Just Two Things.

There were two takeaways from Thursday’s US session.

The first is that more stimulus is both necessary and a foregone conclusion.

“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for”, Richard Clarida said, in a speech to the New York Association for Business Economics.

The vice chair’s remarks came on a day when the latest jobless claims figures showed another 2.4 million Americans filing for unemployment benefits, bringing the nine-week total over the course of the crisis to nearly 40 million, an astounding number that would be wholly inconceivable outside of the current context.

Flash reads on IHS Markit’s PMIs for May painted a similar picture to that seen across the pond: April was the trough, but the situation is still quite dire.

Both the manufacturing and services gauges for the US are still in the 30s, reflecting acute concerns across the economy.

“Direct fiscal support can make a critical difference, not just in helping families and businesses stay afloat in a time of need, but also in sustaining the productive capacity of the economy after we emerge from this downturn”, Clarida went on to say.

“We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook”, Jerome Powell remarked, during comments prepared for a “Fed Listens” event. “We are in the midst of an economic downturn without modern precedent”, he added.

Steve Mnuchin told The Hill “there’s a strong likelihood we will need another [relief] bill”, although he was careful to hew closely to GOP talking points around wanting to assess the efficacy of the current measures before moving ahead with more. “We’re going to step back for a few weeks and think very carefully if we need to spend more money and how we’re going to do that”.

Fed officials are unanimous in their assessment, even as they’ve avoided speaking in prescriptive tones. More fiscal action is necessary. It’s important to remember that what we’ve seen thus far isn’t properly “stimulus”. There’s nothing to “stimulate” until the economy is back open. If demand remains depressed as storefronts lift the shutters, it will be difficult for employers to keep people on payrolls.

In short: Everyone knows another package from Congress is coming, it’s just a matter of how many of Nancy Pelosi’s demands Mitch McConnell is willing to acquiesce to in the course of getting it done. House Democrats have a bill ready to go. “[It’s] meeting resistance in the Senate”, Pelosi told Bloomberg TV on Thursday. “[But] it’s just a matter of time”, she added.

For what it’s worth (which is a lot if you’re one of the many unfortunate individuals caught up in the crisis), the total jobless claims filed over the past two months sum to nearly the same total as the entire Great Recession (using NBER official start and end dates).

Larry Kudlow still doesn’t get it, though.

“I do not believe that more government spending is going to give us a strong and durable recovery – that’s been tried before”, he said Thursday.

He’s right. It has. And it usually works to varying degrees. But what has literally never worked is supply-side economics. Yet that’s what Kudlow is pushing for. He supports a capital gains tax exclusion and fewer regulations. He also wants a payroll tax cut, which actually isn’t a terrible idea.

As a reminder, Larry Kudlow is not an economist. Neither is Stephen Moore.

The second takeaway from Thursday is that US-China tensions are destined to boil over to disastrous effect at some point. That does not mean that whatever disaster comes along will necessarily last very long or materially derail any risk asset rally or economic recovery. It’s just to say that, at this juncture, the number of escalations seen over the past two weeks easily eclipses the worst stretches of the trade war.

As if things needed to get any more contentious after “wacko” Wednesday (see “‘Some Wackos’ Are Pushing US-China Relations To The Brink“), Thursday found both Donald Trump and US lawmakers threatening China with additional sanctions in the event Beijing moves ahead with plans to enshrine mainland national security protocol into Hong Kong law.

The National People’s Congress confirmed press reports that Beijing is set to implement “an enforcement mechanism for ensuring national security”. No additional details were immediately available.

Read more: China Plans Serious Hong Kong Escalation As Trump Accuses Xi Of Letting ‘Plague’ Spread

Trump, speaking to reporters at the White House, said he doesn’t really understand much about what it is Beijing is planning to do, but he knows it’s not good.

“I don’t know what it is”, Trump said, before suggesting that this is one time when he isn’t the only one who’s clueless. “Because nobody knows yet”.

What Trump does know, is that whatever it is, he’s prepared to start a diplomatic melee and, if necessary, an international incident over it.

“If it happens, we’ll address that issue very strongly”, he warned.

USDCNH rose the most in weeks, HKD forwards spiked and the Hong Kong ETF tumbled the most since March.

Even as Trump isn’t entirely sure what it is he may soon find himself “strongly addressing”, lawmakers aren’t similarly befuddled.

Senators Chris Van Hollen and Pat Toomey have already introduced bipartisan legislation to defend Hong Kong’s autonomy against what they’re calling “increasingly brazen interference from the Chinese Community Party”.

According to a press release, the Van Hollen/Toomey measure would impose mandatory sanctions on entities that violate China’s obligations to Hong Kong under the Joint Declaration and the Basic Law. The legislation would also impose mandatory secondary sanctions on banks that do business with the entities in violation of the Basic Law.

“Last year, millions of people in Hong Kong took to the streets to demand democratic freedoms”, Van Hollen, who also co-sponsored the bill to delist Chinese shares from US exchanges, said Thursday. He added the following:

Despite China’s brutal crackdown, and repeated attempts to erode Hong Kong’s political liberties, these protests have persisted. Today, China went a step further, imposing new laws by fiat to criminalize political dissent. This bipartisan legislation will impose serious penalties on those working to strip Hong Kong of its autonomy. I urge the Senate to take up this bill immediately — it’s clear we have no time to waste.

Toomey charged that “the communist regime in Beijing would like nothing more than to extinguish the autonomy of Hong Kong and the rights of its people”. He went on to say this:

In many ways, Hong Kong is the canary in the coal mine for Asia. Beijing’s growing interference could have a chilling effect on other nations struggling for freedom in China’s shadow. This bipartisan legislation will impose strict sanctions on those who undermine Hong Kong’s autonomy or contribute to the erosion of basic freedoms and rights enjoyed by the people of Hong Kong.

Again, this is not tenable – at all. Beijing is going to respond, though they may wait until after the NPC.

While Trump administration officials have been keen to insist the trade talks won’t be affected, that is clearly not a safe assumption. In fact, I’d call it totally unrealistic. It’s just a matter of time before the trade deal falls apart or, at the least, is “officially” thrown into doubt by some kind of bombastic tweet storm.

Coming full circle to the stimulus issue, Pelosi on Thursday said she’s “optimistic” about getting another relief bill passed. “The American people fully support what we are doing and oppose the Senate obstructing it”, she said.

As far as monetary policy goes, Trump offered this: “There’s a lot of ammunition left at the Fed”.


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6 thoughts on “Just Two Things.

  1. Some comments on recent data that indicates re-opening does not increase infection rates as would be indicated in accordance with the model. Typically epidemiological models are based on the diffusion equation which is similar to modelling a table full of billiard balls which are bouncing into each other. The excitation force is heat as these balls are atoms. However in reality infection rates have a cultural component. That is if you got your infection at a local coffee shop that coffee shop may have other infections and in extreme cases can have ‘herd immunity’. For you to re-infect someone else you need to do the equivalent of go to a different coffee shop. While many societal interactions are not in cultural clumps many are. The clumps can be simply one person practicing stellar hygiene.

    The infection models are typically not constructed to this fine level of detail and so do not track well as the infection restarts and is still somewhat contained within existing clumps. Once the virus breaks out of these clumps again in multiple places the infection rates should approach model rates with a lag built into the curves. Time will see, but much like these wonderful economic models I am learning about here on this site, these physical models must be used with interpretation to make good sense of them.

    1. With CDC combining virus tests with antibody tests in its reported testing volumes, we don’t know what the infection rate is . . . is this too imbecilic to be accidental?

  2. Not even comfortable using the term recovery any more. Square Root “repricing reaction” that now enters the flatline phase, blindly stubborn to any news good or bad until something (don’t ask me what) tips the scales beyond the level of ignorance. Key word there being ignore……..they get tipped beyond the level of “ignore”.

  3. If unemployment gets too bad, we should stop counting it. That way we won’t have unemployment. The President can then say we have full employment, and the “Some say…” press will dutifully report that and 40% of the country will dutifully believe it and maybe 20% more will wonder who won Masked Singer or if college football is returning. Unemployment then just becomes a partisan issue and anybody claiming otherwise can be tarred as part of a Derp State hoax.

    1. I continue to be dismayed at the blatant politicization of these very critical situations. As Bassman says, inflation from GFC response has been in financial asset prices. How this collides with antipathy towards globalization, disruption to supply chains, and ultimately US economic interests seems to be getting riskier each day. Why not try supply side economics? It might make you look good on TV tomorrow. Maybe? Larry must know.

      The Economist has an interesting series on the international banking system that discusses how the status of USD as the global reserve currency is a critical strategic asset. Who knew? What is soft power anyway? Guess it’s for pussies. Bludgeoning China, our allies, and trading partners with haphazard tariffs and sanctions is hastening the development of alternative financial systems not based on USD. Why use the TPP to establish long-term US economic leadership around the Pacific when you can challenge Xi to the long game mano a mano?

      One of my biggest lessons of GFC and Coronacrisis is that tectonic changes build slowly but happen very fast, often with little warning. A decade of change in a week. What’s next?

      1. The phenomenon you describe was modeled by a French mathematician named Rene Thom in what he called “Catastrophe Theory. Smooth change suddenly breaks to a new level because of the presence of a “splitting factor,” here COVID.

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