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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with a short discussion of what to expect from today’s monetary policy decision from the Federal Reserve.  In short, we expect no substantive change in policy.  We then discuss a range of news stories from abroad, including signs of increased domestic tension within Russia and international tension between the EU and the U.K.  As always, we wrap up with a discussion of the latest coronavirus news.

United States:  Officials at the Fed are completing their latest policymaking meeting today, but no substantive changes are expected in either its benchmark interest rate or its asset purchasing programs.  That’s especially true given that the recent upswing in longer-term yields has come to a halt amid strong demand for Treasury obligations.  That will likely forestall any immediate need for the Fed to impose “yield curve control” over longer-term yields.  The key focus for investors regarding the meeting today will likely be how the officials assess economic conditions and prospects going forward.

United States-Russia:  The White House said President Biden held his first call as president with Russian President Putin and raised concerns about issues including the detaining of opposition leader Alexei Navalny, Russian threats to Ukrainian sovereignty, the massive SolarWinds computer hack, and reports of Russia offering bounties on U.S. troops.  A readout on the call from the Russian government stated it was “open and businesslike,” suggesting some tough positioning on both sides.

Russia:  In a sign that President Putin has become concerned about the large pro-Navalny demonstrations across Russia last weekend and the Navalny organization’s video exposé of a massive palace built for Putin using public funds, the president admitted at an event yesterday that he had seen part of the exposé and insisted it was false.  At the same time, Russian state television ran several lengthy attacks accusing Navalny of being a corrupt, failed politician working on behalf of western intelligence agencies.  The attacks underscore a sense of irritation and worry in the Kremlin at Navalny’s ability to harness national public anger while representing the latest in a series of missteps by Putin’s administration in its attempts to sideline the activist.

EU-U.K.:  Just when we all thought the whole Brexit saga was over, the U.K. has sparked a row by refusing to grant full diplomatic status to the EU ambassador overseeing the post-Brexit trade deal signed late last year.  British Foreign Secretary Raab insists that the EU official should be regarded as representing merely an “international organization,” but the EU is insisting that the official be recognized as representing a sovereign state, as it is by all other countries with which it has diplomatic ties.

China:  Jack Ma’s fintech giant Ant Group, which Beijing has clamped down on because of Ma’s pushback against government regulation, has reportedly caved to government pressure to become a holding company regulated by the Chinese central bank.  Besides signaling the government’s intention to maintain control over the private sector, the move will force Ant to meet higher capital standards than would otherwise be the case.  Since the news will reinforce perceptions of increasing state interference in the Chinese private sector, going forward, it will probably be a negative for Chinese equities.

China-Hong Kong:  As more financial services firms leave Hong Kong in response to China’s clampdown on it and implementation of its new security law, officials are worried about the city’s future as a financial hub and are putting executives through what appear to be “exit interviews.”  Hedge fund managers who have been subjected to the process say they were asked for a full picture of the decision-making process behind the moves and the significance of the timing.  The grilling highlights the risk that China’s greater control over Hong Kong will probably drive a lot of its financial services industry to other Asian locales, like Tokyo or Singapore, potentially creating investment opportunities there.

COVID-19:  Official data show confirmed cases have risen to 100,381,254 worldwide, with 2,160,783 deaths.  In the United States, confirmed cases rose to 25,445,699, with 425,257 deaths.  Vaccine doses distributed in the U.S. now total 44,394,075, while the number of people who have received at least their first shot totals 19,902,237.  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 approximately 142,000 yesterday, marking their tenth straight day under 200,000.  Hospitalizations related to the virus fell to below 109,000 for the first time since December 12.  Of those hospitalized, the number in intensive care fell to just above 20,000.  On a less positive note, however, the number of virus-related deaths rebounded to almost 4,000.
• The Biden administration said it will boost the supply of vaccines sent to states by about 16% for the next three weeks and purchase enough additional doses to vaccinate most of the U.S. population with a two-dose regimen by the end of the summer.  The updated plan would involve purchasing an additional 100 million doses for each of the vaccines developed by Pfizer (PFE, 37.31) and Moderna (MRNA, 151.85).
• The state government in California said it will change the way it prioritizes who gets vaccine doses, creating a statewide standard and basing the intermediate stages of its vaccination program on age alone. The first two groups to be vaccinated will continue to be health-care workers and residents of long-term care facilities, followed by residents aged 65 years and older, education and child-care workers, emergency services personnel, and food and agriculture workers.
• Despite surging cases in Japan, the government is insisting on Japan-specific clinical trials before approving the various vaccines already in use abroad.  The requirement for Japanese clinical trials means the earliest that Japan can start mass vaccinations would be late February.  Separately, Prime Minister Suga said he will decide next week regarding whether to extend the pandemic state of emergency, currently planned to expire on February 7, in Tokyo and other areas.
• Even with the rollout of vaccines, scientists say infection prevention protocols will still be needed for months.  Now that we have a year’s worth of experience with the virus, scientists are reaching a consensus on which protocols are most important:  mask-wearing, social distancing, and maintaining good air circulation are at the top of the list.

 Economic and Political Impacts

• In India, the recent loosening of pandemic restrictions is not yet prompting any rebound in consumer spending, as consumers continue to hold on to their savings out of fear for the future.  The development highlights how the pandemic could leave more lasting economic scars on less developed countries that couldn’t afford massive fiscal and monetary support measures like those in the U.S.

 U.S. Policy Response

• Some small businesses trying to access second loans from the reopened Payroll Protection Program are getting rejected because of flags on their files related to problems with their initial applications.  The flags relate to anything from clerical errors to indicators of fraud.  In order to get more loans in place, the SBA has announced it will issue new guidelines to make sure the flags can more easily be overcome.

Foreign Policy Response

• In an interview with the Financial Times, French Finance Minister Le Maire called on the EU to overcome bureaucratic obstacles slowing the disbursal of its €750 billion recovery fund to member states.  He also warned that overcoming the pandemic would probably require re-evaluating eurozone fiscal constraints.

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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 news from China, where new data showing a surge of foreign direct investment into the country last year is being tempered by a new move by the central bank to reduce liquidity in the financial markets.  This move helps explain why Chinese equities are down today.  We also examine other key news from overseas, including a potentially groundbreaking move by some German government officials to temporarily abandon a long commitment to balanced budgets.  As always, we conclude with the latest coronavirus news.

China:  According to new data from the United Nations Conference on Trade and Development, foreign direct investment in China rose 4.0% last year, making it the top destination for such capital flows.  While the U.S. had long been the top destination, its inbound FDI plunged 49% in 2020 amid the coronavirus pandemic.  Note that our current WGR series on the U.S.-China balance of power will next week examine how the two countries’ outbound FDI and other economic elements play into their global influence.  The current installment of the series, published here, provides a deep dive into the U.S.-China military balance.  Separately, the People’s Bank of China today withdrew 78 billion yuan ($12 billion) of net liquidity through its open market operations, boosting the overnight repo rate to more than 2.8% — its highest level since late 2019 — from 2.5% the previous day.  Local media reports quote a PBOC advisor saying tighter liquidity is needed to cut the risk of asset bubbles forming.  As might be expected, the moves have driven Chinese equity markets sharply lower today.

United States-China:  In his address to the World Economic Forum’s online convention, Chinese President Xi issued a veiled warning to the new Biden administration not to try to rally allies against Beijing in an attempt to hem it in.  According to President Xi, such efforts would only “push the world into division and even confrontation.”

United States-Iran:  In preparation for a potential war with Iran sometime in the future, the U.S. military has been trying out an array of ports and air bases in Saudi Arabia’s western desert to see whether they could be used in the event of a conflict.

Germany:  A dispute has broken out in Chancellor Merkel’s Christian Democratic Union party over a proposal by her chief of staff to abandon Germany’s strict curbs on budget deficits as the pandemic continues to put huge strains on the country’s finances.  While Chief of Staff Braun isn’t calling for a permanent end to the constitutional “debt brake,” he argues that the constitution should be amended to allow for a multi-year series of declining budget deficits to respond to the coronavirus pandemic.  Nevertheless, the proposal is a stark break from Merkel’s economic orthodoxy.  If passed and extended, it would have the potential to give Germany a freer hand in economic policy and geopolitical strategy.

Italy:  Prime Minister Conte is set to resign today, his office stated, amid disagreements about how Italy should use the €200 billion it will receive as part of the EU’s new pandemic relief program.  Despite winning a vote of confidence in both houses of parliament last week, Conte has been weakened by the withdrawal of former Prime Minister Renzi’s party from his coalition government.  Italy’s parties are now set to negotiate in search of a new governing majority, possibly under the stewardship of Mr. Conte once again but perhaps under a new premier. If no majority in Parliament can be found, Italy is likely to hold elections in coming months, which would be the first in a major West European country since the start of the pandemic.

India:  In a sharp escalation of the protests against Prime Minister Modi’s agricultural reforms, thousands of farmers driving tractors have breached police barricades and invaded the center of the capital city in an effort to disrupt the annual Republic Day celebration.  It remains to be seen whether the farmers, who are a huge part of the country’s electorate, will be able to make Modi back down from his proposed changes.

COVID-19:  Official data show confirmed cases have risen to 99,808,397 worldwide, with 2,142,826 deaths.  In the United States, confirmed cases rose to 25,298,554, with 421,239 deaths.  Vaccine doses distributed in the U.S. now total 41,418,325, while the number of people who have received at least their first shot totals 19,252,275.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• Newly confirmed U.S infections rose to approximately 147,000 yesterday.  However, since that remains significantly lower than the levels seen earlier in the winter, it provides additional evidence that the recent rebound may be under some control.  Importantly, hospitalizations related to the virus fell below 110,000 for the first time since the middle of December, and the number in intensive care fell to 20,875.  New virus-related deaths topped 1,700.
• In California, the improvement in the number of new infections and hospitalizations prompted Governor Newsom to remove regional stay-at-home orders across the state.  That means businesses ranging from hair salons to restaurants could reopen in many counties for the first time since early December.  In New York, Governor Cuomo also announced an easing of some restrictions as case numbers and hospitalizations improve.
• However, conditions continue to worsen in Europe and Japan, in terms of both public health and politics.  In the Netherlands, protests against a new curfew to curb the spread of the virus escalated into rioting in many cities for a third straight night last night, further complicating the pandemic management by the beleaguered government.  In Japan, cases and hospitalizations remain high, and observers have been alarmed that Prime Minister Suga has gone from hoarse to losing his voice.  This has raised concerns that he is either infected or is impacted by the stress of dealing with the crisis.
• Addressing reporters at the White House yesterday, President Biden said his target of giving 100 million vaccines in his first 100 days in office might rise to 150 million.  Biden said he was hopeful the U.S. could soon reach an average of 1.5 million vaccines per day, as opposed to the current pace of one million a day. He said he was optimistic that by this spring, any American who wants a coronavirus vaccine should be able to get one.
• With EU officials alarmed by delays in distributing the vaccine from Oxford University and AstraZeneca (AZN, 54.01), the bloc’s health commissioner has proposed forcing companies to give advanced notice of any plans to send shipments elsewhere in the world.  While not an outright ban on exports of the vaccine, the tougher approach is expected to be modeled on a temporary scheme last year that required companies to seek authorization for exporting personal protective equipment outside the EU.
• Despite optimism over vaccines, the quick and widespread vaccinations in Israel suggest that widespread injections don’t necessarily mean an immediate end to economic and social restrictions.
• In less positive news, British researchers are finding the new coronavirus mutations, like the one that emerged in the U.K., may not only be more transmissible but can also produce more serious sickness, especially among women and younger people.  The rise of these mutations will probably remain a considerable risk for the equity markets until it can be shown with confidence that the vaccines are effective against them.

 Economic and Political Impacts

• In an update to its global economic forecasts, the International Monetary Fund said China and the U.S. will by far be the most successful at steering their economies through the pandemic, leaving Europe and other emerging markets trailing in their wake.  The fund predicts that by 2022, the recoveries in the US and China will leave their economies no more than 1.5% smaller than projected before the pandemic.  Other advanced economies will still be 2.5% short of their pre-pandemic path, while emerging economies, excluding China, will in 2022 be 8.0% smaller than expected in forecasts issued exactly a year ago.

 U.S. Policy Response

• An analysis by Refinitiv shows companies have raised $400 billion in global bond and stock issuance in just the first three weeks of the year as investors respond to the torrent of fiscal and monetary stimulus unleashed to fight the pandemic.  The raising of funds so far this year is one of the highest for a comparable period over the last two decades, and it is more than double the average level of $170 billion for the period.
• Democrats in Congress are weighing the aggressive use of existing procedural steps to enact President Biden’s coronavirus relief plan as Republican opposition to the $1.9 trillion proposal strengthens.

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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.  U.S. equity futures were higher this morning but are in retreat, with only the tech sector showing strength.  This trend is likely due to concerns about another resurgence of the virus, pushing investors to fall back on the safety of tech.  The virtual “Davos week” kicks off today.  This year, instead of meeting at the famous ski resort, it’s all online.  Our coverage begins with Russia and the events over the weekend.  Economics and policy follow, including new trade and procurement policies from the Biden administration.  China news comes next, including threats to Taiwan.  We update the pandemic and discuss EU news.  We close with Saudi Arabia.  As we noted last week, the holiday and inauguration delayed the DOE data, so the Weekly Energy Update is out today.  And, the current Asset Allocation Weekly is available.

Russia:  Russia saw widespread protests with reports of actions in over 100 cities after authorities jailed opposition leader Alexei Navalny.  Over three thousand people have been arrested.  Although the number of protestors doesn’t appear to be notable, the fact that they were seen across much of the country does suggest a problem for Putin.  There are two issues for the Kremlin.  The first is the international reaction.  The U.S. has called for Navalny’s release from jail; the incoming administration is trying to extend the START treaty’s nuclear caps, and the protests will complicate matters.  Poland is leading the charge for increased EU sanctions on Russia.  Second, Putin’s greatest fear is a color revolution.  He has seen various revolutions in Georgia, Lebanon, Syria, and Ukraine bring the ouster of governments.  Although we doubt that Putin is in any real danger from these protests, neither did most of the leaders ousted in the color revolutions.  For this reason, he has tended to react strongly to the sort of threat Navalny poses.  At a minimum, the unrest will make it more difficult to deal with the Kremlin.

Economics and Policy:  Here is a roundup of items.

• The Biden administration is planning a “buy American” government procurement policy. The concept isn’t new—previous governments have had similar programs, including the previous administration.  What is new is that the EO that will be signed today will tighten definitions of an “American” made product by raising local content rules.  Foreign nations are eyeing the new rules with trepidation, worried that it will reduce the potential for their exports to the U.S.
  • Other items we are watching are comments suggesting that future trade agreements will focus on being “worker-centric.” For the most part, trade deals since the 1990s have been about opening markets and streamlining regulations.  In other words, the focus has been on the concerns of capital.  If these comments reflect actual changes in policy, it would be quite significant.
• There is a steady pushback against the size and content of the stimulus package, and it’s not just coming from the GOP. One concern is that the threshold for payments to households is too high.  This is one of the problems with national policy; the current bill provides payments to families making up to $300,000.  In much of the country, that is a very comfortable income, but in some of the high-cost urban areas, that level doesn’t stretch very far.  We suspect the size of the bill will be reduced; negotiations are also complicated by the impeachment proceedings.  We expect the proposals to be broken into parts, which would make passage easier.  We also expect that more controversial elements of the bill, such as the $15 minimum wage, won’t make it into the final draft.
• We are seeing a lot of “bubble talk.” A wide variety of assets are rising in price, everything from stocks to bitcoin and grains.  From our perspective, we are not sure this is as much a bubble as it is asset inflation.  And, there is a difference, in our opinion.  Although easy money, valuation, and “new era” thinking are all part of the mix that fosters bubbles, we note one important difference.  In previous bubbles we have seen, the easy money element was usually triggered by private sector activity.  In other words, the shadow banking system created liquidity for speculation.  For example, in the early part of the century, even with the Fed raising the policy rate, excess liquidity for home buying continued to expand.  That meant that the risk of collapse rose if that flow of private-sector lending dried up (as it did).  This time around, the excess liquidity is being provided by the government, similar to what we saw in the 1970s.  What is different from 50 years ago is that inequality is higher, so more of the liquidity is held in upper-income households, and they will tend to put more of that liquidity into assets rather than goods.  Thus, the issue to watch is a reversal of monetary policy, which we suspect is going to be a while.
  • That isn’t to say that we aren’t seeing some inflationary pressures. The jump in goods production is having an impact on supply chains.  In Friday’s upcoming AAW, we discuss our expectations for a pop in inflation that will likely come in Q2.
• One area seeing rising prices and activity is housing. Last week’s home data was very robust and is being assisted by demographic changes and the pandemic.  Yet, we are still seeing widespread mortgage forbearance, which would suggest that policymakers will continue to provide liquidity to protect these homeowners and prevent another round of foreclosures.

China:  Trade and Taiwan lead the news on China.

• China is still well behind on its commitments to the Phase One trade agreement. We will be watching to see if the incoming administration makes this an issue with Beijing.
• Chinese warplanes flew near Taiwan over the weekend, the most aggressive actions since last autumn. The U.S. has reaffirmed its commitment to the government of Taiwan in light of this intimidation.
• China became the world’s most favored destination for new direct foreign investment in 2020, unseating the U.S. Some of this could be tied to the pandemic, but the news is unsettling.
• Over the weekend, the NYT review section reported about the growing problems with the GPS system. Not only is it easily hackable, but a foreign power could also undermine it, leaving the U.S. without satellite directions.  There are calls for an upgrade that would be improved and hardened.  However, who should pay for the upgrade?  The current system was initially built for the military, but restrictions were lifted to allow anyone to use it.  The private sector has become an aggressive user of GPS but still wants it for free.  Public finance theory would suggest that either a new system is paid for from taxes or that a user fee would be attached.
  • This GPS issue is part of the weaponization of space issue. Although the Trump administration caught flack for creating the Space Force, the reality is that space is being used as a battleground, and the U.S. will be involved.  New areas and technologies usually create force structure concerns.  Airplanes were initially part of the Army (and thus considered a form of artillery).  Without the creation of the Air Force, the Strategic Air Command probably would not have been introduced.
• As the Biden administration builds out its officials, the read from China appears to be that the incoming government won’t be dovish on Beijing. Comments from SoS nominee Blinken would tend to support China’s read.
• China is facing a rise in food prices in front of the New Year’s holiday. Some of this reported price increase may reflect logistical problems.  Usually, the holiday leads urban dwellers to go back “home” to rural areas.  Since the recent pandemic outbreak, movement is being restricted, so food demand in cities is rising.  The government is releasing pork from state inventories to quell price increases.
  • The CPC has been spreading a narrative that COVID-19 may have entered the country on foreign food packaging. Such spreading has not been reported anywhere else in the world; although researchers admit the virus can travel on food packaging, there isn’t strong evidence that it is a vector for the disease.  The narrative would be useful for Beijing because it would question the idea that the virus originated in a bat in Southern China.  However, it now appears that this plan may have backfired.  Chinese shoppers are reportedly shunning foreign food, fearing it may give them COVID-19, which removes an avenue to bringing food prices down.

COVID-19:  The number of reported cases is 99,268,840 with 2,130,995 fatalities.  In the U.S., there are 25,128,378 confirmed cases with 419,225 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 41,411,550 doses of the vaccine have been distributed, with 21,848,655 doses injected.  The number of first doses is 18,502,131, while the number of second doses, which would grant the highest level of immunity, is 3,216,836.

Virology

• U.K. hospitals are struggling to cope with the rapid rise of infections, some triggered by a more virulent strain. There is growing speculation that the U.K. variant, the B.1.1.7., may be more lethal than earlier variants.  This concern has led to more stringent lockdowns in the U.K.
  • The new variants, which seem to spread faster, are raising concerns of a new surge in the U.S. We are seeing a slowing of infections and hospitalizations as the wave triggered by the holidays is waning, but the new variants threaten another rise in infections in the coming weeks.
• The EU is trying to determine why its vaccine rollout is lagging. Part of the problem may be that companies are making less of the vaccine available than originally promised.  The EU is trying to figure out whether this is due to production problems or if vaccines are being diverted to higher bidders.  Legal action is being threatened against drug companies.  At the current pace, it is unlikely that vaccination goals will be achieved.
  • The U.S. is also concerned about vaccine supply constraints.
• Israel is closing its only international airport in a bid to prevent the spread of the U.K. and South African variants. Sweden has closed its border with Norway because new variants were reported in Oslo.
• Eli Lilly (LLY, USD, 206.34) has announced that its anti-body based drug, bamlanivimab, is effective in reducing fatalities in nursing homes. Meanwhile, Merck (MRK, USD, 80.89) has scrapped its vaccine candidates due to poor test results.
• In Mexico, AMLO has tested positive for COVID-19.

Policy and Economics:  The Biden stimulus plan is struggling under GOP opposition.

• Moody’s estimates that renters owe about $70 billion to landlords. Although immediate eviction is off the table due to recent executive orders, it is clear that even the proposed $25 billion allocated in the current stimulus proposal won’t clear the delinquencies.  If landlords decide to evict, they face the prospect of finding renters who may not be in much better financial shape.  It appears to us that rents may have no recourse but to decline.  Rental income has been historically high, and some retrenchment may be due.

This chart shows rental income as a percent of national income.  The data shows that the ratio has recently declined from historic highs.

EU news:  Details are emerging on the China/EU investment deal, and Portugal returns its president for a second term.

• The EU has finally published draft documents on a Comprehensive Agreement on Investment. Over the coming weeks, we will see more on this issue, but early observations suggest the deal is less than meets the eye.
• President Rebelo de Sousa has won a second term in a landslide, with the far-right candidate boosting the share of his party.
• Greece and Turkey are resuming talks next week.
• The EU is launching new probes against Google (GOOGL, USD, 1892.56)

Saudi Arabia:  There was an apparent drone or missile attack over Riyadh over the weekend.  Houthi rebels in Yemen sometimes conduct such operations, although the attack may have had other origins, as attacks on the capital are unusual.  Reports indicate that the weapons were intercepted by Saudi missile defenses.

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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 as fears of a third wave of the coronavirus continue to mount.  New developments related to the pandemic lead our coverage today, followed by a discussion of President Biden’s first day in office.  The report will conclude with a roundup of economic and international news.  A new Asset Allocation Weekly is available, along with the associated podcast and chart book.  The Weekly Energy Update won’t be published until Monday as the DOE has decided to publish the weekly data today.

New COVID Variants: As cases begin to rise globally due to various mutations of COVID-19, there are growing concerns that the virus could be with us longer than anticipated.  So far, countries that had success in containing the virus last year are seeing a spike in cases.  Both China and Japan have re-imposed new travel restrictions in response to the virus as cases have risen in both Beijing and Tokyo.  Meanwhile, there have been several studies suggesting that vaccines may be less effective in protecting against the South African variant of the virus.

COVID-19:  The number of reported cases is 97,425,832 with 2,087,820 fatalities.  In the U.S., there are 24,610,051 confirmed cases with 409,641 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 37,960,000 doses of the vaccine have been distributed, with 15,053,257 doses injected.  The number of second doses, which would grant the highest level of immunity, is 2,394,961.  The next challenge will be when the U.K./South African variant becomes more common in the U.S.  Both variants spread faster and could lead to another surge in the coming weeks.

Virology

• Even though cases are falling, there is fear among public health experts that it is still unclear whether the worst is behind us.
  • New variants in the U.K., Ireland, Brazil, and South Africa have experts suspecting that another spike could soon be on the horizon.
  • President Biden has warned that he expects deaths to rise by an additional 100,000 by next month.
• Florida will require people seeking COVID-19 vaccines to be permanent or seasonal residents of the state amid concerns that foreign visitors were flying in to secure shots.
• On Thursday, Texas reported its second-biggest daily increase in coronavirus fatalities on record, pushing the state’s death toll above 33,000.
• China will give half a million doses of Sinopharm’s vaccine to Pakistan free of charge by the end of January, Pakistan’s foreign minister said on Thursday
• Five people were killed by a fire that erupted at a COVID-19 vaccine-making factory in India.
• During a virtual meeting, Anthony S. Fauci reassured the World Health Organization that the United States is committed to working closely with other nations to implement a more effective global response to the pandemic.
• Japan walked back its goal to secure enough targeted supplies of COVID-19 vaccines by June, one month before the planned start of the Tokyo Olympics.
  • There have been claims that the country will cancel the Olympics altogether and target for 2032, but Japan has since denied those rumors.
• The European Commission proposed identifying “dark red” coronavirus hot spots from which all but essential travel would be discouraged. The proposal was made following fears of a third wave.
• Zimbabwe’s government scaled down operations amid a second wave of coronavirus infections.

 Biden Administration: In his first full day in office, President Biden signed executive orders invoking the Defense Production Act that will allow for the promotion of vaccine production and improved testing, especially for travelers.  In addition, this administration appears to be posturing to take a tougher stance against Russia, while also maintaining some of the China policies of the previous administration.  Lastly, there appear to be more details about the impending impeachment trial of former President Trump.  Below are our thoughts about these stories:

• The new executive orders have been aimed at providing some relief while the administration works to push through its ambitious stimulus plan.  As we mentioned in yesterday’s report, executive orders have been used as a de facto way to get things done in Washington as partisanship has made cooperation politically toxic.  However, Biden has emphasized that he would look to achieve some bipartisan support to get his bill passed.  On Thursday, a bipartisan group of 16 senators that included Mitt Romney (R-Utah), Susan Collins (R-Maine), and Joe Manchin (D-West Virginia) met with Biden aide Brian Deese to discuss details of the plan.  So far, none have come out for or against the proposal, although Romney suggested he isn’t sure if he is interested in another round of stimulus.

• Outside of executive orders, the president has made some changes to foreign policy.  The president has pushed for a five-year extension of the Nuclear Arms Treaty with Russia, while also stating that he will seek to hold the country accountable for its perceived aggressions against the U.S. and its dissidents.  At issue is the SolarWinds cyber-attack that took place last year as well as the attempted murder of Putin rival Alexei Navalny. The president has stated that he has sought a report of Russian misdeeds and will come to a decision on a response after receiving the findings of this report.
• The president’s proposed $1.9 trillion stimulus package is looking to make its way through Congress, which will likely be the first test of his political capital.  House Speaker Nancy Pelosi has agreed to take up the measure in February, vowing a speedy passage, while Senate Republicans have raised concerns over the swelling of the federal deficit at Janet Yellen’s confirmation hearing on Tuesday.  Although we are doubtful of a quick passage of the bill through Congress, as it would need 60 votes to avoid a filibuster, we are optimistic that the more palatable parts of the bill have a great chance of making its way through Congress.  The $15/hour minimum wage will likely not be part of the final bill.  That being said, the president is expected to sign an executive order that would boost the minimum wage for federal workers.
• One of the biggest obstacles of a speedy passage of the bill is the upcoming impeachment trial for former President Donald Trump.  On Thursday, Senator Mitch McConnell stated that he would like a hearing to begin in February in order to give Mr. Trump’s defense team time to mount a defense.  He just recently found an attorney to represent him during the hearings on Thursday.  So far, Nancy Pelosi has not formally sent the articles of impeachment to the Senate, but she is expected to do so any day now.  An impeachment hearing could potentially distract senators from being able to push Biden’s stimulus through Congress, although the Democrats have argued that a trial should be straightforward and quick.  A conviction could prevent President Trump from running again in 2024, but in order for that to happen he would need 17 Republicans to find him guilty.  The possibility of a conviction seems slim as Trump is still popular within his party.  So far, prediction markets have the count between 53-56 votes against the president, although there isn’t much confidence of this outcome.

International news:

• Google threatened to make its search engine unavailable in Australia if the government moves ahead with plans to make tech giants pay for news content.
• Israeli airstrikes targeted a site near the city of Hama in northwestern Syria.  The airstrikes are believed to be aimed at areas connected to Iran’s missile production.
• Twin suicide bombings ripped through a crowded marketplace in Baghdad, killing at least 32 people and wounding at least 75 others.  Islamic State has taken responsibility for the attack, making this attack its first in two years.
• Critics of Thailand’s royal family are now facing criminal charges as more people begin testing the political taboo of questioning the family’s importance in Thai society.

 Economic News:

• On Thursday, Janet Yellen provided a written response to members of the Senate Finance Committee.  In it, she expressed an openness to work with Congress to protect households earning “less than $400,000” from losing their tax cuts, suggested the wealthy will be audited at higher rates, and mentioned that she will not seek to reopen the Fed lending phased out by her predecessor but will continue to act within the mandate.  In addition, she stated that Biden will not actively seek a weaker currency and is expected to return to the Rubin compromise, where the U.S. says it supports a “strong dollar” but merely means it won’t use the exchange rate as a policy tool.
• Each of the 12 Federal Reserve bank presidents were renewed to a five-year term on Thursday.

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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 ECB meets today and leads off our coverage.  A recap of President Biden’s first day follows.  There is a plethora of news out of China.  A pandemic update follows, with a roundup of economic and international news to wrap up our comments.  Due to the Monday holiday (which delays the weekly DOE data), the Weekly Energy report will be published tomorrow along with a new Asset Allocation Weekly report, podcast and, chart book.  The current Asset Allocation Weekly is available.

ECB:  The statement held no surprises—the ECB kept rates unchanged and will continue to absorb bonds at the current pace.  Policy looks to remain in place at least into 2023.  Nothing new emerged in the press conference.  Although nothing changed, financial markets took the statement as hawkish (bond yields rose, and the EUR appreciated) probably because nothing new was unveiled.

Biden:  One of the concerns we have registered is that a deeply divided nation is leading to government by executive order and thus notable swings in policy.  Yesterday was a prime example.  On his first day, President Biden issued a flurry of executive orders, reversing some of President Trump’s policies.  These swings complicate long-term investing for business.  Here are some highlights:

• The U.S. returned to the Paris Accord.
• The moratorium on student loans and evictions was extended.
• Several orders were tied to dealing with the pandemic. This includes using the Defense Production Act to direct the production of goods, e.g., PPE.

We also note the incoming administration is proposing a first-time homebuyer tax credit of $15 thousand, which would offer down payment assistance.  This is potentially a big deal.  As we noted in recent AAW’s and our 2021 Outlook, for the bottom 90% of households by income, their largest asset is their home.  Supporting home values and encouraging home building could boost the wealth of this majority of households and increase construction jobs.  We have been looking for policies of this sort.  If this policy is adopted, we would expect a couple of other measures to emerge:

• Yield curve control will probably become necessary. Part of housing affordability is keeping mortgage rates under control, and the most effective way to do this is to cap the 10-year Treasury note yield.  Our guess is that somewhere between 1.25% to 1.50% the FOMC will move to try to cap further increases.
• The recent trend of build-to-let for single-family homes may be threatened. Some of the demand for single-family home rentals may be from risk-averse households who simply don’t want to take the risk of a mortgage.  But, if this trend is driven by the lack of a down payment, the aforementioned policy might address that and boost homeownership further.
  • An important element of expanding homebuilding will be local zoning. There are situations where it is difficult to increase the home supply due to regulations.  These will need to be addressed.
  • It will be difficult to expand suburbs without allowing some degree of work from home. In many urban areas, we are probably near the limits of suburban expansion if jobs require a daily commute.  However, if the commute is less, it is conceivable that living “further out” becomes possible.

To wrap up, the EU is welcoming the new president; although the contrast with the outgoing government is clear, we expect conflicts to return rather quickly.  We also expect the business community to push back against tax increases and the minimum wage.  That doesn’t mean that no tax increases will come.  We expect them to be less than some expect (for example, if the individual rate rises, look for the SALT deductions to return).  Also, some phase-in on the minimum wage would not be a shock.  And finally, we are seeing continued evidence that fiscal deficits don’t trigger inflation.  Why?  IOHO, the relationship between income inequality and inflation is probably the key element.  Fiscal and monetary policy stimulus is less inflationary under conditions of high inequality.  In fact, the more likely outcome (especially from monetary stimulus) is asset price inflation.

China:  The Xi government appears happy to see Trump go.  That doesn’t mean they will give Biden any slack.

• As a parting shot, China imposed personal sanctions on members of the outgoing administration, including Peter Navarro and Mike Pompeo.
• Jack Ma is back; he participated in a videoconference, a sort of “proof of existence” event.
  • Although Jack may be back, Ant Financial is probably facing a much more adverse regulatory environment going forward as Chinese regulators try to take control of the shadow banking system.
• One way Beijing is working to divide the U.S. is through supporting the American business community. During the Cold War, the Soviets had limited ability to use the business community to create inroads.  But the U.S. and Chinese economies are deeply integrated, and business has an interest in maintaining ties.  We note that President Xi directly contacted Howard Schultz, the chairman emeritus of Starbucks (SBUX, USD, 105.58) in a bid to improve relations.
  • Despite this attempt to woo the business community, the Commerce Department has issued new powers to block Chinese technology, making Beijing’s outreach more difficult.
  • One of the last acts of the outgoing Trump administration was to further restrict the exports of technology to Huawei (002502, CNY, 2.62). This administration also asked the government to minimize procurement from Chinese sources.  Although these rules could be reversed by the new Biden administration, we doubt it will be a high priority.
• During the Cold War, countries tended to play off the Americans and the Soviets for aid and support. We note that Ecuador negotiated a deal to use U.S. loans to repay Chinese debt.  In exchange, Quito will outlaw the use of Chinese equipment in its telecom networks.  This arrangement is politically controversial in Ecuador, pitting followers of former president Rafael Correa, who negotiated the loans with China, against current president Lenin Moreno.
• Chinese investors are purchasing shares of companies that were blacklisted by the U.S., and Chinese telecoms that were blacklisted are seeking to be relisted on the NYSE.
• China is tightening rare earth regulations, which will affect the entire supply chain. This is a potential threat to numerous high-tech items, from smartphones to electric vehicles.
• Ely Ratner will be the new administration’s Pentagon expert on China.
• Zoom Video Communications (ZM, USD, 382.80) has become ubiquitous during the pandemic. Here is some sobering news about the company.  The DOJ has issued a complaint against Jin Xinjiang, a former executive at the firm, for using the tool to surveil and disrupt users.
• The strong CNY is reportedly putting pressure on Chinese exporters.
• Although China’s Q4 GDP was remarkable, the high growth rate was mostly a function of state-led investment and exports, the formula that has been a key element of growth for this century. Michael Pettis described the process.  Consumers, on the other hand, didn’t participate to the same degree.

COVID-19:  The number of reported cases is 96,958,794 with 2,077,332 fatalities.  In the U.S., there are 24,439,427 confirmed cases with 406,162 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 39,990,150 doses of the vaccine have been distributed, with 14,270,441 doses injected.  The number of second doses, which would grant the highest level of immunity, is 2,161,419.  The number of vaccinations to 100 people for the world is available here; Israel is the world’s front-runner.  The R_t data shows dramatic improvement, as does the Axios state chart.  The next challenge will be when the U.K./South African variant becomes more common in the U.S.  Both variants spread faster and could lead to another surge in the coming weeks.

Virology

• Another COVID-19 variant has emerged in Germany and is different from those recently isolated in South Africa and the U.K. Little is known about its characteristics, but we will continue to monitor it.
  • Meanwhile, laboratory studies suggest the BioNTech (BNTX, USD, 103.23)/Pfizer (PFE, USD, 36.50) vaccine is effective against recent variants.
  • The EU is accusing the aforementioned companies of shortchanging its vaccine deliveries.
• China has reported its first COVID-19 fatality since May. The country is facing new outbreaks just before the New Year’s travel season.  Authorities are trying to encourage citizens to avoid travel, but that will be difficult to execute.  Some local governments are resorting to paying workers to stay in place.  In response to higher case rates, China built a hospital, reportedly in five days.  New quarantine facilities are being constructed as well.  It is not clear whether or not this new surge is tied to the U.K./South African variants.
  • China is continuing its efforts to discredit ideas that COVID-19 originated in Wuhan and is trying to discredit Western vaccines.
• Although we report case and fatality data regularly, we acknowledge that the data is less than perfect. Data from the emerging world is especially suspect.
• Brazil is using the Chinese vaccine but is finding it difficult to source key parts of the product.
• Iraq has decided it has achieved herd immunity; there isn’t strong evidence to confirm this idea, but Iraqis are returning to pre-pandemic behavior. If the country hasn’t achieved herd immunity, the new behaviors could lead to rising infection rates.
• Venezuela, experiencing profound economic problems, scored something of a public relations coup by sending oxygen to Brazil, which is facing a deep shortage of the gas due to COVID-19 issues. The Bolsonaro administration was not amused.
• The Netherlands has implemented curfews and has barred flights from Britain, South Africa, and from most South American nations in a bid to reduce the spread of the emerging variants.

Policy and Economics:  As we noted last week, President-elect Biden has floated a $1.9 trillion spending package.  We suspect much of it will be passed, although some of the more controversial measures, i.e., minimum wage increase, might be phased in or separated from the bill.  We view every action by a new government as the spending of political capital.  Biden using his political capital in this manner is a good sign.  There can be quibbles about what and how money should be spent.  In an economy that remains well below its long-term trend, going big early makes sense.  However, this action will reduce the chances of other agenda items getting passed.

• One way to look at the gap that fiscal spending could address is the unpaid rent situation. In NYC alone, it is estimated that there is $1 billion of unpaid rent.  This is a classic funding chain problem.  If the renter can’t pay, the landlord can evict, but that action won’t allow the landlord to become current on whatever mortgage is held.  Giving households cash will give them at least some ability to reduce the unpaid rent and allow payment flows to resume.  Essentially, fiscal spending provides a public borrowing mechanism to prevent the rental market from seizing.
• One unresolved issue of the Great Financial Crisis is the situation with Fannie Mae (FNMA, USD, $1.870) and Freddie Mac (FMCC, USD, 1.86). The mortgage guarantors were taken over by the government during the crisis and have remained in government control since.  The FHFA wanted to return the two back to private control but was never able to execute the transaction.  Under the incoming administration, we suspect the status quo will continue.  One change was that the two companies will be able to keep their earnings for now.
• Housing markets remain active, but one of the reasons home prices are strong is that Americans are moving less. An aging population, the potential for remote work, and the pandemic have led to a rise in the average holding period of a home to 13 years.
• There are widespread reports of semiconductor shortages in the global auto industry. European automakers are facing a short-term supply problem, whereas China’s industry may be dealing with a much longer-term situation due to trade restrictions.
• A series of problems, from misallocated shipping containers to vessels that are too large for the deglobalizing world, are creating bottlenecks and boosting shipping prices. Here is a recent podcast we would recommend on this issue.
• Tyson Foods (TSN, USD, 66.25) has settled price fixing-claims in the chicken market.
• LIBOR is expected to be completely phased out by mid-2023, but there are worries that old loan contracts may retain their rate (and may end up fixing the rate for the life of the loan when LIBOR expires). New York state is proposing legislation that could become a model for national regulation.
• Here is a case of unintended consequences. New entrants into an industry can have a disruptive effect on the industry.  Perhaps no industry was more primed for disruption than the men’s shaving market.  The industry was a duopoly that created increasingly complicated high-priced productions.  Harry’s entered the market in 2013; initially it used a direct to consumer model but eventually went into retail distribution.  Their products were popular and began to take market share from the dominant participants.  In 2019, Edgewell Personal Care (EPC, USD, 34.19), the owner of Schick, approached the company for a buyout.  Interestingly enough, the FTC blocked the sale.
  • From a pure industrial organization perspective, this makes sense. Harry’s was adding competition to the industry, and being purchased by one of the duopolists defeats the point of competition.
  • However, from a financial market’s perspective, this decision is a problem. Venture capital firms have fund disrupters like these with the idea of a payoff at some point.  The buyout is one of the ways for that to occur.  The other is to go public.  The FTC is signaling that buyouts may be a problem, leaving only one real avenue for the initial backers to get rewarded.
  • If this becomes broad FTC policy, it could have the perverse effect of discouraging the initial investment in startups. There may be cases where going public isn’t the preferred option. Therefore, this outcome could actually decrease new entrants and reduce future competition.

International roundup:

• Thailand has strict lèse-majesté laws that can punish individuals who criticize the royal family. A former government worker who shared an audio clip that was critical of the king on social media was sentenced to 43 years in prison, the longest sentence for violating this law in Thailand’s history.  The harshness of the sentence reflects the deep unpopularity of the king, who is facing protests.
• As we noted earlier this week, Japan is considering regulatory changes that would reduce cross-holdings. The impact on stock is still uncertain prices, but ending cross-holdings should improve governance.
• The European Commission published a report in the economic and financial system of the EU and suggested it wants to expand the “international role of the euro.” Despite having this goal for some time, the EUR remains a minor reserve currency.  Although the recent decision to issue a Eurobond is important in expanding the reserve role, the biggest hurdle is Germany.  For the EUR to become a true reserve currency in a fiat system, the Eurozone would need to start running persistent current account deficits (otherwise, the supply of the currency to global markets would decline), and Germany has no interest.
• European banks are facing a serious risk from small businesses. The pandemic has hurt small businesses, and it is highly likely that they will face rising loans in default.

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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 U.S. political news related to Joe Biden’s inauguration as president today.  We next turn to overseas news, focusing mostly on Chinese and Japanese developments.  As always, we end with a discussion of the latest on the coronavirus pandemic.

U.S. Politics:  As Joe Biden prepares to be inaugurated today, Republican Senate leader Mitch McConnell and Democratic Senate leader Chuck Schumer are negotiating a power-sharing deal regarding how to operate the evenly-divided Senate.  The main stumbling block appears to be the filibuster, which some Democrats want to eliminate, but McConnell has vowed to preserve it.

• In his Senate confirmation hearing, Secretary of State nominee Tony Blinken found common ground with many key Republicans by striking a hard line on China.  In his testimony, Blinken said he supports Tuesday’s finding by Mike Pompeo, the current Secretary of State, that China has committed genocide in Xinjiang with its policies toward the Uighur ethnic group.  He also backed military and global diplomatic support for Taiwan as it faces pressure from Beijing.
• In addition, Blinken questioned the future of Hong Kong as a center for global businesses, and he echoed President Trump and others in criticizing China for misleading the world about the origin of the coronavirus pandemic and contributing to its spread.

China-Australia:  Not only has China’s retaliatory ban against Australian coal upended global trade flows of the commodity, as we’ve reported previously, but it now appears that coal shippers are being forced to wait out the dispute.  The flotilla of coal carriers sitting outside Chinese ports has grown to some 65 vessels, and one vessel has been waiting outside port since May of last year.

China:  Technology entrepreneur Jack Ma resurfaced in a public video for the first time since late autumn, after angering Chinese officials by pushing back against financial regulations and was punished by having his IPO of fintech firm Ant Financial scuttled.  Ma’s reappearance has been positive for Chinese tech stocks so far today, as it provides reassurance that his firms won’t be nationalized, and that there may be a limit to how strongly the government wants to punish him for his pushback against their policies.

Japan:  New rules at the Tokyo Stock Exchange and more aggressive guidelines by proxy advisors are threatening to force a massive unwinding of companies’ cross-shareholding networks by a deadline of March 31.  Although businesses will probably try to water down the rules before then, the approaching deadline could produce volatility in Japanese equities over the coming two months.

• Cross-shareholdings are interconnected portfolios of ownership, where listed Japanese companies own shares in each other, which protect underperforming managements with a cushion of automatic investor support.
• Although cross-holdings have been in decline since a peak in the 1990s, companies justify them as necessary to “maintain business relationships.” This infuriates fund managers who view such webs as a recipe for complacency, low returns on equity, and poor governance.

European Union:  EU Competition Chief Margrethe Vestager warned large technology firms that it would be better to work with the EU on developing new digital market rules since failure to do so would lead to a complex patchwork of different rules in each country.

Italy:  Prime Minister Conte narrowly won his vote of confidence in the country’s Senate yesterday.  However, the vote still left Conte’s government severely weakened after the party of the former prime minister pulled out of the ruling coalition last week.

Russia:  The Kremlin reiterated its commitment to extending the New START nuclear arms-control treaty with the U.S., saying it would welcome efforts promised by the administration of U.S. President-Elect Biden to reach an agreement on the last remaining major nuclear arms pact between the two countries.

COVID-19:  Official data show confirmed cases have risen to 96,284,292 worldwide, with 2,060,232 deaths.  In the United States, confirmed cases rose to 24,256,319, with 401,797 deaths.  Vaccine doses distributed in the U.S. now total 31,161,075, while the number of people who have received at least their first shot totals 13,595,803.  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 about 168,000 yesterday, although that was still significantly lower than one week ago.  Just as important, the number of hospitalizations related to the virus edged down to 123,820, including 23,029 in intensive care.  On a less positive note, the number of daily deaths rose back above 2,500.
• In China, health authorities have ramped up their efforts to contain a resurgence of cases.  As the country faces its worst flare-up since the pandemic first exploded there early last year, cities across the northern provinces of Hebei, Heilongjiang, and Jilin have built temporary quarantine facilities, imposed lockdown measures on millions of residents, and rolled out rounds of citywide testing.
• In the U.K., the government remains on track to meet its goal of vaccinating 15 million of its most vulnerable citizens by mid-February.  The apparent success of the program to date is due in part to its reliance on the homegrown vaccine from Oxford University and AstraZeneca (AZN, 52.57), which is easier to store and handle than some rival vaccines.
• A study by German researchers found that the vaccine developed by Pfizer (PFE, 36.73) and BioNTech (BNTX, 104.70) is equally effective against all known mutations, including the rapidly transmitting mutation in the U.K.  Since the news could help ease concerns about vaccine effectiveness, it should be positive for risk assets.
• As major developed countries prioritize acquiring vaccine doses for their own people and contribute little to the WHO program for poorer countries, China is ramping up its vaccine diplomacy.  Foreign Minister Wang Yi pledged last week to hand out more than a million doses of Chinese vaccines during a swing through Southeast Asia.

 Economic and Political Impacts

• According to Boston College’s Center for Retirement Research, the economic and financial impacts of the pandemic only had a modest negative impact on American’s retirement security.  Even though many workers lost jobs or income last year, the difference was made up partially by the strong stock prices.  As a result, the Center estimates that 51% of workers aged 30 to 59 are in danger of not being able to maintain their standard of living in retirement, up just a bit from 49% in the previous year.

 U.S. Policy Response

• In her confirmation hearing before the Senate Finance Committee yesterday, Treasury Secretary-Nominee Janet Yellen argued forcefully for President-Elect Biden’s proposed $1.9 trillion pandemic relief proposal, as anticipated.  That aspect of her testimony was probably behind much of the rise in equities yesterday.  However, it’s notable that she also signaled the Biden Administration will continue to take a tough line on China’s aggressive trade policies.  In a sign that U.S.-China economic tensions could well continue, she promised to use the “full array” of U.S. policy tools to address China’s unfair trade practices and low labor and environmental standards.
• According to the Small Business Administration, roughly 60,000 borrowers were approved for more than $5 billion in forgivable loans during the first week of the reopened Paycheck Protection Program, which was relaunched on January 11.

 Foreign Policy Response

• In Europe, strong central bank-bond buying is helping support property-backed debt, but it is also raising concerns that it is distorting the market and causing long-term risks.

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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 the latest news on President-Elect Biden’s incoming administration, followed by a discussion of China’s success in growing its economy in 2020.  We also touch on other key foreign news before turning to the latest developments related to the coronavirus pandemic.

U.S. Politics:  Reports indicate that Biden’s inauguration speech tomorrow will emphasize themes of national unity and recovery from the pandemic.  After that, Biden’s team has indicated he will embark on a ten-day policy sprint to push forward executive orders and legislation aimed at the pandemic, the economy, the environment, and racial issues.  The package will reportedly include a proposal for an eight-year path to citizenship for 11 million people living in the U.S. without legal status.

• Separately, a slew of Biden cabinet nominees will face confirmation hearings today, including Janet Yellen for Secretary of the Treasury, Lloyd Austin for Secretary of Defense, and Avril Haines as Director of National Intelligence.
• Yellen is not only expected to argue for an aggressive package of further pandemic relief (see below), but to offer the traditional assurances that the U.S. prefers market-determined currency exchange rates; it will not deliberately push down the dollar to increase the country’s competitive advantage.  All the same, we still suspect the greenback will remain in a downtrend in the coming years in response to factors like the euro’s greater attractiveness as a reserve currency and the impact of massive fiscal and monetary stimulus in the U.S.

China:  Official data yesterday showed the Chinese economy managed to grow in 2020 by an inflation-adjusted 2.3%, slightly beating expectations and making it the only major economy to post an annual expansion during the “Year of COVID-19.”  Looking at the fourth quarter alone, Chinese gross domestic product (GDP) was 6.5% larger than in the same period one year earlier, which means the economy has already returned to its pre-coronavirus trend.  China’s ability to get back to a normal economy so quickly would seem to bode well for Chinese equities.  However, it is important to remember that economic and financial risks abound because of the rising bipartisan pushback in the U.S. against China’s geopolitical, economic, and domestic aggressions.

Russia:  Opposition activist Alexei Navalny, who was recovering in Germany from a poisoning last summer, returned to Russia on Sunday and was immediately arrested on what appear to be trumped-up charges aimed at silencing him.  Illustrating how badly the government wanted to keep his arrest under wraps, it diverted Navalny’s flight at the last moment away from a Moscow airport where his supporters were waiting to welcome him.  Despite his detention, Navalny immediately punched back against the Putin government by calling for massive street protests.  Navalny’s arrest has already drawn condemnation from a range of European leaders and President-Elect Biden’s nominee for National Security Advisor.  If the Kremlin cracks down on Navalny too strongly, we would expect further sanctions against Russia and new headwinds for the Russian economy.

Italy:  Prime Minister Conte today faces a crunch vote of confidence in the country’s Senate after Matteo Renzi, the former prime minister, removed his small party’s backing for the government last week.  Conte won a confidence vote in Italy’s lower chamber yesterday, but the vote in the Senate today is expected to be much tougher.  If Conte is unable to win in the upper house, he will be forced to hand in his resignation to President Mattarella, who will then ask parliamentarians to attempt to form a new coalition.

Tunisia:  As the 10^th anniversary of the Arab Spring approaches, nightly riots by Tunisian youths this week have underscored the depth of the economic crisis in the Arab world’s only democracy as it grapples with rising poverty and widespread unemployment.  We have also noted that when global grain prices are rising rapidly, as they were in the Arab Spring and as they are right now, they often spark domestic instability in developing countries like Tunisia.

COVID-19:  Official data show confirmed cases have risen to 95,668,817 worldwide, with 2,043,713 deaths.  In the United States, confirmed cases rose to 24,079,744, with 399,008 deaths.  Vaccine doses distributed in the U.S. now total 31,161,075, while the number of people who have received at least their first shot totals 10,595,866.  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 137,000 yesterday, although the number is usually muted early in the week and during holidays.  Hospitalizations related to the virus fell below 124,000, including approximately 23,200 in intensive care.  Deaths also fell but remain high, as they do in many key countries around the world.  In Japan, daily virus-related deaths topped 100 today for the first time since the crisis began.
• President-elect Biden has rejected an effort by President Trump to lift the bans on most travel into the U.S. from Europe, the U.K., and Brazil that were imposed by Trump in his initial response to the coronavirus pandemic last spring.
• In Switzerland, anti-lockdown activists submitted enough petition signatures to trigger a referendum on whether to remove the government’s legal authority to order lockdowns and other pandemic restrictions.  The ballot could come as soon as June.

 Economic and Political Impacts

• In its monthly report on the global oil market, the International Energy Agency cut its demand forecast for 2021 to 96.6 million barrels per day from 96.9 million bpd previously.  The reduced forecast reflects renewed lockdowns around the world in response to resurgent infections.  Nevertheless, demand would be much higher than the approximately 91.1 million bpd registered in 2020.  Because of the rebound in 2021 and expectations that demand could recover to the pre-pandemic level of almost 100 million bpd by 2022, we suspect crude prices can continue to strengthen in the near term.
• Despite the IEA’s cut to its oil demand forecast, the cost of shipping goods in containers from China to Europe has more than tripled in the past eight weeks, hitting record highs as a shortage of empty containers disrupts global trade.
  • Thousands of empty containers were left stranded in Europe and the U.S. in the first half of 2020 when shipping lines canceled hundreds of trips in response to pandemic lockdowns. When European and U.S. demand for Asian goods rebounded in the second half of the year, competition for available containers among shippers sent freight rates soaring.
  • Rates between China and the U.S. have plateaued in response to a Chinese government request that shippers cap their trans-Pacific rates.  That helped divert scarce containers to the Pacific, boosting rates further on the routes to Europe and threatening trade and economic activity between Asia and Europe.
• Bruce Flatt, the CEO of Canadian real estate firm Brookfield Asset Management (BAM, 38.74), warned that investors are underestimating the speed and extent to which people will return to work in offices and head back to shopping malls as the pandemic subsides.  He is preparing to complete a $5.9 billion deal to delist Brookfield’s property arm amid frustration that the equity market does not recognize the value of its vast real estate portfolio.
• The World Economic Forum issued a report warning the pandemic threatens to widen income and other disparities within and between countries.  Based on a survey of business executives, academics, and risk-management experts, the report says worsening disparities could destabilize some countries and exacerbate the frictions between the U.S. and China.

 U.S. Policy Response

• In her confirmation hearing before the Senate Finance Committee today, Treasury Secretary nominee Janet Yellen plans to tell lawmakers that the U.S. risks a longer, more painful recession unless Congress approves more aid.  Yellen will urge the legislators to “act big” in order to shore up the recovery.  So far this morning, equity futures are rising on expectations that if Yellen makes a credible, effective case for the Biden Administration’s proposed $1.9 trillion relief plan, it would help ensure that the legislation gets passed into law.

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

[Posted: 9:30 AM EST] | PDF

Good morning.  Equity markets are trending lower following Biden’s announcement of additional stimulus.  Despite markets being relatively bullish on fiscal stimulus, there is growing concern that the $1.9 trillion price tag may make it harder to pass through Congress.  We will explain the package in more detail below.  Chinese equities have trended lower as the Trump administration continues its attack on Chinese firms.  We also have new updates on the pandemic and other important news.  And, being Friday, there is a new Asset Allocation Weekly, along with the accompanying podcast and chart book.

Biden COVID-19 Plan: On Thursday, Joe Biden asked that Congress “act now” on a new rescue package. The proposed plan will request $1.9 trillion and is expected to include $1,400 stimulus checks to households, tax cuts, a temporary boost in unemployment benefits, and a moratorium on evictions and foreclosures through September.  The most controversial part of the plan is a boost to the minimum wage from $7.25 to $15.00 an hour.  The plan will likely be the Biden administration’s first test in getting major legislation through Congress.  Here are the things we are looking out for:

• Last night, the House voted to send the articles of impeachment to the Senate.  Typically, impeachment trials last a few weeks, but Democrats have argued that this case is so overwhelming that the trial could end sooner.  We are not optimistic that this will happen as Republicans may try to stall the impeachment trial to make it harder for the Biden administration to accomplish many of its goals.
• Senator Chuck Schumer will have a full plate when he takes over as Senate Majority Leader next week.  He will be tasked with managing the impeachment hearings, confirming members of Biden’s staff, and securing another stimulus package.  To say he has a tall order to fill would be an understatement.  That being said, if he wants the Democrats to hold on to the Senate after 2022, he will probably need to prioritize. It will be interesting to see how he handles the pressure as the fiscal stimulus pushes through the Senate and as angst grows over the impeachment of a person who is no longer president. His biggest hurdles will likely be to get Democrats on the same page while the impeachment process gets underway.  Due to the political nature of impeachments, bipartisan cooperation will be unlikely.  Hence, he will probably need to build some rapport with Senator Joe Manchin (D-WV), who holds a seat in a notoriously conservative state.  As early as last week, Senator Manchin has expressed a reluctance to issue more stimulus checks but has been relatively silent as of late.
• The increase in the minimum wage is, in some cases, the most controversial part of the plan and will probably be a crucial part of Biden’s economic agenda.  The increase in the minimum wage will likely meet stiff pushback from his Republican colleagues. In the past, the party has resisted a minimum wage hike, as it is has been argued that it is a job killer. Given the near doubling of the minimum wage and the overall health of the labor market, we expect that, if implemented, the minimum wage could be phased in as opposed to an overnight jump to prevent small businesses from being overburdened.

China:  The U.S. imposes new restrictions on Chinese firms, and Beijing ignores it and ramps up the pressure on its foes.

• The Trump administration has added nine Chinese firms, including Xiaomi (XIACY,19.75), to its list of companies believed to be owned or controlled by the Chinese government. The designation will ban Americans from investing in those companies and make it harder for them to do business in the U.S.
• The Department of Commerce finalized rules that will make it easier for the federal government to block Americans from importing technology from countries it deems to be a threat to national security. The rule will come into effect in 60 days and will target countries such as Iran, Russia, North Korea, Cuba, Venezuela, and, most notably, China.
  • U.S. automakers have already started complaining about the ban over Chinese technology as firms have already begun shutting assembly lines due to a semiconductor shortage.
• Chinese steelmakers feeling the pinch caused by the country’s ban on Australian coal have asked the government to lift its ban. Although there is hope that China could allow shipments that arrived before the ban to be offshored, efforts to lift the ban were largely unsuccessful.  The stance likely represents China’s willingness to accept some pain if it can force other countries to bend to its will.

COVID-19:  The number of reported cases is 92,993,666 with 1,991,206 fatalities.  In the U.S., there are 23,282,329 confirmed cases with 388,159 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 30,628,175 doses of the vaccine have been distributed, with 11,148,991 of first doses injected.  The R_t data shows 20 states are showing a reading less than one, with South Dakota having the best results and Washington State with the worst.

Virology

• The WHO team sent to Wuhan to investigate the origins of COVID-19 has already run into roadblocks. Two of the experts were forced to stay in Singapore because they tested positive for COVID-19 antibodies, while the remaining experts were required to quarantine for two weeks.  There is a growing belief that China’s willingness to let independent scientists study the origin of the virus may be more for political purposes than for scientific reasons.  As a result, there is skepticism that WHO officials will be given complete autonomy in their investigation.
• In the U.S., COVID-19 hospitalizations fell to a 10-day low, and there is growing optimism that the worst is now behind us. For the first time since September of last year, only one state, North Carolina, set a record in COVID-19 hospitalizations.
• A city in northern China is building a new quarantine facility to deal with a growing number of virus cases ahead of the Lunar New Year, which takes place a month from now.
• Vaccine news:
  • Members of Operation Warp Speed have recommended that states expand access to COVID-19 vaccines to adults over 65 years old and to those with underlying health issues.
  • Three dozen mayors have asked President-elect Biden to deliver vaccines directly to them as opposed to the state governments. The proposal is intended to improve vaccine distribution, which has been lagging as of late.
  • Russia is expected to submit its Sputnik V coronavirus vaccine to the European Union next for approval.
  • Israel vaccine data suggest that infection rates for COVID-19 drop after the first dose.
  • Greece, whose economy is heavily dependent on tourism, has been pushing for a vaccine passport that allows people who have received the vaccine to travel freely.
  • Norway has warned that the COVID-19 vaccine could be too risky for the very old and the terminally ill. Officials said that 23 people in the country have died following the first dose of the vaccine.

Powell Speaks:  Speaking at a virtual conference hosted by Princeton University, Fed Chair Jerome Powell allayed fears that the Fed would end its asset purchase program anytime soon.  He stated that it is way too early to start discussing an exit at present, but the Fed would let it be known when it feels that it has reached its targets in employment and inflation.

European Union and Brexit: Here are the stories.

• As rules around the banking industry remain unclear, many of the U.K.’s top dealmakers have moved from London to the EU.  The migration could foretell a flight of capital in the future if banking rules don’t become clearer.
• The European Central Bank is not expected to extend its monetary stimulus beyond March 2022.  Despite renewed lockdown restrictions and a possible double-dip recession for the Eurozone, economists are still confident that the bloc’s economic rebound will likely make future stimulus unnecessary.
• The Christian Democratic Union party is expected to choose its new leader following Chancellor Angela Merkel’s departure. The top contenders vying to replace Merkel are Friedrich Merz, Armin Laschet, and Norbert Röttgen.

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

[Posted: 9:30 AM EST] | PDF

Good morning.  Equity markets are moving higher despite the continued lift in interest rates.  Our coverage begins with affairs in Washington, the impeachment, and policy.  China news comes next.  There is an update on the breadth of stock purchase bans and a policy declassification.  The pandemic coverage follows.  The Fed released the Beige Book yesterday; we offer a recap.  EU and post-Brexit updates are next, and we close with a paper that seems to come from “Captain Obvious.”  Being Thursday, the Weekly Energy Update is available. We discuss why oil prices and oil equities have diverged.  The current Asset Allocation Weekly is available, too.

Impeachment and policy:  Yesterday, the House approved the articles of impeachment, making President Trump the only president to be impeached twice.  The articles will move to the Senate for a vote, but it doesn’t look like Majority Leader McConnell (R-KY) will bring them to the floor before the inauguration.  Here is our take:

• Despite the turmoil, equity prices continue to lift higher. It doesn’t appear that equities are worried about the fallout from the impeachment or future Biden administration policy.  Monetary policy is still the focus (see below).
• As regular readers know, we focus more on trends than political figures. This is just the opposite of the media.  Nothing sells ad minutes better than villains and heroes.  However, in our analysis, focusing on personalities misses the underlying trends.  We have framed not just the Trump administration, but the Obama administration too, as reflecting the desperation of the working class.  Many of Obama’s supporters in 2008 thought they were getting Bernie Sanders (I-VT) and are still bitterly disappointed that he turned out to be mostly a center-left establishment president.  Right-wing populists have enthusiastically supported President Trump, but his support for that group has been mixed.  The tax cuts did little for them, and while the regulation rollbacks were small-business friendly, regulations tend to protect labor over capital.  Immigration restrictions, on the other hand, were popular.
  • We are seeing the GOP split between the establishment and the populists widen. There are widespread corporate withdrawals of funding support for Republicans seen as supporting the events last week.  We view these decisions as an attempt by the establishment wing of the GOP to retake control of the party.
  • We have been arguing for some time that part of what is going on is a realignment of political parties in the U.S. If the GOP establishment fails to gain some semblance of control, we would not be surprised to see long-time conservatives either become independents (a breakup similar to the Whigs in the 1850s) or become Democrats.
  • The Democrats have their own establishment/populist split but manage it through divide and conquer. The leadership uses identity to play off one populist group against another to stay in power.  That strategy is working for now but may not work indefinitely.
  • Overall, the focus on impeachment is due, in part, to the idea that Trump is a singular figure, and if he is banished, his followers will no longer be a threat. This idea is probably misguided.  Right-wing populists will find another champion.
• For investors, the party realignments do bring some risk. For example, it is getting very difficult for some industries to engage in long-term investments because the regulatory landscape is no longer consistent.  Uncertainty about tax rates changes behavior, even if the tax rates themselves don’t change.  But, for the next few years, we are looking at an environment of liquidity expansion under conditions of high income inequality, which means ample excess liquidity that will need to find a home, with most of the cash sitting on the balance sheets of the wealthy.  This is the topic of discussion for tomorrow’s Asset Allocation Weekly.
• The change in Senate leadership means that Senator Sherrod Brown (D-OH) will become chairman of the banking committee. Expect a couple years of large bank executive grilling.
• One complication that comes from impeachment is that it will reduce the available policy “bandwidth” to work on stimulus and other policies. President-Elect Biden will unveil policy proposals today.
• The merger landscape is changing. Visa (V, USD, 209.35) announced it was abandoning its plans to purchase Plaid.  The DOJ opposed the merger.

China:  U.S. investors get a reprieve on major Chinese tech stocks, and U.S. policy on the Far East is declassified.

• Americans will be able to continue to hold shares of Alibaba (BABA, USD, 235.30), Tencent (TCHEY, USD, 78.43), and Baidu (BIDU, USD, 236.94). The decision emerged after the DoD and Treasury came to an agreement.  The former was worried that these firms assisted China’s military, while the latter was concerned that banning such high-profile companies would lead to unnecessary market disruption.  In the end, the Treasury did prevail.
• The incoming administration named Kurt Campbell to be the Asia tsar[1] to coordinate Asia foreign policy. Campbell is a high-profile appointment; here is a report he wrote for Foreign Affairs, where he discusses his view of the region.  Although there is much talk about working with allies and framing the region in a way similar to Europe after Napoleon, this model probably doesn’t work very well.  Outside of China, the countries in the region tend to treat geopolitics on a transactional basis.  In other words, they like the Cold War tradeoff of being able to run mercantilist trade policies with the U.S. and not have to pay for their own security in return for policy fealty to Washington.  In the absence of the Cold War structure, we anticipate the nations of the region will try to get favors from both the U.S. and China.
• The U.S. declassified its Strategic Framework for the Indo-Pacific The framework has been in place since 2018 and reflects analysis from Australia on containing China and managing North Korea.  The existence of such a document isn’t a huge surprise, but the decision to declassify it reduces the ability of the next administration to deviate significantly from it.  After all, if nations have been using this framework for the past couple of years, it will be a problem to change it radically.
• China continues to clamp down on Hong Kong. The latest is that authorities are considering banning anyone with a British National passport from holding public office.  The U.K. makes it easy for such holders to move to Britain, giving Beijing less control over these passport holders, so denying them political office ties officials closer to China.
  • Beijing is expanding its digital crackdown on dissidents.
  • Ted Hui made an escape from Hong Kong with the help of two young Danes.
• The U.S. has banned cotton and tomato products from Xinjiang.
• As we note below, China’s exports continue to rise at a torrid pace.
• We have been eying Singapore as a destination for foreign companies leaving Hong Kong. The North Face (VFC, USD, 85.57) is the latest to move.

COVID-19:  The number of reported cases is 92,462,193 with 1,981,097 fatalities.  In the U.S., there are 23,078,350 confirmed cases with 384,784 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 29,380,125 doses of the vaccine have been distributed with 10,278,462 of first doses injected.  The R_t data shows 20 states are showing a reading less than one, with New Hampshire having the best results and Washington state with the worst.

Virology

• The Chinese New Year is less than a month away (February 12, the year of the Ox) and Chinese officials are warning citizens to avoid “unnecessary” trips. The Chinese New Year usually brings a mass migration as urban dwellers travel back to the countryside to meet with relatives.  Last year, this travel increased the spread of COVID-19.  China is experiencing another outbreak at what may be the worst possible moment.
• In vaccine news:
  • The Sinovac (SVA, USD, 6.47) vaccine hit a setback when reports from a Brazilian study showed much lower efficacy than the current Western vaccines. The Chinese vaccine was slated for the emerging world, so this news is a disappointment for that region.
  • The Johnson & Johnson (JNJ, USD, 157.89) single-shot vaccine is expected to release trial results over the next two weeks, but initial reports are favorable. There is great hope riding on this vaccine because its distribution will be much less complicated than the current ones.  As noted, it requires just a single dose and only needs refrigeration, not freezing.  However, there are worries about production capacity.
  • In the U.S., distribution facilities are grappling with a problem—if you thaw the current vaccines, they will spoil if they are not used. Thus, if fewer patrons than expected come in for vaccination, the distributors either must let the vaccines spoil or scramble to distribute doses, sometimes to groups not in the
  • Firms are starting to pay workers to take the vaccine.
  • Australian researchers are concerned about the effectiveness of the AstraZeneca (AZN, USD, 50.88) vaccine.
  • Russia is having vaccine distribution problems, too.
• Over time, what will become of COVID-19? Scientists expect it to become similar to a childhood common cold.
• In related news, Asian poultry farmers report an outbreak of the H5N8 bird flu.

Beige Book and the Fed:  The Beige Book offered few surprises, although it did have one interesting observation.  Housing patterns are showing stronger economic activity in the suburbs, with less in the cities.  Chair Powell will be speaking today; we will be watching for any clues on long-term interest rates.

The EU and Brexit:  Here are the highlights.

• By the weekend, Germany’s CDU will have a new party leader and chancellor. Angela Merkel will be stepping down.  She has been the dominant leader of not just Germany but also the EU, and something of a power vacuum will be in place for a while.  Although this vote will lead to Merkel’s retirement, it remains unclear if the new party leader will also be chancellor.
• It looks like Italy’s government is about to fail as former PM Matteo Renzi has pulled his party out of the coalition. What’s odd about this decision is that it seems to have nothing to do with policy.  Instead, it’s personal animosity.
• Details of the EU deal with China are starting to dribble out. The agreement apparently allows Chinese nationals to move to the EU to work on investment projects.  The export of Chinese labor to foreign investment projects has been a point of contention for some time.
• As snags over Brexit abound, the EU negotiator suggests that this will be the new normal. We are already seeing EU logistical firms suspend deliveries to the U.K.  Seafood exporters in the U.K. are finding that their exports are being held up, leading to serious trade disruptions.
  • The Dutch are looking to take financial market share from London.

And, on a lighter note: A study in the journal Economics and Human Biology proves something most of us have suspected for some time—recreational marijuana use leads to higher junk food consumption, a fact the Girl Scouts have already noted.

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[1] We await to see if a Russia tsar is named.