Month: July 2020

One month ago we warned that, absent a deal to extend the record US fiscal stimulus underwritten during the covid shutdowns, the US economy was “about to fly off a fiscal cliff“, resulting an even bigger hit to US consumption than that seen in Q2, and since it makes up 70% of US GDP, leading to another devastating hit to the economy.

With the official deadline now past and the $600 in weekly expanded unemployment benefits ending today, have we flown off the cliff, or will – as Bank of America writes this morning – Congress blink after all?

HEROES vs. HEALS

As BOfA’s chief economist Michelle Meyer recaps today, the next round of stimulus – considered to be Phase IV – is proving to be harder to get through than the first three. The Democrats have put forward the HEROES bill of $3.4tr while the Republicans have their HEALS bill of $1.1tr. The two bills are summarized in the exhibit below based on work from the Center for Responsible Federal Budget (CRFB). Not only is there a significant difference in the dollar amount but also the intent of the policy.

For what it’s worth, BofA continues to expect that a bill is passed in early August likely coming in above the HEALS act but still significantly short of the HEREOS. The bank’s economists review the various pressure points and assess the impact on the economy.

Can’t we all get along

As BofA summarizes, the main area of agreement is over stimulus checks as both the Reps and Dems are calling for a second round of checks along the same lines of the CARES act – up to $1,200 for individuals and $2,400 for joint filers – though the HEROES act includes $1,200/dependent for up to three, while the HEALS act includes $500 for all dependents. According to CRFB, this provision would amount to $300bn under the Republican proposal and $413bn under the Democratic proposal. The stimulus checks should be able to be rolled out fairly quickly. The CARES Act was signed on March 27 and money started to hit bank accounts on April 15th with about three-quarters of funds being distributed by the end of the month. If the legislation is signed into law in the first half of August, we should start to see the money flow in before the end of the month with the biggest support in early September.

What does this do for the economy? A working paper by the Chicago Fed (Karger E. and Rajan A.) found that 48% of the checks were spent over a 2-week period. The rest was saved or used to pay down debt (frankly, we think this is dead wrong as billions of stimulus funds clearly funneled into brokerage accounts as the Robinhood euphoria has made all too clear). Plugging in this marginal propensity to consumer (MPC) to the $300-413bn range of stimulus funds and assume that about three-quarters will be distributed efficiently, it could boost the level of consumer spending by about 10%, likely showing up most significantly for the September retail sales report.

The stimulus checks create a “hump-like” trajectory for income and savings. We simulate the path for income and spending going forward to capture the impact of the stimulus checks (assuming the Republican proposal for unemployment benefits). You can clearly see:

1. hump in income;
2. temporary bounce in savings;
3. lagged response in consumer spending

No way, no how

There are two main areas of disagreement over the stimulus: unemployment benefits and state & local aid. The CARES Act added an additional $600/week to unemployment insurance (UI) and expanded eligibility to self-employed and gig workers. To put this into perspective, prior to CARES, the average weekly UI was $373/week in 2020 1Q. As such, the “replacement” income from UI spiked higher from an average of 38%.

If the average weekly wage of UI recipients was unchanged, the replacement rate will be just under 100%. More likely, however, is that the average weekly wage of UI recipients has declined given that the recession had a disproportionate effect on hourly and low income workers. Indeed Ganong et al. estimate the current median  replacement rate to be 134%.

The Democrats are calling for this program to be extended through January, while the Republicans are calling for two stages:

1) additional UI declines to $200/week through September;

2) formula imposed where UI goes to 70% of income.

However, state unemployment offices have argued that it will be very challenging to put in place a  formula even with the additional money allocated by the Republican bill to update systems.

We can estimate the impact to income and spending from these proposals. If the current policy continues, spending should remain at current levels. Job creation—and therefore labor income— will slowly reduce the unemployment benefits but it will simply be a substitution of income and therefore spending should continue to be supported. Assuming the current 30 million people on UI (standard program and Pandemic Unemployment Assistance, although the true number is likely somewhat smaller given PUA counts retroactive weeks as a separate claim), the reduction to $200/week would slice about $12bn of personal income/week. BofA estimates the transition to a replacement rate of 70% would then boost the benefit to a little more than $300/week, on average. Therefore, personal income relative to the $600/week benefit would be reduced by about $9bn/week beginning in October. Assuming a MPC of about 70%, this proposal would reduce purchasing power by around $7.5bn/week in August and September, and by $5bn/week beginning in October.

When will we see the impact? It will be a bit confusing because the stimulus check will provide an offset so the hit to consumer spending might not be clear until mid-to-late September. The other consideration is that we should see the number of people on UI decline as jobs return, reducing the shock to the consumer. More immediately BofA is quite concerned about the possibility of a temporary lapse of UI given that the CARES UI program expires on July 31st. There has been some discussion of a stopgap bill to prevent the decline in stimulus, but it doesn’t look like the central case. As such, for the next two weeks, we could see a decline in income of $18bn/week. This could weaken near-term spending — we will carefully monitor the aggregated BAC credit and debit card data to determine the impact. Of course, Congress could theoretically backdate the UI payments to make up for these lost weeks.

State and local stress

The Dems propose nearly $1tr for S&L aid while the Reps allow for greater flexibility to use the $150bn that has been allocated through the CARES Act. These funds could now be used to cover shortfalls in the FY2019 year. There is also a difference in education funding where the Reps allocate $105bn for education with 2/3rd reserved to help schools reopen for in-person education. To receive funding, the schools would need to meet “minimum opening requirements”.

According to data compiled by NCSL (National Conference of State Legislatures) 32 states and DC have all revised down their revenue projections for FY2021from their preCOVID levels, illustrating the breadth of need for some type of state and local aid. Without additional funds, the risk is that S&L governments will continue to cut back on expenditures and employment. We have already seen 1.5mn jobs lost in S&L gov’ts since February

You down with PPP 2.0?

The Reps are calling for a new round of funding for the Paycheck Protection Program (PPP) as well as more money for emergency business loans. The Reps PPP 2.0 would leave about $190bn of support for second loans for PPP recipients (which uses about $100bn from PPP 1.0) and change the eligibility to businesses with fewer than 300 employees (vs. the current 500) while requiring that firms demonstrate that their revenue fell by at least 50%. The change in business size would likely be marginal in terms of outreach as 86% of small business jobs are in companies with fewer than 250 employees. They also call for a liability shield to protect businesses from COVID-related lawsuits. The latter is a “red-line” for the Reps but Dems have argued that the liability shield would give large employers the ability to escape damages to their workers. It is difficult to precisely quantify the impact to the economy from this program but presumably it will help to keep small businesses afloat, supporting the labor market and likely resulting in a faster recovery of jobs.

Bottom line: fiscal stimulus has been critical to restoring the health of the economy. As Chart 4 shows, the labor marker only recovered a third of the way back but yet retail spending has made a full recovery.

How can the US solve for this differential? Only stimulus (and lot more of it). What comes next will determine the path forward for the economy. 

With the S&P once again near all time highs even as profits are in freefall, pushing the EV/fwd EBITDA multiple to new all time highs…

… now seems a good time to ask the $64 trillion question: just how overvalued is the market?

The answer: according to BofA’s Savita Subramanian, the S&P 500 forward PE expanded in July to 21.8x from 21.5x in June, as returns (+4%) have outpaced estimate revisions (+ 2%). The current multiple is two standard deviations above the historical average of 15.4x (since 1986) – the highest since the Tech Bubble.

Stepping back, BofA finds that stocks are trading above average on all but three of the 20 measures its tracks.

Most notably, the forward PEG is at record highs (2.3x) and the median forward PE (20.7x) is in-line with the prior record of 20.8x. Only on the equity risk premium (i.e., relative to bonds) and on free cash flow (artificially depressed from low capex) does the S&P appear statistically inexpensive. Both of those metrics are due to the Fed’s direct purchases of billions in bonds every single day.

But wait, it gets crazier, because BofA also finds that the “Growth vs. Value” relative price/book value is in the 6-sigma “stratosphere”.

As Subramanian writes, “we have seen increasingly extended relative valuations for Growth and Value stocks, supporting our preference for Value for at least the next few months.” To wit, on some valuation measures, the Russell 1000 Growth index trades at a historical discount to Value index on Price to L/T EPS Growth (PEG), it trades at a premium on other metrics (such as sales or trailing/forward earnings), but nowhere is the distorted valuation more visible than on a Price/Book basis where the relative multiple looks to have gone “vertical”.

In short, value stocks trade at near-record levels of cheapness vs. Momentum (relative forward P/E ~2 standard deviations below average and at lowest levels since Tech Bubble extremes), yet none of this matters as the Fed’s now constant market interventions make growth stocks the consistent winner at the expense of value.

Update (1350ET): While a large dose of salt should be taken, Charlie Gasparino is reporting that MSFT may be a potential buyer…

CONFIRMED; sources say @Microsoft in talks to buy https://t.co/1q4Y8HRbjG

— Charles Gasparino (@CGasparino) July 31, 2020

*  *  *

It appears a decision has been made on the viral social media app TikTok – what Reddit CEO Steve Huffman called ” fundamentally parasitic.“

Bloomberg reports that, according to people familiar with the matter, President Trump plans to sign an order to direct China’s ByteDance Ltd.’s to divest its ownership of the popular app.

The U.S. has been reviewing potential national security risks due to the company’s control of the app, and the order could be announced as soon as Friday.

This comes after Josh Hawley and Dick Blumenthal asked for an investigation because of reports of violations of Americans’ civil liberties by sharing private info with the CCP.

“Based on numerous reports, we are extremely concerned that Zoom and TikTok have disclosed private information about Americans to the PRC and engaged in censorship on behalf of the Chinese government,” the letter read.

Snap shares are jumping on the news…

We wonder just how this will be achieved and most importantly, if China will allow it.

Authored by Jonathan Turley,

According to police, Douglas Marks, 29, has a curious method for reinforcing social distancing.

After he spotted people without masks, he allegedly fired “four warning shots” at the Crystal Beach Suites Hotel.  The criminal charges contained one interesting element.  While Marks did not reportedly aim at anyone, he was still charged with assault.

This follows an incident in California where a woman maced a couple who was eating with their child at a park without masks.

A woman and her son were in the lobby and encountered Marks. 

She said that Marks told her “You all need to leave. you all aren’t social distancing.” 

She was waiting for her boyfriend and ignored him.  She was sitting on the couch in the lobby and stated that she heard Marks tell staff “Let me take care of them, I have two people not following directions.”  She said that she heard him say again “you all need to leave” and then heard gunshots and ran out of the hotel and saw Marks with a handgun.

Marks is also reported as saying that he thought he was being followed – raising a possible mental capacity issue.

What I thought was notable was the array of charges: two counts of aggravated assault with a deadly weapon, firearm use and display while committing a felony and discharge of a firearm in public.

The aggravated assault charges are interesting since he did not appear to point the gun at anyone. The charges are the result of a broad assault definition and the criteria of the use of a gun in the aggravated assault “step up” for charges:

784.011 Assault.—

(1) An “assault” is an intentional, unlawful threat by word or act to do violence to the person of another, coupled with an apparent ability to do so, and doing some act which creates a well-founded fear in such other person that such violence is imminent.

(Fla. Stat. § § 784.011, 784.03).

784.021 Aggravated assault.—

(1) An “aggravated assault” is an assault:

(a) With a deadly weapon without intent to kill; or

(b) With an intent to commit a felony.

(2) Whoever commits an aggravated assault shall be guilty of a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.

Thus, any firing of a gun will be assault and the use of the gun will make that an aggravated assault.

Earlier today, heavy machinery giant Caterpillar which has been hit hard by the collapse in global industrial activity, reported earnings which came in a bit above sharply reduced expectations, thanks to aggressive cost-cutting efforts (read mass layoffs) which helped the company make up for slowing sales: total operating costs were 25% lower, the company said Friday in an earnings statement released before regular trading hours.

The numbers outside of costs were dismal: sales fell across the company’s segments, with dealers slashing inventories by $1.4 billion signaling a market that remains glutted with equipment. And while Caterpillar declined to provide forward guidance, it sees a similar percentage decrease in end-user demand in the third quarter, and expects dealers to cut stockpiles by more than $2 billion for the full year.

“Unfavorable price realization also contributed to the sales decline due to the geographic mix of sales and competitive market conditions in China,” the company said. “Sales were lower across all regions and in the three primary segments.”

And while the earnings were enough to help push the stock higher premarket, it has since slumped into the red after the company unveiled its latest global retail sales data, which showed that despite a modest, 7% increase in Asia-Pac sales, which rose for the first time since April 2019, it was the continued crash in global sales which tumbled by 23% Y/Y for the second month in a row, the biggest decline since 2010.

More striking however was the devastation in North American (read US and Mexico) sales, which plunged by a near record 40%, the biggest monthly drop since the financial crisis.

So for all those seeking a V-shaped recovery in the US, you may want to avoid the heavy machinery sector, which just happens to be critical for pretty much every other segment of the economy. As for that rebound in China, considering the latest, third wave in Chinese covid cases…

… that’s too is about to go into freefall mode any second.

Authored by Jennie Taer via SaraACarter.com,

During Thursday’s episode of “The Sara Carter Podcast,” Federal Communications Commission Commissioner Brendan Carr slammed Twitter’s “arbitrary” censorship of conservative voices on its platform, telling Carter that content moderators on Twitter are seemingly oddly focused on the President’s tweets.

“They seem to only be narrowly focused on you know, President Trump, and prominent conservative voices and they take action against others as well. I don’t paint with too broad brushstrokes, but it seems by and large like it’s going on against them and in the hypocrisy here, so you know, we have this week as well,” Carr said.

“It seems like what I call an orange man bad policy,” FCC Commission Brendan Carr told Sara Carter.

“It’s the inconsistency, the arbitrary exercise of power that I think is contributing to putting big tech under the spotlight.”

While many conservatives are being censored for spreading alleged disinformation, many prominent figures and organizations who have done the same go unchecked on the platform.

Carr highlighted the double standard, telling Carter there needs to be policy changes that allow the government some leeway to ensure that Section 230, the Communications Decency Act, allows users to have the power to choose the content they consume.

Amending the legislation was a central topic of a hearing this week before a Congressional antitrust panel. The group of lawmakers questioned big tech CEOs, including Jeff Bezos of Amazon, Tim Cook of Apple, Mark Zuckerberg of Facebook and Sundar Pichai of Google.

Twitter’s Jack Dorsey was invited to testify during the earlier hearing, but never made it and is reported to have ignored the request. The tech giants did their best to try and convince the lawmakers that their businesses are not anti-competitive monopolies.

The most incredible aspect of the internet is that no one person or organization controls it: the people make it what it is every day. That ideal is constantly under threat, especially today. We commit as a company to fighting for an #OpenInternet. https://t.co/7fuYeJjUwe

— jack (@jack) July 30, 2020

“What’s interesting, is right now on Twitter, you can go on there -and still up there is a tweet from Representative Swalwell saying don’t wear masks,” said Carr, who had just noted that Twitter suspended President Trump’s son Don Jr., for a Tweet related to information on the Coronavirus epidemic.

“There’s no, you know, screen over that tweet,” he added. “There’s no ‘Click here for more information.”

He listed a number of Democrats and liberal analysts whose inaccurate Tweets remain up on the platform with no correction from Twitter or suspension. Carr also addressed reports from a recent meeting in Israel between lawmakers and Twitter that questioned the company’s use of the arbitrary policy that allows the Iranian regime to consistently post Tweets calling for the destruction of Israel and genocide of the Jewish people, without any repercussions from the company.

Carr stated that he had wished lawmakers in America would ask similar poignant questions at the hearing to expose the bias.

Preliminary investigations conducted by the Chinese authorities have found no clear evidence of human-to-human transmission of the novel #coronavirus (2019-nCoV) identified in #Wuhan, #China🇨🇳. pic.twitter.com/Fnl5P877VG

— World Health Organization (WHO) (@WHO) January 14, 2020

Carr said “what happens when you put all of this together is it doesn’t look like a, you know, policy neutrally applied about COVID.”

“It seems like what I call an orange man bad policy,” he told Carter.

“And it’s the arbitrariness that I think so many people have trouble with if these were policies applied, even-handed to everybody, regardless of their politics. I think we need people who have far less standing to complain, but it’s the inconsistency, the arbitrary exercise of power that I think is contributing to putting big tech under the spotlight.”

Listen to the full interview here:

One day after the BEA reported that US GDP crashed an annualized 32.9% in the second quarter, the biggest drop since the great depression…

… moments ago, the Atlanta Fed published its first GDPNow “nowcast” estimate for the third quarter, which is a relatively healthy 11.9%, and follows the regional Fed’s Q2 GDP estimate which was 0.8% above the official BEA print, at -32.1%.

The Atlanta Fed’s Q3 estimate is most pessimistic than the 18% Q3 GDP consensus estimate from 63 economists polled by Bloomberg, and is just above the lowe-end of the range although both of these numbers will be woefully inaccurate if more US states decide to follow through with another round of shutdowns.

It goes without saying that if Congress fails to roll over the expiring unemployment benefits into August- which as noted earlier now are instrumental in the record 25% of personal income that is funded by the US government…

… Q3 GDP will be another unmitigated disaster and far below any official estimates.