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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with a brief review of U.S. political and policy news, as momentum builds for the second impeachment of President Trump.  We then review key international developments and, as always, the latest on the coronavirus pandemic and the emerging battles between different vaccines and vaccine protocols. The Asset Allocation Weekly is available.

U.S. Politics:  In a letter to House Speaker Pelosi, Vice President Pence said he would not initiate a proceeding under the 25^th Amendment to oust President Trump, as demanded by Democrats to avoid a second impeachment vote against Trump today.  If the impeachment vote is held as planned, the majority of Democrats and many Republicans are expected to support it.  Senate Majority Leader McConnell is reportedly supportive of convicting Trump in the resulting Senate trial.  However, Democrats have said they may want to put off the trial for several months to allow President-Elect Biden to first push through his priority legislative initiatives.  In any case, we still expect investors to generally look through the political noise and ultimately focus again on the positive prospects from mass coronavirus vaccinations and continued monetary and fiscal stimulus.

U.S. Trade Policy:  In her first speech as President-Elect Biden’s nominee to be U.S. Trade Representative, Katherine Tai said the new administration’s trade policy will focus on helping American workers by ensuring trade agreements protect and enhance U.S. jobs, and not just ensure low prices of imported goods for consumers.  Tai said Biden’s policy priorities also include confronting China over its trade practices and enforcing the U.S.-Mexico-Canada Agreement signed by President Trump last year with bipartisan support.

United States-Japan-China:  The outgoing Trump administration yesterday declassified and published its national security strategy for the Indo-Pacific region in an apparent attempt to bind the incoming Biden administration to its tenets and reassure allies of a continued U.S commitment.  Among the key revelations in the document is that Japan and other U.S allies in the region played an outsized role in the plan’s development.  That is consistent with our view that the Biden administration will focus heavily on building a strong alliance to counter China’s malign geopolitical and economic moves in the region.

United States-Cuba:  The Trump administration is putting Cuba back on the list of countries considered state sponsors of terrorism, rescinding a 2015 move by the Obama administration.

United Kingdom:  Even though British stocks remain below their level at the time of the 2016 referendum on Brexit, they continue their post-EU trade deal rebound.  The FTSE 100 benchmark is now up nearly 8% since December 1 in dollar terms, putting it well ahead of the S&P 500, the MSCI World and the Euro Stoxx indexes, despite the U.K. being among the hardest hit by the Covid-19 pandemic.

Russia:  Opposition activist Alexei Navalny said he would return to Russia this weekend despite the Kremlin’s threats to imprison him immediately on what appear to be trumped-up charges.  Navalny has spent the last several months in Germany recovering from poisoning during the summer with a nerve agent he blamed on the Kremlin.  The return of the popular Navalny will put President Putin in a tight political spot.  If he has Navalny arrested, it could inflame opposition passions further.  If he allows Navalny to go free, he will continue his work building opposition to Putin.

Estonia:  Prime Minister Juri Ratas resigned after his Centre Party and its secretary-general were named as suspects in a criminal investigation over a property development in Tallinn, which received a state loan meant for companies hit by the pandemic. Another suspect is an adviser to the minister of finance, who is also head of the far-right Ekre Party.  The scandal threatens to undermine the appeal of right-wing, populist politicians in Estonia and even beyond.

COVID-19:  Official data show confirmed cases have risen to 91,727,510 worldwide, with 1,965,328 deaths.  In the United States, confirmed cases rose to 22,849,962, with 380,821 deaths.  Vaccine doses distributed in the U.S. now total 27,696,150, while the number of people who have received at least their first shot totals 9,327,138.  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 topped 215,000 yesterday, marking the eighth straight day in which new infections exceeded 200,000.  Hospitalizations related to the virus rose past 131,000, and of those, the number in intensive care rose to almost 24,000.
• The CDC issued an order requiring all international airline passengers, including U.S. citizens returning from abroad, to show proof of a negative COVID-19 test before boarding flights to the country.  The order, which will take effect on January 26, and exempts airline crew, military personnel, and passengers under two years old.
• In Japan, the government has expanded its latest pandemic state of emergency to Osaka, Kyoto, Hyogo, Aichi, Gifu, Tochigi, and Fukuoka, making the order effective in 11 of the country’s 47 prefectures.  The state of emergency, initially issued on Friday for Tokyo as well as neighboring Kanagawa, Chiba, and Saitama prefectures, is set to expire on February 7.
• In China, the government’s response to the new outbreak near Beijing in Hebei province now includes a stringent lockdown on 23 million people.  Authorities want to limit the chances of spreading the virus during the lunar new year vacation period next month. The seven-day national holiday is usually the world’s largest annual mass migration when hundreds of millions of city workers return to their family homes in the provinces.
• Meanwhile, a World Health Organization team will arrive in China on Thursday to investigate the origins of the virus after authorities resolved a series of delays over visa approvals. Beijing has been keen to propagate the narrative that the virus originated outside of China, despite the first mass outbreak occurring in Wuhan.
• A Brazilian medical institute that completed the first Phase III trial of the Chinese CoronaVac vaccine said it was only 50% effective against COVID-19.  That still meets the WHO standard for use of the injection, but it was down from a preliminary estimate of 78% issued just last week.  The setback is a significant embarrassment for China and will likely undermine its effort to burnish its international image through vaccine diplomacy.
• Iran and Cuba have begun trials of a joint COVID-19 vaccine, as Tehran fights the worst coronavirus outbreak in the Middle East while pledging not to use vaccines from the U.S. and U.K.
• In Australia, several immunologists and the opposition Labor Party today called on the government to reconsider its reliance on the vaccine from Oxford University and AstraZeneca (AZN, 50.29) because of its relatively lower effectiveness compared with the vaccines from Pfizer (PFE, 37.18) and Moderna (MRNA, 124.55).
• In the U.K., Prime Minister Johnson promised to open special vaccine centers that will operate 24 hours a day, seven days a week, “as soon as we can” in an attempt to hit the ambitious target of vaccinating 14 million of the country’s most vulnerable citizens by mid-February.
• In both the U.S. and Europe, the main pharmaceutical lobbying groups have warned against extending the interval between first and second vaccine shots beyond what was tested in clinical trials, despite U.S. and British government decisions to do so to accelerate first shots.

 U.S. Policy Response

• On Thursday, President-Elect Biden plans to detail the first major legislation of his incoming administration:  a massive new stimulus and relief package meant to address the continuing economic fallout from the pandemic.

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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with a discussion of the latest U.S. political news, but since the markets have largely looked past the recent turmoil, we don’t go into great detail on the issue.  We quickly move on to the latest signs of regulatory risk for the technology sector, further signs of geopolitical tensions between China and the West, and the latest on the coronavirus pandemic.  The Asset Allocation Weekly is available.

U.S. Politics:  In an internal memo, the FBI warned that agitators for President Trump are planning armed protests at all 50 state capitols and in Washington, D.C., ahead of President-elect Biden’s inauguration on January 20.  Citing the continuing danger from violent groups, the National Park Service said it has closed facilities, parking areas, and roadways in Washington and is restricting access to the Washington Monument.  Meanwhile, the National Guard’s top officer said he would increase the number of his troops in Washington to at least 10,000 by Saturday in order to counter any violent protests such as those carried out by Trump supporters last Wednesday.

• Separately, Democrats in the House will vote on impeaching Trump for a second time, on charges of “incitement of insurrection,” on Wednesday.
• Even though investors looked past the violence at the capitol last week, it’s important to remember that additional violent protests could still unsettle the markets over the coming week.

U.S. Technology Sector:  Toronto-based Rumble, Inc., which has become popular among conservatives, has filed an antitrust suit in the U.S. federal court in California arguing that Google is “unfairly rigging its search algorithms” to place YouTube above Rumble in its search results.  Not only does the suit highlight the growing regulatory risk faced by high-flying technology firms, but it also illustrates how that risk is exacerbated by conservatives’ anger over what they see as the technology sector’s biases in favor of liberals.

Australia-China:  The Australian government has banned the China State Construction Engineering Company from acquiring Australian building contractor Probuild.  The decision marks the government’s first use of new powers gained on January 1 to block foreign investment based on national security concerns.  It will likely exacerbate the current Australia-China tensions, which have already prompted China to restrict imports from Australia.

India:  Citing procedural irregularities, the Supreme Court suspended three agricultural reform laws that have prompted mass farmer protests and road blockages around New Delhi for the last several weeks.  However, the decision didn’t fully nullify the laws, so it is not necessarily a win for the protestors, and Prime Minister Modi could still end up putting his market-friendly reforms in place.

United States-Iran:  In a speech today, outgoing Secretary of State Mike Pompeo will accuse Iran of having secret ties to al-Qaeda.  Since Iran and al-Qaeda stand at opposite ends of Islam’s Sunni-Shia divide, many people assume they hate each other.  Pompeo will rely on newly declassified intelligence to argue that they are closer than previously assumed.  The speech may be designed to undercut President-Elect Biden’s expected effort to restart the Iranian nuclear deal.

COVID-19:  Official data show confirmed cases have risen to 90,995,185 worldwide, with 1,947,758 deaths.  In the United States, confirmed cases rose to 22,619,353, with 376,283 deaths.  Vaccine doses distributed in the U.S. now total 25,480,725, while the number of people who have received at least their first shot totals 8,987,322.  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 204,000 yesterday, while the number of people hospitalized because of the virus came in at approximately 129,000.  Of those hospitalized, the number in intensive care stood at about 23,000.  All those figures remain high, but since they are down from the record levels seen last week, they provide some hope that the winter resurgence of the pandemic could be peaking.  Nevertheless, local healthcare systems remain under stress in many states and abroad.
• In China, the government is battling its biggest coronavirus outbreak in months, imposing lockdowns on hard-hit areas, quarantining more than 20 million people, and urging citizens to forgo unnecessary travel as the Lunar New Year holiday approaches in February.
• The Trump administration is set to deliver new guidelines today that will get coronavirus vaccinations moving much faster.  The new guidelines, which largely match those proposed by President-Elect Biden, will recommend opening up the process to everyone older than 65.  They will also aim to move doses out the door quickly rather than holding some back.
• As scientists continue to explore whether it’s possible to transmit the virus after being vaccinated, they recommend people continue to adhere to social distancing and mask-wearing even after receiving their shots.

 Economic Impacts

• According to data provider Refinitiv, municipal bond issuance of $252 billion in 2020 was the highest in a decade, reflecting the collapse of interest rates and increased costs faced by state and local governments because of the pandemic.
• Oil prices hold firm, in a recovery powered by prospects for rebounding travel and economic activity following mass vaccinations.  In addition, output cuts by large suppliers from Saudi Arabia to U.S. companies are turbocharging the advance, giving traders confidence that demand will exceed supply.

 U.S. Policy Response

• Even though the runup in bond yields has many observers focused on possible yield curve control by the Federal Reserve, FRB Atlanta President Bostic warned that if the economy snaps back quickly this year, he might support paring back its bond-buying stimulus efforts later in the year.  The statement could support further yield hikes.

 Foreign Policy Responses

• According to the UN Economic Commission for Latin America and the Caribbean, Mexico will have the smallest budget deficit among all major Latin American countries this year due to President Andrés Manuel López Obrador’s reluctance to approve significant pandemic relief measures.
  • Despite being a populist, the president is fiercely opposed to taking on additional debt.
  • His stimulus plan is equivalent to just 1.1% of GDP, less than a quarter of the average in Latin America.

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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 weaker this morning. Numerous reasons are causing this weakness.  Political unrest, rising COVID-19 infections, and the simple fact that markets don’t rally in a straight line are all part of today’s decline.  The underlying factors remain—accommodative monetary policy is a potent factor in supporting asset prices.  Our coverage starts with the political situation in President Trump’s last week of office.  Rising criticism of the Fed is next.  The China news update follows.  Pandemic information is next.  We update the post-Brexit world, India’s farm crisis, Kyrgyzstan, and an economic roundup.  The Asset Allocation Weekly is available.

Politics:  Although the House leadership continues to press toward issuing articles of impeachment, this action probably won’t go anywhere.  First, time is short.  Impeaching someone when out of office may be symbolic, but it is not much more than that.  Second, Congress only has so much bandwidth, and President-Elect Biden, due to the high likelihood he will be a one-term president, will probably see a faster erosion of this political capital.  Thus, if he wants to move on policy, he can’t have Congress debating impeachment that is unlikely to pass anyway.  Instead, there are two developments from the events last week that we are watching closely.

• The unrest was a public relations coup for China, and Beijing isn’t missing the opportunity. This Global Times editorial is a good example of China’s framing of the unrest as not just a one-off incident but a failure of democracy as a system.
• Social media firms have blocked President Trump’s accounts and have taken other actions that affect right-wing platforms. Although these actions have been criticized in the U.S., it has also raised concerns in the EU.  The near-monopoly power of tech firms gives them the ability to set the terms of the debate.  It seems unlikely that they can continue to operate as unregulated monopolies in this arena.

The Fed:  As asset markets continue to rally, the Fed is starting to come under increasing criticism from establishment figures.

• Mohamed El-Erian warns that if the Fed engages in yield curve control, the Treasury market’s ability to signal inflation worries will be lost. He also points out that liquidity injections have become the key reason for investor optimism.  El-Erian also notes that unconventional policy, initially used as an emergency measure, has become conventional.
• Sheila Bair, former head of the FDIC, suggests that the backstop policies the Fed implemented in March didn’t do anything to boost investment and simply lead to more debt issuance.
• Members of the FOMC are also expressing concern about market activity. We note in particular a quote from Neel Kashkari, President of the Minneapolis FRB, who said, “I don’t know what the best policy solution is, but I know we can’t just keep doing what we’ve been doing.”  We must admit, his admitting the lack of a policy solution is both refreshing and unsettling, the former because policymakers rarely acknowledge the uncertainty, the latter because he doesn’t know.

In our opinion, these criticisms highlight the downside of the moral hazard problem.  When a policy protects a person from risk, it should not be a surprise that risky behavior follows.  However, none of these criticisms discuss the alternative.  If the Fed doesn’t engage in yield curve control, the strength in housing will fizzle.  If the Fed had not put the backstops in place in March, the financial markets would have seized up, and another 2008 (or worse) would have likely developed.  Officials often discuss implementing “macroprudential” policies.  Putting such policies in place does work—Glass/Steagall did a great job making the financial system safe at the cost of deep inefficiency.  But, even there, financiers eventually figured out how to evade these sanctions.  There is no simple solution.  If you allow financial discipline to work, you have to live with occasional financial panics, and such events have become politically unpalatable.  If you protect the system from panic, excessive risk-taking tends to follow.  We do closely follow these criticisms because if Congress decides to limit the ability of the Fed to act, the potential for a financial accident will increase.

China:  In the waning days of the Trump administration, Taiwan, tariffs, and investment policy each remain in focus.

• USTR Lighthizer is urging the Biden administration to keep tariffs on China in place. Overall, our take is that the Trump administration’s trade policy on China had mixed results.  The positive element was that the tariffs clearly got the attention of Beijing.  The policy showed that America’s position regarding China had obviously changed.  The negative was that trade probably wasn’t the best tool for changing China’s behavior.  In our opinion, denying them access to U.S. Treasuries would have probably been more effective.
• If there is one hot spot we are watching in 2021, it’s Taiwan. Since normalizing relations with China in the 1970s, the U.S. and China have engaged in decades of strategic ambiguity; both sides say the same words but mean different things when they say them.  That stance has become threadbare.  President Xi appears he intends to bring Taiwan under his control.  The U.S. seems to be encouraging Taiwan’s sovereignty.  Over the weekend, the U.S. announced it is making it easier for officials from the U.S. and Taiwan to meet.
• Investors have been scrambling to comply with new U.S. regulations on Chinese investments. The policy has led to uncertainty and caused some investors to dump Chinese stocks at a loss.  It also has effects beyond the stocks themselves; structured products that contained some of the stocks have been suspended.  China is retaliating, threatening firms that comply with U.S. regulations will face lawsuits in Chinese courts.  There has been much discussion about a new “Cold War” with China, but an important difference between China and the U.S.S.R. is that there were few economic ties between the U.S. and the Soviet Union.  That is not the case with China.
• China has been building dams in South Asia as part of gaining influence in the region. Vietnam is bearing the brunt of this dam-building as it is finding flows on the Mekong are affected by decisions upstream.
• Ant Financial will likely adopt financial market regulations, which will have an adverse impact on valuations.
• The EU has recently inked an investment deal with China. Australia’s recent experience should be a cautionary tale.

COVID-19:  The number of reported cases is 90,367,346 with 1,936,436 fatalities.  In the U.S., there are 22,410,249 confirmed cases with 374,341 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 22,137,350 of the vaccine has been distributed with 6,688,231 of first doses injected.

Virology

• One factor we have been tracking is the reluctance of health care workers to be inoculated. There are numerous reasons for the decision, but a consistent one is a concern about the rapid speed of development of the vaccines.  Also, slow adoption by healthcare workers will likely make non-healthcare workers less open to being inoculated.
• Sweden, facing rapidly rising cases, is implementing restrictions. The country refused to deploy such measures earlier.
• It appears the latest variant is spreading rapidly. On the good news front, it does appear the current vaccines will be effective against it.

 Post-Brexit:  The U.K. is now dealing with the fallout from Brexit.  Although most goods traded between the EU and the U.K. are free from tariffs, items that are reexported can be subject to tariffs, which was not the case before.  U.K. businesses are struggling to figure out the new regime.  In addition, being free of the EU looks like it means a lot more paperwork and regulations for British industry.

India:  The standoff between India’s farmers and the government continues.  The Modi administration is trying to deregulate the sector; small farmers are concerned this will mean reduced support from the government and the loss of their farms.  Modi rarely loses, but this battle may be difficult to win.

Kyrgyzstan:  Last year, we discussed the situation in the country.  Over the weekend, elections were held and Sadyr Japarov took nearly 80% of the vote.

Economic roundup:  Here is a list of items we are watching:

• Homebuilding has been increasing in the U.S., but a growing portion of that new construction is designed for rental and not single-family homeownership. As home prices rise with stagnant wages, an increasing number of families can’t afford a home.  They want the space of a house, so the industry is responding.  However, a major concern is that the inability to own a home can be a detriment to wealth accumulation.
• A recent study suggests that most households intend to use stimulus checks to increase savings or pay expenses. Very little is expected to support consumption.

Automakers are being forced to reduce production due to a shortage of computer chips.

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

[Posted: 9:30 AM EST] | PDF

The Asset Allocation Weekly is available here.

Good morning.  Today U.S. equity futures are elevated as investors anticipate more fiscal stimulus.  A slowdown in job creation and a Democrat majority in both houses likely supports the case for more expansionary fiscal policy.  Chinese shares took a dip as global indices continue to delist Chinese companies. Meanwhile, better than expected economic data has boosted equities in Europe.  Below are the stories that we are following:

COVID-19:  The number of reported cases is 87,588,168 with 1,890,824 fatalities.  In the U.S., there are 21,394,326 confirmed cases with 362,828 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 21,419,800 doses of the vaccine have been distributed with 5,919,418 of first doses injected.  This map from Axios indicates rising severe infections.  The R_t data show that only five states have a reading of less than one, with Oregon having the lowest rate and Georgia with the highest.

Virology

• A coronavirus vaccine developed in China was declared effective by Brazilian officials. The vaccine developed by the Beijing-based Sinovac Biotech Ltd. was determined to be 78% effective against COVID-19. The new vaccine is expected to fill the gap left by the West.
• Japan declared a state of emergency in Tokyo and three surrounding areas on Thursday. There is growing pressure to expand the emergency to other areas in order to reflect the severity of the spread.  Once praised for its ability to contain the virus, Japan has seen record COVID-19 infections and a rising death toll.
• A variant of COVID-19 has been confirmed in Texas. The victim was an adult male between the ages of 30 and 40 with no history of travel, suggesting that the variant is already circulating throughout Texas. A strain has also appeared in Pennsylvania.
• Iran has banned vaccines from the U.S. and Europe as it feels it cannot trust them.

The fallout: In response to riots at the U.S. Capitol that led to four deaths and 52 injuries, there has been a growing push for President Trump to resign or be removed from office.  Although there were rumors that members of the White House cabinet discussed invoking the 25^th  Amendment, it doesn’t appear that Vice President Pence will support it.  There has also been a call for an impeachment hearing, but this is also unlikely to happen before Joe Biden’s inauguration date of January 20.^[1]  Markets have largely shrugged off the outcry as they have primarily focused on a possible new round of stimulus.

China: Despite developments in its vaccines, the Chinese markets seem to be more focused on China’s growing assertiveness to punish critics as well as the growing number of Chinese firms being excluded from global stock exchanges.

• Beijing continues to show no sign of letting up in its quest to crack down on Chinese tech billionaire Jack Ma’s business empire.  The Chinese government has told the country’s media to limit the reporting of its anti-trust probe as it fears that it could lose control over the narrative.  Jack Ma has come under increased scrutiny following a speech he gave criticizing the country’s regulators.  So far, it appears that Jack Ma has been laying low to prevent further scrutiny regarding investigations into his businesses.
• Although Beijing’s crackdown on members of the elite is not new, this one appears to have investors on edge.  Given Jack Ma’s prominence and popularity, the crackdown has raised concerns that the Chinese government could do the same to other businesses throughout the country.  Additionally, fears about Chinese holdings have been elevated given the scrutiny they have already been getting from abroad.  Last month, China was rebuffed by EU negotiators when it tried to add a clause in its EU investment deal that would punish countries restricting the access of Chinese telecom companies.  On Thursday, MSCI announced it will be delisting seven Chinese companies from indices in compliance with the executive order passed by Trump.
• It appears China doesn’t expect any improvement in U.S.-China relations given Biden’s win.  According to the South China Morning Post, China will likely seek to form relationships with other countries as it expects Biden to continue promoting America First policies.
• China has continued to diversify its holdings of U.S.-denominated assets as it seeks to become less reliant on the U.S.  Its holdings of U.S. Treasuries fell to the lowest level since January 2017.

U.S.-Europe: Strong economic data may be overshadowing other important stories impacting the U.S. and Europe.

• A shortage in semiconductors could hinder car production in Europe.  The U.S. automobile manufacturers have been able to scale up production faster from the pandemic than manufacturers of semiconductors, resulting in a supply gap.  If this continues it could possibly slow car production globally.
• The U.S. has decided to suspend its planned import tariffs on French luxury goods.  The tariffs were in response to France’s digital tax.
• The breakup of the U.K. and the EU appears to be having an impact on businesses. Grocery store Marks & Spencer (MAKSF, $1.88) has stated the deal has caused problems with its business models.  Although the agreement preserves tariffs and quota free-trade between the U.K. and EU, rules around re-exported goods have complicated the way businesses set up supply chains.

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[1] If Trump is impeached, the Senate could vote to disqualify him from running for office in 2024.

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

[Posted: 9:30 AM EST] | PDF

Where do we start?  Yesterday witnessed violent protests in the legislative buildings in Washington that disrupted the confirmation of the Electoral College vote.  We discuss the event below.  Equity markets are higher again this morning, with the dollar recovering modestly.  In the wake of the Georgia elections, there was a clear market shift toward reflation.  Small cap stocks jumped, for example, and technology lagged.  Next up are the Fed minutes and policy.  China news comes next, with potential delistings and arrests in Hong Kong.  Pandemic news follows, and we close with Russia/Sweden news.  Being Thursday, the Weekly Energy Update is available; we discuss the recent decision by Saudi Arabia to essentially return to the “swing producer” role.  As we addressed last year, the Asset Allocation Weekly will no longer be part of the Daily Comment but will be linked as a separate document in this report when it is published tomorrow.  Here are the details:

Yesterday:  As our regular readers know, we pay close attention to history in our research.  The word “unprecedented” gets used a lot, but usually, something similar has occurred before.  The reason we discussed the Election of 1876 (here and here) was to offer readers context about how disputed presidential elections have been resolved in the past.  The echoes to 1876 had some familiarity—Congress did decide to contest some of the state results.  However, one major difference was that there were no competing electoral slates this year, meaning that the protests were mostly pro forma.

The violence that occurred yesterday against Congress is truly unprecedented.  Yes, there have been violent events in the Capitol before, but nothing quite like what we saw yesterday, where a mob disrupted the workings of government.  Because such events are rare, it was clear the congressional security was completely unprepared.  In the end, order was eventually restored.  Congress did certify the election this morning.  Four people died, and 52 were arrested.

As we noted above, financial markets have mostly moved on, as they usually do.  With the government under complete, but narrow, control of one party, there are expectations of additional fiscal stimulus.  Equities that benefit from stronger economic growth rallied, while technology lagged.  Although we could see action to raise taxes, the Democratic majority is so narrow that any tax hike would have to pass the “Manchin test,” and we doubt anything major is likely.  Even with all the turmoil, long-duration Treasury yields moved well above 1%, suggesting little fear among investors.  Fiscal support and an accommodative Fed overcome political turmoil.

What happened yesterday does matter, but exactly how it does will take time to discern.  However, there are a few things we think are likely:

• The establishment/populist division within the GOP is now laid bare. Events like yesterday usually force people to commit to one side or the other.  There have been several GOP members of Congress who have attempted to straddle the divide, but we are seeing many fewer supporting Trump’s brand of populism now.  Meanwhile, the RWE is clearly trying to regain control of the GOP.
• The business community tended to be ambivalent about the Trump presidency. It liked the tax cuts and regulatory policy but was uncomfortable with immigration and trade policy.  Opposition now is evident, with some leaders calling for the removal of Trump from office.
• This event may severely reduce Trump’s future influence; if his legacy becomes yesterday’s unrest, getting him to support a politician’s future candidacy almost writes its own opposition advertisements. Even after announcing he will foster an “orderly transition,” he still disputes the outcome of the election in the same statement.  One fallout from yesterday is that he probably won’t be a candidate in 2024.  Again, we are sure commentators said similar things about Nixon after 1960, so there is a clear risk of being wrong.  The combination of age and the impact of yesterday probably means he can’t freeze the field in the next presidential cycle.  If this analysis is correct, it means a wide-open field for the GOP in four years.  However, that doesn’t mean the voters that Trump attracted are going away; populism isn’t dead by any means.  But, if populism is going to gain ascendency, it will require a higher level of political expertise.
• We would expect aggressive efforts to muzzle President Trump to prevent him from doing much over the next two weeks. There is talk of invoking the 25^th Amendment to remove him from office.  We doubt that will occur, but it is being considered.  The threat alone, coupled with the fact that several members of his administration are resigning, probably makes it hard for him to do a whole lot in the very near term.
• One of the positions we have held for some time is that the U.S. is backing away from its hegemonic role. The events of yesterday have likely undermined America’s standing in the world and may be seen by future historians as another major point on the path of America’s decision to walk away from its superpower role.

Fed minutes:  It is always important to remember that the minutes released are heavily sanitized for current consumption.  In 2025, we will get the actual transcripts, which show what really happens in these meetings.  If you ever have a week to dedicate to the project, reading a year’s worth of meeting transcripts can be interesting.  There were no major surprises in the latest minutes.  There were no hints of additional stimulus, no evidence of substantial disagreement, and a promise of a clear signal before policy changes.  Although we have doubts about the real impact of QE, the FOMC does not share those concerns.

• President Evans of the FRB of Chicago suggested the U.S. needed to revamp its financial regulation. We consider Evans to be a “financial sensitive,” meaning he considers financial conditions when setting his policy.  The Fed has been struggling with regulating the shadow banking system.  In March, the Fed expanded its purchase programs to stabilize markets, but their actions open policymakers to the charge they are creating moral hazard.  In the 1930s, the response was Glass-Steagall.  It remains to be seen what policymakers will do to reduce risk in the financial system.

 China:  There are two headlines of note—arrests in Hong Kong and further actions by the U.S. to deny China access to U.S. capital markets.

• China’s security forces arrested 53 residents on charges of violating the territory’s new security law. The group includes former lawmakers and activists (and at least one American citizen).  The arrests add to evidence that Hong Kong’s political culture is being brought under Beijing’s control.
• A new Executive Order bans U.S. firms and citizens from using a series of Chinese smartphone apps. The ban will take effect in 45 days, meaning that it will be up to the Biden administration regarding whether or not it will implement the order.  A temporary injection has been granted.  The goal of the order is to keep the Chinese government from gaining access to data generated by Americans.
• The NYSE has reversed itself again and will delist three Chinese telecom companies. The U.S. is considering adding Alibaba (BABA, USD, 227.61) and Tencent (TCEHY, USD, 73.62) to its blacklist of stocks.  Putting them on the blacklist would prevent Americans from owning the shares. This action would be very significant; the companies are the two most valuable Chinese-listed companies, and they are owned not just individually, but, due to their size, are part of numerous ETFs and mutual fund holdings.
• There are reports that Chinese nationals are divesting their U.S. real estate holdings, fearing expropriation.
• Chinese tech firms are infamous for encouraging an extended work culture—the so-called “9-9-6” culture of a 9:00 am start, 9:00 pm end, six days per week. A 23-year-old worker named Fei at Pinduoduo (PDD, USD, 176.78) apparently died late last year, presumably from overwork.  This sad event comes at a difficult time for Chinese tech firms.  The government has been bringing pressure on the tech firms to reduce their power and influence.  The passing of Fei will likely be used as a weapon against these firms.
• Bank regulators are imposing performance benchmarks tied to the economic and developmental goals of the CPC. It is unclear how this will change Chinese bank activity.

COVID-19:  The number of reported cases is 87,343,709 with 1,886,348 fatalities.  In the U.S., there are 21,307,125 confirmed cases with 361,312 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 17,288,950 doses of the vaccine have been distributed with 5,306,797 of first doses injected.  This map from Axios indicates rising severe infections.  The R_t data show that only nine states have a reading of less than one, with Oklahoma having the lowest rate and Iowa with the highest.

Virology

• As we noted yesterday, China is desperately trying to shape the narrative about the origins of COVID-19. Although the consensus of opinion is that it originated in Wuhan, how it emerged is still unclear.  China has been reluctant to allow a full investigation of the virus in China, blocking a WHO team of investigators.  One controversy that a full investigation could clear is the idea that the virus may have been an inadvertent leak from the Wuhan Institute of Virology.  The fact that China is blocking investigators supports suspicions.
• China has instituted a 21-day quarantine for inbound travelers, citing reports that newly diagnosed COVID-19 patients have experienced longer incubation periods. It is unclear whether this is really true or if it represents a new variant of the virus.  The trend has been for shorter quarantines, so this decision to extend it bears watching.
• We have been monitoring a rather surprising development, where healthcare workers in the U.S. and Europe have shown a reluctance to be vaccinated.
• A variant of COVID-19 that has emerged from South Africa and Brazil seems to undermine the effectiveness of the current vaccines and spread more rapidly. It also seems to overcome antibody drugs.  This variant, which appears to be spreading rapidly (although it is not clear how far it has spread in the U.S.), is a warning that even widespread vaccination may not completely eradicate COVID-19.

Russia:  For much of this century, Russia has become increasingly belligerent, invading Georgia, annexing parts of Ukraine and engaging in widespread cyberattacks.  Eventually, such actions trigger a counter reaction.  Sweden, a nation with a neutral foreign policy, has started to expend military spending and cooperation in NATO in response.

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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, where the Democrats have won at least one of the two Senate runoff elections in Georgia and hold a small lead in the other.  The election results explain much of the market dynamics so far this morning, as we discuss below.  We next discuss various developments overseas before ending up with the latest coronavirus news.

U.S. Politics:  In the first of the two Senate runoff elections in Georgia, the AP has now called Democrat Raphael Warnock the winner in his race against Republican incumbent Kelly Loeffler.  With 98% of expected ballots reported, Warnock has garnered 50.6% of the votes, giving him a lead of approximately 53,000 votes.  In the other race, Democrat John Ossoff maintains a narrow lead of 50.2% or about 16,000, but the AP considers that race too close to call.

• The prospect of a Democratic sweep that would give narrow control of the Senate to the Democrats is already producing market reactions.  As of this writing, the prospect of higher taxes and greater regulation of technology giants is weighing heavily on the NASDAQ stock index and, to a lesser extent, on the S&P 500.  In contrast, the potential for looser fiscal policy and rising interest rates is giving a boost to small-cap equities and financials.  Bond prices are dropping, pushing the yield on the benchmark 10-year Treasury note above 1% for the first time since March.  Oil prices are up, while gold prices are roughly flat.
• As we have noted before, we believe that the post-election market reactions like we’re seeing today are likely to be short-lived.  The same can be said for any volatility likely from today’s joint session of Congress, where some Republican lawmakers have vowed to challenge the formal counting of the Electoral College votes for president, despite signs the Republican moves are undermining business support for the party.  There is also a potential for violence at political protests in the streets of Washington and other cities, but we think risk assets can still benefit from fundamental factors such as continued loose monetary and fiscal policy and the prospect of economic healing after the wide distribution of the coronavirus vaccines.

United States-China:  President Trump yesterday issued an executive order banning U.S. companies and individuals from transactions with several Chinese-owned apps, citing concerns that the apps could help China access private data and build dossiers on Americans.  The ban would normally be expected to exacerbate U.S.-China tensions.  However, since it doesn’t go into effect until mid-February, China’s reaction may be muted in hopes that it will be reversed by the incoming Biden administration.

China-Hong Kong:  Police in Hong Kong arrested dozens of pro-democracy politicians today in a series of dawn raids that swept up many of the opposition’s most prominent figures, some of whom said they were accused of subversion under China’s national security law.  The arrests, which were related to the politicians’ participation in unofficial election primaries held last year by the democratic camp ahead of planned legislative elections, mark a major escalation of China’s attempt to stamp out political opposition in the territory.  Therefore, they could spark immediate new U.S.-China tensions once the Biden administration takes power.

China:  Reports indicate that Jack Ma, the founder of Alibaba (BABA, 240.40) and fintech giant Ant, is being pressured by Chinese regulators to share Ant’s trove of consumer credit data.  One plan being considered would require Ant to feed its data into a nationwide credit-reporting system run by the central bank. Another option would be for Ant to share such information with a credit-rating company that is effectively controlled by the central bank.

• Either way, the power play illustrates how far President Xi’s government will go to rein in business people seen as putting their own interests ahead of those of the country or of the Communist Party (the regulators are particularly concerned about the increased risk to the financial system from Ant’s microlending).
• Longer term, the situation also shows just how much interest modern governments have in maintaining access to data, which can be used to monitor and control personal behavior, and in controlling financial flows.  Those interests go far toward explaining why central banks around the world are exploring their own digital currencies.

OPEC+:  Just hours after Saudi Arabia, Russia, and their oil-producing allies agreed to maintain last year’s pandemic-related production cuts at their current levels through February, the Saudi government announced it would unilaterally cut one million barrels a day of crude production starting next month in order to support prices.  Global crude prices surged in response, although it is important to remember that renewed pandemic lockdowns could temporarily drive down oil demand and prices once again.  Besides, it appears that the Saudi cut is to facilitate production increases in Russia and Kazakhstan that will help keep the alliance together, so the net impact of the Saudi reduction may be less than meets the eye.

India:  Vandals have damaged more than 2,000 cellphone towers as part of a protest against the deregulation of India’s agriculture industry.  The towers are owned by Reliance Industries (RELIANCE.BO, 1914.15), a conglomerate that also owns major Indian grocery chains expected to benefit from the reforms.

North Korea:  According to state media, paramount leader Kim Jong Un has opened a rare ruling party congress — only the second since the strongman came to power — with an admission that the economic strategy he unveiled at the previous meeting had not panned out.  He also touted national self-reliance and promised to lay out new policies later in the meeting.

COVID-19:  Official data show confirmed cases have risen to 86,555,947 worldwide, with 1,871,517 deaths.  In the United States, confirmed cases rose to 21,052,711, with 357,390 deaths.  Vaccine doses distributed in the U.S. now total 17,020,575, while the number of people who have received at least their first shot totals 4,836,469.  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 more than 230,000 yesterday, topping both the seven-day moving average of  215,408 and the 14-day moving average of 198,007.  Hospitalizations related to the virus jumped to a record 131,195, of which a record 23,509 were cases in intensive care.  Adding to the near-term concerns about the virus, the faster-transmitting mutation that first appeared in the U.K. continues to spread to more states.
• Just a day after the FDA rejected suggestions to inject half-doses of the vaccine developed by Moderna (MRNA, 109.18), an official at the National Institutes of Health said the agency is studying whether a half-dose could be enough to help protect people against the disease, thus effectively doubling the supply of the vaccine.
• Meanwhile, the European Medicines Agency approved the Moderna vaccine for use in the EU, giving the region a second approved vaccine against the disease.
• As the virus resurgence continues in Europe, raising concerns of a new recession, the German government announced it would extend its new lockdown until the end of January and ban non-essential travel in those areas worst-hit by the coronavirus pandemic.
• In Japan, a survey by Kyodo News found that the country’s new nationwide surge in cases has forced 44% of hospitals that also offer advanced medical procedures to encounter difficulties providing patients with the treatment they need.
• WHO Director-General Ghebreyesus took the rare step of criticizing China on Tuesday, using his first press conference of the new year to express disappointment that Beijing has still not given permission to UN investigators to enter the country and probe the origins of the coronavirus pandemic.

 U.S. Policy Response

• The U.S. Treasury Department said it has electronically sent out more than $112 billion of the latest pandemic stimulus payments to individuals, meaning that about two-thirds of the second round of payments approved by Congress is already in bank accounts.

 Financial Market Impacts

• As investors look forward to the prospect that widespread vaccine use will start to control the pandemic, they are increasingly turning to foreign equities, especially emerging markets.  That includes Turkey, where the country’s stocks, bonds, and currency have all been helped by improved monetary policy.

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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 political news; today’s Senate runoff elections in Georgia and tomorrow’s Congressional consideration of the presidential vote could produce short-term market concerns.  We next turn to international news, with a focus on China and the global oil market.  We end with an update on the coronavirus pandemic, where worries about surging infections and new mutations helped produce yesterday’s big drubbing in the risk markets.

U.S. Senate Elections:  Georgia’s two Senate runoff elections are being held today, and the races are very close.  Prediction markets now suggest a split decision is likely, potentially reflecting the weekend release of a recorded phone call in which President Trump pressured Georgia Secretary of State Brad Raffensperger to “find” enough new votes to make Trump the state’s winner (listen to the call here).  If the Democrats win both races, they would gain very narrow control of Congress.  In our estimation, Senator Manchin (D-WV) would become the swing vote in the Senate, meaning that extreme policy measures would be unlikely to pass.  All the same, a Democratic sweep could trigger temporary weakness in equities.

• Adding to the potential for politics to generate short-term market volatility, Congress will meet in a joint session to formally count the Electoral College votes for president tomorrow.  Many Republicans planning to mount time-consuming challenges even though they are highly unlikely to be successful.
• Besides the challenges from Republican lawmakers, planned protests in Washington and other cities have the potential to produce unsettling violence.

United States-China:  The New York Stock Exchange last night reversed its decision to delist Chinese telecom giants China Mobile (CHL, 26.86), China Telecom (CHA, 26.04), and China Unicom (CHU, 5.50) under the recent U.S. ban on investing in companies that support the Chinese military.  According to the NYSE, the shares will remain listed while the exchange further researches the impact of the U.S. ban.

• The U.S. Treasury Department’s Office of Foreign Assets Control, which handles economic sanctions, said the ban covers derivatives and depositary receipts, as well as exchange-traded funds, index funds, and mutual funds.
• Last week, the Treasury said it would add subsidiaries to the blacklist if they are majority-owned—or controlled—by a company that has been named.
• Even though the NYSE only committed to putting off delisting “at this time,” shares in the targeted telecom firms today are reversing much of their sharp declines yesterday.

OPEC+:  Saudi Arabia and Russia deadlocked yesterday over whether their oil producers’ alliance should continue boosting crude output amid a resurgent pandemic.  Although Russia and its allies pushed for another production increase of 500,000 barrels per day, equal to the one approved last month, the Saudis urged restraint, and the meeting ended with no deal.

Saudi Arabia-Qatar:  Saudi Arabia reopened its airspace, land borders, and ports to Qatar in an initial step to end a bitter feud that erupted in 2017.  At the time, the Saudis, the United Arab Emirates, Bahrain, and Egypt launched a blockade against Qatar for supporting terrorism and aligning with Iran.  Now, the Saudis have apparently decided it’s better to play nice in the region before the inauguration of Joe Biden as U.S. president.

Mexico:  State-owned oil major Pemex is reportedly struggling to come up with the cash to meet its massive debt payments, surrounded by continued production declines and low global oil prices.

COVID-19:  Official data show confirmed cases have risen to 85,827,486 worldwide, with 1,856,288 deaths.  In the United States, confirmed cases rose to 20,824,710 with 353,632 deaths.  Vaccine doses distributed in the U.S. now total 15,482,500, while the number of people who have received at least their first shot totals 4,563,260.  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 were only slightly above 180,000 yesterday, but reported numbers are typically low early in the week.  The seven-day moving average stood at 213,437, while the 14-day moving average was 198,781.  Virus-related hospitalizations jumped to 128,210, with a record 23,435 in intensive care.  The winter resurgence in infections continues to put intense stress on healthcare systems around the country and globally.
• With the new, faster-transmitting mutation of the virus galloping across the U.K., Prime Minister Johnson launched the nation’s third national lockdown.  Under the new measures, schools and nonessential shops are to stay shut until mid-February, and residents are permitted to leave their homes only if necessary.
  • To cushion the economic blow, the government announced it would provide an additional £4 billion of one-off “top-up grants” for an estimated 600,000 retail, hospitality, and leisure companies, which can each claim up to £9,000.
  • There will also be a new £594 million discretionary fund made available for local governments to support other businesses that are not eligible for those grants but are affected by the restrictions.
• Over on the continent, as officials prepare to start implementing the EU’s newly approved, €750 billion pandemic recovery fund, some economists warn that major aid recipients like Italy and Spain will likely struggle to manage and spend the funds effectively.
• In Japan, Prime Minister Suga said he would decide on Thursday whether to implement a new lockdown in the greater Tokyo area as COVID-19 rebounds there.

 Economic Impacts

• As vaccines finally become available, some investors are starting to consider a possible recovery for urban apartment buildings and apartment REITs.

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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, the first of 2021!  We’re back and rested from the holiday break.  Equity markets are higher this morning, and commodities are on a tear.  The dollar is dropping in the new year, and bitcoin rose to new records.  Our coverage begins with the pandemic news; we are adding a new statistic, tracking the path of inoculations of the COVID-19 vaccines. The Georgia Senate runoff elections are next.  An update on China follows.  Brexit is done (it will be nice to talk less about that topic), but now the sorting-out process begins.  Headlines on finance are next.  We close with a short note on Iran.  Here are the details:

COVID-19:  The number of reported cases is 85,192,180 with 1,844,687 fatalities.  In the U.S., there are 20,639,854 confirmed cases with 351,590 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 13,071,925 doses of the vaccine have been distributed, with 4,225,756 of the first doses injected.  Here is a global look at reinfections; so far, there have been 31 confirmed cases of COVID-19 reinfections.

Virology

• The surge in cases that began in November is stretching medical system resources. In Europe, countries are preparing to extend and enhance lockdowns.
• Although there has been some consternation over the slow pace of vaccinations in the U.S., this isn’t a unique situation. Worldwide distribution has been slow.   Even though governments have been planning for distribution for months, there is always a slip between planning and the actual event.[1]  The current vaccines have more complicated logistics than normal due to the requirement of cold storage and two doses.
  • In the U.S., state and local governments are in charge of distribution, leading to different priorities by locale. And, acceptance of the vaccine has been surprisingly slow among medical professionals.  We view these issues as normal, but the return to growth that has been forecast by the financial markets is probably more of a second-half event than Q2.
  • There is an increasing discussion about concentrating on a single dose of the currently approved vaccines with the booster to be delivered later (if at all). The idea is that the single shot offers some degree of protection, and the problems of distribution are making two shots difficult to execute.  Although not an ideal outcome, it is important not to allow the perfect to become the enemy of the good.
  • In addition, cutting the Moderna (MNRA, USD, 104.47) dose in half is under consideration to expand distribution. A half dose would be given to those between the ages of 18 and 55.
• Prominent officials have been quietly lifting their estimates of herd immunity. There are probably two reasons for this increase.  First, as we noted earlier, we don’t know if the vaccines currently used provide sterilizing immunity or merely prevent symptoms.  In other words, does the vaccine prevent infection or simply stop illness.  If it’s the latter, we will probably need more than a 70% inoculation rate to reach herd immunity.  Why?  Because the vaccinated could become asymptomatic carriers of COVID-19.  On the other hand, if the immunity is sterilizing, a lower number will achieve the herd-immunity goal.  Second, we suspect this is a form of ‘nudging’ to encourage people to accept the vaccine.  The idea is that if there is widespread acceptance, we can get back to normal sooner.
• The British variant of COVID-19 appears to be spreading rapidly around the world.

Georgia:  The Senate runoff elections will be held tomorrow, and indications suggest the race is tightening.   Prediction markets have flipped to the Democrats.  If that bet holds, it would give control of Congress to the Democrats, although the margin will be very narrow.  In our estimation, Senator Manchin (D-WV) would become the swing vote in the Senate, meaning that extreme policy measures would be unlikely to pass.  However, a Democratic sweep could trigger weakness in equities.  We would expect any pullbacks to be temporary.

China:  the crackdown on tech continues.

• We are seeing a global regulatory assault on technology. The U.S. has opened several anti-trust actions against major tech firms, the EU is widening its regulatory reach, and China is bringing the major tech firms under party control.  In China, the thrust appears to be to curtail the financial functions of the tech firms.  We are seeing a broadening concern over bad debt in the Chinese financial system.   There are clear worries that the loosely regulated tech firms could become a conduit for increased lending that may be risky.  If the heavily regulated official banking system is generating a lot of bad debt (a function of an economic system driven by investment growth), the non-bank system could cause major problems.
• Japan is acknowledging that Taiwan is critical to its security. If China were to take control of Taiwan, this base of operations could cut off Japan from South Asia trade flows.  Japan’s defense ministry is asking the incoming Biden administration to “stay strong” in the face of increasing Chinese belligerence against Taipei. [2]
• The NYSE is delisting three Chinese telecom stocks in response to a U.S. government ban. The shares will cease trading on January 11, and trading in ETFs and closed-end funds that hold these shares will be halted on that date.   There is growing speculation that China’s oil majors may be next.
• Strong export demand for Chinese goods is causing capacity issues for global shipping, driving costs higher.
• The EU and China have an investment deal, and China has been cementing arrangements with Asian nations. These developments will weaken the ability of the U.S. to build an anti-China coalition.

Post-Brexit:  Now that a deal is done, the messy details are next to be worked out.  Spain, the EU, and Gibraltar have worked out a temporary arrangement to allow for free transit between the U.K. territory and Spain.

Finance:  Money markets and the Fed are the headliners this morning.

• A Treasury working group has pointed out several problems with money market funds but did not lay out any specific recommendations. The problem with money market funds is they are “runnable.”  Because they lack government backing, holders can demand redemptions, which force the funds to liquidate assets and can cause a financial cascade of problems.  One obvious solution would be to bring them into the FDIC, but that would lead to restrictions that would reduce the attractiveness of the funds.  In addition, regulation could potentially corral the non-bank financial system, making it less unstable but also less efficient.  Thus, it’s no surprise that specific recommendations were not made.  However, the odds of “something” being done at some point are high.
  • A related issue is a growing concern that T-bill rates may challenge zero soon. One-month bill rates are down to six bps, and with cash balances elevated, there are growing worries about where to park the funds.  Short-dated T-bills are a “safe” option, but if T-bill rates go negative, it will add additional pressure to money market funds.
  • The Treasury is proposing new regulations on cryptocurrencies to reduce the use of the product in money laundering. As one would expect, the crypto industry is not pleased.
• Recent wrangling over the stimulus bill highlighted another issue—the Fed’s ever-expanding mandate. IOHO, much of this is due to the Fed needing to become the “dealer of last resort” by providing backstops to various financial instruments used for collateral.   However, it’s a small leap for the Fed to begin broad asset accumulation; other central banks have gone down this path, and it is conceivable that instead of being a backstop, the Fed could become the market maker, setting rates on a host of instruments.  This issue has profound effects on financial markets, potentially weakening the financial markets’ ability to  allocate capital efficiently.  After all, if there are no losers, then every investment is feasible.
• Last week, the U.S. increased tariffs on the EU over aircraft subsidies. They will go into effect on January 12.

Iran:  The anniversary of the death of Qassem Soleimani passed yesterday.  The Pentagon initially ordered the U.S.S. Nimitz home but reversed course and told it to return to the Middle East.  We continue to monitor developments.

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[1] Everyone has a plan until they get punched in the mouth, Mike Tyson.  No plan of operations extends with any certainty beyond the first contact with the main hostile force, Helmuth von Moltke.

[2] The importance of Taiwan will be the subject of a future WGR.

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

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with the latest coronavirus developments, where the scary news of a new strain is largely offset by the final Congressional passage of a new pandemic relief bill.  We next turn to international news, including a reminder of the particular risks when investing in Chinese stocks.  Lastly, we want to extend our heartiest holiday wishes to our loyal readers.  We wish you all a happy, healthy holiday season, and we look forward to sharing our thoughts with you again in the new year!  As a reminder, our Daily Comment will go on holiday hiatus starting tomorrow, December 23.  Our Comment will return on January 4.

COVID-19:  Official data show confirmed cases have risen to 77,517,453 worldwide, with 1,705,654 deaths.  In the United States, confirmed cases rose to 18,043,824 with 319,466 deaths.  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 topped 190,000 yesterday, falling short of the seven-day moving average of 215,761 and the fourteen-day moving average of 215,272.  However, hospitalizations rose to yet another new record of 115,351 and continue to put huge strains on the nation’s healthcare system.
• Despite surging cases in Japan, Prime Minister Suga continues to push back against calls for a new state of emergency to combat the pandemic.  Because of the perceived dithering on the decision, public approval of Suga’s cabinet has plunged in recent weeks.
• The vaccine developed by Pfizer (PFE, 37.38) and BioNTech (BNTX, 106.46) yesterday was deemed safe and effective by the EU’s pharmaceutical regulator, clearing the way for it to receive emergency-use authorization this week.  The distribution could begin next week, following administrative procedures needed to coordinate a rollout across 27 member states.
• Meanwhile, new data shows that nearly 150,000 doses of the Pfizer/BioNTech vaccine have already been administered in the U.S.
• According to people involved in its late-stage trials in Brazil, a vaccine from the Chinese firm Sinovac has achieved more than 50% effectiveness.  However, scientists tracking the vaccine’s development say they expect it to ultimately show efficacy comparable to other COVID-19 vaccines that have proven 95% effective.
• The nation’s drugstores and grocery stores are rushing to hire tens of thousands of pharmacists and pharmacy technicians to administer vaccines to the masses next year—a reversal for the profession after recent layoffs and years of slow wage growth.
• While vaccine developments continue to hold out hope for an end to the pandemic, European countries remain in a panic about the new, faster transmitting strain discovered in the U.K.  France and other countries have banned travel from Britain, prompting worries that the U.K. could face shortages of some foods and other vital goods.
  • European and British officials today are racing to come up with a mechanism to ensure transport workers don’t spread the new strain to the rest of Europe, but so far this morning, there is no agreement in place that would allow trade flows to start again.
  • Ugur Sahin, BioNTech’s chief executive, said he expects the Pfizer/BioNTech vaccine to be just as effective against the new strain as it is against the original strain.  However, even if that’s not the case, Sahin said the companies could use existing technology to produce a new vaccine against mutations of the coronavirus within six weeks.

 Economic Impacts

• New data from the Centers for Disease Control and Prevention suggest the coronavirus, which has now become the country’s third-leading cause of death, will reduce U.S. life expectancy by two to three years in 2020.  Birth rates and population growth are also expected to fall, which will exacerbate the secular demographic headwinds that have been weighing on economic performance for years.

 U.S. Policy Response

• Congress last night gave bipartisan approval to the new pandemic relief spending we outlined here yesterday, which was married with a major appropriations bill to cover regular government funding over the remainder of the fiscal year.  The Senate vote was 92-6, while the House vote was 359-53.  The bill now goes to President Trump, who is expected to sign it into law.
  • Barring any unforeseen glitches, the first spending from the bill, including direct payments to individuals, could begin next week.
  • Even though the pandemic package was significantly smaller than originally demanded by the Democrats, the spending is likely to help provide a meaningful boost to the economy as it struggles with the autumn/winter resurgence of the virus.  Passage of the bill should, therefore, give a boost to risk assets in the near term.
• Despite the positive news of the latest pandemic relief package being passed, the effort by some Congressional Republicans to stop the Federal Reserve from re-instituting debt-market support programs bears watching, as investors start to worry more about increased corporate borrowing and a rise in “zombie” companies.
• Likewise, as the Fed and other major central banks push down interest rates and unleash massive liquidity in response to the pandemic, they continue to push yield-seeking investors into ever more risky debt, including emerging markets issuing obligations in their own currencies.

 United States-China:  As the U.S. clamps down on investment in Chinese firms based on their accounting practices and threats to national security, some observers are starting to note the risk that Chinese officials could also disrupt bilateral capital flows.  For example, to skirt Chinese restrictions on foreign investment in certain industries, and to raise capital from overseas stock markets, many Chinese companies rely on “variable interest entities,” or VIEs.  In this structure, the investor is really only buying into an offshore entity that gives him or her a contractual right to participate in the Chinese company’s profits.  It doesn’t actually convey any equity in the firm.  By one estimate, U.S.-based investors could hold as much as $700 billion worth of Chinese VIEs.  The risk comes from the fact that the Chinese government has never explicitly approved the VIE structure, suggesting it could pull the rug out from under it at any time, endangering foreigners who currently believe they have secure rights in a wide range of popular Chinese stocks.

Brexit:  Reports suggest the EU and Britain are edging closer to a deal on EU fishing rights in British waters, one of the last issues holding up a post-Brexit trade deal before the current transition arrangements end next Thursday.  In a further sign that a final deal may be close, British Prime Minister Johnson has penciled in a parliament session on December 30 to approve any agreement.

Central African Republic-Russia-Rwanda:  Central African Republic President Bozize said Russia and Rwanda have deployed hundreds of troops in his country to help him fend off a budding coup as he prepares a reelection bid, despite being disqualified by the supreme court.  However, the Russian government denied sending any new soldiers to the country beyond the military instructors who are already there.

Russia:  Opposition leader Alexei Navalny says he duped a Russian agent into revealing how the country’s Federal Security Service (FSB) poisoned him with the chemical weapon Novichok.  The agent, Konstantin Kudryavtsev, inadvertently made the admission during a recorded phone call with Navalny, who was posing as a high-ranking security official conducting a debriefing on the August attack.  During the call, which used software to make it appear it originated from an FSB phone line, Kudryavtsev admits that Russian security officials put the Novichok in Navalny’s underwear expecting it would kill the 44-year-old while on a flight to Moscow.

Global Iron Ore Market:  The price of iron ore soared 7.8% to $176.90 a metric ton yesterday, reaching its highest level since September 2011 and approaching a new all-time record.  The jump reflects a landslide at a major Brazilian mine, which has raised global supply concerns, even as Chinese demand continues to run high.

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