called for a “reset” in a speech.  What does that mean in practice?  The U.S. should lift sanctions and stop interfering in China’s internal affairs.  We have seen nothing to date that suggests the U.S. policy strategy towards China is changing.  Tactics are, as the Biden administration is courting allies, a change from the Trump administration.  The overall thrust of policy, which is curtailing China’s international ambitions, remains the same.
• China admitted that four soldiers died in various clashes on the India/China frontier.
• Beijing is trying to introduce a degree of local governance, creating homeowners’ associations. These bodies would be self-governing, deciding such issues as maintenance fees, superintendents, and other local matters.  The goal is to improve social stability.  However, the CPC wants to install its handpicked leaders for these groups.  Homeowners are rejecting these choices, creating a quandary for the CPC.  The party doesn’t want to get mired in these local disputes; conflict between property managers and homeowners is common, as their interests don’t coincide.  But, if homeowners get to pick their own association leaders, it looks like a democracy.

Economics:  Mortgages, the Midwest, and the British pound are in the news.

• The rise in long-duration Treasury yields is starting to lift mortgage rates. The average 30-year mortgage rate is now 2.99%, up nearly 20 bps over the past two weeks.  It is not unusual that buyers will rush to complete purchases when rates begin to rise, but eventually, the rise in rates will cool the housing market until home prices adjust lower.
• The Midwest labor market is showing signs of strength. First, the economy has seen a rise in goods consumption relative to services, and this area of the country is more dedicated to goods output.  Second, the relative lack of tourism in the region relative to the coasts means that fewer leisure and hospitality jobs have been lost.  Finally, working from home is apparently more manageable in the Midwest due to relatively inexpensive housing.
• The British pound took a dive after the Brexit vote and has remained depressed since then. However, now that Brexit is behind us, the GBP is beginning to make a comeback.  Our fair value, based on relative inflation, is in the $1.60 area, suggesting the currency has significant room to rally.

Politics:  It appears that the administration’s pick for OMB director may not be confirmed by the Senate.  Sen. Manchin (D-WV) has indicated he will not vote to confirm Neera Tanden.  She was a controversial choice, given her aggressive stances taken on social media, where she has been critical of senators.  This is the first Biden pick that has not had the full support of the Democratic caucus.  Although it is possible that a GOP vote could be found to save her nomination, the odds of her confirmation have lengthened considerably.

International news:  Iran, Myanmar, North Korea, the EU were in the news.

• Although Iran has been pushing for sanctions relief as a perquisite for talks with the U.S., it does appear Tehran is softening a bit. Iran had threatened to end or limit IAEA inspections.  In the end, Tehran has ended “snap” inspections by the IAEA but will allow for “satisfactory” oversight.  Although this outcome is better than a complete restriction of inspections, it isn’t clear that Tehran has moved enough to prompt the U.S. to reengage in talks.
• Since the recent coup, protests have continued in Myanmar. Over the weekend, security forces used deadly force against protestors, killing two and wounding at least 40 people.
• In our 2021 Geopolitical Outlook, we included North Korea as an item to watch. Reports suggest that the combination of sanctions and self-imposed border controls to prevent the spread of COVID-19 has led to a collapse in economic activity.  Kim Jong-un is reacting by cracking down on private market activity and trying to return to Stalinist economic policies of central control.  It is not unusual during periods of economic stress that North Korea engages in external threats to extract support from the rest of the world.  Given the current turmoil, we would not be surprised to see tensions rise in the coming weeks.
• The U.S. has not “named names” with regard to the Nord Stream II project, meaning that actual sanctions are less likely.  This second natural gas pipeline will make Europe increasingly dependent on Russian natural gas and deprive Ukraine of transit fees.  Previous administrations have opposed the pipeline, although none took aggressive enough steps to halt its progress.  Without new sanctions, it is more likely the pipeline will be completed.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have several recent multimedia offerings.  First, we have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  As we noted last week, we’ve also posted a new Confluence of Ideas podcast.  Being Friday, we have a new Asset Allocation Weekly, chart book, and podcast.  The new Weekly Energy Update is now available; it was delayed a day due to the holiday earlier this week.  You can find all this research and more on our website.

U.S. equity futures are higher this morning as markets grapple with the steady rise in interest rates.  We begin the discussion with our view of rising debt levels.  From there, we cover policy and economics, with special focus on the minimum wage developments.  A roundup of international news follows, and we close with a pandemic update.

Following last year’s debt binge that saw households, companies, and governments raise over $24 trillion to offset the pandemic’s impact, worldwide debt levels have soared to unprecedented levels. This surge in global debt has sparked concerns of a possible financial crisis in the offing. Here are our thoughts about it:

This time may be different: The four deadliest words in economics are “this time is different,” as almost every time an economist has uttered the phrase, he was proven wrong.  Therefore, we hedge the statement with the word may. That being said, we are optimistic that the debt binge will not lead to an imminent financial crisis for the following reasons:

• Creditors are being proactive. Unlike the months leading up to the Asian Financial Crisis and Global Financial Crisis, global creditors this time around appear to be more flexible regarding working with debtors to restructure loans.  The IMF, World Bank, and some private institutions have provided struggling countries and companies with much-needed debt relief and debt forgiveness in order to prevent future defaults.
• Households are deleveraging and throughout the developed world have used stimulus money to improve their balance sheets. As a result, the Euro area, U.K., Japan, and the U.S. have all seen declines in household debt as a percentage of GDP.  The reduction of debt suggests that households are better positioned to withstand a recession.  In general, households have less power in the creditor/debtor relationship, so the decision by households to reduce debt reduces the risk that we will see a repeat of the Great Financial Crisis.  At the same time, using stimulus to reduce debt does weaken the overall impact of fiscal spending.
• Financial institutions are more capitalized. In December, the Fed released the results of its 2020 stress test. It concluded that the banking sector was sufficiently capitalized to lend to households and businesses in the event of a crisis.  Given the role of the U.S. in providing global liquidity, strong banks here likely bode well for the global financial system.
• There is low rollover risk. Increases in the federal funds rate have frequently led to weakness in the financial system as companies and governments often finance debt with short-term loans.  Thus, a rise in those rates generally results in increased servicing costs.  Although there is growing concerns that the Federal Reserve could raise rates in order to contain inflation, Fed Chair Powell has signaled that he is more focused on full employment rather than inflation.

 If we are wrong: The biggest risks to our prediction are:

• There is a possibility that creditors may become less patient over time. As the recovery solidifies, debt moratoria will be lifted, and we could still see debt deflation develop.
• Higher interest rates pose a risk. As we have seen the yield curve steepen, there is a risk that rising rates will increase financial system stress.  Thus, we are paying close attention to the FOMC and the idea of yield curve control.
• Although the banking system is well-capitalized, the non-bank financial system is probably less so. Because this part of the financial system is “in the shadows,” it is more difficult to determine its health.  Usually, rising interest rates trigger problems in this sector.
• Rising asset prices, over time, present a risk. This is what Hyman Minsky noted when he said, “stability breeds instability.”  Rising asset prices can encourage excessive risk taking, leading to problems.  The important factor to note from this “Minsky risk” is that excessive behavior is endemic to financial markets; the key is whether or not the excessive action occurs within a critical sector.  The activities we have seen discussed this week on Capitol Hill are probably not.

Policy and economics:

• When President Biden met with a group of mayors and governors last week, he bluntly told them to get ready for a legislative defeat; his proposed minimum wage hike is unlikely to happen, at least in the near term.
• The State Department said on Thursday that the Biden administration is open to reopening discussions with European countries and Iran to begin rejoining the 2015 Iran nuclear agreement, also known as the Joint Comprehensive Plan of Action (JCPOA).
  • In response, Iran said the U.S. must first return to the 2015 nuclear deal and lift sanctions if it wants to start talks, appearing to snub the Biden administration’s efforts to begin direct discussions before officially rejoining the accord.
• The Senate Energy and Natural Resources Committee is planning to hold a hearing on electric grid reliability and resilience after millions were left without power in Texas and elsewhere due to a winter storm.
• The value of U.S. farm exports to China will touch $31.5 billion in the federal fiscal year ending September 30, the highest ever, according to the U.S. Agriculture Department.
• Vice President Kamala Harris said on Thursday that the 2.5 million women who have left the workforce since the beginning of the pandemic constitute a “national emergency,” one that could be addressed with the Biden administration’s $1.9 trillion coronavirus relief plan.
• Democrats filed President Biden’s immigration bill on Thursday; it is unlikely to make its way through Congress.
• Biden is expected to speak with Saudi Arabia’s King Salman and signal a downgrade in relations with the kingdom’s day-to-day ruler, Crown Prince Mohammed bin Salman.
• President Biden will deliver a robust defense of America’s own democracy and the broader power of democracies to face autocratic threats from China and Russia during a virtual address on Friday to the Munich Security Conference.

International news:

• In a surprise retaliatory move Thursday, Facebook blocked Australians from sharing news stories, escalating a fight with the government over whether powerful tech companies should have to pay news organizations for content.
• Taiwan’s presidential office named the former head of the National Security Bureau, Chiu Kuo-cheng, as its new defense minister in a major reshuffle of the island’s key national security posts.  The move comes amid China’s increasingly aggressive posture toward democratic Taiwan.
• Italian Prime Minister Mario Draghi said the European Union’s recovery package would help make the country’s debt sustainable.
• Spain is hoping to entice people to prepare for retirement with a voluntary savings plan as it tries to wean them off relying solely on state pensions.  The aim is to set up a fund by the end of the year that would be run by private investment companies, offering Spaniards an affordable alternative to supplement their public pensions.
• Sterling climbed to $1.40 for the first time in almost three years as investors looked past gloomy data and focused on hopes that the U.K.’s rapid coronavirus vaccine rollout will boost economic prospects.
• On Thursday, Canada’s main opposition party called for the House of Commons to formally declare that China is committing genocide against more than one million Uighurs in the western Xinjiang region.

China news:

• China may ban the export of rare earth refining technology to countries or companies it deems a threat to state security concerns, according to a person familiar with the matter.
  • This is likely in retaliation to increased scrutiny Chinese firms have been getting from the West.  In 2019, we discussed the threats of a potential export ban on rare earths in a Weekly Geopolitical Report.
• United States agencies in charge of food safety have taken aim at a controversial theory backed by Chinese health officials with a new statement saying there is no evidence that COVID-19 can spread via food and food packaging.
• China has for the first time revealed that four of its soldiers were killed, and one seriously wounded, in last year’s Himalayan border clash with India.
• It’s time for the United States to be “crystal clear” that it will not allow China to invade Taiwan and will end its longstanding “strategic ambiguity” about whether it would come to the island’s defense, said Senator Tom Cotton, a senior Republican on the Senate Armed Services Committee.

 COVID-19:  The number of reported cases is 110,146,931 with 2,435,733 fatalities.  In the U.S., there are 27,854,389 confirmed cases with 491,411 deaths.  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 CDC reports that 73,377,450 doses of the vaccine have been distributed with 57,737,767 doses injected.  The number receiving a first dose is 41,021,049, while the number of second doses, which would grant the highest level of immunity, is 16,162,358.  The Axios map shows marked declines in infection rates.

Virology

• President Biden makes his first appearance at a meeting of the G-7 today as the economic heavyweights gather virtually to discuss the global coronavirus pandemic and come up with a plan to distribute vaccines equitably.
• The first study of a coronavirus vaccine in pregnant women launched on Thursday. This is part of an ongoing effort to assess the safety and effectiveness of the shots in groups of people that were excluded from the original trials.
• French President Emmanuel Macron has said Europe and the U.S. should urgently allocate up to 5% of their current vaccine supplies to developing countries where COVID-19 vaccination campaigns have scarcely begun and China and Russia are offering to fill the gap
• Israel has raced ahead with the fastest COVID-19 vaccination campaign in the world, inoculating nearly half its population with at least one dose.
• The two coronavirus vaccines developed by Pfizer-BioNTech SE (PFE, USD 34.47; BNTX, USD 113.86) and Moderna (MRNA, USD 173.00) appear to be highly effective against the more transmissible variant of the virus first detected in Britain, according to newly published studies in the New England Journal of Medicine, in a potential boost to vaccination efforts around the globe.
• The African Union has secured 300 million doses of Russia’s Sputnik V vaccine as it seeks to ramp up inoculation in a region that has largely been left out of the global rollout of COVID-19 jabs.
• New evidence from China is affirming what epidemiologists have long suspected: the coronavirus likely began spreading unnoticed around the Wuhan area in November 2019 before it exploded in multiple different locations throughout the city in December.
• The COVID-19 vaccine developed by Pfizer Inc. and BioNTech generates robust immunity after one dose and can be stored in ordinary freezers instead of at ultracold temperatures, according to new research and data released by the companies.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have several recent multimedia offerings.  First, we have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  As we noted last week, we’ve also posted a new Confluence of Ideas podcast. We also have a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.

Good morning from St. Louis, where it is a balmy 14^o!  The midsection of the U.S. all the way to Texas continues to deal with a vicious cold snap, which has affected the energy industry and chip makers, too.  Mercifully, it looks like the Arctic blast will dissipate by the weekend, with much warmer temperatures forecast for next week.  U.S equity futures are lower this morning as markets grapple with the steady rise in interest rates.  We discuss the Fed minutes and look at recent equity market activity and breakeven rates.  From there, we discuss policy and economics, highlighting the continued tussle between Australia and the tech industry.  Pandemic news follows.  We close with a roundup of international news.

Fed minutes and markets:  In general, the comments from the recent FOMC meeting were rather upbeat, with the FOMC members arguing that fiscal stimulus measures, coupled with expected improvement in virus control, would lift economic growth over time.  Still, given the gap between current and full employment, monetary policy was projected to remain accommodative for the foreseeable future.

In equity market action, we are seeing a “good news is bad news” trade, usually confined to bonds.  Yesterday, for example, we saw equity futures reverse, moving from green to red in the wake of the strong retail sales numbers.  Below are a couple of charts highlight what we are seeing.  First, the Atlanta FRB’s GDPNow forecast shows Q1 GDP coming in at a blowout 9.5% growth rate.

(Source:  Atlanta FRB)

Although we expect this estimate to decline (some of the retail sales yesterday were likely imported goods, for example), GDP is coming in much stronger than we expected.

Second, the TIPS/T-note spread, the measure of inflation expectations, is now up to 2.2%

We have been looking at the relationship between equities and Treasury yields.  Although it wasn’t mentioned in the Fed minutes, we do expect the FOMC to eventually “sit” on Treasury yields, engaging in some form of yield curve control to prevent higher rates from adversely affecting the economy.  There are a lot of unknowns surrounding this decision.  The most immediate is whether the Fed will take this step outside of a crisis.  Another is what level of rates would trigger a reaction; our best estimate is around 2% on the 10-year Treasury.  It is important to note that rising yields are, in part, a function of economic recovery.  The fact that equities are, at least so far, reacting adversely to better economic data suggests that accommodative monetary policy is the prime driver of equity values.  That may change in the coming weeks, but in the short run, it does suggest at least some degree of churn in equities.

Policy and Economics:  Here are some of the highlights.

• News Corp (NSWA, USD, 23.12) has reached an agreement with Google (GOOGL, USD, 2116.72) where the tech giant will begin paying the content provider for the news it publishes on its website. So far, this agreement only affects Australia.  Google has been trying to get ahead of new regulations being considered in Australia, which would require platform aggregators to pay for the news they provide.  If this movement gains traction, it will be interesting to see if the aggregators begin selling subscriptions for readers to access content.
• Meanwhile, in stark contrast, Facebook (FB, USD, 273.57) decided to strike back at Australia by blocking users in that country from sharing news. Today, this decision prevented government health and emergency services from being accessed by the public.  The blocked information was for vaccine distribution.  We will continue to watch this situation unfold, but this action by the company could turn into a public relations nightmare and lend credence to the company’s critics.
• One policy proposal that has been circulating since the 1970s is universal basic income (UBI). The idea is that citizens receive a regular stipend from the government.  It has received support from both the right and left.  The former likes it because it would end the government’s welfare infrastructure and more efficiently distribute aid, while the latter supports UBI because the left likes the idea of a permanent safety net.  However, it has its detractors.  The lack of targeting means those who don’t need the money get it anyway.  Those in the government’s welfare apparatus usually oppose it.  There are concerns about the policy adversely affecting work effort; studies of limited UBI programs mostly indicate that work effort isn’t dramatically affected, although that may not be the case on a large scale.  Andrew Yang ran for the Democratic Party presidential nomination on the policy.  For the most part, UBI remains a sort of policy curiosity for now.
  • However, there is a growing movement to create a type of UBI for kids, something of a mirror of Social Security. President Biden has a plan to boost the child tax credit to $3,600 for children under six years of age and $3,000 for children 7-17.  Support would begin to phase out for couples earning $150,000 per year.  Senator Romney (R-UT) has a plan to raise the credit even more, to $4,200 per child six and under, and match the president’s plan for older children.  The phaseout is higher under Romney’s plan.  However, there is a twist in both plans.  Instead of the credit coming once a year when taxes are filed, the Social Security Administration would distribute the credit monthly, making the plan less of a tax credit and more of a child allowance.  In other words, this credit begins to look a lot like Social Security for kids (and their parents).
  • In general, Americans tend to prefer universal benefits. Means-testing benefits are targeted and thus more efficient, but they can also project a stigma on recipients.  It also requires a bureaucracy to distribute and monitor recipients.  This “kids UBI” program could have political legs.  The right will probably support it because it should help stabilize families, and the left will like the chance to reduce child poverty.
• In the meantime, the establishment continues to press against populist policies:
  • Last year, California voters refused to pass Proposition 22, which would have given contract workers the rights of employees. With that win, other firms are exploring the “gig” model to reduce their labor costs.
  • The Chamber of Commerce says that decoupling from China could cost thousands of jobs and billions of dollars of sales. We tend to agree, but if the policy goal is to isolate China, this sort of outcome is probably unavoidable.
• The U.S. will extend the mortgage foreclosure moratorium through the end of June. The majority of those in forbearance are in the FHA loan guarantee program.
• The CFTC has approved a binary event market platform from Kalshi, Inc., a privately held firm. Decision markets have become more popular recently, and this could become a source of information about expectations surrounding various events.
• The pandemic has accelerated trends that were already in place. Work-from-home and streamlining procedures are part of these changes.  Economists worry that millions of jobs, most likely for less affluent households, will be adversely affected.
• There has been an uptick in illegal immigrant crossings in what looks like expectations of a less harsh immigration policy from the new administration.

COVID-19:  The number of reported cases is 110,002,089 with 2,432,607 fatalities.  In the U.S., there are 27,827,801 confirmed cases with 490,717 deaths.  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 CDC reports that 72,423,125 doses of the vaccine have been distributed with 56,281,827 doses injected.  The number receiving a first dose is 40,268,009, while the number of second doses, which would grant the highest level of immunity, is 15,471,536.  The Axios map shows marked declines in infection rates.

Virology

• One concern regarding the push for vaccines is that antiviral treatments have received less attention and funding. Israel has been working on a treatment designed to tame the antibody response which can, in some cases, go into overdrive and make a COVID-19 infection worse.  The drug, Allocetra, made by Enlivex Therapeutics (ENLV, USD, 20.33) has shown promise in improving the recovery of severely ill patients.  If COVID-19 becomes endemic, as we expect, having drugs to treat patients who contract the disease, even if inoculated, will be critical.
• We are seeing the U.S. slowly extend the time frame for dealing with the pandemic. Earlier this week, President Biden suggested that enough vaccines will be available to all Americans by the end of July.  Although this is favorable news, having available vaccines is a far cry from having them in arms.  Production problems have plagued vaccine producers; the latest bottleneck to emerge is a shortage of plastic bags used in bioreactors that produce the vaccines.
• During the 1918 influenza pandemic, there was a notable decline in life expectancy. We saw something similar last year due to COVID-19.
• As vaccines are distributed, the potential for “vaccine passports” is rising. Increasingly, industries that require face-to-face contact are beginning to consider proof of vaccination.
• South Korea is accusing North Korea of using hacking to acquire information about vaccine formulation and production.
• We continue to monitor cases of reinfection, especially related to mutations. In South Africa and Brazil, there are reports of variants causing new infections in areas where infections were previously widespread.  Current vaccines appear to offer less effective protection.  Overall, this pattern fits our expectations that COVID-19 will move from pandemic to endemic over time, meaning that the disease is now part of our lives, similar to influenza.
  • Slow vaccine distribution in the emerging world will tend to foster new variants and prolong the pandemic.
  • South Africa has started to distribute the Johnson & Johnson (JNJ, USD, 165.66) vaccine to healthcare workers, even though the vaccine hasn’t been approved.
  • Cuba has developed its own vaccine and is preparing to produce it in quantity. It may force tourists to take the vaccine.
  • Taiwan is accusing Beijing of blocking access to vaccines.
• Evaluations of some patients who died of COVID-19 show very large cells, usually seen elsewhere in the body, in brain capillaries. It is possible that reports of the virus causing “brain fog” may be caused by blockages.
• The CDC is funding a new effort to track variants of the virus in the U.S.

International news:  North Korea, Italy, Germany, and China were all in the news.  The latter, which usually has its own report, had a dearth of news due to the Lunar New Year.

• The U.S. has accused North Korean hackers of conspiracy to steal more than $1.3 billion of cash and cryptocurrency.
• Italy’s new PM, Mario Draghi, easily won a confidence vote, cementing his control of the new government.
• Germany is hopeful that the new administration will reduce tensions over the Nord Stream 2 pipeline, the natural gas pipeline that will connect Germany with Russia.
• As reported earlier this week, China is threatening to close off rare earth exports to the U.S. Here are some background reports on rare earth elements.
• One of the trends that developed during the Cold War was that each new administration, regardless of party, found itself with little room to maneuver regarding Soviet/U.S. relations. The GOP, which tended to be more hardline, felt it couldn’t deviate or it would lose its identity, and the Democrats didn’t want to look “soft on the Soviets.”  We are beginning to see similar restrictions emerge on U.S./China relations.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have several recent multimedia offerings.  First, we have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  As we noted last week, we’ve also posted a new Confluence of Ideas podcast. We also have a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.

In today’s Comment, we open with coverage of the big winter storm pummeling most of the U.S., followed by various international news.  As always, we wrap up with the latest developments regarding the coronavirus pandemic.

Winter Storm:  The massive winter storm blanketing the U.S. has now left nearly 75% of the lower 48 states covered in snow and almost four million people without power.  Even with the storm moving off the Northeast coast late Tuesday, dangerously cold wind chills from Arctic air are expected to linger over the Great Plains and Mississippi Valley through midweek.  On top of that, a new winter storm is emerging in the Southern Plains and is heading toward the mid-South today.

• President Biden has declared a state of emergency in Texas, responding to a request from Governor Abbott.  Rolling blackouts in Texas have left approximately three million people without power and disrupted a wide range of businesses, including agriculture and energy production.
• Governor Abbott has also called for an investigation into what caused the power outages in Texas.
• At this point, it’s too early to gauge the impact of the storm and power outages on the overall economy.  However, even if the storm causes enough disruption to show up in the statistics, we do know that such weather-related impacts are often quickly reversed and usually only have fleeting effects on the financial markets.

United States-China:  Speaking at a town hall event in Wisconsin yesterday, President Biden signaled that part of his strategy to deal with Chinese aggression would be to bludgeon it over its human rights record.  According to Biden, “China is trying very hard to become the world leader, and to get that moniker and be able to do that they have to gain the confidence of other countries . . . As long as they’re engaged in activity that is contrary to basic human rights, it’s going to be hard for them to do that.”  We have already noticed that Biden’s approach to China is turning out tougher than many people expected, but this statement also illustrates that he’s likely to use a wider range of tools to counter China’s aggressive geopolitical moves.  Biden’s statement is an example of using the U.S. advantage in “soft power,” i.e., it has a much better reputation as a historical force for good in the world than China.  We discuss the U.S. advantage in diplomatic and political influence, including soft power, in Part IV of our recent WGR series on the U.S.-China balance of power.  Importantly, we would note that a tougher Biden policy on China that expands into new directions could mean continued risks for both Chinese and U.S. assets.

China:  Officials inside the Chinese government say President Xi’s move to block the IPO of Jack Ma’s Ant Group actually intended to hurt Xi’s internal political rivals as much as it aimed to protect the financial system from risks.  The insiders now say a previously secret government investigation ahead of the scheduled IPO revealed that many of Xi’s potential rivals could have pocketed billions of dollars from the transaction.  If true, the news would highlight that companies in China not only face general regulatory risk but, because of the increasingly authoritarian rule of President Xi, they also face political risk.  Chinese equities could eventually face headwinds as evidence of such risk accumulates, and the power pendulum continues to shift toward greater government control of the economy.

United States-Japan:  The U.S. and Japanese governments have reached an unusual one-year agreement on cost-sharing for the U.S. troops based in Japan.  The deal, in which Japan will shoulder about ¥200 billion ($1.9 billion) — roughly in line with the previous year — is widely seen as a temporary measure, freeing the Biden team to battle the raging pandemic inside its borders and sparing Japan a potentially contentious negotiation over the costs.

COVID-19:  Official data show confirmed cases have risen to 109,613,248 worldwide, with 2,421,481 deaths.  In the United States, confirmed cases rose to 27,757,609, with 488,103 deaths.  Vaccine doses delivered in the U.S. now total 71,657,975, while the number of people who have received at least their first shot totals 39,670,551.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rebounded a bit to approximately 59,000 yesterday, but that was still much lower than the seven-day moving average of 85,296, and the 14-day moving average fell to 98,075.  Hospitalizations related to the virus fell to 64,533, but deaths climbed back above 1,000.
• After refusing to implement tough lockdowns in the early European stages of the pandemic, the Swedish government has warned that it might have to close businesses and shut down parts of society as unease grows in Stockholm regarding the possibility of a new wave of the pandemic.
  • The center-left government today put forward a proposal that, for the first time, would allow it to close shopping centers, gyms, and restaurants.
  • The proposal would also allow the government to fine those who fail to obey the rules SKr2,000 ($240).
• Meanwhile, the big winter storm and mass power outages mentioned earlier in this Comment have forced the closure of many U.S. vaccination centers.  That’s particularly important because the vaccines require special refrigeration, and concerns are growing that the facility closures and power outages could spoil many doses.
• The European Commission today will announce a deal for a further 150 million doses of the vaccine developed by Moderna (MRNA, 178.53), as well as an option for 150 million more next year.  The agreement is part of a wider effort to tackle criticism of the EU’s sluggish vaccine rollout and prepare for the possible evolution of the disease as mutant strains appear.
• The Taiwanese government has accused China of blocking its plan to buy vaccines from BioNTech (BNTX, 114.38) just as it was about to be announced.  It appears the German drug company had been using a Chinese pharmaceutical firm based in Shanghai as its agent for the greater China region, and that company is under pressure from Beijing not to service the Taiwanese.
• After halting the use of the vaccine from AstraZeneca (AZN, 50.89) because of efficacy concerns with new mutations of the virus, the South African government started inoculating healthcare workers with the vaccine from Johnson & Johnson (JNJ, 165.07), even though it hasn’t yet received official approval in any country.  In a large clinical trial, however, the J&J vaccine was found to be 57% effective at preventing moderate and severe COVID-19 symptoms, including from the B.1.351 variant, which has become the predominant version there.
• Many poor, less developed countries are running far behind on vaccinating their populations, which could keep infection rates high and pose an ongoing risk for unvaccinated people in the wealthier, developed countries.

 U.S. Policy Response

• Speaking in Wisconsin yesterday, President Biden promised vaccines would be available to all Americans who want one by the end of July, and the U.S. economy would “come roaring back” if Congress approves his $1.9 trillion pandemic relief proposal.
• Even though the question of reopening schools remains controversial, with many teachers wanting to delay openings but parents wanting to get their kids out of the house, recent polling suggests teachers who go back to work are actually happy to do so.

Foreign Policy Response

• In his first speech as Italian prime minister, Mario Draghi said he would accelerate the country’s vaccine rollout and outlined plans to invest €210 billion of EU recovery money, as well as plans for structural reforms of Italy’s legal system and public administration.  Outlining how Italy would spend the so-called Next Generation EU recovery program, Draghi said that his administration would follow the previous government in focusing on digitalization, ecological transition, research and training, and health, although he also signaled he will work to “strengthen” the plan over the coming weeks.
• Optimism over Draghi’s plan has taken some of the gloss off the Spanish government’s preliminary plan to spend the €140 billion or so it will receive from the Next Generation EU program.  The Spanish plan was initially seen as far better than Italy’s, but now officials must work hard to assure people that it will be a success.  For example, Deputy Prime Minister Calviño said in an interview with the Financial Times that the government will redouble its effort to transform the Spanish economy, revitalize the small business sector, and boost demand.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We want to point our readers toward our recent multimedia offerings.  First, we have a new chart book recapping the recent changes we made to our Asset Allocation portfolios.  As we noted last week, we’ve also posted a new Confluence of Ideas podcast. We also have a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.

Turning to today’s Comment, we open with a report over the long weekend that Japanese economic growth at the end of 2020 was much better than expected.  That news helped give a boost to international markets while the U.S. was closed for its holiday yesterday.  In another positive development, Mario Draghi officially became Italy’s new prime minister.  We review key international news, the latest U.S. developments, and recent trends with the coronavirus pandemic.

Japan:  Following reports that Japan’s GDP grew by a much faster-than-expected 3.0% in the fourth quarter, the Nikkei 225 index Monday closed above 30,000 for the first time since 1990.  Even though Japan had to reimpose some coronavirus restrictions to deal with a renewed outbreak in certain areas in January, the economic impact is anticipated to be relatively mild.  Investors remain optimistic that Japan will benefit from the rollout of vaccines and a global economic rebound as the pandemic comes under control.

China-United States:  The Chinese government is reportedly exploring limits on the export of “rare earth” minerals that are crucial for the manufacture of advanced U.S. weaponry such as the F-35 fighter.  According to the reports, the Ministry of Industry and Information Technology last month proposed draft controls on the production and export of 17 such minerals from China, which controls about 80% of the global supply.  Industry executives said government officials asked how badly companies in the U.S. and Europe, including defense contractors, would be affected if China restricted rare earth exports during a bilateral dispute.  As we’ve noted in our recent WGR series on the U.S.-China balance of power (see Part I, Part II, Part III, and Part IV), China’s growing military, economic, and diplomatic power and aggressiveness under President Xi will likely keep it on a course toward more friction with the U.S., especially given that the Biden administration’s traditionalist, establishment foreign policy team is signaling it will push back against China more strongly than many people anticipated.  In other words, U.S.-China frictions will likely remain a risk for financial markets going forward, although it is difficult to say when or if they might cause broad market disruptions.

Italy:  Over the weekend, former ECB Chief Mario Draghi succeeded in forming a government and was sworn in as Italy’s new prime minister.  Importantly, Draghi named a very broad-based cabinet that includes both career politicians from a wide range of parties and technocrats with practical policymaking expertise.  In fact, Draghi’s broad-based approach points to one potential political advantage to be gained from large pandemic relief programs like the EU’s new program.  Italy’s previous government fell in large part due to disagreements over how to use the EU money for Italy, expected to total at least €200 billion.  Once asked to form the government, Draghi apparently used that funding as an incentive for most major Italian parties to support him.  Essentially, the pot is big enough that Draghi could offer “something for everyone,” so all the major parties wanted a seat at the table with him.  There’s still a long way to go before Italy has a workable plan and implements it, but the political signs so far are encouraging, which helps explain why Italian equities and bonds continue to perform so strongly.

Spain:  In elections on Sunday, pro-independence parties cumulatively received more than 50% of the vote in Catalonia and strengthened their majority in the regional parliament.  As a result, key separatist politicians are already calling for a renewed effort to negotiate with Madrid over an independence referendum, even though the central government has taken tough measures against such a move in the past and points to the Spanish constitution’s provision stating that the country is “indivisible.”

Energy Markets:  The frigid weather enveloping much of the country has led to rolling electricity blackouts across Texas, which will likely disrupt at least some energy production in the coming week.  Coupled with the high demand for fuel to heat homes and power the ongoing economic recovery from the coronavirus pandemic, that’s pushing energy prices even higher.  So far this morning, WTI crude oil is trading at approximately $59.84.  Natural gas prices stand at approximately $3.07.

COVID-19:  Official data show confirmed cases have risen to 109,246,204 worldwide, with 2,410,455 deaths.  In the United States, confirmed cases rose to 27,695,365, with 486,334 deaths.  Vaccine doses delivered in the U.S. now total 70,057,800, while the number of people who have received at least their first shot totals 38,292,270.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections totaled only about 52,000 yesterday, far less than the seven-day moving average of 90,416 and the 14-day moving average of 103,822.  Of course, the figure may reflect the impact of yesterday’s holiday, but even so, recent trends point to a stunningly rapid drop in new infections.  Hospitalizations related to the virus fell to 65,455, while new deaths came in at a two-and-a-half-month low of 985.
• Although U.S. vaccinations have ramped up in recent weeks, the winter storm stretching across the country is disrupting vaccine distribution and closed vaccination sites, especially in the hard-hit South.
• Israel’s rapid vaccination program has now inoculated approximately 42% of the country’s population.  The success of the program to date suggests countries can benefit from simple steps like sending relatively smaller shipments to vaccination centers, setting up dedicated vaccination sites at large venues like stadiums, actively encouraging high-risk people to get the shot, and taking special care to encourage minorities to get vaccinated.
• Data from Israel show a 94% drop in symptomatic COVID-19 infections among 600,000 people who received two doses of the vaccine developed by Pfizer (PFE, 34.72) and BioNTech (BNTX, 117.56).  The news confirms that the vaccine’s high efficacy in clinical trials is likely to be replicated in real-life vaccination programs.
• Cypriot President Anastasiades announced Sunday that starting in April, Israeli citizens who have had coronavirus vaccination will be able to travel to Cyprus without being required to quarantine or take a test.  The announcement indicates the positive economic impacts that are likely in store as more countries roll out their massive inoculation programs.
• European Health Commissioner Kyriakides said any EU-approved coronavirus vaccine upgraded by the manufacturer based on the previous vaccine to combat new mutations would not have to go through the whole approval process again.  Rather, the EU will shorten the approval process for vaccines that are simply altered to better protect against new mutations, which should help speed the fight against those new mutations.
• The UK is considering rapid virus testing for the entertainment industry to allow mass gatherings to resume later this year in situations where social distancing is impractical or uneconomical.  Government officials confirmed that plans were being drawn up for rapid testing to roll out once most of the economy had reopened.
• Around the world, militaries are seeing upticks in enlistment as younger adults seek refuge from a pandemic that has curbed job opportunities, social life, and traditional education. Some younger adults are also lured by the fact that life in the military often brings healthcare perks such as free virus tests, treatment, and vaccines, while social distancing has made some facets of early military life less strenuous.

 U.S. Policy Response

• This week, President Biden will try to go over the heads of Congress and make his case directly to the people for his $1.9 trillion pandemic relief plan.  In his first official trip as president today, Biden will travel to Wisconsin for a town hall meeting.  On Thursday, he’ll be visiting a Pfizer plant in Michigan.  Since expectations for more fiscal stimulus have helped buoy risk markets so far this year, the markets could get an added boost if the trips seem to generate additional support for the plan.
• Despite the promise that vaccinations could soon bring the pandemic under control, government reluctance to lift restrictions on travel is sparking fears in the airline industry.

Economic and Market Impacts

• Loose monetary policy and ultralow bond yields continue to push investors into riskier debt, leading to record issuance of $139 billion in below-investment-grade obligations for the year through February 10.
  • In recent weeks, at least three companies have financed dividends to private shareholders by issuing PIK toggle notes—bonds that give the issuer flexibility to pay interest in additional bonds rather than cash. Such deals are hallmarks of hot credit markets, rising to prominence in the years leading up to the 2008-2009 financial crisis.
  • According to a new study by Refinitiv, more than 15% of all debt raised in the U.S. high-yield bond market this year has been sold by groups with ratings of CCC or below.  That’s the highest share for such debt since 2007.
  • Easy financing at low rates will probably help many firms weather the pandemic, even if it exposes many investors to more risk than they would normally want.
• At the same time, and despite the growing risk that China will face a wave of defaults, Chinese high-yield bonds are luring investors with their massive spread over U.S. rates.  As of Monday, yields on an ICE BofA index of Chinese offshore high-yield corporate bonds stood at 9.18%, a roughly 4.5-percentage-point premium over U.S. yields.  More broadly, the increasing lure of Chinese assets is boosting Chinese economic power.
• In Europe, one potentially positive result of the pandemic is that it seems to be forcing banks to slash payrolls, close expensive branches, and push customers toward online systems.  Cost-cutting has long been a key demand from investors.  If banks continue to streamline and become more efficient, it will likely make an even stronger case for European bank stocks.

 View PDF

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

[Posted: 9:30 AM EST] | PDF

We have a plethora of recent multimedia offerings.  First, our new chart book, which recaps the changes we made to our Asset Allocation portfolios, is available.  As we noted Wednesday, a new Confluence of Ideas podcast was posted. Being Friday, there is a new Asset Allocation Weekly, chart book, and podcast.  You can find all this research and more on our website.  Due to Monday being President’s Day, we will not be publishing a report.

Good morning!  Equity futures are slightly lower this morning.  Our coverage begins with European news, particularly regarding EU and Russia relations.  We then discuss the policy and economic news.  An update on China comes next, followed by pandemic coverage.  We conclude the report with a roundup of international items.

Russia and Europe divorce? Following the detainment of Putin foe and Kremlin critic Alexei Navalny, the West and Russia have been at loggerheads.  The arrest has been viewed by the West as anti-democratic, while Russia views the issue as an internal matter.  Tensions were on display following a contentious exchange during a joint news conference that included European Foreign Minister Josep Borell and Russian Foreign Minister Sergei Lavrov.  During the exchange, Borell was blindsided with questions about the EU human rights record and baited into condemning the U.S.’s embargo on Cuba.  Afterward, Borell’s abysmal performance at the press conference led to calls for his resignation.  Angered by Russia’s blatant attempt to embarrass one of its officials, Paris and Berlin have hardened their stance at imposing new sanctions.  Russia has responded to the sanction threat by warning the EU that any sanction that hurts the Russian economy will result in a severance of ties.

The rise in tensions between Russia and the EU will likely bode well for the U.S. but could be divisive within the bloc.  The U.S. has long chided EU countries for not doing enough to unwind themselves from Russia following its invasion of Crimea.  A particular bone of contention is the Nord Stream 2 pipeline, which the U.S. believes will expand Russia’s influence in Europe. Although we do not believe that the construction of this pipeline is in jeopardy, we suspect the EU could seek to form closer ties with the U.S.  There are countries within the EU that could hamper EU retaliation efforts.  Italy, which has forged a close relationship with Russia in recent years, will likely push back against anything that might put those ties in jeopardy.  Greece could possibly be another country to express reluctance.

Although the severance of ties would hurt the EU, the chances of it backfiring on Russia are very high.  The EU is the country’s largest importer, so Russia will likely hurt itself with that decision.  Given the economic struggles, which began before the pandemic, we don’t see breaking ties as a tenable solution.  It could possibly try to make up for the loss by forming a closer bond with China, but given the history between the two countries, it wouldn’t be an attractive alternative.  As a result, we wouldn’t be surprised to learn that the threat was likely an effort to further divide the EU.

European news:  A new Italian president, London losing business to rivals, and more.

• In the latest evidence of the blow dealt by Brexit to the U.K. financial center, trading in a key euro-denominated derivatives market flooded out of London last month, rivaling financial centers in New York, Amsterdam, and Paris.
• As the result of an overwhelming parliamentary majority, Mario Draghi will become Italy’s prime minister. Supporters of the Five-Star Movement voted in favor of joining his forthcoming national unity government.
• Under new legislation agreed to on Friday by Chancellor Angela Merkel’s government, companies will have to ensure their partners don’t engage in harmful practices and exploitation. In addition to penalties, German firms can also be excluded from public contracts.
• Russian Foreign Minister Sergei Lavrov warned that his country is ready for a break in ties with the European Union if the bloc imposes sanctions that damage Russia’s economy.

Policy and Economics:  More action against China and progress with the stimulus package.

• President Biden warned that China is making advancements in transportation that give it an advantage over the U.S.  He urged Congress to invest in more infrastructure.
• America’s federal debt is expected to exceed the size of the entire U.S. economy this year for only the second time since the end of World War II.  The nonpartisan Congressional Budget Office said Thursday that this reflects the extraordinary emergency measures approved by Congress in response to the coronavirus pandemic.
• The Biden administration is treading lightly with governors who are relaxing coronavirus restrictions — even as top federal health officials urge the public to keep wearing masks and social distancing to limit the spread of highly contagious virus variants.
• The Biden administration has said it is reviewing former President Trump’s proposed ban of Chinese messaging app WeChat in the U.S., a day after announcing a similar pause to consider the fate of video app TikTok.
• Yesterday, the House Ways and Means Committee advanced a key portion of the Democrats’ coronavirus relief package that includes stimulus payments of up to $1,400 per person and an expansion of the child tax credit.
• Federal prosecutors are investigating whether market manipulation or other types of criminal misconduct fueled the rapid rise last month in prices of stocks such as GameStop Corp. (GME, $51.10) and AMC Entertainment Holdings Inc. (AMC, $5.61), according to people familiar with the matter.
• President Biden plans to sign an executive order to address the shortage of semiconductors, or chips, an issue that industry has begged him to take action on recently.
• The Biden administration on Friday rolled out its plans for addressing tens of thousands of migrants camped out at the southern border, as it seeks to replace the Trump administration’s “remain in Mexico” policy.
• Agriculture land values rose 6% last year, the biggest gain since 2012, across the Seventh Federal Reserve District, a five-state region including all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.  Bankers say more gains are expected this quarter, according to the Chicago Fed’s latest AgLetter.
• U.S. home prices, fueled by the lowest mortgage rates in history, rose at the fastest pace on record, surpassing the peak from the last property boom in 2005.
• The Federal Reserve Bank of San Francisco leader Mary Daly said the U.S. central bank is unlikely to pull back on its bond-buying stimulus this year and that another round of government aid shouldn’t overheat the economy.

 China: China bans the BBC, the U.S. is maintaining contact with Taiwan, and China and India ease tensions.

• Chinese authorities banned BBC World News on Thursday, accusing the British broadcaster of not being “factual and fair,” according to a government statement.
• Taiwan’s top envoy to the U.S., Hsiao Bi-khim, has met U.S. acting Assistant Secretary Sung Kim at the State Department, signaling that high-level official contact between Taiwanese and American officials has not stopped despite the change of government in the United States and a stern warning from Beijing.
• China and India have been pulling back frontline troops along disputed portions of their mountain border where they have been in a standoff for months, officials in both countries said.

 COVID-19:  The number of reported cases is 107,648,109 with 2,363,449 fatalities.  In the U.S., there are 27,366,838 confirmed cases with 474,554 deaths.  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 CDC reports that 68,285,575 doses of the vaccine have been distributed with 46,390,270 doses injected.  The number receiving a first dose is 34,723,964, while the number of second doses, which would grant the highest level of immunity, is 11,188,782.  The Axios map shows marked declines in infection rates.

Virology

 The Biden administration on Thursday purchased another 200 million doses of the two coronavirus vaccines authorized for emergency use in the United States.

• Anthony Fauci, President Biden’s chief medical adviser for COVID-19, said Thursday that most members of the general public could become eligible to receive the coronavirus vaccine as soon as April.
• Officials in Michigan have confirmed the presence of a highly contagious coronavirus variant in one of its state prisons, the first such case documented in an American correctional facility, and a potential harbinger of even wider dispersion of the virus in prisons, public health officials said.
• Facing a shortage of coronavirus vaccine doses, Los Angeles will temporarily close five of its inoculation sites, including one of the country’s largest at Dodger Stadium, raising new questions about the federal government’s handling of supplies and distribution.
• A new study shows blood-thinning drugs reduced the risk of death from COVID-19, pointing to one more promising tool as physicians scour their medicine cabinets for treatments to blunt the pandemic.
• U. S. hospitalizations for the coronavirus plunged about 16% so far in February, dropping to the lowest since mid-November, data from the Department of Health and Human Services show.
• Japan’s health ministry panel is expected to approve the use of Pfizer’s COVID-19 vaccine on Friday, public broadcaster NHK reported, citing an unidentified person.
• New data from the U.S. Centers for Disease Control and Prevention shows allergic reactions to COVID-19 vaccines are rare, and anaphylaxis, one type of severe reaction, occurs in two to five people for every million vaccinated in the U.S.
• Countries with cases of the COVID-19 variant that was first identified in South Africa are receiving conflicting advice about whether to roll out the Oxford/AstraZeneca vaccine, a sign of the complex challenge facing public health officials.

 International news:  More developments in Myanmar and Benjamin Netanyahu appeals to Israeli Arabs and other news.

• Despite an uptick in inflation, Mexico’s central bank board unanimously cut rates by a quarter point to 4% amid weak demand and a tough economic outlook, after pausing at both of its last two meetings.
• Myanmar’s military government is detaining election commission officials in night-time raids and asking them to provide evidence that November’s election was rigged, according to a senior member of the organization and a human rights watchdog.
  • Yesterday, Myanmar’s new junta leader called on civil servants to return to work and urged people to stop mass gatherings to avoid spreading the coronavirus as a sixth day of protests against him and his coup rocked the country.
• After years of alienating Israel’s Arab voters, Prime Minister Netanyahu is now courting them, hoping they hold the key to staying in power.
• Alexei Navalny, the leading opposition figure whose jailing this month sparked protests across Russia, has been back in court to face charges of slandering a war veteran in a separate case.
• Australia’s Parliament will debate making Google and Facebook pay for news, after a Senate committee on Friday recommended no changes to drafts of the world’s first such laws.

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

[Posted: 9:30 AM EST] | PDF

Good morning!  Equity futures are higher again this morning.  Our coverage begins with policy, where we look at Chair Powell’s comments and the controversy over the size of the stimulus.  China news comes next; President Biden and General Secretary Xi had their first phone call yesterday.  The usual pandemic update follows.  EU news is up next. We have some comments on bitcoin, and we close with a roundup of international news.

We have a plethora of recent multimedia offerings.  First, our new chart book, which recaps the changes we made to our Asset Allocation portfolios, is available.  Being Thursday, the Weekly Energy Update was published today.  As we noted yesterday, a new Confluence of Ideas podcast was posted.  And, the current Asset Allocation Weekly is also available (updated every Friday).  You can find all this research and more on our website.

Policy and Economics:  The Fed and fiscal policy are the focus today.

• The primary reason equities are so strong is due to high levels of liquidity; low inflation is the other supporting factor. Thus, there are two threats to equities.  The first is that inflation will rise.  Although January CPI, released yesterday, indicated that price levels are mostly steady, as we noted recently, base effects will lead to higher inflation in Q2.  These increases should be temporary, and the market effect will likely be modest because this rise has been well telegraphed.  But, if the increases last into Q3, concerns about mounting inflation could become a problem.  The second issue is the withdrawal of stimulus.  If the Fed begins to reduce QE or signal rising interest rates, we expect a major negative market reaction.  Chair Powell, in a speech to the Economic Club of NY, indicated that no changes in policy are being contemplated now or in the near future.  Financial markets took the news well.
  • On a side note, President Biden has an empty position on the Board of Governors. President Trump nominated Judy Shelton, but her nomination stalled in the Senate, and the White House withdrew her from consideration last week.  Biden is reportedly considering Lisa Cook.  She is an economist at Michigan State and was an economist on the Council of Economic Advisors during the Obama administration.  We would rate her a “5” dove.
  • In addition, Governors Quarles and Clarida, vice chairs for Supervision and the Fed, see their terms as vice chairs end in 2022. (Quarles’s term as governor ends in 2032, but Clarida’s term will expire next year).  It is possible that Biden could fill the open vice chair positions with Governors Brainard or Cook if he proceeds with the latter’s nomination.  The bottom line is that the board is getting increasingly dovish.
• One of the ramifications of the pandemic has been a drop in economic migration. Several nations, in order to slow the spread of the virus from abroad, closed their borders, and air travel became more difficult, which played a role as well.  There are growing concerns that the drop in migration will lead to slower global growth.
• There is currently a debate among economists regarding whether or not the current stimulus plan debated in Congress is too large. Larry Summers has represented those suggesting it’s too big.  Others have argued that given the uncertainty, it is better to run the risk of overdoing it rather than repeat the experience of the Great Financial Crisis when the stimulus was too small.
  • Our take is that a good case can be made that the stimulus was too small in 2008-09 but not for the reasons often expressed. It wasn’t too small because of the damage to the economy but because households were deleveraging.
  • There are essentially two paths to resolve excessive private sector debt. The first is to simply allow the markets to adjust.  This path usually leads to deep declines in asset values, sharp increases in unemployment, and a collapse in growth.  But, once asset values adjust, the economy has a good base to recover.  The second path is to move private sector debt to the public sector balance sheet and then use financial repression to gradually reduce the relative size of the government’s debt by reducing the return to the bondholders.
  • During the Great Depression, Hoover tried the first path. It was such an economic disaster that the process was completed with a private/public debt swap, which occurred as part of WWII.  Although the war was not caused by the need to address private sector deleveraging, the outcome was the same.  Through massive government spending and borrowing, private sector debt was shifted to the public balance sheet and then reduced over time through financial repression.
  • One fear of a stimulus that is too large is that households will use the funds to spend, overheating the economy. This could happen.  However, we continue to watch the situation with real estate.  Last week, we noted the high level of rent arrears and how stimulus checks could be going to reduce these arrears.  We note in recent articles that households are building mortgage balances due to forbearances granted resulting from the pandemic.  It is also possible that stimulus money will go to addressing the forbearance issue.  If so, the inflationary impact will be much less than feared.
  • We also note that recent surveys tend to confirm that the transfers were primarily used for debt reduction.
• One of the issues we are watching with great interest is the rapid rise in food commodity prices. Although developed economies tend to exclude food and energy prices from their policy inflation rates, for much of the world (and for less affluent households in the developed world) food prices are very important to political stability.  There are reports that the Philippines are facing higher food prices.  Usually, the first response by governments is to freeze prices, which President Duterte has implemented, which only leads to shortages.  High food prices played a role in the Arab Spring, and we fear another bout of global unrest is possible if our expectation for higher food prices develops.
• Salesforce (CRM, USD, 236.29) has announced that most of its employees will stop using a central office full time. Instead, workers will either work from home on a permanent basis or only use the office on a part time-basis.  The office space will be restructured mostly for meetings and collaboration.  The company projects that at least 65% of its workforce will use the office one to three days per week.
• The SEC is increasing its enforcement staff for new investigations.
• State governments are moving faster than the federal government to regulate tech.

China: The presidents have a conversation.

• Presidents Biden and Xi had their first phone call The readout suggests that Biden confronted Xi on several issues, including human rights, trade practices, and coercion of Taiwan and other nations in the region.  They did discuss areas of potential cooperation, such as climate change.  Overall, the Biden policy on China tends to agree with Trump’s position that China is a strategic competitor but differs over tactics.  However, what the new administration’s tactics will look like remains a work in progress.  For example, the administration has just formed a Pentagon task force on China, suggesting that Biden is still formulating the tactical response.
• A clue to watch is who the administration settles on for the role of the Commerce Department’s Bureau of Industry and Security. Currently, there are two candidates, Kevin Wolf and James Mulvenon.  Wolf is a trade lawyer who has helped companies seeking exemptions to technology restrictions, while Mulvenon is an expert on Chinese military and technology.  Nominating Wolf would suggest that Biden wants to work with China and will take a less stringent role on technology; Mulvenon’s nomination would signal just the opposite.
• In the U.S., tech firms are famous for the mantra of “move fast and break things,” which is another way of prompting disruption. Therefore, we have watched Elon Musk’s sourcing of Tesla (TSLA, USD, 848,60) into China.  Beijing’s policies are mostly about stability; the recent moves to rein in Chinese tech firms shows less tolerance for the U.S. tech mantra.  We note that Tesla is apparently running afoul of regulators on quality issues.  Although China lacks the American tort bar on such issues, it is quite possible the government may turn out to be more effective in slowing things down.
• Here is a postmortem on Phase I of the Chinese trade deal.
• The Trump administration policy toward Taiwan was very supportive; Taipei is watching with trepidation as the new administration settles in.
• As the U.S. tries to build an anti-China coalition, Beijing isn’t standing still. It is working to woo nations to align with it to thwart this effort.  Central and Eastern Europe have become a target for Chinese influence, which mostly comes from investment.  Meanwhile, Sweden is becoming Europe’s most strident opponent to China’s goals in the region.

COVID-19:  The number of reported cases is 107,435,033 with 2,357,210 fatalities.  In the U.S., there are 27,288,290 confirmed cases with 471,764 deaths.  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 CDC reports that 65,972,575 doses of the vaccine have been distributed with 44,769,970 doses injected.  The number receiving a first dose is 33,783,384, while the number of second doses, which would grant the highest level of immunity, is 10,469,514.  The Axios map shows marked declines in infection rates.

Virology

• The slow rollout of vaccines and the hesitancy of some citizens to be vaccinated suggests that herd immunity may not be achieved until Thanksgiving. The delays will likely allow for new variants to develop, which may render the current vaccines less effective.  Our take is that we will be moving from pandemic to endemic, meaning that COVID-19 will be with us for good, and we will adjust to it the same way we manage influenza.
  • The Iranian government, due to its anger at the West, has raised doubts about the vaccines from the U.S. and Europe. It has, instead, built a campaign around Sputnik V.  Unfortunately for the Mullahs, Iranians are skeptical of the Russian vaccine, meaning that vaccination rates are low.
• The WHO visit to China worked out well for Beijing. The group essentially sided with China’s narrative on the virus, downplaying the source as a virus lab and maintaining the idea that the virus may have entered China on imported frozen food.  There are concerns that the WHO is under regulatory capture by Beijing, and this recent trip will tend to support that thesis.
  • Although it looks like the WHO mostly placated Beijing, the team did start an investigation into 90 cases of what appear to be SARS infections that were reported in central China as early as October 2019. Unfortunately, there is no easy way to determine whether the infections reported in October were COVID-19.  Serological tests have shown no antibodies, but they would have dissipated over time.  Still, it is possible that COVID-19 has been around much longer than just last January.
• For Japan, one of the most effective tools in reducing virus transmissions has been orders to close restaurants by 8:00. Japan’s mask compliance is generally high, but the one place that mask-wearing is impossible is during meals.  By reducing dining out, the country has been able to curtail infections.
• Due to the slow vaccine rollout and uncertainty about the level of immunity the vaccine will offer, companies are realizing that remote work will likely be extended well into 2021.
• A combination of antibody drugs from Eli Lilly (LLY, USD, 203.54) has been approved for use. It will be given to patients who contract COVID-19 that are in high-risk categories.

European news:  Military posturing is the order of the day.

• In response to Russia’s continued militarization of the Arctic, the U.S. is deploying four B-1 bombers and 200 personnel to the Orland Air Base in Norway. The unit will begin missions in the region within the next three weeks.
• The U.S. Navy quietly sent the destroyer USS Porter, the guided-missile destroyer USS Donald Cook and the supply ship USNS Laramie into the Black Sea for exercises. The American Navy ships were joined by vessels from Turkey for joint exercises.  The exercises ended yesterday.  There were two takeaways from this event.  First, although exercises are not unusual, this one was insofar as the Russians weren’t notified in advance.  Second, Turkey has been on the outs with the U.S. since it purchased the S-400 from Russia.  This exercise may signal that Ankara is trying to improve relations with the new administration.

International news:  Iran, India, and the U.K. were all in the news.

• Iran has begun producing uranium metal, a clear violation of the JCPOA. The metal could be formed into a warhead…but, the metal produced was not highly enriched, meaning that Iran isn’t quite at the bomb-making level yet.  This is yet another provocative step taken by Tehran to move toward nuclear status.
• Twitter (TWTR, USD, 67.77) has blocked accounts tied to the farmer protests after the Modi government threatened to arrest company employees for not complying with government orders.
• The border problems that the U.K. hoped to avoid are proving more difficult than expected. Port staff in Northern Ireland will be allowed to return to work after a week off.  The staff was kept away from the office after unionists physically threatened the workers.  The Johnson administration wants a grace period into 2023 to manage the North Sea border.  The EU probably won’t be that generous.  The unionists fear that keeping Northern Ireland in the EU’s trade bloc but separate from the U.K. on a trade basis will increase the likelihood of Ireland’s unification.
• Last month, stock exchanges in Amsterdam became the largest stock exchanges in Europe, with higher volume than London.

Bitcoin:  The structure of bitcoin is unique.  Most transactions are either (a) totally anonymous but require face-to-face contact (e.g., cash transactions), or (b) require a central authority (middleman) to complete the transfer.  Bitcoin transactions are pseudo-anonymous, in that they can be seen by all but are in a code that only the wallet holder knows their identity, and the transaction doesn’t require a central authority.  Instead, “miners” crack puzzles to compete for the right to record the transaction on the distributed ledger and are paid for their efforts.  This process creates a situation where transactions can occur over distance without a bank or other financial intermediary involved.  There is a downside, however.  The mining is done through massive computational power that is so energy taxing that environmentalists are starting to warn that bitcoin is becoming an environmental hazard.  For example, bitcoin farming represents more energy consumption than the nation of Argentina.  For firms and investors with ESG concerns, it begs the question as to whether fostering bitcoin doesn’t violate the “E” of ESG.

• Despite the energy consumption issues, BNY Mellon (BK, USD, 41.74) announced it would begin providing custody services for holders of bitcoin.
• Mastercard (MA, USD, 334.21) is preparing to offer its network to facilitate cryptocurrency transactions.
• Looking for a good background podcast on cryptocurrencies? Here is one we recommend.

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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with several items reflecting rising geopolitical risks, mostly related to China and Russia.  There is further evidence of increased regulatory and political risk for the major U.S. technology firms, which could present them with increasing headwinds going forward.  As always, we wrap up with the latest pandemic news.  That news still points toward falling infections in the U.S. and should be positive for the markets today.

United States-China:  The commander of the U.S.S. Nimitz, Rear Admiral James Kirk, said Chinese military activity in the South China Sea was expanding steadily during the aircraft carrier’s recent ten-month deployment in the area, which had included a rare two-carrier exercise with the U.S.S. Theodore Roosevelt.  Kirk specifically cited a larger number of Chinese aircraft and navy ships utilized on a daily basis.  Although the statement doesn’t necessarily point to imminent Chinese military action, it does dovetail with our recent WGR highlighting the increasing strength of the Chinese military and its growing confidence in taking on the U.S. in the waters near Taiwan and off the coast of mainland China.

• Separately, the Trump administration’s plan to force the sale of Chinese social media firm TikTok’s U.S. operations to a group including Oracle Corp. (ORCL, 63.67) and Walmart (WMT, 145.83) has been shelved indefinitely.  President Biden will undertake a broad review of his predecessor’s efforts to address potential security risks from Chinese tech companies.
• Regarding China’s domestic financial markets, note that today was the last day of trading before the week-long Lunar New Year holiday.  After ringing in the Year of the Ox (hopefully, the Year of the Bull Market?), trading in China will resume next Thursday, February 18.

Australia-China:  Reports indicate that Chinese efforts to punish Australia for its call to investigate China’s role in starting the coronavirus pandemic could be backfiring.  One big problem is that China’s punitive embargo on importing Australian coal has left its own users scrambling for supplies and forced them to pay exorbitant prices.  If Chinese officials were to start fearing this kind of blowback, they could become more reluctant to throw China’s economic weight around, which could help ease tensions and ultimately be positive for Chinese assets.  However, it’s not yet clear that such blowback is sufficiently painful to prompt a change in China’s behavior.

United States-Russia:  Norwegian intelligence officials have warned that Russia is developing a range of exotic new nuclear weapons that wouldn’t be covered by existing U.S.-Russian arms control agreements, including a nuclear-powered, nuclear-tipped, underwater “mega-drone.”  Despite Russia’s demographic decline and worsening economic challenges, the news shows that the Kremlin is still intent on boosting its military might to preserve its leadership power and maintain Russian influence in geopolitics.

Russia:  The wife of opposition activist Alexei Navalny has reportedly left Russia for Germany.  It is not yet clear whether she escaped freely amid the Kremlin’s political crackdown on protests over Navalny’s imprisonment, or whether she was forced out of the country.  Meanwhile, close Navalny associate Leonid Volkov has been put on the country’s wanted list.  The moves illustrate the intensity with which the Kremlin is focusing on Navalny and his supporters, which will likely further strain relations between Russia and the major democracies and pose new challenges for Russian assets.

India:  In another sign of the rising regulatory and political risks for major technology companies, Twitter (TWTR, 59.87) has buckled to government pressure and started blocking more than 500 accounts related to growing protests against Prime Minister Modi’s agriculture reforms.  The company was criticized last after temporarily blocking several high-profile accounts amid a government clampdown on tweets about the demonstrations.  However, the company’s decision to reopen the accounts within hours put it on a collision course with the government, which threatened Twitter with fines or even the imprisonment of executives.

COVID-19:  Official data show confirmed cases have risen to 107,002,486 worldwide, with 2,343,477 deaths.  In the United States, confirmed cases rose to 27,193,849, with 468,217 deaths.  Vaccine doses delivered in the U.S. now total 62,898,775, while the number of people who have received at least their first shot totals 32,867,213.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose slightly to approximately 92,000 yesterday, but they remained far lower than just a month ago.  Meanwhile, hospitalizations related to the virus fell below 80,000, including about 16,000 in intensive care.  Both those figures were the lowest since mid-November.  New deaths totaled approximately 3,000.  Taken together, the figures suggest the mid-winter surge in infections is coming under control, although scientists warn that it’s still too early to sound the all-clear signal.
• The Biden administration said yesterday that it would increase the number of vaccine doses it sends each week to states, territories, and tribes to 11 million, up from 8.6 million weekly doses previously assigned.  The surge in shipments expected to last at least three weeks.
• Officials in the Biden administration say they are adjusting their pandemic public awareness campaign to emphasize the need for social distancing and mask-wearing.  Because of insufficient vaccine supplies to inoculate everyone who wants a shot, the campaign will also be adjusted to encourage vaccinations only for certain groups who are particularly reluctant.
• Meanwhile, the Chicago Teachers Union begrudgingly ratified an agreement to reopen elementary schools for in-person learning for the first time since the pandemic closed schools in March.  Union members voted 13,681 to 6,585 to approve the deal, averting a possible lockout and strike after months of increasingly bitter negotiations, in large part over teachers’ safety concerns about the virus.
• Amidst the bungled rollout of vaccines in Europe, which has led to painfully slow inoculation rates, EU Commission President Ursula von der Leyen admitted numerous mistakes in the program but stressed it was essential to continue following a collective approach in order to maintain EU unity.  In von der Leyen’s words, “I cannot even imagine what would have happened if a handful of big member states had rushed to it and everyone else would have been left empty-handed, what it would have meant for our internal market and the unity of Europe . . . In economic terms it would have been nonsense, and it would have been, I think, the end of our community.”
• One major problem for European vaccinations has been manufacturing hiccups, but new reporting suggests Chinese manufacturers are also having trouble ramping up output.  That has left China with relatively subpar vaccination rates, and it has delayed inoculations among those countries relying on Chinese vaccines.

 U.S. Policy Response

• In order to build support for his $1.9 trillion pandemic relief plan, President Biden yesterday met in the Oval Office with the chief executives of several major U.S. companies, including Jamie Dimon of JP Morgan (JPM, 139.58) and Doug McMillon of Walmart (WMT, 145.83).  Officials who attended said the discussion of Biden’s proposal was wide-ranging, serious, and detailed, but the corporate leaders didn’t offer any public endorsement of the plan.
• The Biden proposal would reportedly include major enhancements of the Affordable Care Act in order to help people who have lost their employer-provided health insurance due to the pandemic.  Under the proposal:
  • People making up to 150% of federal poverty would be eligible for fully subsidized plans.
  • No one — regardless of income — would pay more than 8.5% of their income for health insurance.
  • People receiving unemployment would get full subsidies for a year.

Economic and Market Impacts

• New analysis shows large U.S. banks saw their loan books shrink in 2020, the first time in more than a decade.  In fact, the 0.5% drop was just the second decline in 28 years.  The drop in lending came even as companies rushed to borrow against credit lines early in the pandemic.  Once the situation calmed down and bond yields fell, those firms rushed to issue their own debt and pay off their credit lines.  Meanwhile, smaller businesses borrowing under government support programs have seen more of those loans forgiven by the government.  And finally, many individuals receiving rich government support payments have used them to pay down debt.
• Propane prices have climbed more than 70% since late November, thanks to an explosion in patio heating amid pandemic-related restrictions on indoor restaurant dining, as well as an uptick in exports to Asia.  On top of that, an arctic gust expected to deliver some of the coldest temperatures in decades to the Great Plains and upper Midwest this coming week could push prices for the rural heating fuel even higher.

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