Covid’s Resurgence. This week a rise in % positive tests, increased Covid hospitalizations and news of more prevalent spread accompanied the testimony of chief infectious disease expert Dr. Fauci. Even as economic leaders emphasized not shutting down the economy a second time, some businesses showed they are willing to act independently. One key metric to continue to monitor—hospital capacity. Goldman Sachs reported this week that in their view “a decline in hospital capacity below 20% could pressure states to consider slowing or reversing reopening.” Any measures announced in the coming days will impact the data in mid-July. As Scott Gottlieb pointed out, “Infections don't just stop. Something has to stop them, like a change in behavior/actions.” Of course, by that point, things are getting very close to the traditional start to the school year.
Fiscal Runway. Given the limitation of what monetary policy can do—only address lending problems, not spending problems—there is a clear consensus on Wall Street that more fiscal support is coming. As Paul McCulley said in an interview with Consuelo Mack, “Monetary policy will take a back seat and fiscal policy will take the lead.” Deutsche Bank reported this week that if we do not get more support to households, further deterioration of household finances will lead to a surge in personal bankruptcies:
Presidential Election. The dynamics of the Presidential race are unfolding in a much different environment from when the Iowa Caucuses were held. June has seen a turn, with Biden now leading, according to PredictIt and FiveThirtyEight. With Trump trailing, and the path to fiscal spending clear, the package could be “huge.”
Deflation to Inflation. The initial economic shock from Covid was deflationary, causing prices to fall as households retrenched and increased savings in the face of uncertainty. Now, with businesses dealing with higher costs (PPE, equipment, cleaning, and wages) combined with the trend towards reshoring supply chains and away from globalization, the seeds for inflation are being sown. The deflation/inflation trend is important to monitor and can be seen in a variety of indicators, such as 10-year implied inflation expectations, the difference between nominal 10-year Treasury yields and comparable TIPS yields (below). This measure hit a Covid-era high this week at 1.33%:
Pension Problems. In a research paper published this month, Research Affiliates Partner Rob Arnott shined a bright light on the problems facing public and private pensions. Mr. Arnott called out their dire financial condition and need for immediate reform. These plans, pancaked between falling asset values and discount rates after 25 years of chronic underfunding, pose a retirement risk to plan participants and a systemic risk to taxpayers. Research Affiliates estimates the total unfunded obligations of public pensions amount to $90,000 per family.
Bubble? Not Seeing it. In an interview with Bloomberg this week, Federal Reserve President James Bullard was asked about the prospect of negative consequences of prolonged low rates. “…bubbles are always an issue and I do keep my eye on it, but again I'm just not seeing things that are of the same magnitude as what happened in the late 90s dotcom bubble that blew up on us and the much more serious housing bubble in mid 2000s that also blew up and turned into a global crisis, but I'm not seeing anything like that right now. We do watch it closely...and so far, so good." This comes on the back of news this week that US non-financial corporates have issued a record amount of debt and traders are speculating on stocks of bankrupt companies. Bullard’s response begs the question, even if there is a bubble, how qualified is he to see it?
I will close here for the week. Have a great weekend.