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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Friday!  U.S. equity futures are modestly higher this morning.  The last presidential debate came and went; it was more orderly than the last one.  At this late date, we doubt it will have a significant effect on the race.  The response overnight from the betting sites suggests nothing has changed.  We lead off coverage today with the pandemic update—cases around the world continue to rise.  The news from China comes next.  Negotiations for further stimulus continue, but we still doubt there will be a deal before the election.  We close with odds and ends.  And, being Friday, there is a new Asset Allocation Weekly, along with the accompanying podcast and chart book.  Starting in January, in a bid to shorten this report, we will no longer publish the AAW at the bottom of the Daily.  It will be available only as a stand-alone report but will be linked within the Daily Comment.  Here are the details:

 COVID-19:  The number of reported cases is 41,791,766 with 1,138,671.  In the U.S., there are 8,411,262 confirmed cases with 223,059 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 R_t data show a deteriorating picture; only four states have a reading less than one.  Mississippi has the lowest infection rates, with New Jersey having the highest.

Virology: 

• In light of rising infections, local lockdowns are starting to return. Chicago is resorting to a curfew, and other upper Midwestern states are enforcing local restrictions to slow a trend of rising infections.
• A similar pattern is emerging in Europe with similar responses. Hospitalizations are rising in Europe, and there is evidence the surge in infections is beginning to affect the economy.
• There has been a debate about pandemic response, arguing for and against lockdowns. Those for lockdowns argue it is the only way to slow the spread of the disease.  Those arguing against them say that lockdowns are an overtly blunt tool, and the economic damage they cause is likely greater than the benefit of avoiding infections.  However, missing in this debate are the actions of individuals who may decide, even in the absence of mandatory lockdowns, to stay at home.  Some states never implemented a lockdown, but that didn’t prevent the economy from slowing.  Although lockdowns do have some impact, there is a growing body of research that suggests an individual’s fear is more important.  Therefore, easing restrictions may have a less positive impact on the economy; at the same time, this data likely signals that a working vaccine or improved antiviral treatments would probably have the most beneficial impact on the economy.
• When making decisions about lockdowns, one of the factors policymakers must measure is how many lives will be saved from the virus compared to the potential economic loss. This calculus requires some forecast of fatalities and infections. Thus, a good forecasting model is critical.  The most reliable model emerging is the one that collects an ensemble of forecasts and generates a sort of “meta-forecast” from these models.

China:  Two items are of note today.  First, the State Department approved a $1.8 billion arm sale to Taiwan.  We are seeing more analysis suggesting the U.S. will need to base missiles on land in the theater because of China’s improving missile systems that may deny access to aircraft carriers.  Missiles on Taiwan would be a potent threat to China, one they probably can’t counter.  This deal would include two missile systems.  Second, there is a growing element of nationalism in China that is squelching internal criticism as unpatriotic.  This sort of behavior isn’t new in China; Mao tapped it during the Cultural Revolution.  In the modern version, social media is used to react to what appears to be legitimate criticism of local official’s actions.  Although such nationalism can be useful for a leader, it also prevents him from ever hearing anything contrary, and thus, hidden problems begin to fester.  This is one of the dangers of authoritarianism—how does the leader maintain control but also have an accurate picture of what is happening in the country?  In democracies, the press and the ballot box act as correctives.  Although technology and social media have the potential to provide something similar, these work only if dissent is allowed.

Policy:  What continues to emerge about the stimulus talks is an odd “dance” involving three figures—Speaker Pelosi, Treasury Secretary Mnuchin, and Senate Majority leader McConnell.  The odds of an agreement coming before the election in less than two weeks are very low and falling.  So, why are the talks continuing?  All three have an interest in the discussions, even if they have less interest in actually making a deal.  The Speaker probably doesn’t want a deal unless it clearly looks like she won on all counts.  Otherwise, she is giving a win to the White House.  The Treasury Secretary wants to avoid a market selloff that is more likely if talks break off.  So, even if the odds are long, keeping talks in place has value.  And, Majority Leader McConnell has no interest in a large spending package.  Most of the GOP Senate is right wing establishment (RWE) which supports balanced budgets and views the only legitimate fiscal stimulus as being (a) defense spending and (b) tax cuts.  Government spending outside of defense isn’t welcome.  In addition, McConnell is thinking past this election.  His goal is for GOP control of the Senate, and a big spending package doesn’t really help that goal.  In fact, if the Senate remains in GOP hands but Biden wins the White House, he may obstruct any new spending.  So, the market’s expectations that future stimulus will come at some point aren’t as likely as generally held.

Odds and ends:  Here is the list of individual “short stories” we are watching this morning:

• The K. and Japan have reached a trade agreement, the first in the post-Brexit era. Although there isn’t anything necessarily novel in this deal, getting an agreement is a sign that Britain is adjusting to its new independence.
• Chileans go to the polls on Sunday to vote on a referendum for a new constitution. The current one, from the Pinochet era, is considered overly favorable to capital.  For investors, the process of forming a new constitution is a risk factor.  Chile has been a capital friendly standout in South America, and if a new constitution is coming, that status would be at risk.  Although we expect voters will opt for a new constitution, it is still uncertain what form it would actually take.  It is possible the new one would look more like a refresh than a revolution.  But, until the new constitution is approved, there is a new element of risk for Chilean investments.
• We have been seeing a quiet rally in bitcoin recently. One of the factors supporting the cryptocurrency is currency turmoil in Turkey and Argentina. As we noted yesterday, the Turkish lira plunged to new lows.  In Argentina, the government is implementing capital controls, and there is widespread fear of devaluation, leading Argentines to buy dollars, gold and bitcoin.
• One of the more unappreciated elements of economics is the risk of investment. Keynes was keenly aware of the issues surrounding investment, arguing that it was driven by “animal spirits.”  In our opinion, investment is the hardest task for an economy, regardless of how it is organized.  Why?  Because it always involves a prediction about the future.  A report about the shipping industry highlights this issue.  The shipping container industry decided that bigger boats were the wave of the future on the idea that globalization would continue to expand.  However, after the Great Financial Crisis, the trend in globalization flattened, and these vessels have proven to be completely inappropriate for the new world.  They sail too slowly; their size makes them hard to manage in ports, slowing logistics, and the industry would have been better off with smaller vessels.  We view this as a cautionary tale.

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