Month: March 2021

By Michael Every of Rabobank

The Construct-It Show

“It’s time to face the music; It’s time to tax at new heights; It’s time to finally build stuff, on the Construct-It Show tonight;

It’s time to put pigs in makeup; It’s time to dress it all up right; It’s time to raise the curtain on the Construct-It Show tonight;

Why do we end up here?; I guess we all should know; Will it really be a kind of torture; To have to watch the show?;

And now let’s get things started –Why don’t you get things started?– It’s time to get things started;

On the most sensational, inspirational, celebrational, infrastructurational; This is what we call the Construct-It Show!”

(Gonzo blows his trumpet pathetically)

Roll up, roll up! Today is the day when the White House releases its infrastructure plan. Will it be USD3 or 4 trillion over 10 years? As Professor Bunsens and Beakers do the number crunching, I will be more of a Statler and Waldorf. What I can say from my box seat is that there are several huge questions and implications associated with this Construct-It Show.

Could it pass? Even using reconciliation for a second time this calendar year, it would take ALL Democrats to back it. Is that possible? It seems a stretch – but not necessarily impossible. Of course, if it doesn’t pass, then all we have is the current sugar high…and then the post-sugar crash.

If even some of the proposed tax hikes (corporate taxes up from 21% to 28%; taxing offshore corporate profits; making the wealthy pay income tax, not 20% capital gains tax; raising the top income tax bracket) make it through, it’s going to be *big* stuff for the US and global economy – and US equities. (New Zealand just did it though.) That does make it less likely to pass. So let’s presume it can only get through on the spending side: that would take us from ‘No MMT’ back into MMT territory.

To put the scale of what is being proposed here into perspective, we are talking about either 1.5% or 2% of 2021 US GDP each year in public investment for a decade. Can you see what that is going to do to US growth?! And not only US, as without ‘Buy American’ much of that capital will also flow out to the rest of the world via imports – which isn’t what the White House wants. Yes, it would probably take more than just ‘Buy American’ to stop stimulus leaking – but don’t expect it not to happen over a decade. Shifts in the Overton Window are a key act in this Construct-It show: from free trade to qualified protectionism via Republicans; and from sound money to mega-stimulus via the Democrats. Even the Great Gonzo would be proud – and it’s Gonzonomics to follow, at least as far as neoclassical Bunsens and Beakers are concerned.

For that Sam the American Eagle of the Fed, a new stimulus bill would present a major challenge to its view that nothing needs to be done on rates for years. In which case, would US yields be allowed to rise “because growth”, even if that meant equities went down? Or would the Fed still do YCC (and MMT) “because markets”? Note that despite historical warnings of ‘excessive exuberance’, which Kaplan echoed yesterday, the Fed’s pattern of behaviour has been to ensure that stocks, not bridges, go up. But perhaps the Show is under new management now?

Let’s then imagine where the USD would sit with GDP growth of 4% and 10-year yields at 4%, for a hypothetical example (higher!); and where it would sit if the same stimulus and growth sees yields artificially capped at 1.50% (lower!). Can you see the wild ride markets could be about to set out on? It’s really quite the Show!

It’s unclear how the Swedish Chefs at the ECB (“We pooot de PEPP in de poot”) would be prepared for this US recipe. They can “bork, bork, bork!” all they like, but it’s something they can’t control – just hope any US stimulus lifts their booot.

Likewise, the giant Sweetums of the PBOC, overseeing an economy where there don’t appear any post-2021 GDP growth targets, and some view the sustainable level of GDP growth being as low as 2-3%, could face a US economy outgrowing it for a decade, and potentially with higher yields too. Where would that put CNY? Today’s fixing was 6.5713, so the direction is already clear – in which case those who know think: pork, pork, pork!

Meanwhile, as the Construct-It Show rolls out, bridges are being burnt, not built, in geopolitics:

• China has introduced sweeping changes to the political system in Hong Kong, which the US press describes as “part of Beijing’s efforts to consolidate its increasingly authoritarian grip over the territory”;

• The US, UK, Australia, Canada, and 8 other countries have signed a document criticizing the WHO report into the origins of the coronavirus pandemic in Wuhan, implicitly accusing China of “withholding access to complete, original data and samples”. Even WHO head Dr. Tedros has stated the investigation was “not extensive enough”, and that there should be continued examination of the theory that the virus escaped from a lab. Wasn’t that enough to get one censored from social media a few months ago(?);

• The US has again accused China of “genocide and crimes against humanity” in a human rights report, which also calls out Russia, Saudi Arabia, and Myanmar. The US has also expanded the number of areas it will now call out abuses over;

• The Inter-Parliamentary Alliance on China suffered a serious cyber-attack yesterday; and

• China’s Global Times argues that the EU Parliament will still pass the EU-China investment deal because “It is believed that the business community will eventually stand up to the narrow-minded moves of the political class. The CAI may need to go through some rounds of competition and wrestling, but the final adoption of the deal is an inevitable outcome, given the fact that it’ll not only benefit China and Europe but also the entire world.” Yet the GT also warns the EU that “recklessly leaning toward the US would ultimately hurt [them]” – which is counterproductive.

And these are only the acts that made the final cut. In short, globally we are set to see far more of Animal and Crazy Harry. Which makes neoclassical Beakers do this.

Meanwhile, returning to the Construct-It theme, what is the alternative to either no stimulus, or state-led stimulus? Try Australia, where building permits today were up 21.6% m/m vs. 3.0% expected. What’s an RBA to do? Nothing is the answer. And, tragicomically, the same is true for the Aussie financial regulator APRA, which has now publically added Completely Redundant to its title. In recent testimony it openly claimed that hot house prices, which are so hot it is hard to fathom, are “not our job”(!) Even the Australian Financial Review notes: “Nothing to worry about? Maybe APRA chief should attend an auction.” Honestly, is this really any better/more sustainable a model of capitalism, even if it sells more tickets to some crowds?!

And *there’s* the sound of Gonzo’s pathetic trumpet.

Following the unexpected plunge in new- and existing-home sales, analysts expected a 3.0% MoM drop in pending home sales to round out the dismal housing data in February. Instead – mimicking the huge drops in thge other segments of the housing market, pending home sales crashed 10.6% MoM (the biggest drop since April). Worse still, pending home prices are now back down 2.7% YoY…

Source: Bloomberg

That completes the triple whammy of collapse in the home sales market…

Source: Bloomberg

Surging home prices and low inventory are slowing the pandemic-era housing boom, evidenced by declines in contract signings in all four U.S. regions.

By region, contract signings fell the most in the South, where winter storms curtailed business activity and led to a 13% slump in pending home sales. In the Midwest, sales declined 9.5% and in the Northeast they fell 9.2%. In the West, they decreased 7.4%

In addition, severe winter weather limited purchases during February. At the same time the average rate for a 30-year fixed-rate mortgage has been increasing, which may affect buyer demand in the coming months. Contract signings were down 2.7% from the same period in 2020 on an unadjusted basis.

“The demand for a home purchase is widespread, multiple offers are prevalent, and days-on-market are swift but contracts are not clicking due to record-low inventory,” Lawrence Yun, chief economist at the NAR, said in a statement.

As Wolf Richter details in his latest report at WolfStreet.com, we suspect that these are the first signs that higher mortgage rates are impacting the housing market.

Mortgage refis have dropped since January, driven by a sharp drop in no-cash-out refis; cash-out refis have also dropped, but less so, for a reason we’ll get to in a moment. This chart shows the Mortgage Bankers Association’s mortgage refi index:

No-cash out refis “are already seeing large volume declines,” according to a report by the AEI Housing Center, which pointed out that due to the higher rates, fewer loans are “in the money.”

Cash-out refis are also down but only modestly, “as these borrowers are driven more by cash needs than rates,” the AEI report said.

The chart by the AEI Housing Center shows the weekly no-cash-out refis in 2021 (light-blue line, left scale) heading south, and in 2020 (brown line); it also shows the median mortgage rate in 2021 (dark blue line). The time line indicates the weeks of the year:

The AEI’s weekly Home Price Appreciation index, while still up a massive 14% year-over-year, has started to back off tad: at one point in early February, it was up over 17% year-over-year.

The “decreased buying power” due to the rising interest rates is “already having a limited effect in slowing HPA,” The AEI said. “The somewhat lower HPA in week 10 of 2021 looks to be the first sign of this trend.”

But the AEI added that “a loan rate of 4% might, due to severe supply constraints, still result in an unsustainable HPA rate of 8%-11%.”

Mortgage applications for the purchase of a home have also declined from the peak in mid-January:

So it seems from this weekly data that the housing market remains red-hot, but the higher mortgage rates, which remain ultra-low by historical measures, have already started dialing down the heat.

*  *  *

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Despite expanding lockdown measures to cover more than one-third of the country (including Paris and other major cities) earlier this month, and other areas French President Emmanuel Macron is expected to follow German Chancellor Angela Merkel by imposing strict new nation lockdown measures as Europe’s “third wave” of COVID cases intensifies.

France has seen COVID cases (adjusted for population) surge to the highest level in Western Europe, while only hard-hit ex-eastern bloc countries like Poland, Hungary and the Czech Republic have it worse than France, as the chart below shows. This has inspired Germany and Spain to restrict travel from the country.

Bloomberg reports that President Macron is planning to announce during a national address on Wednesday evening that he will impose new nationwide measures to contain the spike, and that these measures could include school closures and a ban on inter-city travel. The new national edict would mark the end of the “regional” approach that France has relied on all year.

Although he declined to elaborate, government spokesman Gabriel Attal said Wednesday after a defense council meeting that “decisions have been made” regarding new lockdown measures, but he declined to elabroate. Macron will address the nation at 2000 local time (1400ET). If Macron follows through with the school closures, that would also mark a major reversal for France, which had insisted on keeping schools open over the past year, unlike many of its European neighbors.

Macron has so far been “unapologetic” about his resistance to more restrictive measures, according to Bloomberg.

As the EU vaccination push lags for a number of reasons (primarily a shortage of supplies, and widespread skepticism) more than 8MM people have received at least one jab of the vaccine, which represents more than 10% of the population. The target to vaccinate all French adults willing to get the jab by the end of the summer remains in place.

Notably, Macron ignored the advice of his health minister who began advocating for more restrictive measures earlier this year. Instead, the government imposed a nationwide curfew, closed malls and expanded travel curbs – but didn’t go all in on a national lockdown. The hope was that the most pessimistic forecasts wouldn’t become a reality – but they have.

This could leave Macron vulnerable to a challenger when he is up for reelection next year. His former rival Marine Le Pen has seen her popularity rise over the past year, a sign she could be a serious threat in an electoral rematch.

Well that just happened… Buy Mortimer, buy!

The Dow, S&P, Russell 2000 all spiked dramatically at the US cash open (Nasdaq did not initially then decided to join the momo party because, well, someone must know something right?)

No move in bonds or the dollar at all. Don’t even both to rationalize this muppetry.

After weeks of waiting with investors hanging on every new detail, President Joe Biden is expected to unveil the first part of his sweeping economic reform/redistribution plan on Wednesday afternoon.

As Biden’s press secretary Jen Psaki revealed over the weekend that Biden and his team are planning to unveil his sprawling “Build Back Better” plan in two parts: The first part of the “Build Back Better” plan, which will be officially unveiled later today, is expected to focus on rebuilding “roads and railways” while the second part, which will be released “in just a couple of weeks”, will focus on “social infrastructure” funding, including childcare and healthcare initiatives.

Details of the plan have been leaking out at a steady pace for weeks, although some of the details reported earlier have been changed. According to the leaked 25-page document obtained by the NYT, Biden’s “American Jobs Plan” will “invest in America in a way we have not invested since we built the inter-state highways and won the Space Race.” The plan, which will carry a $2 trillion price tag (2/3rds of the $3 trillion marked for “BBB”), will finance the rebuilding of 20K miles of road, repairs to the 10 most economically important bridges in the country, and the elimination of lead pipes and service lines from the country’s water supplies. In total, the plan features $50 billion “in dedicated investments to improve infrastructure resilience”.

The plan also includes a long list of other projects intended to create millions of jobs, with the goal of strengthening America’s long-term competitiveness. The plan will also address Biden’s climate change priorities, by hastening the shift to new, cleaner energy sources, and would help promote racial equity in the economy. The plan includes $16 billion to fund a program to retain fossil fuel workers to transition to new work (we imagine they’ll take to learning to code like a fish to water).

Fortunately for Tesla, its shareholders and – most importantly – its CEO, Elon Musk, the plan proposes an additional $46 billion in federal procurement programs for government agencies to buy fleets of electric vehicles, and $35 billion in research and development programs for cutting-edge, new technologies. While more competitors are making their own EV vehicles, Tesla remains the market leader.

Here’s a breakdown of the innards of the $2 trillion proposal reported in the NYT (courtesy of Newsquawk):

• USD 180bln for research and development

• USD 115bln for roads and bridges

• USD 85bln for public transit

• USD 80bln for Amtrak and freight rail

• USD 174bln to encourage EVs via tax credits and other incentives to companies that make EV batteries in the US instead of China

• USD 42bln for ports and airports

• USD 100bln for broadband

• USD 111bln for water infrastructure

• USD 300bln to promote advanced manufacturing

• USD 400bln spending on in-home care

• USD 100bln in programs to update and modernize the electric grid

• USD 46bln in fed procurement programs for government agencies to buy fleets of EVs

• USD 35bln in R&D programs for cutting-edge, new technologies

• USD 50bln in dedicated investments to improve infrastructure resilience

• USD 16bln program intended to help fossil fuel workers transition to new work

• USD 10bln for a new “Civilian Climate Corps.”

In theory, at least, a sweeping infrastructure plan should have strong bipartisan support. But as we learned during the Trump Administration, political priorities can easily scuttle even the most popular package, and while Democratic opposition helped transform Trump’s “infrastructure week” into a punchline, the GOP – and a handful of East Coast Democrats – are already digging in their heels over taxes.

Here’s a quick rundown of how Biden plans to pay for it all via massive tax hikes, some of which (like the corporate tax hike) have already been reported:

• Eliminate tax preferences for fossil fuel companies

• Raise the corporate tax rate to 28% from 21%

• Overall taxation of profits earned oversees by US megacorps (including raising minimum tax on global profits and eliminating several provisions that allow companies to reduce US tax liability)

• Ramp up enforcement of large companies avoiding taxes

• Prevent American companies from “inversions” to tax havens

• Eliminate loopholes that encourage offshoring

• Deny expense deductions for companies that are offshoring jobs

Readers can learn more from a White House “fact sheet” released Wednesday morning that includes detailed breakdowns of the Biden infrastructure plan, and the associated tax plan.

Republicans and business groups have already attacked Mr. Biden’s plans to fund the spending with corporate tax increases, which they say will hurt the competitiveness of American companies. In addition, several Democrats including NY Rep. Tom Suozzi and New Jersey’s Josh Gottheimer, have insisted that they will oppose the infrastructure package unless Biden repeals a Trump-era limit on state and local tax deductions known as the SALT deduction.

These Dems actually have a lot of pull, and could end up getting their way. Because, as a team of analysts at Deutsche Bank pointed out in a note to clients this morning, Biden can only afford to lose 3 Democrats in the House, and zero Dems in the Senate, if Republicans oppose the plan on a party-line vote.

“Policymakers should avoid creating new barriers to job creation and economic growth,” said Joshua Bolton, the president and CEO of the Business Roundtable, a top business lobbying group.

Biden will unveil the plan during a Wednesday press conference in Pittsburgh. He’s expected to start speaking at 1630ET, after the market day has come to an end. And with markets mostly closed on Friday, Thursday’s session will be critical for parsing the market’s reaction to the Biden plan.

“The plans as announced have a long and tortuous journey to make it through Congress and thus the end result is likely to be nine months or more away and may well look very different indeed once it has been through that political wranglings on the Hill,” said James Athey, investment director at Aberdeen Standard Investments. “If investors are weighing the risks appropriately, there shouldn’t be much impact on markets in the short term.”

On Tuesday evening the US State Department issued an advisory for all non-emergency government employees and their family members to evacuate Myanmar. It comes after last month closer to the start of the coup crisis which began with the military seizing control on Feb.1 and junta crackdown against protests the State Dept. made departure “optional”.

“The Burmese military has detained and deposed elected government officials,” the department in the written statement, using Washington’s preferred old naming for Myanmar. “Protests and demonstrations against military rule have occurred and are expected to continue.”

“The Department of State made the decision to authorize ordered departure from Burma because the safety and security of US government personnel and their dependents, as well as private US citizens is the Department’s highest priority,” a State Department official further said.

The spokesperson added the embassy “will remain open to the public and continues to provide a limited range of consular services to both US citizens and visa applicants due to Covid-19 restrictions.”

Clashes between security forces and protesters, which have for weeks seen police and military unleash live ammunition on anti-coup demonstrators, has now resulted in over 500 people killed since the start of the crisis. This includes the bloodiest weekend so far, with 141 people killed on Saturday alone.

German international broadcaster Deutsche Welle (DW) writes “The death toll in Myanmar’s military crackdown on anti-coup demonstrators has reached 510, the Assistance Association for Political Prisoners (AAPP) confirmed on Tuesday, warning that the true toll might be higher.”  

There’s now growing calls for outside international powers to “do something” beyond mere sanctions, with online activists even going so far as to call for military intervention against Myanmar’s army.

“On Myanmar’s Armed Forces Day, security forces are murdering unarmed civilians, including children, the very people they swore to protect. This bloodshed is horrifying. These are not the actions of a professional military or police force.” Full statement by Ambassador Vajda: pic.twitter.com/7Gh2OTXEOe

— U.S. Embassy Burma (@USEmbassyBurma) March 27, 2021

The latest Western action has been as follows: 

On Monday, the United States suspended a trade deal with Myanmar, demanding the restoration of a democratic government.

The US, Canada, Britain and the European Union had imposed sanctions on Myanmar’s military generals. International organizations, including the United Nations, have continuously condemned the crackdown.

Meanwhile China has been accused by opposition voices on the ground of quietly aiding the junta, despite the Chinese embassy’s official denials.

Widespread anger over China’s alleged role in providing political cover and support for the junta has resulted in dozens of arson attacks against Chinese-owned factories and business inside the country, which Beijing has vehemently condemned, calling for police to protect them.