UPDATE COVID-19 / CREDIT BUBBLE BULLETIN

Update COVID-19

Doug Nolan


Can we even attempt a reasonable discussion? Someone’s got this wrong.

June 12 – Reuters (Judy Hua, Cate Cadell, Winni Zhou and Andrew Galbraith): “A Beijing district put itself on a ‘wartime’ footing and the capital banned tourism and sports events on Saturday after a cluster of novel coronavirus infections centred around a major wholesale market sparked fears of a new wave of COVID-19… ‘In accordance with the principle of putting the safety of the masses and health first, we have adopted lockdown measures for the Xinfadi market and surrounding neighbourhoods,’ Chu said.”

June 14 – Financial Times (Don Weinland): “Over the weekend, authorities closed the Xinfadi market, a sprawling complex that provides most of Beijing’s fresh seafood, fruits and vegetables. Several residential compounds on the west side of the city have been locked down and more than 100 people have been put in quarantine… China has adopted a ‘zero tolerance’ stance toward new cases. Areas that present any new cases have been quickly locked down, often trapping millions of people.”

June 19 – CNN (Nectar Gan): “Within a matter of days, the metropolis of more than 20 million people was placed under a partial lockdown. Authorities reintroduced restrictive measures used earlier to fight the initial wave of infections, sealing off residential neighborhoods, closing schools and barring hundreds of thousands of people deemed at risk of contracting the virus from leaving the city.”

China is said to have mobilized its 100,000-strong infection tracing force. More than 1.1 million tests were administered in Beijing over the past week.

From the UK Guardian (Lily Kuo): “Officials have ordered all residents to avoid non-essential travel outside of the capital, and suspended hundreds of flights and all long-distance buses. Other cities and provinces have begun to impose quarantine measures on travellers from Beijing… ‘Everyone is scared. No one wanted this to happen,’ says Zhang, waiting in the queue near Chaoyang park.”

June 19 – CNBC (Berkeley Lovelace Jr.): “White House health advisor Dr. Anthony Fauci said Friday that he is frustrated Americans aren’t following recommended health guidelines to prevent the spread of the coronavirus. ‘Clearly, we have not succeeded in getting the public as a whole uniformly to respond in a way that is a sound scientific, public health and medical situation,’ Fauci, director of the National Institute of Allergy and Infectious Diseases, told CBS News… ‘And it’s unfortunate. And it’s frustrating.’”

Florida positive COVID cases surged to 3,822 Friday – almost 20% ahead of the previous day’s record infections (3,207). From CNBC: “Earlier this week, Republican Gov. Ron DeSantis said the state would not reimplement more restrictions or delay its reopening progress. ‘We’re not shutting down. We’re going to go forward. ... We’re not rolling back,’ the governor said at a news briefing Tuesday. ‘You have to have society function.’” This week marked a notable jump in the percentage of positive test results, with between 10 and 12% returning positive Tuesday, Wednesday and Thursday (versus less than 5% early in the month).

New cases in California jumped three straight days to Friday’s 4,317 – the single-largest increase yet – surpassing 4,000 for the first time (some delayed results were reported Friday). Hospitalizations also rose to a new high. From Politico: “California Gov. Gavin Newsom announced Thursday he will require masks in most public settings statewide in an effort to slow the spread of Covid-19 as the state is still setting daily records for new infections.”

Arizona announced 3,246 new cases Friday – about 30% above Thursday’s previous record 2,519. Prior to June, Arizona only reported two days with new infections above 500. Early this month is had its first 1,000 infection day. From KVOA: “Since June 2, the percentage [of positive results] has spiked back up from 5.7% to 7.8%.” And from Harvard epidemiologist Feigl-Ding (reported by Fox10): “Arizona is currently the worst off. In terms of a per capita basis, on a 7-day average, Arizona has 212 cases per million population and Arizona ranks number one.” Apparently, 20% of Arizona COVID tests came back positive Thursday.

Texas reported 3,516 new infections Thursday, 12% above the previous high on Wednesday (3,129). Total infections surpassed 100,000, as hospitalizations rose for eight straight days. From Community Impact: “In the last two weeks, Texas Medical Center-affiliated hospitals have seen its COVID-19 patient numbers increase to 883 as of June 18, a 41% increase in two weeks… The jump in hospitalizations at the medical center comes as the Greater Houston area has experienced an influx of new COVID cases…” Covid hospitalizations in Dallas County were also up 40% in two weeks.

From the Brownsville Herald: “In Austin and Travis County, health authorities said earlier this week that community transmission is now widespread in the area. The challenge is that many people who have tested positive have visited many different locations, which makes the exact infection site ‘difficult to pin down to one particular location’ where the virus is being spread, said Mark Escott, Austin Public Health’s interim medical director and health authority.”

Friday saw South Carolina new cases surpass Thursday’s record by 5% to 1,018. Total cases reached 22,608. Oklahoma on Thursday reported a record 450 new positive infections.

June 19 – New York Times: “The World Health Organization issued a dire warning on Friday that the coronavirus pandemic is accelerating, and noted that Thursday was a record day for new cases — more than 150,000 globally. ‘The world is in a new and dangerous phase,’ said Dr. Tedros Adhanom Ghebreyesus, the director general of the W.H.O. ‘Many people are understandably fed up with being at home. Countries are understandably eager to open up their societies and their economies. But the virus is still spreading fast. It is still deadly, and most people are still susceptible.’ If the outbreak was defined early on by a series of shifting epicenters — including Wuhan, China; Iran; northern Italy; Spain; and New York — it is now defined by its wide and expanding scope. According to a Times database, 81 nations have seen a growth in new cases over the past two weeks, while only 36 have seen declines. Dr. Tedros said that almost half of the new cases reported on Thursday came from the Americas. Large numbers are also being reported from Africa, South Asia and the Middle East.”

June 19 – Bloomberg: “Brazil exceeded 1 million coronavirus infections, the second nation to reach the mark, as the disease shows no sign of slowing in Latin America’s largest nation months after the first cases were recorded. The country registered a record 54,771 cases on Friday, bringing the total to 1,032,913. The data compiled by Brazilian states also showed 1,206 fatalities, raising the toll to 48,954. In both counts, Brazil trails only the U.S., which had 2,206,333 on Friday… Brazil’s response, plagued by political infighting and mismatched quarantine orders, has made it harder for experts to pinpoint when the disease will peak in the nation of 210 million.”

India reported a record 14,574 new cases Friday.

Beijing goes to “wartime” footing with a 100-case outbreak. The U.S. on Friday reported 33,000 new infections, the largest increase in weeks. Expectations that our outbreak would follow the path of Italy, Spain and Germany were much too optimistic.

The U.S. “curve” not only hasn’t declined as expected, it is turning higher. But there will be no U.S. mobilization. Former FDA Commissioner Dr. Scott Gottlieb asked the pertinent question Thursday on CNBC: “Can we keep this from getting out of control. This is a virus that wants to infect a very large portion of the population.”

The U.S. is more deeply divided today than it has been in decades. Divisions fall along political, ethnic, economic and generational lines. These lines seem to harden by the week. Part of the country will look to Tulsa this weekend with pride and enthusiasm. A segment of society will see the President’s rally as a repulsive display of ignorance and recklessness. Only in this extraordinary environment could masks become a political statement.

The pandemic is worsening – at home and abroad.

Here in the U.S., states will be hesitant to reimpose lockdowns. Yet it’s difficult for me to see how deteriorating conditions in many states – including large ones – don’t come with serious economic ramifications. A return to normalcy will be postponed. Consumers will remain hesitant to venture far from home. Recovery for scores of businesses will be further delayed.

Lockdown or otherwise, a virus resurgence would equate to more business failures, permanent job losses and Credit problems.

Brazil has a population of 210 million. India is approaching 1.4 billion. Both nations are staring at potential health and economic catastrophes. With a record 180,000 new global infections reported Friday, scores of countries are at risk of the pandemic spiraling out of control. When it comes to global recovery prospects, markets are much too complacent.

June 18 – Bloomberg: “China’s central bank wants the total flow of credit to rise by almost a fifth this year, as part of efforts to push the economy out of the coronavirus-induced slump. That’s to be achieved through record special-purpose bond issuance as well as a 19% increase in bank loans, according to People’s Bank of China Governor Yi Gang. In all, total social financing flow should rise to at least 30 trillion yuan ($4.2 trillion) this year, Yi said… That would represent a 17% expansion from 2019’s 25.6 trillion yuan in new credit including government bond issuance… Even so, the depth of China’s first-quarter contraction and the chance that the virus shutdowns will return in earnest imply that the increase may not be enough.”

Beijing is coming to grips with the reality of deteriorating economic recovery prospects.

China’s Bubble is faltering. Inflated consumer confidence has fallen back to earth, portending an extended period of weak domestic demand. Meanwhile, China’s manufacturers remain highly exposed to ongoing weak global demand.

I’m tempted to label markets as “crazy” for downplaying pandemic and myriad risks. But markets are just playing a different game.

In the U.S., a resurgent COVID ensures an extended period of massive fiscal and monetary stimulus.

A weak China guarantees Beijing slams the Credit accelerator. Global weakness ensures the BOJ, ECB and others continue to flood global markets with liquidity. It’s a replay of earlier in the year when manic markets disregarded pandemic risks.

And expect a replay of March dynamics when the latest speculative Bubble iteration ruptures.

How will central banks react – after already flooding the world with Trillions of liquidity?

I wanted to circle back to document the final question and reply from Chairman Powell’s June 10th post-FOMC meeting press conference:

Bloomberg’s Michael McKee: “I came across a statistic the other day that amazed me. Since your March 23rd emergency announcement, every single stock in the S&P 500 has delivered positive returns. I’m wondering, given the levels of the market right now, whether you or your colleagues feel there is a possible bubble blowing that could pop and setback the recovery significantly, or that we might see capital misallocation that will leave us worse off when this is over? Second, inequality is not just about wages, it’s also about wealth, and a number of studies have suggested that by keeping rates low for so long and targeting the markets after the great financial crisis, that the Fed did contribute to wealth inequality in this country. And I’m wondering if you think there is some tweak or some message you could give that would affect that?”

Powell: “What we’ve targeted is broader financial conditions. If you go back to the end of February and early March, you had basically the world markets realized at just about the same time… that there was going to be a global pandemic and that this possibility that it would be contained in one province in China, for all practical purposes, was not going to happen. It was… Iran, Italy, Korea, and then it became clear in markets. From that point forward, investors everywhere in the world for a period of weeks wanted to sell everything that wasn't cash or a short-term Treasury instrument. They didn’t want to have any risk at all. And so, what happened is markets stopped working. They stopped working and companies couldn’t borrow; they couldn’t roll over their debt. People couldn’t borrow. So, that’s the kind of situation that can be -- financial turbulence and malfunction. A financial system that’s not working can greatly amplify the negative effects of what was clearly going to be a major economic shock.

So, what our tools were put to work to do was to restore the markets to function. And I think, some of that has really happened… and that’s a good thing. So, we’re not looking to achieve a particular level of any asset price.

What we want is investors to be pricing in risk, like markets are supposed to do. Borrowers are borrowing, lenders are lending. We want the markets to be working. And again, we’re not looking to a particular level. I think our principal focus, though, is on the state of the economy and on the labor market and on inflation. Now inflation, of course, is low, and we think it’s very likely to remain low for some time below our target. So, really, it’s about getting the labor market back and getting it in shape.

That’s been our major focus. And I would say, if we were to hold back because - we would never do this - but just the concept that we would hold back because we think asset prices are too high, others may not think so, but we just decided that that’s the case, what would happen to those people?

What would happen to the people that we’re actually, legally supposed to be serving? We’re supposed to be pursuing maximum employment and stable prices, and that’s what we’re pursuing.

We’re also pursuing financial stability, but there you have a banking system that is so much better capitalized, so much stronger, better aware of its risks, better at managing its risks, more highly liquid. You have all of those things and they’ve been lending, they’ve been taking in deposits, they’ve been a source of strength in this situation.

So, I would say that we’re tightly focused on our real economy goals. And again, we’re not focused on moving asset prices in a particular direction at all. It’s just, we want markets to be working. And I think partly as a result of what we’ve done, they are working and we hope that continues.”

The Chairman’s rambling (non-answer) reply could be summarized in four words: “The Fed is trapped.” It’s trapped by Bubble Dynamics – a historic Bubble that either inflates or collapses.

What the Fed labels as “markets functioning” is at this point a “functioning” speculative Bubble.

And feeding this dynamic exacerbates inequality, social instability and financial and economic fragility.

The Fed “pursuing financial stability”? It’s difficult to imagine a backdrop with greater instability.

At this faltering Bubble phase, throwing Trillions at efforts to aggressively pursue employment and inflation mandates essentially destroys the prospect for any semblance of financial stability.