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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with news of a concerning computer hack on a public utility in Florida.  We discuss more evidence that the Biden administration is focused on building international alliances against Chinese geopolitical aggression, along with more signs of increased regulatory risks that could be negative for technology stocks going forward.  As always, we review various other international developments and the latest coronavirus news.

Today, the newest episode from our Confluence of Ideas podcast series is available.  In this episode, titled “The 2021 Geopolitical Outlook,” Bill O’Grady and Patrick Fearon-Hernandez examine the five areas of concern discussed in our written report published in mid-December by the same name.  These issues are the return of the establishment, the anti-China alliance project, the Middle East, North Korea, and the return of inflation. In addition, we talk about the factors that failed to make the cut, such as Russia, the pandemic, and climate change.

United States:  Authorities say a computer hacker got into the systems of a water treatment plant in Florida and briefly increased the amount of lye used to treat water to a dangerous level.  A plant operator noticed the alteration Friday and immediately reversed it, avoiding adverse effects on the city’s water supply, but the breach highlights the exposure of utilities to cyberattacks.

United States-India:  President Biden had his first telephone call as president with Indian Prime Minister Modi yesterday, and the official White House readout of the conversation indicates that Biden highlighted strengthening of the “Quad” alliance to improve Indo-Pacific security against Chinese aggression.  As we noted in our geopolitical outlook, we think one of the key geopolitical developments this year will be the U.S. effort to revitalize alliances like the Quad (the U.S., Japan, Australia, and India) or build new alliances to counter Chinese aggression in the area.

European Union:  Members of the European Parliament working on drafts of the Digital Services Act (DSA) and the Digital Markets Act (DMA) told the Financial Times the laws could be amended as they pass through parliament to require big technology firms to pay for the news they share digitally, just as Australia is currently considering.  According to Alex Saliba, a Maltese lawmaker who led parliament’s first report on the DSA, “With their dominant market position in search, social media and advertising, large digital platforms create power imbalances and benefit significantly from news content.  I think it is only fair that they pay back a fair amount.”  The move represents another in the growing list of global regulatory threats the technology industry is facing.

European Union-Russia:  The governments of Germany, Poland, and Sweden said they would each expel one Russian diplomat in retaliation for Russia’s removal of three European diplomats last week for purportedly attending protests in support of jailed opposition figure Alexei Navalny.  The Russian action was actually a shot across the EU’s bow as it considers new sanctions against Russia for its treatment of Navalny.  As we noted yesterday, Russia’s snub of the EU reflects how little the Kremlin fears the bloc as a political force.

France-China:  French Defense Minister Parly said the French nuclear attack submarine Émeraude and the support ship Seine sailed through the South China Sea on a freedom of navigation operation.  The action, aimed at demonstrating allied resolve against China’s effort to assert exclusive sovereignty in the Indo-Pacific region, will likely further growing tensions between Beijing and the leading democracies.

United Kingdom-China:  The British government warned U.K. citizens in Hong Kong that the territory has stopped recognizing dual nationality and may no longer be able to provide consular services to those who also hold a local passport.  The shift in this Hong Kong practice is in line with other efforts to bring the territory closer to the rest of China.  Not only will the move further exacerbate U.K.-China relations, but it could also further undermine global goodwill toward China and leave it more politically isolated.  In fact, growing anger over Chinese authoritarianism in the leading democracies has even sparked talk of a boycott against the 2022 Winter Olympic Games in Beijing.

China:  New data show births plunged by 15% last year to just 10.04 million.  The figures suggest the coronavirus pandemic, greater urbanization, and the country’s historic one-child policy will continue to present major demographic headwinds for China in the coming decades.  In any case, China’s huge population of 1.4 billion will still be a major geopolitical advantage.  However, the U.S. is likely to retain some advantage from its faster population growth rate, which reflects both a natural population increase and immigration.

COVID-19:  Official data show confirmed cases have risen to 106,567,454 worldwide, with 2,327,726 deaths.  In the United States, confirmed cases rose to 27,098,367, with 465,083 deaths.  Vaccine doses distributed in the U.S. now total 59,307,800, while the number of people who have received at least their first shot totals 32,340,146.  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 fell to only about 86,000 yesterday, marking their second day in a row under 100,000.  The number of virus-related hospitalizations declined to 80,055, including just 16,174 in intensive care.  Meanwhile, new deaths came in at approximately 1,400.  Taken together, the figures are now about where they were in late November, before the holiday surge.  Meanwhile, vaccinations in the U.S. continue to accelerate, with ten states now having given at least an initial shot to 10% or more of their population.
• The office of Representative Ron Wright, a Republican from Texas, announced that he died from COVID-19 on Sunday, making him the first U.S. congressman to succumb to the disease.  Wright had also been undergoing treatment for cancer for the last several years.
• The World Health Organization team visiting China to investigate the origins of the pandemic said the most likely possibility was that the virus spilled over from an animal into humans, either directly or through an intermediary.  According to the researchers, it was “extremely unlikely” that the virus escaped from a lab experiment.  All the same, the team also said it was possible the virus could have been transmitted via frozen food, a theory heavily promoted by the Chinese government to deflect criticism for its initial stumbles during the crisis.
• Following news that the vaccine developed by AstraZeneca (AZN, 50.06) may have only limited efficacy against new virus mutations, officials at the World Health Organization argued the shot is still an important weapon against COVID-19.  WHO officials, including Dr. Kathleen O’Brien, director of the WHO’s immunization program, suggested the body would still list the vaccine—seen as a cornerstone in the world’s fight against the pandemic thanks to its low cost, high-volume target, and easy storage—for emergency use later this week.
• In Iran, the government has kicked off its vaccination campaign against COVID-19 using the Russian-developed Sputnik V vaccine.

 U.S. Policy Response

• House Democrats last night released the biggest piece of their coronavirus relief bill, offering a measure that would extend unemployment insurance payments to$400 per week through Aug. 29 and send $1,400 per-person payments to most households, without lowering the income thresholds from earlier rounds.  The proposal should be voted in the House Ways and Means Committee this week.
  • In one way, the payments per person have actually been expanded, as this time they will be available for both children and adult dependents (like college students).
  • On the other hand, the per-person payments will phase out more quickly.  The full amounts would go to individuals with incomes up to $75,000 and married couples with incomes up to $150,000.  They would completely phase out at incomes above $100,000 for individuals and $200,000 for married couples.
• In an interview with the Financial Times on the impact of loose monetary policy in the U.S., Richmond FRB President Tom Barkin said he expected “short-term price volatility” but stressed that he saw deflationary as well as inflationary risks on the horizon.  Barkin said he was keeping his focus on medium-term inflation expectations, saying, “I still think there are a lot of people out of work who need a bridge to the other side, and I am supportive of what we can do to help them.”

Economic and Market Impacts

• According to Indeed.com, the number of help-wanted ads posted on the job-search website at the end of January was up 0.7% from one year earlier.  The year-over-year increase adds to evidence that the labor market is continuing to heal from the pandemic.  Hiring could accelerate soon from its mid-winter slowdown, which would naturally be positive for stocks.
• Coupled with optimism over the rollout of vaccines and a likelihood of global economic recovery this year, the prospect for continued loose monetary policy and increased fiscal stimulus should auger well for commodity prices.  Some analysts are even predicting a long period of commodity-intensive growth that marks a repeat of the “supercycle” of the 2000s.
• Finally, analysts expect a strong snapback in the British property market this year, reflecting not only low interest rates and a post-pandemic economic revival but also the removal of uncertainty now that Brexit is complete and there is a U.K.-EU trade deal in place.

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

[Posted: 9:30 AM EST] | PDF

Good morning, and Happy Monday!  Congrats to Tampa Bay.  U.S. equity futures continue to tick higher.  Our coverage this morning starts with economic and policy news.  Updates on Europe come next, followed by an overview of international news—we touch on India, Iran, Cuba, and Myanmar.  China news follows; our pandemic coverage comes next.  We close with a technology update.  The current Asset Allocation Weekly is also available.

Policy and Economics:  Here are some of the highlights.

• One potential threat to the rally in equities would be a rise in inflation. Although we expect inflation to rise in Q2 on base effects alone (the yearly change will look large because Q2 2020 inflation plunged resulting from pandemic shutdowns), a sustained acceleration of price levels would send long-term interest rates higher and contract market multiples.  Because of this threat, we are paying close attention not only to stimulus measures but the path of liquidity injections.
  • As part of the pandemic response, the federal government, along with state and local governments, implemented eviction and foreclosure moratoria. Although the action has prevented a mass increase in homelessness, the impact on payment streams has not been resolved.  Landlords face payment delays that could move further up the payment chain, leading to a default on mortgage bonds.  Once moratoria are lifted, evictions could start, but that won’t necessarily help landlords; it may be difficult to find new tenants without reductions in rent.  In addition, foreclosure may lead to falling home prices.  One solution would be to socialize the problem—send money to renters and mortgagees who use the payments to make their rent or mortgages, securing the payment chain.  If the funds are used for this purpose, the inflation impact would be negligible.
  • Since the Great Financial Crisis, households have been deleveraging, although the pace has slowed in recent years. The injection of stimulus funds could find their way to accelerate the deleveraging process if recipients use the money to reduce their debt load.  The WSJ reports that there is some evidence this is occurring.
  • Treasury Secretary Yellen argued that if the full stimulus bill passes, the U.S. could be back at full employment by 2022. Perhaps, but if the stimulus is saved or used to reduce debt levels, the economic impact will be muted, and the immediate impact on inflation will be weak.  At the same time, if household deleveraging is the result, it will create conditions for a sustained recovery in future years.
• Another path for liquidity could be the financial markets. The recent “flows vs. pros” event could reflect that trend.  One area that has been highlighted is the “cost” of commission-free trading.  As the adage goes, if something is free, the user is likely the product.  Commission-free trading usually has two characteristics.  First, there is payment for order flow.  Your commission-free broker pays a wholesale trading firm to execute your retail trade inside the exchange’s bid/ask spread.  How can they do this?  The retail flows tend to be random, while the exchange market maker must accommodate institutional flows, which are not.  Thus, the exchange bid/ask is wider than what would be required for retail, allowing a wholesale trading firm to execute the order inside the official bid/ask spread.  When your commission-free broker advertises that they gave you “price improvement,” they are referring to the price inside the exchange’s bid/ask.  The retail broker and the client share in the price improvement, which is revenue to the former.  Second, the retail firms get information about you, like all “free” tech firms offer, which they can use or sell.  Our take is that we won’t see market manipulation charges with the GameStop (GME, USD, 63.77) situation; however, increased scrutiny on (a) payment for flow and (b) what the retail brokers do with your information may occur.
  • Further evidence of excess liquidity going to financial markets is that dogecoin, a cryptocurrency created on a lark that has no apparent purpose, has jumped in value recently.
  • This morning, Tesla (TSLA, USD, 852.23) announced it will buy $1.5 billion of bitcoin and may accept it for payment for its vehicles. The cryptocurrency jumped on the news.
• Although tax revenues to state and local governments didn’t fall as much as feared, the pandemic has lifted spending, putting pressure on these governments.
• The U.S. has lifted its objection to Ngozi Okonjo-Iweala’s appointment to Director General of the WTO.
• As immigration restrictions are relaxed, immigrant flows on the southern border are increasing.

European news:  Trouble with Russia and Draghi is making progress in forming a government in Italy.

• EU foreign policy director Josep Borrell got a frosty reception on a visit to Moscow on Friday. At a press conference, Russian Foreign Minister Lavrov called the EU an “unreliable partner” and accused European leaders of lying over Alexei Navalny’s poisoning.  The press conference was something of a disaster; the Russians managed to trip Borrell into criticizing U.S. policy toward Cuba.
  • The public dressing down suggests a number of insights. First, the Navalny issue is apparently a very sensitive one for the Kremlin.  The official stance of President Putin is to treat Navalny as a non-entity.  Clearly, talk of EU sanctions for Navalny’s arrest is part of this unexpected reaction.  Second, Russia is viewing the EU as an insignificant threat.  The fact that the Nord Stream 2 pipeline continues to move forward and the EU is willing to make an investment deal with China suggests that human rights issues grab headlines but don’t affect policy.  Thus, the public humiliation of Borrell was seen as an acceptable risk.  Third, Russia has correctly assessed that the EU isn’t a military threat and believes the bloc is easy to divide over issues.  In addition, although the Biden government is looking to return American foreign policy to its previous hegemonic position, Moscow is assuming that this is a short-term reversal of the dominant trend.  We would tend to agree with that assessment.
  • Russia expelled three EU diplomats over the Navalny criticism.
• Mario Draghi has received conditional backing of Italy’s two largest political parties, which improves the odds he can form a government.
• Some corporate borrowers in Europe are able to receive a more negative interest rate on their paper than those set by the ECB.
• The U.K. is considering a special tax on tech companies who have prospered during the pandemic. It reminds us of President Carter’s “windfall tax” on oil companies during his term.
• And finally, in France, it is no longer illegal to eat your lunch at your desk.

International news:  Iran, Cuba, Myanmar, and India were all in the news.

• Iran has indicated it won’t return to its nuclear commitments until the U.S. lifts sanctions. The U.S. has indicated it won’t lift sanctions to facilitate talks with Tehran.  So, for now, we are at an impasse.
• Cuba announced it would lift its ban on private businesses. This is a cycle in Cuba.  When the economy stumbles, the leadership allows free enterprise, and when conditions improve, crackdowns on private business follow.  The decision to lift the current ban suggests the economy is struggling.
• In the wake of the recent coup in Myanmar, widespread protests The new regime has responded with an old playbook—arrests and beatings.
• A glacier in India burst causing a massive flash flood and destroying two dam projects. So far, 125 people are missing.

China:  Relations between Washington and Beijing remain strained.

• In his first phone call with China’s Yang Jiechi, SoS Blinken leveled the Chinese diplomat, indicating the U.S. intends to hold Beijing “accountable for its abuses.” Last week, Yang laid the blame for deteriorating U.S./China relations at the feet of Washington.  Blinken’s call appears to be the American response.  Although there are concerns that the Biden administration will be “soft on China,” the concern over human rights will not be popular with the Xi regime.
  • Secretary of Commerce designate Gina Raimondo’s confirmation has been put on hold over fears she won’t maintain restrictions on technology exports to China. We expect her appointment to be confirmed, but the appointment for the Bureau of Industry and Security, which is part of Commerce, is key.  That is the body that regulates dual-use technologies and will be an important element in China policy.  Kevin Wolf is the designate for this position.
• Relations between China and Australia remain strained. Beijing arrested Cheng Lei, an Australian journalist, on spying charges.  Australian farmers warn they could face massive losses due to China tensions; however, as we saw with the U.S., over time, export patterns do adjust.
• It isn’t just the U.S. that is using antitrust law to corral tech firms; China is too.

COVID-19:  The number of reported cases is 106,228,670 with 2,318,696 fatalities.  In the U.S., there are 27,008,565 confirmed cases with 463,482 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 59,307,800 doses of the vaccine have been distributed with 41,210,937 of those doses injected.  The number receiving the first dose is 31,579,100, while the number of second doses, which would grant the highest level of immunity, is 9,147,185.

Virology

• There is good news on the pandemic in the U.S. Cases and hospitalizations are falling rapidly, suggesting the surge tied to the holidays is starting to wane.
• The U.K. variant is spreading rapidly in the U.S., which could lead to another rise in cases in the coming weeks.
• AstraZeneca (AZN, USD, 49.73) has paused its vaccine rollout in South Africa after its version shows less protection against the South African variant. The Novavax (NVAX, USD, 290.18) vaccine doesn’t do well against the South African variant either.
• Hungary will begin distributing China’s Sinopharm (SHTDY, USD, 11.95) vaccine this month; the EU has not approved the vaccine but allows individual nations to override the EU’s authority. Meanwhile, China has approved the Sinovac (SVA, USD, 6.47) vaccine.
• In the U.S., there is growing anger over well-connected people “skipping the line” for vaccination. Some cases are clear, but we note that because states are in charge of distribution, some states have prioritized teachers, for example, while others have not. This has led some local governments to run afoul of their state governments by administering the vaccines to teachers.  Another issue is that if the vaccines are thawed but projected recipients skip their appointments, distributors either must destroy the vaccine or offer it “first come, first serve” and the end of a session.  That method of distribution can lead to charges of favoritism.
• AMLO is under pressure regarding his handling of the pandemic.
• There is great hope that vaccines will allow the world to return to “normal,” but the reality is that COVID-19 is more likely to become endemic. Although the current level of lockdowns will likely pass, the fact that the virus continues to mutate likely means that vaccines will need regular boosters and that some measures of protection will become the new “normal.”  That is good news for HVAC firms, as improved ventilation will likely become a priority, but bad news for airlines.

Technology:  The auto industry is facing periodic shutdowns due to semiconductor chip shortages.  In a reversal of “just-in-time” inventory models automakers are starting to stockpile chips, which, in the short run, will increase demand and cause further shortages to develop.

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

[Posted: 9:30 AM EST] | PDF

Good morning.  U.S. equity futures are higher this morning, the yield curve has steepened, and oil prices have risen as optimism grows over another round of fiscal stimulus.  We begin our discussion with possible student loan forgiveness and an update in Biden’s inaugural address to the State Department.  We will review policy and economic news, including the Treasury Department investigation into the GameStop (GME, $53.50) rally.  We then discuss international news, specifically why Rihanna and Greta Thunberg have gone viral.  Our coverage of the pandemic is next, and we close with China news.  Being Friday, we have our new Asset Allocation Weekly, podcast, and chart book available on our website.

Student loan forgiveness: On Thursday, Senate Majority Leader Chuck Schumer (D-NY) pressured President Biden to use an executive order to forgive up to $50,000 in student loan debts for each borrower.  Congressional Democrats have also added pressure through a proposed non-binding resolution urging Biden to take this approach.  Although we suspect any executive order to forgive student loans will likely be challenged in court, the actions aren’t as straightforward as most people would assume.  The reasons are as follows:

• There is a moral hazard problem. Over the last thirty years, college tuition has outpaced CPI by a wide margin.  Increases in tuition prices haven’t always been used to improve the quality of education as schools have instead invested heavily in living standards on their campuses.  As a result, schools have offered better food and lodging, while simultaneously relying more on part-time faculty to teach classes.  In addition, there also seems to be a pricing issue as students pay the same tuition regardless of majors, despite some fields being more expensive to teach.  Hence, if student debt is truly in crisis, it makes sense to treat the sickness before the actual symptoms.  By not doing so there is a risk that this action could likely make this problem much worse.

• There is a tax liability problem. The way the tax system is set up is that forgiveness of debt is generally treated as a write-off by the creditor and as additional income to the debtor.  Hence, student loan forgiveness would likely result in a huge tax bill if Congress doesn’t pass legislation.  Biden would still need congressional approval at some point in order to avoid burdening the people that this executive order is designed to help.
• Finally, an executive order is limited in its overall scope. The government can only forgive loans that it owes; therefore, only federal student loans and not individual loans to the private student can be forgiven.  The problem will still leave a lot of people in debt.

Our thought on student loan forgiveness is that although it may not be a good policy, it is generally positive for equities and real estate.  It is estimated that over 36 million people will be free of federal student loan debt with this order, freeing up more money to be used to invest in equities and to support home prices.

 America is back?  In his inaugural address to the State Department, President Biden announced his desire for the U.S. to take a larger role in the world.  During the speech, he announced he would reverse several policies from the previous administration, including a drawdown of troops in Germany and an end to the support of offensive operations in Yemen, including arms sales. He emphasized that his administration would not seek to do it alone and would focus more on establishing diplomacy abroad.

The immediate market impact from the speech will be limited; the changes outlined in his address were well anticipated.  As we noted in our WGR The 2021 Geopolitical Outlook, Biden is going to try to implement an establishment foreign policy, a reversal of the past two administrations.  However, the world cannot “unsee” the changes wrought by the last two administrations.  This is especially true in the rapidly evolving situation with China.  As we have documented recently, tensions over Taiwan have increased.  The Trump administration took steps to enhance the visibility of relations with Taipei, angering the Xi regime.  There are other issues as well.  The desire to work with allies in Asia to build containment will face two difficulties.  First, the countries in question have to wonder about the durability of America’s commitment to the policy.  Second, the countries themselves are loath to choose.  After all, aligning with the U.S. may have negative effects on trade and commerce conducted with China.  Of course, China is an actor in all of this too, and is prone to “own goals.”  For example, its continued aggression toward India in the Himalayas is driving New Delhi into the arms of an American alliance.  The capriciousness of China’s behavior is leading some countries to reconsider their supply chains in China.  As we noted yesterday, Japan is increasing subsidies for firms considering moving from China.  At the same time, the EU (read: Germany) is trying to tighten economic relations.

This is an area of geopolitical concern.  Although we don’t think the odds of a kinetic event with China are high, they are clearly not zero.  Anytime carrier groups are targeted, the chances of a mistake are elevated.  It should be noted that the goal of American foreign policy toward China isn’t changing; the goal is to isolate and contain China’s rise.  The tactics between the Trump and Biden administrations are the only difference.  The former was more interested in a unilateral policy, the latter multilateral.  In practice, it’s easier to implement a unilateral policy, but if it works, a multilateral policy, as evidenced by the Cold War, is probably more effective.  We have doubts that the American people are willing to accept the policies that would make multilateralism work, e.g., persistent trade deficits and allowing other nations to “free-ride” American security.  So, for now, we continue to closely monitor the situation.

Policy and Economics:  Here are some of the highlights.

• The Senate approved a budget bill early Friday that paves the way for passage of President Biden’s $1.9 trillion coronavirus relief package, with Vice President Harris casting the tiebreaking vote on the measure that will be key to enacting Biden’s first major legislative initiative. The House, which approved its own budget bill on Wednesday, must now act on the Senate’s version, expected to be done within a day.
  • The final passage of a relief package bill is anticipated in mid-March.
• The Senate overwhelmingly approved a proposal from Senators Joe Manchin (D-WV) and Susan Collins (R-ME) that would bar high-income households from receiving another round of stimulus checks. The budget amendment does not offer much detail about what it classifies as high-income, but there has been a push to begin phasing out stimulus for those making around $50,000 for individuals and $100,000 for couples.  This bill is notable not only because it comes on the heels of President Biden agreeing to stricter eligibility requirements, but it also signals that Senator Manchin, the key Democrat holdout, may support additional stimulus.
• Treasury Secretary Janet Yellen met with fellow regulators on Thursday to discuss recent market volatility and a few wild weeks on Wall Street, during which a crush of retail investors sent stocks soaring — in GameStop’s case, more than 1,700 percent — and then plunging back to earth.
• Senator Mitt Romney (R-Utah) on Thursday proposed providing at least $3,000 per child to millions of American families, lending bipartisan support to President Biden’s push to expand child benefits dramatically.
• A global semiconductor shortage is expected to impact vehicle output for automakers in the first quarter of this year.  The computer-chip crunch has hit the auto industry hard.  Ford (F, $11.37) has announced that it expects its output to drop by 20%.
  • German carmakers are considering building up semiconductor stockpiles to prevent a crisis from happening again in the future.
• Former head of the U.S. Cybersecurity and Infrastructure Security Agency Chris Krebs told the Financial Times that the country needed to be more aggressive in going after hackers who use ransomware. He suggests publishing the hackers’ public information online, a tactic known as doxing, to deter these criminal activities.

International roundup:

• The man best placed to be the next German chancellor told Reuters that Germany should not drop support for the planned Nord Stream 2 pipeline from Russia because of the crackdown on Kremlin critic Alexei Navalny as “feel-good moralizing” is not foreign policy.
• Spain and the United Kingdom have reached a “preliminary agreement” to avoid the British Overseas Territory from becoming a hard border of the European Union.  The border that separates Gibraltar from La Línea de la Concepción, which is known in Spanish as La Verja (“The Fence”), will cease to exist in six months.
• Hong Kong has unveiled controversial guidelines for schools in the Chinese-ruled city that include teaching students as young as six about foreign interference and subversion as part of a new national security curriculum.
• German factory orders fell for the first time in eight months after the spread of the coronavirus forced the euro area’s biggest economy, and many of its trading partners, into lockdowns.
• Yoo Myung-hee, the South Korean candidate to lead the World Trade Organization (WTO), has dropped out of the race, effectively opening the door for Nigeria’s Ngozi Okonjo-Iweala to become its first African leader.
• India’s crackdown on dissent of its new laws targeting farmers have trended on social media, with singer Rihanna and activist Greta Thunberg speaking out.

COVID-19:  The number of reported cases is 104,816,294 with 2,281,024 fatalities.  In the U.S., there are 26,663,251 confirmed cases with 455,259 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 57,489,675 doses of the vaccine have been distributed with 35,203,710 injected.  The number receiving a first dose is 27,905,197, while the number of second doses, which would grant the highest level of immunity, is 6,926,050.  The Axios map shows declining infections across the country.

Virology

• Russian developers are in talks with China’s CanSino Biologics Inc. (CASBF,$38.70) to test a vaccine that could potentially protect against new virus strains.
• Johnson & Johnson (JNJ, $161.99) is seeking an emergency use authorization for its vaccine with the Food and Drug Administration (FDA).
  • The vaccine has a 66% efficacy rate and only requires one shot.
• The FDA is drawing up new rules to speed the approval process for vaccines targeting variants.
• Daily cases of COVID-19 are currently falling across most of the world, and deaths — which had been climbing globally until late January — are also beginning to decrease.
• Bloomberg has created a model estimating the time it will take for the world to reach herd immunity. According to its calculations, assuming vaccinations maintain their current pace, it will take 7.4 years.
• In the most extensive real-world test so far, Israel has demonstrated that a robust, rapid coronavirus vaccination program can have a quick and powerful impact. Among people who were vaccinated, cases of COVID-19 and hospitalizations have dropped significantly within just a few weeks, according to new studies in Israel.
• Britain has launched a 13-month study to determine whether mixing vaccine doses, in this case, Pfizer-BioNTech and AstraZeneca, still protect people from infection.
  • Britons returning from coronavirus hot spots abroad will have to quarantine in hotels starting February 15, the BBC
• Younger Black adults are far more hesitant to get the vaccine than their elders, according to the new survey of 1,340 respondents released by the National Foundation for Infectious Diseases.
• The International Federation of Red Cross and Red Crescent Societies announced a $110 million plan to help distribute vaccines, after warning of the “potentially devastating” consequences if poorer countries lagged behind their richer counterparts in inoculations.
• The New York Times found that at least 24 states and Washington, D.C., are providing shots to some teachers of kindergarten through high school. Some of those states, however, consider teachers eligible for the vaccine only in certain counties.

China:  Tensions between China and the West are heating up.

• China said it “firmly opposes” a decision by the U.K.’s media regulator to revoke a state-run television channel’s license to broadcast, accusing the British government of “blatant double standards and political oppression” amid rising tensions between the two countries.  The decision by watchdog Ofcom to pull CGTN off the air builds on a growing list of spats between the two nations, including a newly announced path to U.K. citizenship for Hong Kong residents in the wake of controversial national security legislation imposed on the city by China.
• China is again warning its students studying in Australia, telling them to be aware of a “serious threat” to their safety.  It also noted that international travel still poses great risks amid the coronavirus pandemic, urging overseas students to “conduct proper safety risk assessments, and be cautious in choosing to go to or return to Australia for their studies.”
• A U.S. warship sailed near the Chinese-controlled Paracel Islands in the disputed South China Sea on Friday in a freedom of navigation operation, the U.S. Navy said, the first such mission under President Biden’s new administration.
• Australian farmers have warned that the country’s trade dispute with China and supply chain disruption linked to the coronavirus pandemic will cost the industry $28 billion over the next decade.
• Guyana abruptly terminated an agreement with Taiwan to open an office in the South American country on Thursday after China urged them to “correct their mistake.”

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

[Posted: 9:30 AM EST] | PDF

Good morning.  U.S. equity futures are modestly higher this morning.  We begin our coverage with a look at tomorrow’s non-farm payroll report and why it could be a rather deceptive blowout.  The next stop is international news, including a discussion of Italy’s new PM.  We follow with policy and economic news.  Our coverage of the pandemic is next, and we close with China news.  Being Thursday, we publish a new Weekly Energy Update.  And the current Asset Allocation Weekly is also available.

About tomorrow:  Normally in January, retailers lay off large numbers of seasonal workers who were hired for the Christmas rush.  Other industries, due to winter weather, also lay off workers.  These layoffs are easy to see in the non-seasonally adjusted data.

The largest decline each year is in January; a smaller one occurs in July as schools lay off some teachers and automakers engage in model retooling.  Since 2001, the average decline in non-farm payrolls for January is 2.874 million jobs; retailers account for about 22%, and goods-producing jobs represent about 16%.  Since the layoffs are regular, the BLS uses seasonal adjustments to smooth out the data.  The seasonally adjusted data is reported.  The average January seasonally adjusted non-farm payroll data since 2001 is more than 91,000, so obviously, the seasonal adjustment factor is sizeable.

Retailers didn’t increase their November hiring as much as in the past.  Compared to the average since 2001, hiring was about 73,000 less in 2020.  In addition, it is possible that some of the seasonal hirings were in delivery and other forms of e-commerce, which may not have the same layoff patterns.  The bottom line is that we could get a bullish surprise tomorrow; this was reflected in yesterday’s ADP data, which came in stronger than expected.  Current expectations are calling for a greater than 100,000 non-farm payroll increase.  We would take the “over” on that one.  Although the stronger data will be welcome, it may not be as robust as it first appears.

International roundup:  A new Italian prime minister?

• Although new governments in Italy are not at all unusual, we were surprised to see the former ECB head, Mario Draghi, tapped to form a new government. Draghi is credited for saving the Eurozone.  His aggressive actions to bolster banks over the opposition from Germany likely prevented several countries from exiting the Eurozone.  Thus, he has the credentials of a crisis manager.  Italy is facing a myriad of problems.  It was hit hard by the pandemic, and its economy has been moribund for years.  Forming a government will be a challenge.  Italy has seen a radical and technocratic government in recent years.  The key will likely be finding a balance.  We note that Italian financial markets greeted the announcement favorably.
• We are seeing the dollar rally from its lows last year. Although we remain dollar bears, the lift in the greenback appears to be coming from three sources:
  • The stumbling Eurozone economy is putting downward pressure on the EUR. This bearish pressure will likely persist until vaccine distribution improves.  In addition, the ECB has made it known it isn’t pleased with its currency’s appreciation, making traders less sure about holding bullish positions.  Because the EUR is a “major” currency, its weakness is notable.
  • Several central banks are quietly extending their policy stimulus in the face of currency strength. The BOE today signaled that banks should prepare for the possibility of a negative policy rate.  The Reserve Bank of Australia extended its QE program, which has included yield curve control.  Several other emerging economy central banks, including Chile, Poland, India, and Israel, have signaled they intend to buy dollars this year.  Some of this buying is to bolster foreign reserves, but we suspect it is also designed to prevent the dollar from weakening, undermining their export competitiveness.
  • The Biden administration returned to the Rubin “strong dollar” policy.
• We don’t expect these trends to dominate over time. However, it does highlight a clear “race to the bottom” on exchange rates.  No nation appears to be happy about a stronger currency, which is usually favorable to currency debasement positions, e.g., gold, bitcoin.
• The U.S. has approved a five-year extension to the New Start ballistic missile treaty. SoS Blinken criticized China and Russia and is considering new sanctions against North Korea.
• Indian farmer unrest continues unabated. The Modi government is extending its crackdown by blocking the internet and attacking journalists.

Policy and Economics:  Here are some of the highlights.

• The Democratic Party leadership and the president are moving towards using budget reconciliation to push its $1.9 trillion of fiscal stimulus. This would allow the measure to pass with a party-line vote.  However, they must tread carefully because the reconciliation law has automatic debt triggers that could lead to unintended Medicare cuts.  Avoiding these cuts would require GOP support.  Thus, the path to “going it alone” is fraught with risk.  At the same time, there are discussions about restricting the $1,400 stimulus checks to lower-income households, which may expand support.  Meanwhile, the $15 minimum wage looks like it will have a hard time making it through Congress.
• We are watching Europe’s views on the Biden administration’s trade policy. So far, Brussels looks unimpressed, with a Dutch paper calling Biden “a Trump with manners” regarding trade.  Why the disappointment?  The ‘buy American’ policy has Europeans worried about their ability to sell to the U.S. government.  The new government rescinded the Trump administration’s decision to remove a 10% tariff on aluminum imports from the UAE.  Biden hasn’t moved on approving a new WTO leader; the previous administration was the only government in the WTO to reject Ngozi Okonjo-Iweala for the post.  There were expectations that Biden would quickly reverse course, but, so far, her acceptance is only “under consideration.”  What is happening here is simply that the media tends to focus on personalities rather than trends.  Personalities are far more interesting and meet the needs of the media, which is readership.  In reality, all leaders work under constraints and can usually only make changes within those constraints.  Thus, radical changes in policy are fairly infrequent.  The trend in U.S. trade policy is to regionalize consistencies with the evolving equality cycle we are moving toward.  Thus, the differences in trade policy won’t be all that significant.
• Klobuchar (D-MN) has introduced an antitrust bill focused on “…materially lessening competition.” What is new is that since the mid-1980s, harm to consumers has been the standard for antitrust.  This bill appears to change the standard to size.  Firms, especially in technology, have studiously avoided giving the appearance of harming consumers; mostly, they have gained margin through labor suppression.  Stopping mergers on size alone would be a return to pre-1985 policy.  Will this get through?  The establishment of both parties will oppose it, but it will be interesting to watch if the GOP Senate populists, Rubio/Cruz/Cotton/Hawley (RCCP), support it.
• Last year, Congress passed the Corporate Transparency Act, a bill designed to make it harder to launder funds in the U.S. financial system. One part of the bill requires “shell” corporations to let law enforcement know who is purchasing real estate.  The bill doesn’t go into effect until next January, but already, the real estate industry is scrambling to adjust.
• A Fed study of small businesses shows they are still operating below pre-pandemic levels.
• Semiconductor chip shortages are causing automobile production cuts.

COVID-19:  The number of reported cases is 104,499,482 with 2,270,990 fatalities.  In the U.S., there are 26,558,715 confirmed cases with 450,826 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 55,943,800 doses of the vaccine have been distributed with 33,878,254 injected.  The number receiving a first dose is 27,154,956, while the number of second doses, which would grant the highest level of immunity, is 6,436,931.  The Axios map shows declining infections across the country.

Virology

• The WHO is investigating the Wuhan virology lab, which has been the subject of claims that a leak from this lab let COVID-19 loose on the world. The fact China is letting the team in would suggest that Beijing feels comfortable that nothing will be found.  Frontline has done a show on China’s behavior surrounding the virus; we haven’t looked at it, but it is available here.
• One of the developing features of COVID-19 is that it is causing health irregularities in some patients, even those with asymptomatic cases. Given how new the disease is, it is not clear whether these symptoms persist or weaken over time.
• For the first time, the number of vaccines distributed exceeded the total number of confirmed cases, indicating that the distribution is starting to ramp up.
  • The government is beginning to ship vaccine supplies directly to pharmacies, which should aid in distribution.
  • The Russian vaccine was found to be almost 92% effective; it does require two doses but can be stored at refrigeration temperatures.
  • One unknown about the vaccines is if they induce sterilizing immunity, which means that a vaccinated person can no longer contract the disease. If it doesn’t, the immunity it gives means that one doesn’t get sick but can be an asymptomatic carrier.  A study of the AstraZeneca (AZN, USD, 50.00) suggests it may give sterilizing immunity.
  • High levels of hesitancy remain among Americans regarding getting the vaccine, which will slow progress in managing the virus.
  • Denmark is issuing a coronavirus passport; we will be watching to see if this becomes a trend. If it does, it should help open up travel.
  • Vaccine makers are starting to work on changes to address the new strains emerging. In addition, research on using different vaccines for boosters is beginning.
• Britain is reporting new variations of the B.1.1.7 mutation. There is some speculation that a person may have been infected with both the British and South African or Brazilian variants, and the virus is recombining.  The fear is that this new “supercharged” variant may undermine the current vaccines.  This variant carries the E484K mutation.
  • Despite these fears, data from Israel suggest that the Pfizer (PFE, USD, 34.84) vaccine is working well to protect recipients. It is not clear whether this immunity is being tested by new variants.
  • Meanwhile, the EU has had a very difficult time with its vaccine program.
• Low reimbursement rates are leading some doctors to stop testing for COVID-19.

China:  Relations between Washington and Beijing remain strained.

• Yang Jiechi gave a policy address to the National Committee on U.S./China Relations. There is no evidence in the talk that China intends to change its behavior.  The blame for tensions, according to Yang, is solely due to American behavior.  Yang is a high-ranking diplomat, and his speech would be a signal of China’s policy stance.  Meanwhile, the Biden administration appears to be taking its time to engage the Chinese leadership.
• When the USS Theodore Roosevelt entered the South China Sea near Taiwan last week, the PLA Air Force simulated an air attack on the carrier group. Both sides are engaging in the threatening activity.  Some of this could be China testing the new U.S. administration.
  • A recent survey conducted by the Chicago Council on Global Affairs and the University of Texas at Austin showed two interesting trends. First, the GOP members and its leadership favor a much more aggressive policy against China compared to Democrats, both leadership and members.  Second, the leadership of both parties tends to favor defending Taiwan, but the American public universally opposes that policy.
• As China prepares for a loss of access to U.S. semiconductors and equipment, Chinese firms are said to be stockpiling chips and chip-making equipment.
• Turkey has welcomed Chinese Uighurs in the past; the Uighurs are ethnic Turkmen. However, the Erdogan government is working to improve relations with China, and as part of this goal, Turkey is starting to arrest Uighurs in Turkey on allegations of terrorist acts in China and extraditing them.
  • The Intercept has a new report on the degree of surveillance Beijing deploys in Xinjiang.
  • As horrific reports about the treatment of Uighurs continue to circulate, we are seeing a movement is starting to boycott the 2022 Winter Olympics, which are to be held in China.
• Although Western governments are clearly displeased with the coup on Myanmar, their leverage is limited due to the regime’s close ties to China. One key project is a large oil and gas pipeline project that will terminate at Kyaukpyu.  When completed, the project would allow Beijing to avoid the Straits of Malacca to import oil and natural gas.
• Chinese hackers also used the SolarWinds (SWI, USD, 16.33) bug to spy on the U.S. government’s payroll agency.
• China has been dealing with a serious air pollution problem for some time, a side effect of rapid and mass industrialization. Although there are government agencies tasked with addressing the problem, they have been sidelined historically due to a higher goal of development.  However, we are beginning to see signs that the Xi government is getting more serious about tackling environmental issues.
• The U.K. will still accept the British National Overseas passport, despite Beijing’s decision to no longer recognize the document.
• Ant Financial appears to be acquiescing to the Xi government’s demand that it be regulated as a financial institution, something that its founder, Jack Ma, tried to avoid. The regulator that took on Ma, Guo Shuqing, is seeing his status rise.
• Japan is increasing government incentives for Japanese firms to move production out of China.

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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 a quick update on the Reddit-related trading frenzy, but it then pivots to key European news, including former ECB chief Mario Draghi’s agreement to try to form a new government in Italy.  That development has boosted Italian stocks and bonds so far this morning, though there is no assurance that Draghi will be successful.  Finally, we end with the latest coronavirus news.

Reddit Craze:  Last night, Treasury Secretary Yellen called a meeting of top financial regulators to discuss recent volatility in financial markets related to GameStop (GME, 90.00) and other financial products.  The meeting, which could take place as early as Thursday, would include officials from the Securities and Exchange Commission, the Federal Reserve, the New York Fed, and the Commodity Futures Trading Commission.  Meanwhile, shares in GameStop, AMC Entertainment, and other heavily promoted favorites on Reddit are flat or up so far today after getting crushed Tuesday. Silver, another “WallStreetBets” favorite, is up slightly.

European Union:  Headline consumer inflation in January jumped far more than expected to 0.9% year-over-year from -0.3% in December.  Stripping out the volatile food and energy components, the January Core CPI was up 1.4% from the same month one year ago, versus an annual gain of 0.2% at the end of last year.  The surge in inflation was the largest in over a decade, but it appears to have stemmed in large part from one-off factors, such as a regular update to the product weightings in the index and the end of a tax holiday in Germany last month.  As in the U.S., most observers in Europe expect that resurgent inflation in the coming months will prove temporary and shouldn’t force the major central banks to tighten monetary policy just yet.  The following chart shows the key measures of Eurozone inflation since just before the previous recession.

 

Italy:  Following the collapse of Prime Minister Conte’s government last week, President Mattarella today asked former ECB chief Draghi to try to form a new government that can lead the country out of the coronavirus crisis.  Because of Draghi’s strong reputation, at least among many mainstream investors, his appointment will probably be taken well by the markets.  Indeed, Italian stocks and bonds are rallying this morning.  However, it’s not clear whether Draghi would take the job or that he could actually garner a majority in parliament, especially since he has no history in parliamentary politics.  One bad sign:  Hours after the president’s office confirmed today’s meeting with Draghi, the acting leader of the populist Five Star Movement, a former anti-euro party that is the largest in the current parliament, announced that he would not back a purely technocratic government led by the former ECB president.

Russia:  Opposition activist Alexey Navalny was sentenced to three-and-a-half years in prison yesterday, in an apparent attempt by the Putin government to silence him.  Police have also cracked down hard on demonstrators protesting in his defense in recent weekends.  We still expect President Putin to weather the crisis, although Russia could be in for a period of political instability, renewed international condemnation, and potentially new international sanctions.

Iran:  The Defense Ministry yesterday launched a new solid-fuel rocket with updated technology that could be used to improve the country’s intercontinental ballistic missiles and make its budding nuclear weapons’ capability more potent.  The missile launch was probably aimed toward improving Iran’s bargaining position ahead of the Biden administration’s effort to lure it back into the 2015 nuclear deal.

COVID-19:  Official data show confirmed cases have risen to 103,982,364 worldwide, with 2,255,754 deaths.  In the United States, confirmed cases rose to 26,436,867, with 446,910 deaths.  Vaccine doses distributed in the U.S. now total 52,657,675, while the number of people who have received at least their first shot totals 26,440,836.  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 fell to approximately 110,000 yesterday, far below the seven-day moving average of 146,019 and the 14-day moving average of 158,364.  Hospitalizations related to the virus fell to just 92,880, reaching their lowest level since November 28.  However, new deaths spiked to 3,300.
• The World Health Organization team admitted into China to investigate the origins of the pandemic has finally visited the Wuhan Institute of Virology. In the early days of the pandemic, the institute was at the center of theories that the virus escaped from one of its labs.
• New research indicates that people aged 20 to 49 were responsible for most coronavirus transmissions in the U.S. last year, even though it was mostly older people who died.
• In a study of 20,000 people in the U.K. previously infected with the virus, antibodies for COVID-19 persisted in the vast majority for at least six months.  The findings indicate those infected are unlikely to be re-infected for at least half a year.
• Officials in the U.K. say initial data show its fast-track effort at mass vaccinations may already have a positive impact on the pandemic.
• Researchers at Oxford University said a single dose of the vaccine developed by Oxford and AstraZeneca (AZN, 50.06) was 76% effective from three to 12 weeks after injection.  The research lends support to the British government’s decision to space out the first and second doses of the vaccine by up to three months in order to start the vaccination process quickly with as many people as possible.
• The U.K.’s GlaxoSmithKline (GSK, 37.59) and Germany’s CureVac (CVAC, 98.70) announced they will jointly develop a new generation of vaccines to tackle emerging variants of the virus that have shown some resistance to the existing ones.  The two companies agreed to a €150 million deal to jointly develop a product using mRNA technology that would work on multiple variants of the coronavirus; it could be ready for use in 2022, subject to approval.
• One trend that could impede mass vaccinations is that anti-vaccine activists are beginning to teaming up with anti-mask leaders in a push for “health freedom.”
• In Japan, the upper house of parliament passed a series of legislative measures that will introduce fines for people and businesses that do not comply with restrictions imposed to prevent the spread of the virus.

 U.S. Policy Response

• In a virtual meeting with Senate Democrats yesterday, President Biden and Treasury Secretary Yellen urged the lawmakers to press ahead with the administration’s proposed $1.9 trillion pandemic relief plan rather than a smaller plan like the $618 billion one suggested by Republicans.  Despite Biden’s professed desire to pass a bipartisan plan, he urged the Senators to pass the larger package even if it required using the “reconciliation” process without Republican support.  Of course, it’s not entirely clear whether that is just a negotiating tactic or a way to keep the left-wing of the Democratic Party on board with the process.  It would not be surprising if the Democrats ultimately accept some compromises to garner at least some Republican votes or keep conservative Democrats from opposing the bill.  One element of Biden’s proposal that could be jettisoned is his idea of raising the minimum wage to $15 per hour, which many lawmakers oppose because it could cut jobs.

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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 key trade and international news, including an important sign of where the Biden administration will go with the protectionist trade policies it inherited from the Trump administration.  Eurozone economic activity held up better than anticipated late last year, although fourth quarter GDP still posted a decline.  We wrap up with the latest coronavirus developments.  The good news is that new U.S. infections and hospitalizations continue to moderate.  The less positive news is that virus mutations continue to be a concern.

Reddit Craze:  Rep. Maxine Waters, chairwoman of the House Financial Services Committee, announced her panel will hold hearings on February 18 regarding the short squeeze of GameStop (GME, 225.00) and the related volatile trading.  Meanwhile, both GameStop and silver prices are down sharply so far this morning as the Reddit-fueled market craze, at least temporarily, unwinds.

United States-United Arab Emirates:  In an important signal that the Biden administration will likely maintain many of the Trump administration’s protectionist policies, President Biden yesterday reversed a last-minute decision by former President Trump to lift aluminum tariffs on the UAE.  The exemption would have gone into effect on February 3, but Biden blocked it on grounds that “the available evidence indicates that imports from the UAE may still displace domestic production, and thereby threaten to impair our national security.”

Eurozone:  After stripping out price changes and seasonal impacts, the bloc’s fourth quarter GDP declined just 0.7%, erasing only a small part of its 12.4% rebound in the third quarter.  The renewed decline largely reflected lockdowns associated with the recent coronavirus resurgence in Europe, but the downturn wasn’t nearly as bad as anticipated.  Compared with the fourth quarter of 2019, Eurozone GDP was down just 6.8%, helping to buoy equity markets in Europe and the U.S. so far this morning.  The chart below shows the Eurozone’s quarterly change in GDP (blue columns) and its year-over-year growth (red line).

China-United States:  In the first speech by a Chinese official to a U.S. audience since President Biden took office, Chinese Foreign Minister Yang blamed Donald Trump for the dismal state of U.S.-China ties and warned Biden not to meddle in Beijing’s affairs.  In the speech to the National Committee on U.S.-China Relations, Yang argued, “The U.S. should stop interference in the affairs of Hong Kong, Tibet, and Xinjiang, which all matter to China’s sovereignty and territorial integrity.”  The pushback suggests that Biden’s tougher-than-expected rhetoric on China so far has struck a chord with Chinese officials and will likely serve to keep U.S.-Chinese tensions high.  We note that the Chinese pushback has also been seen in a recent incident in which Chinese warplanes conducted a simulated attack on a U.S. aircraft carrier southwest of Taiwan.  To help explain how the tensions could evolve, our latest WGRs continue to examine the U.S.-China balance of power from a military and economic perspective.

Russia:  At a hearing yesterday, Russian prosecutors asked a Moscow court to sentence opposition leader Alexei Navalny to three and a half years in prison in a case widely seen as an attempt to neutralize President Putin’s most prominent critic.  Although Navalny is far from a popular figure in Russia, his detention on trumped-up charges and his exposure of government corruption has struck a nerve among Russian citizens who are tired of the lack of justice that many perceive under Putin.  We still suspect Putin will survive the crisis, but some instability has been introduced into the system, including the possibility of additional U.S. sanctions.  That could be a headwind for Russian stocks in the near term.

Iran:  The Defense Ministry yesterday launched a new solid-fuel rocket with updated technology that could be used to improve the country’s intercontinental ballistic missiles and make its budding nuclear weapons’ capability more potent.  The missile launch was probably aimed at improving Iran’s bargaining position ahead of the Biden administration’s effort to lure it back into the 2015 nuclear deal.

COVID-19:  Official data show confirmed cases have risen to 103,514,983 worldwide, with 2,241,062 deaths.  In the United States, confirmed cases rose to 26,322,368, with 443,613 deaths.  Vaccine doses distributed in the U.S. now total 49,936,450, while the number of people who have received at least their first shot totals 26,023,153.  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 130,000 yesterday, significantly lower than both the seven-day moving average of about 148,000 and the 14-day moving average of about 159,000.  The figures point to a clear downtrend in new infections since the beginning of the year.  Meanwhile, hospitalizations related to the virus have fallen to approximately 93,500.  New deaths totaled only about 1,800.
• The Biden administration said it reached a $230 million deal with Australian diagnostics company Ellume USA LLC to produce at-home, over-the-counter COVID-19 tests.  The FDA previously authorized the test and two others that can also be processed entirely at home, but Ellume’s is the only one that doesn’t require a prescription.  None are widely available at this point.
• Public Health England said in a technical paper that the more infectious B.1.1.7 variant now dominating coronavirus infections in the U.K. is developing further mutations that could make existing vaccines less effective.  Importantly, researchers have detected almost a dozen U.K. cases of B.1.1.7 acquiring a mutation called E484K, which is present in the variants fueling the COVID-19 surges in South Africa and Brazil.
• According to the CDC, about 78% of nursing-home residents and 38% of staffers received at least one shot at the 11,460 nursing homes that had vaccination clinics last month.  While the number of residents inoculated was encouraging, the lagging figures for staffers suggest many are still resistant to getting vaccinated.
• A peer-reviewed study in The Lancet has confirmed that Russia’s flagship two-shot vaccine, Sputnik V, has 91.6% efficacy against symptomatic COVID-19 patients in clinical trials.  That makes Sputnik V the world’s third vaccine with an efficacy rate above 90%.
• Israel is starting to provide small amounts of vaccine doses to the Palestinian Authority based on the fear that surging infections among Palestinians could spread to the Israeli population.

 Economic and Political Impacts

• Late yesterday afternoon, the Congressional Budget Office issued updated economic forecasts showing U.S. economic output will regain its pre-pandemic peak by mid-2021 thanks to the massive stimulus packages already put into place.  However, the CBO also said economic activity would remain below its potential—or maximum sustainable output—until 2025, suggesting the burst of activity expected this year could be followed by a long, slow recovery.

 U.S. Policy Response

• President Biden yesterday met with a group of 10 mostly moderate Republicans, led by Sen. Susan Collins of Maine, to begin negotiations over his proposal for a new pandemic relief bill.  After the meeting, Collins described the meeting as “very productive, cordial,” but all indications are that Biden is sticking to his call for a $1.9 trillion package instead of the $618 billion plan offered by the Republicans.

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

[Posted: 9:30 AM EST] | PDF

Good morning and welcome back from the weekend.  Lots going on, but first, equity futures have turned higher, and the Northeast is getting some snow.  Our coverage leads off with the coup in Myanmar.  Russian protests follow.  The continuing saga of pros vs. flows continues this morning, with a look at potential systemic risk.  Pandemic coverage is next, with a focus on the EU’s travails on vaccine distribution, followed by policy news.  We close with China news.  The current Asset Allocation Weekly is available.

Myanmar:  Last November, Aung San Suu Kyi’s National League for Democracy won a landslide victory.  Yesterday, the military decided they’d had enough of civilian rule and removed her government from power.  The generals claimed fraudulent elections occurred last November for deciding to take control.  The usual tactics were deployed—communications were cut off, and airports were closed.  The military gave up control to civilians in 2015; it now claims it will return the government to the civilians in a year.  The U.S. and EU have protested against the coup; however, China has made deep inroads into Myanmar over the years, and, so far, Beijing seems ok with proceedings.  Suu Kyi has called for protests.

Myanmar is a frontier market, meaning that its impact on emerging market indices will be modest at best.  However, it is an important nation in South Asia and the coup will likely improve China’s foothold in the region.  China has made investments in Myanmar and could use the country for the transit of goods in the event of a naval blockade.  We don’t expect an immediate market effect from this event, but it is one that merits watching.

Russia:  Although we don’t expect Putin to face significant risk from Alexei Navalny, he is facing widespread unrest.  Russia had another wave of protests over the weekend.  A notable trend is that, unlike earlier protests that were mostly urban, this one is occurring around the country.  Security forces are retaliating aggressively.  Thousands have been detained, and curfews are being implemented.  What is driving the continued protests in the dead of winter?  Anger over corruption appears to be the underlying issue.  The massive palace on the Black Sea has struck a nerve with Russians.  Although Putin has denied ownership, that is generally not believed.  We expect Putin to bring the civil disorder under control, but its continued existence does indicate the level of distress in Russia.

Pros vs. flows:  The saga of GameStop (GME, USD, 325.00) continues.  The latest controversy is over Robinhood’s decision to restrict the trading of some of the Reddit raiders’ favorite stocks.  Although there is grumbling that the firm is trying to prevent traders from generating short squeezes, the reality is more pedestrian—clearing firms are lifting safety margins on volatile stocks, thus the firm is forced to restrict trading to maintain risk buffers.

Market manipulation rules require some degree of misrepresentation to impose a penalty.  A group merely discussing whether to buy or sell a stock doesn’t, by itself, designate illegal activity.  There are differing opinions on whether or not the activity on Reddit constitutes illegal market manipulation.  The SEC is expected to investigate the recent activity.  But, for now, we doubt that there will be widespread action taken by regulators.

After reflecting on this issue over the weekend, there are two items we view as important.  First is the issue of the “wisdom of crowds.”  The advent of decision markets has highlighted the insights of large groups of people.  We use decision markets for tracking elections and generally find that they give us better signals than we get from polling.  However, any reading of history will also indicate that crowds can go mad.  There is no obvious trigger point where a crowd goes from insightful to unhinged, although there is an element of the Judge Potter Stewart opinion to the current situation.  Second, we are closely watching to see if the “flows” lead to something systemic.  Our first whiff may have occurred on Friday.

One item that caught our attention late last week was Friday’s “sell everything” trend.  To be sure, it wasn’t as pronounced as the one we saw in March 2020, but it bears watching.  As a reminder, this is what markets looked like last year.

Last year from late February into March, we saw the S&P tumble, the VIX rise, and Treasury yields rise, too.  That is abnormal; long-dated Treasuries usually act as a hedge for financial risk, but as the pandemic raged, a separate financial crisis emerged that was leading some participants to sell “everything” to acquire liquidity.  That crisis ended when the Fed essentially backstopped most of the financial system.  To reiterate, this sort of pressure comes from excessive leverage, which is a side effect of ZIRP.

On Friday, we saw the VIX rise, equities decline, and long-duration Treasury yields rise.  One day could simply be an anomaly, but the market action does suggest that “somebody” out in the financial system is scrambling to secure liquidity.  The activity we saw on Friday wasn’t severe. However, if it continues, it may indicate rising stress, perhaps tied to the issues of the “pros vs. flows” situation.  So far today, we are not seeing a repeat of Friday, but we continue to watch closely.  If another March 2020 emerges, the key will be whether Congress and the Treasury quickly give the Fed the powers to backstop markets that it took away earlier this year.

Finally, silver continues to be one of the markets in focus; prices moved above $30 per ounce for a period overnight.

COVID-19:  The number of reported cases is 103,036,685 with 2,229,601 fatalities.  In the U.S., there are 26,188,167 confirmed cases with 441,331 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 the total number of doses distributed is 49,933,250 and the total administered is 31,123,299, while the number of second doses, which would grant the highest level of immunity, is 5,657,142.  The pace of infections, hospitalizations, and fatalities is falling as the country finally gets the post-holiday surge under control.

Virology

• The EU has had a tough time acquiring the vaccine and distributing it. The latest fiasco has to do with Ireland.  Because Brexit leaves Northern Ireland within the EU’s trading bloc, the mandarins in Brussels are worried that vaccines sent to Ireland could find their way into Northern Ireland and the U.K.  In response, the EU restricted vaccine flows to Ireland.  As one would expect, Dublin was not pleased.  After a few days of criticism, the EU backed down.  Although this situation was resolved, the fact that the EU behaved this way is raising fears that Brussels is looking for ways to punish the U.K. for Brexit.  The event will raise worries that relations will continue to deteriorate.
  • France has ordered its borders closed to non-EU travelers.
  • Civil unrest against lockdown orders has spread to Belgium.
  • The EU has approved the AstraZeneca (AZN, USD, 50.60) vaccine for all adults. Earlier, it appeared that some EU states would not allow it to be injected into anyone older than 64.
  • Macron praised the U.S. “Warp Speed” program.
• Two trends are converging that could mean the pandemic’s effects will linger. The first is the mutation of the virus.  Coronaviruses mutate regularly.  Often, they mutate to a less virulent form; after all, the goal of the virus is survival, so killing the host is not optimal.  However, no plan or judgment is occurring with a piece of genetic material.  The most recent variations appear to be spreading faster and could be more deadly, which could extend the return to normal.  Second, vaccine nationalism is exacerbating the first trend.  The natural action of politicians is to service their voters.  After all, foreigners don’t get a leader elected.  But, trying to get vaccines into the developed economies before distributing them to the emerging world means that new variants have a chance to develop.  The convergence of these two trends probably means that the virus will be with us for longer than we expect.
• As the vaccine distribution in the U.S. ramps up, look for more participation from local pharmacies.
• One of the raging debates during the pandemic has been the best way to address it. One position held is that broad lockdowns and social distancing should be deployed to protect the population.  The other position is that the virus should be allowed to circulate to bring about herd immunity.  The debate has been difficult.  The former position was criticized as not being realistic and too costly economically.  The latter position was criticized as being immoral because it seemed to condone high fatalities.  The latest data from India, which mostly followed the latter protocol due to its income status, shows a rapid decline in infection rates, suggesting that letting the virus circulate may have led to getting past it sooner.  Blood tests suggest that at least 50% of the population is carrying antibodies, even though not nearly that many were symptomatic.
  • Such a policy may not have been possible in the developed West. For one thing, India’s 65 years and older population is only 6.5%, compared to more than 20% in Europe.  The virus is particularly lethal for older people, which would have raised the political costs in the West.
  • In addition, we don’t know if the previous infections will protect against variants.
  • It is also possible that the Indian population faces more infectious diseases on a regular basis, which may have offered its population some degree of natural immunity or resistance from other viruses.
• China is aggressively building quarantine centers, suggesting Beijing is worried about another increase in infections.
• Will dogs help open up public facilities? Canines are gifted with acute senses of smell and are used by security forces to find bombs and illegal drugs.  The NBA is testing to see whether dogs can tell if a person has COVID-19 when they attend a basketball game.  Some studies suggest dogs can determine with 95% accuracy if a person is infected.
• The CDC will now require masks on all forms of public transportation.
• Health care workers have been surprisingly reluctant to be vaccinated.
• Life insurers are starting to screen for COVID-19; it is unclear if they will use evidence of infection to deny life insurance coverage or lift premiums. It is possible they may require proof of vaccination to underwrite a policy.
• As Super Bowl Sunday looms, the NFL was able to complete its season. The league attributes its success to stricter rules on meetings and mask-wearing.

Policy and Economics:  Here are some of the highlights.

• Ten GOP senators are calling for the Biden administration to open discussions to build a bipartisan stimulus bill. The opening bid is $600 billion.  This will be a test of bipartisanship for the new government.
• Banks are preparing for stricter regulation under the new administration.
• Lockdowns have encouraged the purchase of higher-end liquor.

China:  Hong Kong leads the news.

• The British National Overseas Passport was granted to Hong Kong citizens before the handover to China. So far, about 7,000 people have taken advantage of this passport.  But with the U.K. now granting visa eligibility to some five million Hong Kong citizens, a massive expansion of those looking to flee the area is likely.  We note that China will no longer recognize these passports.
• Multinationals are starting to write Hong Kong out of their legal contracts.
• PMI data suggest that recent COVID-19 outbreaks are slowing economic momentum, especially for services.
• China’s brokers are facing a surge of new investment; the industry is struggling to create investment products to deal with this high level of interest.
• As China moves to project power, it must learn the lessons of a large military. For example, the Peoples Liberation Army/Navy is discovering that operating a submarine force requires structures to protect its submariners from psychological stress.  The USN began putting psychologists on submarines in the 1990s.

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

[Posted: 9:30 AM EST] | PDF

Good morning.  Global equities are lower this morning as the spread of a new variant of the virus and COVID-19 vaccine production delays continue to worry investors.  We begin our coverage with a discussion of new developments in the Reddit controversy.  We next discuss China news, which includes a summary of its new assertive stance against Taiwan.  We round up the commentary with developments in policy, economics, and international news.  Being Friday, the Asset Allocation Weekly is now available, along with the associated podcast and chart book.

Reddit Rally: In the last 48 hours, the online community has been the talk of Wall Street and K Street.  Following the unprecedented rise of the stock prices of AMC (AMC, $8.74) and GameStop (GME, $193.60), there is now bipartisan support to hold congressional hearings regarding this matter.  Additionally, several trading sites and apps have restricted trading, and in some, cases have blocked trades.  NASDAQ has announced that it will limit the trading of stocks it believes to be hyped by social media chatter.  As we mentioned yesterday, the recent rally has caught many politicians and regulators off guard, and there are growing calls for government intervention.  Our take is that even though there have been discussions on platforms about these stocks, it isn’t legally clear whether stocks boosted by social media message boards count as market manipulation by current standards.  Market manipulation involves artificially inflating or deflating the price of a security for personal gain.  An unrelated group of people getting together to openly promote stock buying likely doesn’t meet that standard.  That being said, if this practice becomes more widespread, it could potentially make markets less efficient and will make bubbles (likely small ones) and zombie companies more likely.  As a result, we expect that we could see new regulations to address the issue.  What they will look like is anybody’s guess. We have already seen social media sites being proactive in clamping down on these groups. On Thursday, Facebook (FB, $265.00) removed a discussion group with conversations around the shares of GameStop.  In addition to message boards, there have also been some discussions surrounding the role that trading platforms have in limiting trading as many lawmakers and investors alike have questioned the legality of its decision to restrict trading on certain stocks.

Flows v. Pros, Part Deux:  The Reddit crowd has turned its sights on another market, silver.  The message board is looking to go after Wall Street firms and has decided on silver due to JP Morgan (JPM, USD, 130.11) paying fines for manipulating trades in the silver market.  Traders working for the firm engaged in “spoofing,” which is placing bids/offers with no intention of fulfilling trades at those prices or volumes.  However, targeting silver appears to be a bit like going after someone already in jail.  As noted, JP Morgan has already paid a sizeable fine on its activities, and we haven’t seen any evidence that the silver market is being manipulated.  That being said, silver does have a history of being manipulated.  The famous Hunt brothers’ attempt to corner the silver market in the early 1980s is a classic example.  It’s a rather small market, so it doesn’t take a huge amount of money to affect prices.

 

A casual look at short interest in silver companies doesn’t suggest they are heavily shorted; the short-interest ratio is usually, at most, around 20%, whereas the normal target is 40%.  However, in addition to buying silver companies, it appears these traders are moving into the silver commodity as well.  So far, moves in silver are notable, but not outside the norm for a commodity accustomed to price swings. 

(Source: Barchart)

It is not clear to us how long this activity will last, or who will be the next target.  However, this group is clearly making headlines.

China: On Thursday, China warned Taiwan that any moves toward independence will lead to war.  This is the firmest warning issued by China to the province it considers to be its territory and will likely prove to be a test for the Biden administration.  Fears that Taiwan may formally declare its independence has led China to become more abrasive in recent weeks.  Earlier this month, Taiwan accused China of using intimidation tactics when it found multiple Chinese fighter jets and bombers flying through its airspace.  Although China denies any wrongdoing, it is becoming clear that it is growing confident in its ability to counter any possible U.S. intervention.  It was reported on Friday that China simulated missile attacks against U.S. aircraft carriers in Taiwanese waters.  We suspect that open conflict with China is unlikely, but we do believe the chances of conflict have recently escalated significantly.  Our biggest concern is the risk of miscalculation from China.  Its actions suggest that China may be underestimating the stake that other Southeast Asian countries (particularly Japan) have in maintaining Taiwan’s independence. Although other Southeast Asian countries enjoy a cordial relationship with China, many are reluctant for it to be the sole power in the region.  China has long viewed other Asian countries as extensions of its diaspora, and therefore are subordinate to China.  In 2017, Chinese President Xi Jinping told the then newly elected President Trump that Korea used to be part of China, a claim strongly rejected by South Korea.  As a result, we suspect that conflict over Taiwan could have serious consequences for equities as the scale of war may be larger than most investors realize.  Here are the other stories coming out of China:

• A team lead by the World Health Organization investigating the origins of the COVID-19 pandemic will meet with Chinese scientists on Friday and plans to visit labs, markets, and hospitals in Wuhan.
• Britain will offer to work with the European Union, Japan, and the U.S. to clamp down on what it calls unfair behavior by Chinese state-owned enterprises.
• Britain on Friday hailed a new visa offering Hong Kong citizens a route to citizenship after China’s crackdown, but Beijing said it would no longer recognize special British passports offered to residents of the former colony.
  • Beijing declared it would stop recognizing British National passports as travel and identification documents beginning Sunday, and it warned of further actions in retaliation against Britain’s offer of a pathway to citizenship to 5.4 million eligible Hong Kong residents.
• China’s banking and insurance regulators issued draft rules on Friday regarding corporate governance of banks and insurers, the latest regulatory move to contain management risks of financial institutions.
• Prime Minister Lee Hsien Loong of Singapore said Friday that China’s influence had grown so rapidly in recent years that it needs to “recalibrate its position” and do more globally to secure the legitimacy of its new-found standing.

 COVID-19:  The number of reported cases is 101,253,267 with 2,184,718 fatalities.  In the U.S., there are 25,708,124 confirmed cases with 431,882 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 48,386,275 doses of the vaccine have been distributed with 26,193,682 doses injected.  The number of first doses is 21,698,606, while the number of second doses, which would grant the highest level of immunity, is 4,263,056.  The Axios map shows that case growth is falling across the country.  The R_t data confirms the Axios map, with only six states showing a reading greater than one.  Vermont has the worst reading, and Nebraska has the best.  Hospitalizations in the U.S. for COVID-19 are declining as well.

Virology

• Novavax announced that it has a COVID-19 vaccine that is 89% effective but also found that the vaccine is not as effective against the South African variant.
  • Early tests showed the South African variant may chip away at the effectiveness of the Pfizer (PFE,$35.86) and Moderna (MRNA,$159.55) vaccines as well.
• Two cases of the more contagious South African variant of the coronavirus were discovered in South Carolina.
• The EU will empower member states to block exports of vaccines, forcing pharmaceutical companies to seek authorization before shipping the life-saving jabs out of the bloc.
• The independent commission advising the German government on vaccination policy has recommended that the Oxford/AstraZeneca vaccine not be used for people over age 65, in a move likely to complicate the acrimonious rollout in the EU.
• Africa has secured 400 million doses of the AstraZeneca COVID-19 vaccine, which will be supplied by the Serum Institute of India (SII), according to the director of the African Union’s disease control and prevention body.
• COVID-19 cases have quadrupled since November to almost 4,000 a day, and doctors complain of a shortage of beds, even as the United Arab Emirate’s vaccination drive speeds ahead.
  • Britain said it was adding the United Arab Emirates, Burundi, and Rwanda to its coronavirus travel ban list because of worries over the spread of a more contagious and potentially vaccine-resistant COVID-19 variant first identified in South Africa.
• Mexico’s confirmed coronavirus death toll surpassed India’s on Thursday to become the world’s third highest.
• A single-shot coronavirus vaccine from pharmaceutical giant Johnson & Johnson (JNJ, $169.16) was 66% effective at preventing moderate and severe illness in a massive global trial as shown by findings released Friday.  But its performance was stronger in the United States and weaker in South Africa, where a worrisome coronavirus variant now dominates — a complicated result that reflects the evolution of the pandemic.

Policy and Economics: Here are the highlights:

• House Speaker Nancy Pelosi announced that the House will hold a vote next week on the budget.  The move could help fast track President Biden’s $1.9 trillion stimulus package.  Senate Republicans have come out against the move as being counterproductive; the general sentiment is that Congress will be able to get a deal done, possibly near the $1.1 trillion range.
• Democrats are believed to be weighing the nuclear option in order to change the rules for reconciliation to pass the $15 minimum wage.  This change would end the filibuster rule for non-budget measures.
  • The two newly elected Democratic senators from Georgia pressed White House officials and fellow Senate Democrats Thursday to act quickly to pass a new round of stimulus checks, arguing that this promise won their party the Senate majority and needs to be accomplished.
• The White House announced it will reopen healthcare enrollment, making it easier for the uninsured to get coverage during the pandemic.
• The Pentagon warned the Taliban that it is jeopardizing its agreement with the United States for a full U.S. military withdrawal by May.  U.S. military officials said the Taliban had yet to break with al Qaeda and that has complicated efforts to remove troops from the country.
• President Biden’s nominee for the chair of the Council of Economic Advisers, Cecilia Rouse, testified before the Senate Banking Committee on Thursday.
• The U.S. oil industry is seeking to forge an alliance with the nation’s corn growers and biofuel producers to lobby against the Biden administration’s push for electric vehicles. So far, it is meeting a cool reception, according to multiple sources familiar with the discussions.
• The Philippines expect to benefit if there is a renewed emphasis on Asia by the new administration of President Biden, which could help act as a counterbalance to China in the region.
• President Biden will issue executive orders on immigration next week.

International roundup:

• Former premier Matteo Renzi said on Thursday he was ready to help form a new Italian government but would not commit to supporting a fresh mandate for Giuseppe Conte.
• A Russian court upheld the 30-day arrest order for opposition leader Alexei Navalny on Thursday.
• Germany’s health minister said he expects the European Union’s drug regulator to authorize a coronavirus vaccine made by AstraZeneca on Friday.
• Women’s rights advocates and allies in Poland vowed on Thursday to continue to fight a near-total ban on abortion, calling it a breach of human rights and a sign that the country is regressing.

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

[Posted: 9:30 AM EST] | PDF

Good morning.  A lot is going on in the world; equity futures were down most of the night but are crawling back to unchanged.  We lead off with a recap of the first Fed meeting of the year, followed by some comments on recent equity market behavior.  China news is next, with remarks on Xi’s Davos speech.  We have an update on the pandemic.  Policy and economic news come next.  U.K. information follows, and we close with an international news roundup.  Being Thursday, the Weekly Energy Update is available; we look at Biden’s oil policy in the report.  The current Asset Allocation Weekly is also available.

The Fed:  No real surprises emerged from the FOMC statement, although we would view the tone as somewhat more cautious on the economy, acknowledging the risks apparent from the pandemic.  In the press conference, Chair Powell was asked repeatedly about the link between financial market froth and policy accommodation.  He made it abundantly clear that the Fed would not tighten policy to combat overvalued markets (which may more reflect his views but not views universally held within the FOMC).  Despite the dovish tone, equity markets tumbled, which brings us to the next topic.

Pros v. flows:  Tracy Alloway, a reporter for Bloomberg, coined the phrase in bold, and in a nutshell, captures the mood.  For the most part, we have studiously avoided commenting on the massive short squeeze occurring in various equities.  But the impact has moved beyond a curious run in a handful of stocks to something looking systemic.  To capture the gist of the situation, try explaining what is happening to an intelligent but generally uninformed person.  We did, as spouses, friends, and neighbors asked, and the nearly universal response is, “isn’t that illegal?”  In our reading of the case law commentary, what is happening on Reddit falls into a legal gray area.  If a group of investors conspired to do what is happening in secret, it would clearly be illegal.  But, when it is a mass movement on a social media platform in plain sight, the element of conspiracy is missing.  Or, for now, that is how it is being read.  Here are a few of our thoughts:

• There is a clear element of “sticking it to the man” in the social commentary surrounding what is happening.  Hedge fund managers are seen as privileged and rich and the actions over the past week or so are seen as getting even.  It doesn’t seem to have much to do with the companies themselves.  One theater company targeted for buying had a company in an unrelated industry with a similar name that also rose sharply, suggesting that what we are seeing here is a targeting of shorted stocks and buying without much interest in the underlying business.
• As short sellers become increasingly squeezed, they are being forced not only to buy their way out of their shorts but probably to sell their longs to make margin. The selling to gain liquidity is likely a factor in the recent pullback.  That isn’t to say it is the only reason—worries about the pandemic and civil unrest have also played a role.
• Regulators appear to have been caught flat-footed. The response from the SEC was underwhelming.  Former regulators are suggesting the market is being manipulated and that current laws should simply be enforced.  As we noted above, that may not be the case.
• A number of factors have developed to bring about this situation. Very low interest rates have encouraged leverage.  Social media creates mass herding.  Trading costs have fallen to zero.  We note recent reports from platforms of temporary outages in trading.  If you stop being paid for an activity, how does one justify upgrades and investment in such activity?
• What is the potential fallout? If short selling becomes impossible, then ”zombie” companies will proliferate.  Despite Chair Powell’s position on not using rate policy to reduce financial froth, it may become untenable to maintain that position.  It would stand to reason that the companies who have enjoyed the ramping up of their prices should simply issue more stock.  There are fears that they will be sued for putting shares on the market that have clearly been manipulated, but this would be a surefire way to reduce the practice.  The SEC could grant a safe harbor for such issuance.  At some point, the “flows” will likely end in tears, much like what happened in 2000.  Will this create a radicalized group?  In the end, our take is that we are seeing a result, in part, of persistent and overly accommodative monetary policy.  We don’t criticize the Fed because the counterexample is the Great Depression. We are now seeing what follows as a side effect of flooding the economy with liquidity.

China:  Davos leads the reporting.

• General Secretary Xi gave a speech at the virtual Davos forum that hit most of the elite topics such as inclusive growth, green investment, consensus, and pushed against unilateral actions. It isn’t hard to criticize the speech as divorced from China’s actual behavior.  However, we did note an interesting take in the speech, which touched on the “north/south” divide that was mostly missed by the Western media.  Xi made a point to express a shared disappointment at Western behavior that denigrates South Asia.  Although several nations see concerns about China’s bullying in the South China Sea, Beijing is clearly trying to build goodwill with South Asia, which seemed to elude Western commentary.  We recommend this recent podcast for background on China’s relations with South Asia.
  • We note that Chancellor Merkel agreed with Xi about avoiding “Cold War blocs” in her speech. Germany has massive investments in China and has been reluctant to criticize Beijing.
• One area of concern within the Chinese financial system has been residential real estate. There is increasing evidence that policymakers are trying to curtail price increases.  What isn’t apparent is if authorities are comfortable with price declines.
• Although the general position of the CPC has been that the U.S. will remain hostile to China, it appears that Beijing is interested in calming relations. There are claims that China has asked for a high-level meeting, although this claim has been disputed.  We doubt that the new administration will dramatically change the path of U.S. policy, but we would expect the tone to be less belligerent, and a focus on an allied response, instead of a singular U.S. response, is more likely.
  • Business leaders remain uncomfortable with rising tensions with China. Chipmakers especially would like to see export controls eased.
  • At the same time, the CPC is pressing the Chinese tech industry to unwind ties to the U.S. and become independent. Interestingly enough, U.S. tech leaders are also supporting a withdrawal from China.
  • The Biden administration is delaying action on the Chinese military ban for investors. We also note that Gina Raimondo, in her confirmation hearing for Commerce Secretary, did not commit to keeping Huawei (002502, CNY, 2.66) on the Entity list, leading Representative McCall (R-TX) to call for a hold on her nomination.
• There are reports of renewed tensions on the India/China frontier.
• In the face of rising tensions between the PRC and Taiwan, the U.S. not only sent a carrier group into the area, but it also declassified a 1982 cable that shows the “Six Assurances” the U.S. has given Taiwan. Although observers of Taiwan/U.S. relations could generally have outlined these assurances from American behaviors, the release now suggests that the new administration wants to make its position clear.  China has responded by making it clear that Taiwan’s independence is an act of war.
• China is expanding its crackdown on fintech. Ant Financial is restructuring as a financial firm.
• Hong Kong authorities are “grilling” finance executives who leave the former colony.

COVID-19:  The number of reported cases is 100,977,927 with 2,177,418 fatalities.  In the U.S., there are 25,599,961 confirmed cases with 429,178 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 47,230,950 doses of the vaccine have been distributed with 24,652,634 doses injected.  The number of first doses is 20,687,970, while the number of second doses, which would grant the highest level of immunity, is 3,801,053.  The Axios map shows that case growth is falling across the country.  The R_t data confirms the Axios map, with only six states showing a reading greater than one.  Vermont has the worst reading, and Nebraska has the best.  Hospitalizations in the U.S. for COVID-19 are declining as well.

Virology

• China has been raising the argument for some time that COVID-19 exists on imported food packaging. The goal is to undermine the position that the virus emerged from China.  Although there is a general consensus that it did, in fact, emerge in Wuhan, Beijing has an interest in making the food-import claim to build the narrative that it isn’t responsible for failing to containing the disease.  The WHO finds itself facing pressure from China to accept this narrative.  And, there is no real evidence to suggest that anyone has gotten sick from COVID-19 by foreign food.
  • As a result, Chinese consumers are shunning food, leading to disrupted supply chains. Foreign sellers are trying to prove the food is safe and are protesting against China’s testing of food imports.
  • China is continuing to use aggressive disinfecting of food import facilities.
  • Taiwan’s health minister has indicated that China should have contained the virus.
  • And, if you are traveling to China anytime soon, take this as a warning.
• In the vaccine area, China has been trying to promote its vaccines to enhance its image. So far, the plan isn’t working out very well.  India is accusing Beijing of undermining New Delhi’s vaccine industry.
• The EU is getting increasingly agitated over the lack of vaccine supplies. Germany is calling for a suspension of vaccine exports.  Germany has numerous vaccine manufacturing sites, so the threat could be a clear example of vaccine hoarding.  There is also a brewing conflict with the U.K.; the EU is considering cutting vaccine exports from Belgium.  The EU is also demanding the U.K. send vaccines that it holds, claiming it has contracts for the drugs.  There are clear shortages in Europe.  Madrid has halted vaccinations due to the lack of supply.  Some of this anger may be tied to widespread unrest against lockdowns in the Netherlands.
• Meanwhile, there are increasing concerns about the mutations of COVID-19. So far, the current vaccines do appear to work against the most recent variants (BTW, here is a good recap of the current vaccines and how they work).
  • Germany has blocked the AstraZeneca (AZN, USD, 52.10) vaccine for anyone older than 65 due to the lack of testing.
  • Minnesota has confirmed the first U.S. case of the Brazilian variant, which is another highly transmissible mutation.
• There is an underlying belief that vaccines will allow a return to normal. The experience of Israel would suggest tempering that sentiment.  Fears of new variants and the uncertainty about whether vaccines offer sterilizing immunity means that social distancing and other measures must continue even after vaccines are distributed.
• The CDC is indicating that the spread of COVID-19 seems controllable in schools and is considering a recommendation that schools reopen.
• Although there is a focus on vaccines, we continue to monitor developments in other treatments.
  • One symptom of COVID-19, especially in severe cases or the “long-haul” patients, is inflammation. A recent trial of Chochicine, a drug usually prescribed for gout and rheumatic diseases, has shown some degree of effectiveness.
  • Regeneron, the antibody treatment, has been shown to reduce COVID-19 infections in high-risk patients.
• Finally, lockdowns have apparently encouraged some Americans to take up cigarettes.

Policy and Economics:  Here are some of the highlights.

• One trend we have been following for some time is how consumer confidence is affected by party affiliation. Recent data from Morning Consult offers another example of this phenomenon.
• The Democratic Party leadership in Congress is considering using budget reconciliation to pass the Biden stimulus. Under budget reconciliation rules, a simple majority will pass the budget bill.  It’s not clear how all parts of the bill could be contained in this rule (e.g., the $15 minimum wage), but some parts could fit.  That could speed the stimulus, assuming all the Senate Democrats would be on board.  That might not be the case.
• The Biden administration’s “buy American” plan is being watched with great trepidation abroad.
• A survey of younger Americans shows a decided openness to regulating the tech industry.
• Telework is raising a serious problem for state taxing authorities. Often workers in high-tax states commute from low-tax states.  As they work at home, do they still owe taxes in the state where the business is domiciled?  If the courts decide they can’t, the temptation to work remotely from a low-tax state will be large.
• Although we know many businesses have failed during the pandemic, it is important to remember that many of these businesses are in industries with low barriers to entry. We are already seeing a rise in new business formation.
• In New York, landlord and tenant groups are cooperating to manage the current rent shortfall. Usually, when this sort of cooperation develops, a third party is encouraged to pay; in this case, the government will likely be tapped.
• Although the U.S. and EU are at loggerheads over the digital tax, in reality, it’s less about taxing and more about control.

In the U.K., the Brexit aftermath continues.  Small businesses are considering shifting operations to the EU to avoid the loss of access.  Truckers are avoiding U.K. ports instead of sitting in line for hours.  And, PM Johnson is facing an increasing risk of Scottish devolution.

International roundup:

• After a year of living quietly, it has been revealed by a South Korean politician that the former North Korean ambassador to Kuwait has defected and is living in South Korea. Kuwait has allowed a contingent of North Koreans to work in Kuwait, likely to earn hard currency for the regime.  But, since 2017, Kuwait has been removing the North Koreans from the country to comply with sanctions.
• President Biden and President Putin had a call yesterday. It doesn’t sound like they are going to be close friends.

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