economy Markets

$1 Trillion Is The Floor (California Dreamin’)

“Stimulus Talks at Standstill With GOP Yet to Agree on a Proposal” read one feature headline on Monday afternoon.

“The Coronavirus Surge Is Officially Slowing the US Recovery”, read another.

That’s a rather stark juxtaposition, but you can be sure the ominous message is at least partially lost on some lawmakers, particularly Republicans. With the Senate in recess until next week, negotiations on the next round of virus relief will come down to the wire.

Read more: You’re Looking At The Wrong Unemployment Data

Extra federal unemployment benefits credited with bridging the income gap for millions of jobless Americans will expire at the end of the month, representing a potential fiscal cliff for the economy, which is now being menaced by surging COVID-19 infections.

States representing more than half the US population have paused or rolled back re-opening plans. Jobless claims are sticky at levels that would have seemed unfathomable in the pre-pandemic context. You’re reminded that total claimants far exceed the “official” number of unemployed Americans (see the linked post above).

The Trump administration has repeatedly said the White House wants to see a bill by the first week of August, and negotiations with Senate GOP’ers are ongoing. “No decisions have been made, no formal negotiations yet”, Larry Kudlow told reporters Monday. “I can’t be specific”.

Kudlow told Fox he doesn’t see any interruptions in the “V-shaped” recovery and that rising cases aren’t translating into a downturn.

That’s debatable, to say the least.

Restaurant bookings have certainly turned lower in hotspot states and a new Bloomberg dashboard of high-frequency, alternative and market-based data, shows pockets of improvement, but little else.

Adding to the chaotic atmosphere are reports that the White House is engaged in an effort to discredit Anthony Fauci, going so far as to distribute bullet points that resemble campaign-style opposition research. Although the official word is still that the president and Fauci have a “good relationship”, the nation’s top infectious disease expert has been sidelined for more than a month, according to officials, a time period during which infections surged.

Republicans are working on their own version of a new virus relief package. Democrats have, of course, proposed a $3.5 trillion plan, but Mitch McConnell essentially laughed it off the Hill — as though there’s something funny about the current situation.

Budget hawks are circling. The deficit hit a record $864.1 billion in June, the government said Monday. Outlays soared to $1.1 trillion, mostly due to the Paycheck Protection Program.

“Negotiations with Democrats… won’t begin until a GOP bill is complete”, a person familiar with the discussions told Bloomberg, whose Erik Wasson, Laura Litvan, and Laura Davison remind you that while McConnell is willing to accept a $1 trillion package, Nancy Pelosi “is treating $1 trillion as a floor that must be negotiated up”.

Morgan Stanley sees another ~$1 trillion in stimulus getting the green light near the end of this month. “The failure of such a measure would mean significantly higher risk for markets”, the bank cautions.

The S&P briefly took out its post-pandemic high on Monday, before stocks pulled back stateside on signs California may be headed into another lockdown. Governor Gavin Newsom closed all indoor operations for restaurants, bars, and movie theaters. The state also closed card rooms, zoos, and gyms.

“At several points during the session, the S&P 500 erased year-to-date losses… a milestone that triggered a selloff upon the last occurrence and is a pattern that intuitively leaves investors wary of a repeat”, BMO said, late in the session. “Reducing equity exposure at December 31st prices is certainly consistent with the collective sense that it probably would have been better if 2020 thus far just hadn’t happened”.

Big-cap tech was on track to underperform small-caps for a second straight day, a notable development in light of recent trends, which heavily favor secular growth, strong balance sheets, and defensives over cyclicals and everything that would benefit were the US definitively on track for a robust recovery.

“We don’t expect these negative headlines to derail the economic recovery, which, based on the latest US data, is showing encouraging signs”, UBS wealth management said Monday. “Governments are continuing to provide fiscal support [and] while localized restrictions have been reintroduced in the US, Germany, the UK, and Australia in response to new spikes in COVID-19 infections, there appears to be no political appetite for renewed national lockdowns”, the bank added.

There may not be any “appetite” for sweeping new stay-at-home decrees, but it’s a delicate balance for elected officials. Lockdowns aren’t popular, but standing idly by while a deadly virus spreads unchecked can become a political liability if mortality rates begin to rise before officials have a chance to reimpose restrictions.

But if Dr. Fauci is, in fact, getting the cold shoulder at 1600 Penn., it probably means the chances of the White House getting behind an aggressive containment push are remote.


 

12 comments on “$1 Trillion Is The Floor (California Dreamin’)

  1. “We don’t expect these negative headlines to derail the economic recovery, which, based on the latest US data, is showing encouraging signs”, UBS wealth management said Monday. “Governments are continuing to provide fiscal support [and] while localized restrictions have been reintroduced in the US, Germany, the UK, and Australia in response to new spikes in COVID-19 infections, there appears to be no political appetite for renewed national lockdowns”, the bank added.

    Really? “Localized restrictions?” That sounds like Betsy DeVos.

    Are US consumers are going to ignore the “headlines” as well? Perhaps in the Trump heartland. Disney World is open!

  2. We can ignore covid up until it cripples supply chains which have been under stress for months. We can ignore it until it overwhelms hospitals. We can ignore it until it closes schools unexpectedly. We can ignore it until massive amounts of people become homeless. We do not have the luxury of ignoring it much longer. Given the current approach the country will be in the most severe crisis of it’s existence by November and the stock market will be at all time highs.

  3. We need a political analyst akin to H’s market commentary to explain the rationale for why Republicans are pushing so hard to limit the size of the package. My uneducated guesses:
    1. Senate Republicans secretly don’t want Trump to be re-elected
    2. They don’t want to admit that deficits don’t matter so they can keep pushing back on progressive policies
    3. They don’t want to set up Biden to take credit for the recovery if he is elected
    4. Endangering lives is their way of secretly raising wages for the working class (just look what the plague did for the peasants who survived in the middle ages!)

    • Or they are looking at breaking from Trump in the last couple of months of the campaign. This would let them say they went against Trump.

    • The truth is most people still believe deficits do matter and this includes politicians, particularly on the right. The Senate Republicans aren’t plotting, they actually believe it. The UK government is already talking about how they’re going to have to raise taxes later to ‘pay for it’. This is the mentality in most conservative parties around the world. MMT is still very much a minority view, even though it is de facto being practiced in many countries.

    • #2&#3…. They go hand in hand.

  4. Our government is in crisis mode unable to get out in front of this in any meaningful way. Virus will likely go until it burns out. We have a long road ahead and lots of body bags to achieve burnout. Soylent Green anyone?

    • It is not clear what “burnout” looks like with this virus. Antibody levels in COVID survivors are falling off within a matter of months. We don’t yet understand much about T cell response and its persistence. There are isolated reports of COVID survivors becoming reinfected. So while we are working feverishly towards vaccines (and I hope we are successful), there is a chance that even a “successful” vaccine will only give short-term immunity, possibly protecting people from severe infection, but not inhibiting infectivity much. The other circulating coronaviruses (4 of them) cause variants of the common cold, and we become vulnerable to reinfection within months to a year or so. So there is a scenario in which COVID circulates like the common cold, indefinitely. We can hope for mutations that make the virus less virulent, but coronaviruses do not mutate nearly as rapidly as influenza viruses, and there’s no guarantee that it will in fact become less virulent (particularly because there is already so much asymptomatic spread already). So absent a really good vaccine–which is possible, in spite of the negative tone of this post–the virus could well just keep going, without achieving burnout.

  5. Maybe just maybe the issue of a Ricardian equivalence is a reality which makes additional fiscal support counterproductive

  6. “It probably would have been better if 2020 thus far just hadn’t happened.”

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