‘Serious Problems’

“As you can see, we are facing a serious problem in certain areas”, Anthony Fauci said Friday, during remarks delivered at the first public briefing from the White House’s coronavirus task force in months.

Fauci was, of course, referring to outbreaks of COVID-19 in Texas, Florida, and other states where caseloads and hospitalizations are rising sharply. But his assessment could easily serve as an indictment of America’s plight in 2020 more generally.

From the persistence of the epidemic to widespread social unrest to the deterioration of public discourse, the world’s foremost democracy is in a chaotic spiral. Just ask the 80% of Americans who said things are “out of control” in a NBC/Wall Street Journal poll released earlier this month.

Fauci essentially begged Americans to help in the fight against the virus.

“We can be either part of the solution or part of the problem”, he said. Deborah Birx advised vulnerable members of the population to shelter in place in states where cases are on the upswing.

The media is mocking the administration without even trying. “Pence Sees ‘Remarkable Progress’ as Virus Spikes, States Retreat”, one headline read.

The vice president spent an inordinate amount of time during Friday’s briefing celebrating what he characterized as a string of successes in America’s public health crisis.

Irrespective of your partisan affiliation, you’re not likely buying it. Texas closed taverns from noon Friday and Florida banned the consumption of alcohol at bars statewide after recording its largest single-day spike in infections yet.

It’s true that fatalities remain low, and that around half of new cases are in people 35 and under. That’s good news, but it’s not going to keep the market pacified as long as headlines continue to suggest that the “new” hotspots are reentering partial lockdowns.

“The issue remains in a subset of US states: Texas, Florida, South Carolina and Arizona in particular [but] relative to 10 days ago, the two key metrics (percentage of positive tests and hospitalizations) in these states (but not in the US in aggregate) have worsened markedly”, Deutsche Bank wrote Friday, adding the following:

The worsening of these key metrics has not yet translated into a noticeable rise in deaths. Given the lag between hospitalization and death it may be too early for the deterioration to manifest itself in higher mortality. The more optimistic case would be that increased testing and greater awareness are resulting in milder cases and better treatment than earlier in the crisis. The next two weeks of data should settle this debate. In the meantime, there is some evidence of official or self-imposed lockdown which should (with a lag) slow the progress of the epidemic.

“You have an individual responsibility to yourself but you have a societal responsibility, because if we want to end this outbreak, we’ve got to realize that we are part of the process”, Fauci went on to say, pretending for a moment that Americans are concerned enough about each other to chance looking silly wearing a paper mask at the grocery store if it means saving the life of someone else’s grandmother.

I jest — but only a little.

What’s interesting is that Americans are suddenly taking their responsibility to society more seriously. Protests against racial injustice and inequality have forced corporations to take aggressive steps to “prove” their commitment to promoting equality of opportunity, if nothing else.

In the same vein, corporate management teams have had enough of misinformation and hate speech as disseminated on Facebook. Unilever on Friday yanked ad spend in the US from the platform as well as from Instagram and Twitter. “Continuing to advertise on these platforms at this time would not add value to people and society”, the company said in a statement. “We will be monitoring ongoing and will revisit our current position if necessary”.

Facebook is now facing an effective boycott from some of the world’s largest companies, including Verizon, which said Thursday it’s freezing Facebook ad spend until the company “can create an acceptable solution that makes us comfortable”.

In addition, Ben & Jerry’s, Patagonia, The North Face and, as of next month, Honda, are pausing ads on the site.

The shares had their third-worst day since the July 2018 earnings debacle on Friday.

“For the month of July, American Honda will withhold its advertising on Facebook and Instagram, choosing to stand with people united against hate and racism”, Honda said. “This is in alignment with our company’s values, which are grounded in human respect”.

Comms services plunged 5% to close the week.

Banks were a disaster too, falling more than 6% after the Fed capped dividends and banned buybacks through September.

Meanwhile, Exxon is following Macy’s (which said Thursday it will cut thousands of back-office and management positions) in slashing white collars. “Between 5% and 10% of US-based employees who are subject to performance evaluations could end up leaving this year after their assessments”, Bloomberg reported Friday, citing unnamed sources, who said the cuts “are expected to be performance-based and not characterized as layoffs — and not all workers are subject to such evaluations, which typically apply to white-collar jobs such as engineering, finance and project management”.

Maybe Jeff Gundlach was right — I’m sure he’d tell you as much.

Earlier this month, during a webcast, Jeff predicted a wave of white collar job losses. “If a $100,000 white collar worker gets laid off, I think that they just stare in the mirror in the morning with fear in their eyes –looking at their own eyes because what are you going to do?”, Gundlach wondered.

The dollar was insult to injury for markets Friday, rising for a third day. That is kryptonite for risk. In the curve: bull-flattening, also bad news, as it essentially equates to a lack of faith in the reopening story. 30-year yields dropped below their 50-day moving average for the first time since May 22.

On the whole, US equities dropped for a second week in three, and Friday marked the third serious selloff in the last dozen sessions.

Simply put: The economic, market, and societal cross currents are strong right now.

Market participants would probably just as soon stay disengaged, and let the summer lull kick in, but that could be a costly proposition.

I’ll leave you in the capable hands of Nomura’s Charlie McElligott (from a Friday note):

Lower trailing realized vol avgs allow for increasing risk exposure / leverage across the systematic universe, which sees trend- and carry- momentum build in price action; Overwriter flows will continue to build that over time likely turns the aggregate Dealer gamma position back “long,” which is a further market shock absorber which will allow for more leverage and position accumulation–until of course this “short vol” asymmetry builds into a TBD macro shock-down catalyst (COVID resurgence with hospitalization rate jumping and challenging the reopening narrative, Dem Sweep in Nov, or perhaps something market-based like a blast of US Rate Vol on a spike in yields on a growth- or inflation- impulse), Dealer “long gamma” flips into “short gamma” territory, trend- and carry- positions are deleveraged as vol- and price- inputs are triggered…RINSE, REPEAT.


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