Month: January 2022

As President Biden attempts to squeeze as much political capital as he can out of the anniversary of the Jan. 6 protest at the Capitol, the White House has informed the press that Biden intends to accuse his predecessor, President Trump, of having “singular responsibility” for the events of that day. The remarks come as the new AG Merrick Garland insists that anyone involved with that day’s events will be prosecuted, whether they were present or not.

We’ll set aside the fact that the AG has stopped just short of openly calling for Americans to be persecuted for thought crimes, and focus on the matter at hand: that President Biden’s sagging polling and twin devils of inflation and the current COVID surge have left him in a desperate position.

In ten months, Americans will head to the polls in what’s bound to be a closely watched midterm election. It’s possible Democrats could lose both of their narrow Congressional majorities. To try and stop this from happening, Biden needs to try and scare Americans into remembering how bad the last guy was. And he intends to accomplish this with high-handed rhetoric about media lies and the “subversion” of Democracy.

Biden is set to speak live from the Statuary Hall of the Capitol at 0900ET:

The Biden Team has already distributed select excerpts from the president’s planned remarks to the media. In one quip, Biden exhorts Americans not to accept “political violence as the norm”.

“Are we going to be a nation that accepts political violence as a norm? Are we going to be a nation where we allow partisan election officials to overturn the legally expressed will of the people?” Biden will say in his speech, according to excerpts provided by the White House. “We cannot allow ourselves to be that kind of nation.”

As Bloomberg points out in its coverage, Biden appears to be abandoning a strategy of not mentioning Trump directly. As his poll numbers continue to sag, Biden and his team are going to try “reengaging” with Trump (on a purely rhetorical basis) to see if this might help lift Biden’s sagging approval rating. The day represents “a rhetorical opportunity” for Biden to change the narrative of his flailing presidency and “reorient” the conversation away from the disastrous handling of the COVID pandemic and toward something more politically useful for the Democrats.

Speaking during yesterday’s White House press briefing, Biden Press Secretary Jen Psaki insisted that Biden was “personally” affected by the events of Jan. 6. “It hit him personally”, she said (though not as personally as it hit AOC, who infamously lied about the “rioters” threatening her during the “siege”.

Psaki also claimed Biden would be discussing “the truth” of what happened that day, while pushing back against “lies” and the “subversion” of American democracy.

Biden’s comments are part of a “day long” parade of speeches from top Democrats including – of course – Nancy Pelosi. The speeches will focus on the importance of “democracy” and dovetail with Biden’s planned push to reject voter ID laws that are increasingly being implemented across the country at the state level.

Pelosi, Biden and VP Kamala Harris will all speak at the Capitol (starting at 0900ET, as we noted above). After a morning of remarks, a House pro forma session will be held on the House floor at noon, with prayer, a statement from the chair and a moment of silence. At 1300ET, Librarian of Congress Dr. Carla Hayden will moderate a conversation between historians Doris Kearns Goodwin and Jon Meacham to “establish and preserve the narrative” of Jan. 6.  At 1430ET, members of Congress will reflect on Jan. 6, presided over by Representative Jason Crowe. A prayer vigil will be held at 1730ET.

One person we won’t be hearing from Thursday (thanks in part to the ongoing social media blackout): President Trump. He has cancelled a planned press conference at Mar a Lago at the urging of allies, according to Bloomberg. Although we wouldn’t be surprised to hear something from him, perhaps in the form of a statement disseminated through one of his former aides, or  perhaps on Gettr.

Both Pelosi and Schumer have released statements to mark the occasion:

Here are Schumer’s:

Dear Colleague: As we approach the anniversary of the January 6 attack on our Capitol and our democracy, I am writing to follow up on my last Dear Colleague before Christmas, specifically to outline next steps on urgently-needed voting rights legislation. One year ago this week, we experienced great sorrow: mere hours after the dawn of a new Congress and a new Majority, our beloved Capitol was attacked. It was attacked in a naked attempt to derail our Republic’s most sacred tradition: the peaceful transfer of power. Domestic violent extremists sought to inflict chaos and violence. Fueled by conspiracy and the ravings of a vengeful former President, they sought to destroy our Republic. Our democracy held – for now. As we all are witnessing, the attacks on our democracy have not ceased. In fact, they have only accelerated. Much like the violent insurrectionists who stormed the US Capitol nearly one year ago, Republican officials in states across the country have seized on the former president’s Big Lie about widespread voter fraud to enact anti-democratic legislation and seize control of typically non-partisan election administration functions. While these actions all proceed under the guise of so-called “election integrity”, the true aim couldn’t be more clear.

They want to unwind the progress of our Union, restrict access to the ballot, silence the voices of millions of voters, and undermine free and fair elections. They wish to propagate the Big Lie perpetuated by the former president that our elections are not on the level. Make no mistake about it: this week Senate Democrats will make clear that what happened on January 6th and the one-sided, partisan actions being taken by Republican-led state legislatures across the country are directly linked, and we can and must take strong action to stop this antidemocratic march. Specifically, as we honor the brave Capitol police officers who defended us from those motivated by the Big Lie who tried to undo a fair and free election, Senate Democrats will continue to make the case for passing voting rights legislation to counter the Republican voter suppression and election nullification laws with the same anti-democratic motives born out of the Big Lie. Let me be clear: January 6th was a symptom of a broader illness – an effort to delegitimize our election process, and the Senate must advance systemic democracy reforms to repair our republic or else the events of that day will not be an aberration – they will be the new norm. Given the urgency of the situation and imminence of the votes, we as Senate Democrats must urge the public in a variety of different ways to impress upon their Senators the importance of acting and reforming the Senate rules, if that becomes a perquisite for action to save our democracy.

Our Caucus has fought back against these assaults, uniting behind comprehensive legislation that would address these threats to our democracy. Sadly, these common-sense solutions to defend our democracy have been repeatedly blocked by our Republican colleagues, who seem wholly uninterested in taking any meaningful steps to stem the rising tide of antidemocratic sentiment still being stoked by the former president today. In June, August, October, and once more in November, Republicans weaponized arcane Senate rules to prevent even a simple debate on how to protect our democracy. The Senate was designed to protect the political rights of the minority in the chamber, through the promise of debate and the opportunity to amend. But over the years, those rights have been warped and contorted to obstruct and embarrass the will of majority – something our Founders explicitly opposed. The constitution specified what measures demanded a supermajority – including impeachment or the ratification of treaties. But they explicitly rejected supermajority requirements for legislation, having learned firsthand of such a requirement’s defects under the Articles of Confederation. The weaponization of rules once meant to short-circuit obstruction have been hijacked to guarantee obstruction.

We must ask ourselves: if the right to vote is the cornerstone of our democracy, then how can we in good conscience allow for a situation in which the Republican Party can debate and pass voter suppression laws at the State level with only a simple majority vote, but not allow the United States Senate to do the same? We must adapt. The Senate must evolve, like it has many times before. The Senate was designed to evolve and has evolved many times in our history. As former Senator Robert Byrd famously said, Senate Rules “must be changed to reflect changed circumstances.”

Put more plainly by Senator Byrd, “Congress is not obliged to be bound by the dead hand of the past.” The fight for the ballot is as old as the Republic. Over the coming weeks, the Senate will once again consider how to perfect this union and confront the historic challenges facing our democracy. We hope our Republican colleagues change course and work with us. But if they do not, the Senate will debate and consider changes to Senate rules on or before January 17, Martin Luther King Jr. Day, to protect the foundation of our democracy: free and fair elections.

As Beijing struggles with the worsening outbreak in Xi’an, the provincial capital of 13M that has been under lockdown for about 2 weeks now, authorities are finding it increasingly difficult to paper over the popular outcry. So, authorities in the northern Chinese city have banned “negative news” on social media as many residents took to Weibo and other platforms to complain about their present circumstances.

The citywide lockdown, believed to be the most brutal since the original Spring 2020 lockdown in Wuhan, has left many stranded at home without enough food, and without access to medical treatment. Unfortunately, they’ll need to keep their complaints private if they want to avoid angering the powers that be.

“From Jan. 4, people are banned from posting details of the pandemic restrictions or information about the road situation, videos, links, mini-apps or photos of the situation, particularly negative news,” the municipal government said in a mass text message to the city’s 13M residents. “There is background surveillance operating on all WeChat groups, and any negative news will be deleted as soon as it is sent,” the message said. “Please bear this in mind and pass the message on.”

Radio Free Asia reports that the message was triggered by a wave of public dissatisfaction and online complaints as people have been prevented from leaving their homes to buy groceries and basic necessities.

Just like in Wuhan, many have been turned away from hospitals for medical treatment because they come from high or medium-risk areas.

Instead of allowing complaints to fill up social media platforms, the local government in Xi’an is running a high-profile propaganda campaign to remind people of the efforts underway to bring shipments of fresh food to beleaguered residents.

Amusingly, some residents have been pressed into service of this campaign: RFA managed to get its hands on a clip of a family receiving a delivery of food and drink, before being asked to thank the government by the agents who delivered the shipment.

“You should thank the government,” the officer is seen saying. “Thank you, government, for your care, thank you,” replies the resident, having just received a white radish, three potatoes, six carrots and two onions.”

One Xi’an resident said the authorities want to put the people’s complaints “on mute”.

“They want to put us on mute, so that we can’t talk about anything negative regarding the pandemic restrictions,” Feng said.

Another resident complained that the government can silence people, but it can’t fool them.

“It’s pretty clear now what the government is doing,” Ma said. “Now, if people are hungry, they’re not allowed to say so.”

“This isn’t a place fit for humans to live, where they won’t even let sick people seek medical treatment, or give birth — that’s how they treat people in a pandemic,” she said.

Xi’an isn’t alone. Lockdowns are also in place in Henan province’s Yuzhou city and in the central city of Zhengzhou. There are also restrictions on travel in and out of Beijing ahead of the 2022 Winter Olympics on Feb. 4, and lockdowns have also impacted the port at Ningbo, as we reported earlier.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The first part of our 2022 outlook looks through the front windshield and contrasts 2021s tailwinds with 2022s growing headwinds. While no one knows what 2022 holds in store for investors, our concern is that it should not foster the same optimism as 2021. The economic and financial environments are shifting rapidly making the 2022 outlook much more difficult than this past year.

Part 2 of the 2022 outlook, coming out next week, will cover our thoughts on the stock and bond markets.

“The more extended the advance, and the higher valuations become, the more stable and promising the investment can appear to be, when judged through the rearview mirror.” 

– John Hussman

It’s All About Growth

Before looking forward, it’s worth explaining how economists assess economic activity.

Most economic activity is measured in percentage growth terms and not nominal terms. To stress the importance of this nuance, consider the following:

If the government gives consumers $1 trillion to spend, it will boost GDP by at least $1 trillion. In our example, the stimulus will boost GDP to $21 trillion from $20 trillion, equating to 5% growth. Without government stimulus and excluding any new economic activity, GDP will retreat to $20 trillion in the following year. As a result, GDP will decline by 5%. While nothing changed with the economy, the 5% decline will be considered a recession. To avoid zero or declining economic growth, again assuming no other activity, the government will need to provide at least $1.01 trillion of stimulus.

As we show above, stimulus boosts economic activity. However, it detracts from economic growth rates unless it grows each year. This fact will become important in our 2022 outlook as the government will not likely replicate the massive amount of stimulus doled out over the prior two years. Can the economy make up for it?

Covid TailWinds

In hindsight, the rearview mirror showing the period from March 2020 to the present paints an unusual picture. What started so poorly ended up being one of the greatest periods for investors. The S&P 500 total return since the March 2020 lows is +115%.

In March 2020, the sky was falling, and investors aggressively sold stocks. It turns out buying stocks in the face of such a unique calamity was the right thing to do. The justification was not a coming cure or vaccine for Covid or an imminent return to normal, but the government with their fiscal guns blazing.

Since March 2020, the government has run a $5.6 trillion deficit, dwarfing any prior instance. Such massive spending was only possible with the Treasury’s trusty sidekick, the Federal Reserve. 

As we show, the Fed has bought nearly $5 trillion of bonds since the pandemic began. In doing so, it came close to absorbing 100% of the net new debt issuance from the government.

While the government was doling out money to boost economic activity, the Fed spewed liquidity, supported asset prices, and kept interest rates low. Despite Covid shutting down large segments of the economy, economic data quickly recovered to pre-Covid levels.

Record low interest rates, massive consumer and corporate stimulus, and enormous liquidity gusted at investors’ backs producing double- and triple-digit gains. Not only did most asset prices regain March 2020 levels, but many have well surpassed those levels.

In the latter half of 2021, vaccines, increased consumer demand, and a record amount of savings added further oomph to the tailwinds. However, the ominous winds of inflation began picking up at that point.

2022 Headwinds

The perfect fiscal and monetary storms are petering out. As a result, headwinds for 2022 are mounting. Let consider how that weighs on our 2022 outlook.

Fiscal Spending

Over the last 3 months, the federal deficit grew at a $1.6 trillion annualized rate. That is historically high but well below 2020 and 2021 levels. Further, Joe Biden and the Democrats are struggling to pass the Build Back Better (BBB) social infrastructure program. We think it will pass in time, but the fiscal stimulus and spending related to it will not be as immediate or significant as initially planned.

The coming election in November poses more hurdles for spending bills. West Virginia Senator Joe Manchin and other Senators and Representatives from red and purple states face a growing risk of losing their seats. Some may take a page from Manchin’s playbook and voice deep concern for growing budget deficits to appease their voting bases.

Throughout later 2021 and even into 2022, Covid related stimulus programs ended or will end shortly. The closure of these programs will further reduce the flow of stimulus to consumers. For example, the recently extended student loan deferment program ends in a few months. In this case, many student debtors consume goods and services with money that should be servicing student debt. Once the deferment period ends, spending, in many cases, will decline. The child tax credit will also end shortly, resulting in a shortfall of funds for those receiving the benefit. Likewise, those that did not pay rent are now left with back payments or higher rents to make their landlords whole.

The graph below from Goldman Sachs helps quantify the sharp decline in fiscal spending related to the pandemic.

As we discuss later, the savings rate has fallen back to normal levels, meaning many of those affected will have to reduce consumption.

Monetary Stimulus

The Fed is tapering QE, expecting to end new purchases by March 2021. QE provides vast amounts of liquidity to the financial markets. As the Fed backs away, not only will it reduce liquidity to markets, but reduce the power of the world’s largest holder of U.S. Treasury debt. Someone will take the Fed’s place but must shed other assets to do so.

To help better understand this concept, we suggest reading The Fed Is Juicing Stocks. In particular, the section titled “Draining the Asset Pool.”

The Fed is also hinting at raising interest rates. Higher interest rates will increase interest expenses for debt-laden companies, consumers, and the government. Additionally, those using loans to leverage assets will have to pay more for the leverage. This will undoubtedly cause some investors to reduce or remove leverage as the potential returns diminish. 

The graphs below highlight that margin debt has proliferated and sits at or near record levels. The last two times margin debt grew this rapidly was in 1999 and 2007.

Elections and the Fed

Further pressuring the Fed is politicians. Consider the following from the Financial Times:

“The Fed needs to start tapering immediately and then they need to raise interest rates. Both those things can be done by March,” Jake Auchincloss, a Democrat from Massachusetts and member of the House of Representatives financial services committee, which oversees monetary policy, told the Financial Times. “I think chair [Jay] Powell would do well to end the decade of easy money,” he added.

Political pressure from the President and legislators may force the Fed to remove liquidity too quickly or raise rates too fast. Both are likely to be problematic for asset prices and economic recovery.

Savings Rate

The combination of direct government stimulus and the inability to spend money during the lockdowns resulted in unprecedented savings rates. As we show below, the savings rate jumped to levels that were twice as high as any previous level since at least 1959. Note that the two recent peaks result from the two rounds of personal stimulus checks.

The following graph, courtesy of Brett Freeze, shows how government stimulus to consumers (transfer receipts) and credit provided a bonanza of spending power for consumers. Like the bloated savings rate above, that too has normalized.

The savings rate is back to pre-Covid levels. Most consumers, especially those in the middle to lower-income classes, have fully exhausted extra savings and must either reduce spending or increase their use of debt.

Credit card debt and home equity withdraws are both increasing. While such funds can propel additional spending, it will not be nearly the same as the enlarged savings rates. Further, higher interest rates will make debt less appealing. Inevitably credit card and home equity are limited based on wage growth and the ability to service their debt.

Inflation

Prices are on the rise. Higher prices mean consumers spend more to get the same amount of goods. If wages keep up with inflation, the consumer is indifferent.  

Inflation is running at 6.9%, over three times higher than the Fed’s stated 2% objective. At the same time, wages are growing but at a lesser rate than inflation. Average hourly earnings are up 4.8%. While historically robust, real wages, factoring in inflation, are down 2%.

As we note earlier inflation is pressuring the Fed to prioritize their fight against inflation. Might the Fed have to choose between inflation and asset prices? Ohio Democrat Sherrod Brown recently shared thoughts on that- “The Fed should make sure our economy works for workers and their families, not Wall Street.”

Also, consider inflation is highly responsible for the recent string of poor consumer sentiment. People usually spend more when they have a positive outlook. As the graph below shows, the University of Michigan’s current and expected consumer sentiment indexes are at or near ten-year lows. The current index sits at 70.6. In April 2020, during the peak of Covid lockdowns, it was 71.8. In September 2008, when Lehman and others were failing, it was 70.3.

Pent up Demand and Mid-Life Crisis

Having been deprived of vacations, eating out, and a host of other activities, people were hungry to return to normal. Vaccines further raised comfort levels and allowed many stores and venues to return to normal.

Consumers splurged as they bought those things they couldn’t buy during lockdowns. Not only did they travel and go out to dinner, but some bought cars and houses and other big-ticket items. It was as if many consumers had a mid-life crisis simultaneously.

Most of that pent-up demand is quickly diminishing. The bills from those spending sprees are mounting, and life is slowly becoming more normal by the day. This additional source of spending is fading quickly.

Summary

“Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.” 

-George S. Patton

As you just read in part one of our 2022 outlook, this year’s monetary and economic environment will not be as friendly for asset prices as last year. While that may seem problematic for investors, if we learned anything in 2020 and 2021, it is that stock prices can climb a wall of worry efficiently.

In part two of our 2022 outlook, coming next week, we share our thoughts on how stocks and bonds might perform in the new year.

COVID cases have continued to climb across Europe, and while UK PM Boris Johnson has stood his ground, saying he won’t revive economy-crushing lockdowns, in Italy, PM Mario Draghi is moving ahead with his plans to make vaccines mandatory for all Italian citizens over the age of 50.

Sources inside Italy’s “control room” virus task force have apparently confirmed the PM’s plan, according to ANSA, the Italian-language newswire.

The recommendations are expected to be approved by a cabinet meeting later Wednesday.

Draghi’s crackdown on the elderly is on par with French President Emmanuel Macron, who said during an interview that he really wanted to “piss off” the unvaccinated.

“I am not about pissing off the French people,” Macron told the readers of Le Parisien on Tuesday.

“But as for the non-vaccinated, I really want to piss them off. And we will continue to do this, to the end. This is the strategy.”

Circling back to the situation in Italy, PM Draghi said the so-called ‘Super Green Pass’ would be used to verify that workers have been vaccinated.

The control room is made up of key ministers representing majority parties and public health officials and led by Premier Mario Draghi.

Over in the UK, Boris Johnson said Wednesday that he didn’t see a reason to go into lockdowns, at lest not right away.

As for whether the UK should move toward a lockdown, BoJo noted that lockdowns are not “cost free”, in fact they represent a serious tax on the livelihoods of those who are prevented from working because of them.

“This government does not believe we need to shut down our country again”

Boris Johnson rules out another lockdown in England, saying ministers have instead agreed to continue Plan B Covid rules for another three weeks

pic.twitter.com/sSxH14SaUb

— Markets Today (@marketsday) January 5, 2022

BoJo added that his government “doesn’t believe we need to shut down the country again.”

The UK added nearly 200K new cases on Wednesday; prompting NHS workers to insist that there’s still justification for a lockdown.

So far, an estimated 3.7M Britons have been infected with COVID as of the end of December, as the UK deals with the highest number of weekly cases recorded yet.

UK prime minister Boris Johnson has announced a shake-up of the COVID testing regime in England, in what he said was an effort to “ensure our testing capacity reaches those who need it most”.

An estimated 3.7M people in the UK were infected with COVID as of the end of December, the highest number of weekly cases recorded in the pandemic, the Office for National Statistics has found. Infections in the week ending Dec. 31 were up around 60% from the 2.3M infections recorded a week earlier.

How long before Brussels starts berating BoJo for enabling Brits to be the superspreaders across Europe? It appears the latest round of draconian dragnets across the mainland just add to the list of confirmations for why Brexit was worthwhile after all.

Authored by Naveen Athrappully via The Epoch Times,

A Danish study of nearly 12,000 households has discovered that Omicron spreads faster than Delta among those who are fully vaccinated, and even higher between those who have received booster shots, demonstrating strong evidence of the variant’s immune evasiveness.

The Omicron variant was found to evade the immunity of vaccinated individuals at a much faster pace compared to Delta, and at a higher rate than the unvaccinated, according to the study conducted by researchers at the University of Copenhagen, Statistics Denmark, and Statens Serum Institut.

“Comparing households infected with the Omicron to Delta VOC, we found an 1.17 times higher SAR for unvaccinated, 2.61 times higher for fully vaccinated and 3.66 times higher for booster-vaccinated individuals, demonstrating strong evidence of immune evasiveness of the Omicron VOC,” said the preprint of the study. SAR refers to secondary attack rate.

However, the study also discovered that unvaccinated individuals spread the virus more easily than those who are fully vaccinated, while there was reduced transmission between people who received booster shots.

There were altogether 11,937 households involved in the study, out of which 2,225 already had Omicron. After one to 7 days, the team followed up with the households and found 6,397 secondary infections. The SAR was found to be 31 percent with the Omicron, and 21 percent with the Delta variant.

Omicron has spread to 90 countries worldwide and has become the dominant variant in the United States. However, the strain has proven to cause mild symptoms compared to earlier variants like Delta, and results in fewer hospitalizations.

“The Omicron VOC (variant of concern) has been reported to be three to six times as infectious as previous variants, with a short doubling time, including early estimates from countries with a high vaccination coverage indicating doubling times of 1.8 days (UK), 1.6 days (Denmark), 2.4 days (Scotland) and 2.0 days (United States),” from the study.

The researchers also suggested considering alternate methods for combating the infection. “Our data indicate that the non-pharmaceutical interventions that were used to control the previous variants of SARS-CoV-2 are also likely to be effective against the Omicron VOC.”

Seventy-eight percent of Danish citizens are fully vaccinated with two doses, while almost half have received a booster shot. More than 80 percent have received Pfizer-BioNTech’s vaccine.

The effectiveness of vaccines is reduced to around 40 percent for symptoms and 80 percent for severe disease with the Omicron variant. Numbers were better with booster shots as the effectiveness was reduced only to 86 percent for symptoms and 98 percent respectively for those suffering from severe infection.

The vaccination effectiveness with Pfizer-Biotech for preventing infection with the Omicron variant is only 35 percent, the study found. “The advantage of the Omicron VOC seems to be a combination of high transmissibility and increased immune evading abilities.”

“We therefore suggest that adapted or improved vaccines may be necessary to mitigate the spread of the Omicron VOC.”

The Danish team added that more studies are required to understand the latest COVID-19 variant, as they concluded, “Our results confirm that booster vaccination has the potential to reduce Omicron VOC transmission in households, although vaccination as a strategy for epidemic control is increasingly challenged by the immune evasiveness of the Omicron VOC.”

A preprint of the study was published on Dec. 27, and it has not yet been peer-reviewed.