Lawmakers Set to Unveil Two-Part Relief Plan: Congress Update Lawmakers are readying a two-part proposal with $908 billion in pandemic relief.

(…) A bipartisan group of eight lawmakers plans to split up their $908 billion proposal and release two bills on Monday. One will include just liability protections and the aid for state and local governments. The other will include all the other provisions that have broad consensus, including aid for small businesses. (…)

The group worked through the weekend to resolve the differences on these two provisions, which have stymied a deal for months. The next step for the legislation will be for Republican and Democratic leaders to finish negotiating the final package that could get a vote.

While Democrats have endorsed the bipartisan plan as a basis for negotiations, it is unclear whether McConnell would put it on the Senate floor for a vote. McConnell favors Mnuchin’s $916 billion relief proposal, which includes $600 in direct payments to individuals but doesn’t have the $300-per-week supplemental unemployment insurance included in the bipartisan bill.

Lawmakers of both parties have said that the best chance for passing a pandemic-relief bill this month would be to attach it to the 12-bill omnibus package Congress must pass by Friday to fund the government. (…)

COVID19 UPDATE

South Korea weighs tougher Covid-19 restrictions to stem third wave (FT)

Bloomberg:

• Japanese Prime Minister Yoshihide Suga said the government will suspend its “Go To” domestic travel incentive campaign from Dec. 28 to Jan. 11, according to remarks carried by public broadcaster NHK. The government had been under pressure to halt the campaign after coronavirus cases surged last week.
• London Mayor Sadiq Khan called for schools in the capital to close to stem a rising tide of coronavirus infections that threatens to push the city into the government’s tightest pandemic rules. Khan wants schools to break early for Christmas, with lessons continuing online until the end of term, and to reopen later than usual in January. In a statement on Twitter, the mayor also called for face coverings to be made mandatory in all busy outdoor public spaces such as shopping streets.
• The Italian government is considering new measures to tighten Covid-19 restrictions over the holidays, effectively walking back some recent moves to allow more movement and business openings during the period, Corriere della Sera reported. Measures would include closing down bars and restaurants, which had been permitted to partially reopen for the Christmas and New Year period.

After the Pandemic, a Pile of IOUs Economists see a free lunch in fiscal stimulus, but that depends on low post-pandemic interest rates.

Niall Ferguson paints the landscape and highlights the most important knowns and unknowns.

(…) According to the International Monetary Fund’s October Fiscal Monitor, the Covid-19 pandemic and associated lockdowns have prompted a plethora of fiscal measures amounting to $11.7 trillion, around 12% of global GDP — and that number has probably risen since it was calculated  on Sept. 11. “In 2020,” according to the Fund, “government deficits are set to surge by an average of 9 percent of GDP, and global public debt is projected to approach 100 percent of GDP, a record high.”

(…) because the federal government is expected to keep borrowing as far as the eye can see, with the deficit rising inexorably from 4% in the late 2020s to over 12% by mid-century. The CBO’s baseline projection is for the federal debt in public hands to reach 195% of GDP by 2050, nearly twice as high as at the end of World War II. (…)

In an important new paper, economists Jason Furman and Lawrence Summers argue that public borrowing today offers something very like that rarity in economics: a free lunch. The key is the historically low level of nominal and real interest rates. On the one hand, low rates mean that “monetary policy cannot be relied on to stabilize the economy.” On the other hand, low rates also mean that “fiscal expansions themselves can improve fiscal sustainability by raising GDP more than they raise debt and interest payments.”

Today’s interest rates mean that debt/GDP ratios are a bad way to measure debt burdens. After all, the accumulated public debt is a stock, whereas GDP is a flow. If debt is measured relative to estimates of the present value of GDP or prospective tax receipts, then “current debt levels are at low rather than high levels.”

Furman and Summers are not saying — as the proponents of modern monetary theory do — that debt doesn’t matter and the sky is the limit. They are simply arguing that “traditional ideas of a cyclically balanced budget on the grounds that [high debt] would likely lead to inadequate growth and excessive financial instability” are anachronistic. Fiscal policy can support growth with ongoing deficits so long as real debt service (i.e., interest payments adjusted for inflation) does not rise above 2% of GDP over the coming decade. (…)

The problem is that for there to be a free lunch, financed by borrowing that pays for itself, secular stagnation has to continue: In other words, interest rates have to stay at their present low levels, which isn’t what the CBO expects. In its most recent long-run forecasts, nominal and real rates rise over the course of the 2020s. That means that net interest payments would rise above 2% of GDP from 2030 onward and hit 8.1% in 2050.

True, as Furman and Summers point out, the CBO has been consistently wrong about the future path of interest rates, overshooting repeatedly since 1990. True, any forecasts beyond a ten-year time horizon are subject to great uncertainty. (…)

In any case, as noted above, around three-quarters of this year’s deficits have been financed by Fed money creation in the form of excess bank reserves. “When the economy recovers,” Cochrane argues, “people may want to invest in better opportunities than trillions of dollars of bank deposits. The Fed will have to sell its holdings of Treasury securities to mop up the money. We will see if the once-insatiable desire for super low-rate Treasury securities is really still there. If not, the Fed will have to raise rates much faster than their current promises.”

This goes to the heart of the matter. A debt mountain doesn’t matter only so long as interest rates remain low. That implies that there could very well be a key role for monetary policy if market participants anticipate higher inflation and start selling their holdings of Treasury bonds. The Fed has a new framework now, which states that inflation above its 2% target is just fine, after 12 years mostly below that level, as long as it averages out around 2%. But that clearly means a prolonged period of negative returns on government bonds, made worse for foreign investors if the dollar continues to slide against other major currencies.

If market rates start to rise, the Fed will be put to the test. Will it behave as it did in World War II, intervening to keep rates low in order to avoid a rapid rise in government debt-servicing costs? There is a widespread belief that it will and that Japanese-style “yield curve control” lies ahead. But in 1945 that was a wartime expedient and it was ended with the Fed-Treasury Accord of 1951, which restored the separation of monetary policy from debt management.

Another way of thinking about this is to contrast the likely trajectory of the post-pandemic economy with the sluggish path of recovery after 2008-9. A financial crisis originates in overstretched balance sheets — in the case of the 2008-9, those of banks, shadow banks and subprime mortgage borrowers. It took the better part of a decade for balance sheets to be repaired, which was one reason for the slow pace of recovery in the Obama years — the background against which secular stagnation seemed the right diagnosis.

The post-pandemic economy will be very different — and this is the bad good news. This year, thanks to Covid-19, the U.S. household savings rate has had its most volatile year since modern data began in 1948. In the second quarter, it jumped to an unprecedented 26%, compared to 7.3% a year before. As lockdowns and other restrictions were relaxed, the rate declined to 16% in the third quarter.

To expect such high rates to persist into 2021, as the OECD does in its latest Economic Outlook, is surely wrong. This was forced saving of income boosted by government handouts, prompted by a supply-led shock (lockdowns), not balance-sheet repair as after 2008-9. According to our estimates at Greenmantle, U.S. households are now sitting on roughly $1 trillion of excess savings as a result. Many are itching to spend a large chunk of that money as soon as they can.

The best analogy for the Covid-induced economic slump is not a normal recession but a war. With vaccine distribution in sight, society is now preparing to demobilize. As World War II wound down, many esteemed economists — notably Alvin Hansen, who coined the term “secular stagnation” — wrongly predicted an enduring economic crisis. Instead, the gradual removal of wartime restrictions led to a boom in consumption. Something similar seems in prospect next year.

The key question is how inflationary that post-pandemic boom will be. Most economists seem to agree with Furman and Summers that secular stagnation is here to stay. Charles Goodhart of the London School of Economics is one of the few to predict a “surge of inflation” as soon as next year. If he is right, the promised debt-funded free lunch could turn out to be a very expensive dinner.

While I doubt Goodhart’s prediction that inflation might rise to 5% next year, inflation can come at you fast, as my Bloomberg colleague John Authers pointed out last week. The U.S. housing market has roared back. Home equity withdrawals have soared. Bank deposits are way up and household debt-service ratios are at all-time lows. We are heading for a roaring 2021, if not the full Roaring Twenties. With a weak dollar and rising commodity prices, inflation might just give the Fed a fright. (…)

In a new book published in online installments, “The Changing World Order,” Bridgewater Associates LP founder Ray Dalio argues that the U.S. is in the wrong stage of classic debt cycle. “When the government runs out of money (by running a big deficit, having large debts, and not having access to adequate credit) it has limited options,” he writes in chapter 9:

It can either 1) raise taxes and cut spending a lot or 2) print a lot of money, which depreciates its value. Those governments that have the option to print money always do so because that is the much less painful path, but it leads investors to run out of the money and debt that is being printed. Those governments that can’t print money have to raise taxes and cut spending, which drives those with money to run out of the country, state, or other jurisdiction because paying more taxes and losing services is intolerable. If these entities that can’t print money have large wealth gaps among their constituents, these moves typically lead to some form of civil war/revolution. This late-cycle debt dynamic is now playing out in the United States.

Scary stuff. And, to judge by an essay written by Guo Shuqing, chair of the China Banking & Insurance Regulator Commission and party secretary of the Chinese central bank, Dalio has influential readers in China, the inexorable rise of which is the other big theme of his book. (…)

Most commentators are ending the year bullish on China — the only major economy that grew this year, and forecast by the OECD to grow by 8% next year. China’s gross public debt will be just 62% of GDP this year, less than half the U.S. figure.

But it is private debt that worries Chinese officials such as Guo and Vice Premier Liu He, not public debt. Since President Xi Jinping came to power in November 2012, according to the Bank for International Settlements, credit to households has doubled as a share of GDP to 59%, while credit to non-financial corporations has jumped by 38 percentage points to 162%.

Guo’s fear is that excess leverage in the property sector — which accounts for about 39% of total outstanding bank lending — is the “biggest gray rhino risk” facing China’s financial system. The enduring impact of the pandemic has created a growing problem of non-performing loans, driving smaller lenders to insolvency. Last month saw a series of defaults by state-owned companies in China. And last week S&P Global Ratings warned that local government financing vehicles could be the next casualties as the authorities clean house.

After the disease, the debt. But it’s important to look not just at public debt but also at private debt when trying to see which great power has the steeper mountain to climb.

Today’s Globe and Mail enters the debate:

• Ottawa beware: There’s no guarantee Canadians will actually spend their pandemic savings

(…) Canadians have stuffed an extra $150-billion or so into their bank accounts since the pandemic began – a veritable stockpile of rocket fuel to ignite the economic recovery once consumers get the pandemic all-clear. Many economists are expecting it. Ottawa is pretty much counting on it.

“Preloaded stimulus,” the federal government called it in its fall economic statement. Unlocking these savings “will be a key element of the government’s recovery plan,” it said.

But what we have here may be a case of walking the proverbial horse to water and expecting it to drink. There may be a pretty significant gap between clearing the path for consumers to spend their ample stockpiles of cash and them actually doing so. (…)

Canadian Imperial Bank of Commerce economist Benjamin Tal noted recently that the vast bulk is just sitting in standard chequing and savings accounts, “ready to be redeployed in short order.”

Bring back the opportunities to spend, the argument goes, and it will open the floodgates on those extra savings – lighting a bonfire under the postpandemic recovery.

This hasn’t escaped Finance Minister Chrystia Freeland, who stirred up controversy recently by making a public plea, on television, for policy ideas that would encourage consumers to spend their excess cash.

“Certainly, it would be great if that money could go toward driving our recovery,” she told BNN Bloomberg on a Dec. 4 broadcast. “If people have ideas on how the government can act to help unlock that preloaded stimulus, I am very, very interested.” (…)

Mr. Tal noted that the bulk of the savings appears to be parked in the accounts of higher-income earners, who have generally been less exposed to the pandemic’s business shutdowns and job losses than have lower-income Canadians. But the thing is, the wealthy don’t have to spend their extra money; they are notorious for not putting all of their financial windfalls back into the economy, unlike lower-income consumers, who have more genuine need to spend any additional cash.

But the arithmetic facts of the savings boom overlook a key element that’s harder to quantify: the fear factor. The pandemic has given Canadians some very compelling reasons to be cautious with their money, and has heightened awareness of having a cash cushion for a rainy day. (…)

“Despite the prospect of better days ahead, a theme that is going to emerge from this pandemic is one of more precautionary savings,” Mr. Rosenberg wrote in a recent report. (…)

Canadian households were certainly undersaved and overindebted before the crisis. The debt-to-disposable-income ratio hovered near record highs for years, while the savings rate languished below historical norms. If the crisis convinced consumers to merely return their savings to something closer to their historical levels, it would imply more constrained spending than we saw before the pandemic.

“As the economy transitions to the new higher steady-state savings rate, the decreased propensity to consume will act as a drag on growth,” Mr. Rosenberg argued.

There are policies that the government could enact to lean against this – like, say, a temporary GST cut, or perhaps more targeted tax holidays to help drive business in battered sectors such as travel and restaurants.

But perhaps we should ask whether the federal government has any business encouraging a pandemic-battered Canadian public to unload their savings. Maybe the government should simply accept that some significant portion of that mountain of stored cash will inevitably tumble into the economy as the pandemic fades, without being too eager to topple the mountain in the name of turbo-charging the recovery.

EARNINGS WATCH

From Refinitiv/IBES:

Through Dec. 11, 499 companies in the S&P 500 Index have reported earnings for Q3 2020. Of these companies, 84.4% reported earnings above analyst expectations and 12.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 21% missed estimates.

In aggregate, companies are reporting earnings that are 19.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.5% and the average surprise factor over the prior four quarters of 8.7%.

Of these companies, 78.6% reported revenue above analyst expectations and 21.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 39% miss estimates. Over the past four quarters, 61% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenue that are 3.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.1%.

The estimated earnings growth rate for the S&P 500 for 20Q3 is -6.1%. If the energy sector is excluded, the growth rate improves to -1.9%. The estimated revenue growth rate for the S&P 500 for 20Q3 is -0.9%. If the energy sector is excluded, the growth rate improves to 2.4%.

The estimated earnings growth rate for the S&P 500 for 20Q4 is -10.7%. If the energy sector is excluded, the growth rate improves to -7.5%.

What’s remarkable is that Q3 earnings surprised by 19.5% (!) and ex-Energy profits were almost flat! Who now wants to believe the Q4 estimates of a 7.5% drop in ex-E earnings?

Actually, who cares about earnings and valuations?

Well, some apparently do:

(via Barron’s)

From Deloittes’s quarterly CFO survey:

Finishing out a difficult 2020, just over 40% of CFOs expect to achieve 95% or more of their originally budgeted 2020 revenue, with the average expecting 88% (Retail/Wholesale is lowest at 69%). Consistent with their near-term COVID-19 worries and hopes for a broadly available vaccine later next year, nearly two-thirds do not expect pre-crisis operating levels until at least the second half of 2021, and 26% do not expect to get there until 1Q22 or later (especially in Retail/Wholesale, Manufacturing, and Services).

With the S&P 500 above 3,500, nearly 60% expect it to be higher by the end of the year—even though 80% also say it is overvalued.

CFOs mostly say their companies’ 2021 strategies will not be substantially different from pre-pandemic. There are predictably strong industry differences, but there seems to be a general trend toward M&A-driven growth, broader offerings, a smaller real estate footprint, and more diversified supply chains.

Goldman Strategists Say SPACs May Spur $300 Billion M&A Activity

Special-purpose acquisition companies, or SPACs, have raised $70 billion in 2020 — a fivefold increase from last year, according to strategists led by David Kostin. Driving the deal boom is a hunt for yield, a shift in SPAC focus to growth stocks from value and retail investors looking for nontraditional and early-stage businesses, they said.

Some 205 SPACs have raised $61 billion in equity IPO proceeds and are searching for acquisition targets, according to Goldman.

“If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” they said. (…)

Tesla to Replace Real-Estate Stock in S&P 500 When it takes the place of Apartment Investment & Management, Tesla will be the biggest-ever single-stock addition to the index.

The swap is due to take effect before the start of trading Dec. 21, according to S&P Dow Jones Indices, which outlined the final details of its plans for Tesla’s induction late Friday. (…)

With a market value of about $578 billion, Tesla will be the sixth-biggest company in the S&P 500 and the largest stock ever added to the index. Fund managers and analysts anticipate more than $100 billion in stock will change hands Dec. 18 to account for the swap. More than $4 trillion is linked to the S&P 500 through index-tracking mutual funds and exchange-traded funds. (…)

Aimco’s shares are down 37% this year, putting its market value at $6.5 billion. (…)

Based on where Tesla shares have been trading, Mr. Silverblatt estimates index funds will have to buy more than $80 billion of Tesla stock—a number backed up by several fund managers and traders. Index funds will have to sell that same amount of stock, including shares of Aimco, along with trimming their positions in most of the other stocks in the S&P 500. Tesla is expected to enter the index with a weighing of more than 1%. (…)

“You’ll likely see dislocation among the bottom tier of S&P 500 stocks, which are a little less liquid.” (…)

More important, Tesla will have an immediate noticeable impact on the market-cap-weighted S&P 500. The company doesn’t pay a dividend, so it will bring the S&P 500’s payout ratio down to 1.54% from 1.56%, Mr. Silverblatt said based on recent figures. The index’s forward-looking price/earnings ratio will climb to 22.4 from 22.1.

For every $11 Tesla moves, the S&P 500 will gain or lose a point, he added, potentially making the index itself more volatile. (…)

U.S. Government Agencies Hit by Suspected Russian Hackers

• US orders emergency action after huge cyber security breach Homeland security tells all federal agencies to disconnect from widely used software

California Seeks to Join Antitrust Case Against Google The state filed court papers seeking to join the Justice Department suit alleging that Google violated federal antitrust laws by entering into exclusionary business agreements that shut out competitors and suppressed innovation.

How Tight Is the Christmas Tree Supply? An 8-Footer Can Sell for $2,000