Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 6 NOVEMBER 2020: Sweep?

Nonfarm payroll employment rises by 638,000 in October; unemployment rate declines to 6.9%

Total nonfarm payroll employment rose by 638,000 in October and has increased for 6 consecutive months. In October, nonfarm employment was below its February level by 10.1 million, or 6.6 percent. (…)

The change in total nonfarm payroll employment for August was revised up by 4,000 from +1,489,000 to +1,493,000, and the change for September was revised up by 11,000 from +661,000 to +672,000. With these revisions, employment in August and September combined was 15,000 higher than previously reported. (…)

In October, the unemployment rate declined by 1.0 percentage point to 6.9 percent, and the number of unemployed persons fell by 1.5 million to 11.1 million. Both measures have declined for 6 consecutive months but are nearly twice their February levels (3.5 percent and 5.8 million, respectively). (…)

The labor force participation rate increased by 0.3 percentage point to 61.7 percent in October; this is 1.7 percentage points below the February level. The employment-population ratio increased by 0.8 percentage point to 57.4 percent in October but is 3.7 percentage points lower than in February. (…)

In October, 15.1 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic—that is, they did not work at all or worked fewer hours at some point in the last 4 weeks due to the pandemic. This measure is down from 19.4 million in September. Among those who reported in October that they were unable to work because of pandemic related closures or lost business, 11.7 percent received at least some pay from their employer for the hours not worked, up from 10.3 percent in September.

The above employment report reaches mid-October. Here are the more recent trends:

  • U.S. Unemployment Claims Held Nearly Steady Last Week The number of people applying for jobless benefits has trended down in recent weeks, suggesting the pace of layoffs eased despite a resurgence in new coronavirus cases and the return of some economic restrictions.

Weekly initial claims for jobless benefits fell by 7,000 to a seasonally adjusted 751,000 in the week ended Oct. 31, the Labor Department said Thursday. That was the lowest level since mid-March, but was well above the 217,000 claims filed in late February, before economic shutdowns to control the spread of the new coronavirus began.

The previous week’s data were revised up by 7,000 to 758,000. (…)

Haver Analytics plots trends in each of the three unemployment programs:

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Axios stacks them up to show the changing split among the 22 million recipients:

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Data: U.S. Department of Labor; Chart: Andrew Witherspoon/Axios

(…) data from the Labor Department showed more than 1 million people filed for first-time jobless benefits for the 33rd week in a row. More than 738,000 people applied for first-time traditional unemployment benefits last week and nearly 363,000 applied for benefits through the Pandemic Unemployment Assistance program. The rate of unemployment filings has been remarkably high for a remarkable amount of time. (…) unemployment benefits are starting to run out for more people and will expire for all of the nearly 14 million Americans on pandemic programs at the end of the year.

  • Morning Consult survey data in October shows that a persistently high share of American adults lost pay or income over the course of the month. This finding is consistent with the high volume of weekly initial unemployment insurance claims over the past five weeks.
    The share of Americans living in households with annual incomes over $100,000 who reported losing pay or income rose from 11.5 percent to 14.2 percent from Oct. 3-Oct. 31, reversing the downward trend over the prior 23 weeks.

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Fed Says Virus Poses Considerable Risks, Keeps Low-Rate Vow The Federal Reserve said the coronavirus pandemic poses considerable risks for the U.S. economy despite recent gains, and officials made no changes to their commitment to provide sustained stimulus.

Fed Chairman Jerome Powell said they were monitoring two prominent risks to the recent rebound in economic activity: one from rising infection rates and another from households exhausting savings after earlier fiscal relief measures had dissipated.

“Economic activity has continued to recover” but “the pace of improvement has moderated,” Mr. Powell said at a news conference. (…)

Mr. Powell said the recent upswing in virus cases was “particularly concerning” and said steps such as wearing masks in public would help the economy. Still, he indicated policy makers have been surprised through the late summer and early fall by the degree to which economic activity held up despite higher infection counts. (…)

Officials also discussed whether to provide additional support by adjusting the composition of those purchases to target longer-term Treasury yields, as they did in their 2012-14 asset-buying program.

But several Fed officials have said the low level of long-term Treasury yields makes this unnecessary. And Mr. Powell said the current program, due to its larger size, was pushing down longer-dated yields even without explicitly targeting them. (…)

U.S. Cases Top 120,000 in a Day The number of people dying of Covid-19 is increasing again as well. More than 1,200 deaths were reported on Thursday, according to Johns Hopkins data, a figure not seen since mid-September.

Thursday’s 121,888 newly reported infections, according to data compiled by Johns Hopkins University, bring the U.S. total to more than 9.6 million. The tally is 18.5% higher than the previous record high, Wednesday’s count of 102,831. It is the third day in a week the U.S. has set a daily record. Last Friday’s tally was 99,321.

With 53,322 people hospitalized, a number not seen since early August, hospitals in the South and Midwest are scrambling to accommodate a surge of new patients. Face masks are once again in short supply in many parts of the country. (…)

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THE ELECTIONS
  • Polls were mostly very wrong. Or were they? The “10-point lead” may have incited many voters to split their ticket to avoid a sweep and a clearly leftist government for 4 years.
  • Even Hispanics, wary of “socialists and communists”, helped Trump in two very key states, Florida and Texas.
  • Pandemic management was not as critical as many thought. It’s the economy, stupid! In the last 10 days, Trump focused on the economy and “socialist dems”.
  • Results: a weaker Democrat House, and a (potentially) adversarial Republican Senate. Biden, if elected, but particularly Sanders, Warren and AOC might not rock any boat.
  • Bipartisan areas: infrastructure, China, Big Tech.
  • In all, no clear winner but, perhaps, democracy. Wisdom, or luck?

But wait, wait!

The fight for control of the U.S. Senate now is centered on Georgia, where the state’s close election has pushed at least one, and possibly two, of its Senate races to Jan. 5 runoffs.

The outcome of those two races could shift the balance of power in the Senate, as Democrat Jon Ossoff tries to unseat Republican Sen. David Perdue, and Democrat Raphael Warnock faces off against Republican Sen. Kelly Loeffler. (…)

Under Georgia law, if no candidate gets more than 50%, the two top vote getters, regardless of party, compete in a runoff to be held on Jan. 5.

The Warnock-Loeffler race already is headed for a runoff, as the Associated Press projected Tuesday. Mr. Perdue’s share of the vote was at 49.88% as of late Thursday, with about 16,105 outstanding ballots still to be counted, according to the Georgia Secretary of State’s Office. Mr. Ossoff was at 47.81%. Some provisional and military ballots are also yet to be counted.

Based on results so far nationwide, Republicans will control 48 seats next year, and they lead in two other states—North Carolina and Alaska. Democrats so far have locked down 48 seats, leaving the two Georgia races as their best hopes to reach 50.

If Democrat Joe Biden wins the White House, vice-presidential nominee Kamala Harris would cast a tiebreaking vote when needed. (…)

It might be a sweep after all…

The War of the Norm

By: George Friedman

The primary reason about half the country voted for Joe Biden was that he wasn’t Donald Trump. Trump was seen by many as violating fundamental norms of the presidency and of personal dignity. Biden had not introduced any stunning policy initiatives, nor did his supporters necessarily want him to. What they wanted was a return to the norm, as represented by Barack Obama, George W. Bush and others. They wanted a return to what they saw as moral rectitude and propriety, a country united rather than divided.

On the other hand, just under half the country voted for Trump because they saw the norm as unbearable. On the surface, it seemed to represent civility. Underneath, for them, it was a ruthless attempt to enhance the power of the elite and assault the values of the country. Put differently, the norm was seen as a way to manipulate society for the benefit of the elite, who covered their actions with mock civility. In the view of Trump supporters, the norm divided the country deeply, against the Trump voters’ interests and values.

For Biden voters, supporting Trump was inconceivable, since he was in it for himself and stood for the lowest values possible. For Trump supporters, not voting for Trump was inconceivable, since he represented resistance against hypocrisy and the ruthlessness of the elite as they accumulated power. Trump’s supporters knew that he lied. They argued that all politicians lied, but that their lies were subtle and hidden. Trump’s were open. Given a choice between the two, they voted for Trump. Trump’s enemies thought this attitude abnormal, seeing open and self-serving lies as destructive and denying that the American norm had become systematic but subtle dishonesty.

At the time of writing, the election is a virtual tie: Biden has about 50 percent of the national vote, and Trump one to two points less. For Biden supporters, this is a disappointment, though not a fatal one. The polls showed Biden with a substantial lead over Trump. For Trump voters, these polls were not only in error but deliberately so, seeking to portray America as in revolt against the Trump presidency. For them, the polls were simply another lie of the norm. What for Biden voters was a statistical anomaly was for Trump voters another case in a long line of deception. And so too, according to them, was the voting system put in place because of the COVID-19 crisis.

Biden voters argue that these conspiracy theories are lies destroying national unity. Trump voters argue that they are simply a representation of what is going on in the country. The voting rules and polls were what would normally be expected under the circumstances. But Trump voters viewed these rules and polls as being justified by a norm that concocts rules that benefit the powers that be.

Obviously not all Biden and Trump voters approached the election this way. No single statement exhausts the complexity of the vote. But I think that, on the whole, what divided the country was the gap between the hunger for a return to what some considered the norm, and the demand that the old norm be overthrown and a new one forged. Thus what Biden voters see as normal processes are unbearable to Trump voters.

The issue is not who is right. The issue is that this country, judging by the vote, is divided down the middle. The tally is an important marker for who wins and loses, but in a broader sense the social split finds half the country on each side. The malice toward the other side varies. There is likely a spectrum of loathing, from merely disagreeing with each other to seeing the other side as the embodiment of evil. But the core distinction is that one side regards their antagonists as abnormal, while the other side views their antagonists as the normal purveyors of skillful oppression.

This can’t be understood by recourse to policies. The mutual loathing points to fundamental differences on existential questions, such as the nature of truth, the definition of freedom and the meaning of citizenship. And that in turn is rooted in the fundamental social and economic shifts of the past 50 years. As the transformation takes place, demonstrators sit outside the building in Georgia where ballots are counted, with the Biden supporters unable to grasp that the protesters genuinely believe the election, among other things, is being stolen. Meanwhile in Portland, the response to the election by the radical left is breaking windows and destroying ATMs. They also are disgusted by the election, as they too despise the norm. They are a small fraction of the left – but in these times the opponents of the norm are powerful.

The fact is that the old norm is gone. Its economic foundation is old and tired, and the companies founded in garages 50 years ago are the General Motors of our time. People who had had comfortable lives working at GM are now threatened with penury, while a new elite is as indifferent to their fate as new elites always are.

It is a time of pain that will not go away until a new normal is established. Franklin D. Roosevelt was considered a freak – a rich man championing the immigrant working class. So too was Ronald Reagan – an actor, disengaged and not too bright, cutting taxes for the rich. We are years before the Roosevelt or Reagan of our time emerges, but one will. In the meantime, the only choice we have is between laughter and tears at how history is tearing at our beloved country. But since we have been here before, I suggest a good chuckle. Since we are unable to change the course, we may as well enjoy it.

A few days after the 2016 election, I asked Bill, a small contractor working on my house, if he was happy with a Trump presidency. He said he was a life Democrat but he voted for Trump because he was desperate for changes. “I am making the same money as 20 years ago working twice as hard.” Taxes and regulations were killing him. His hopes that “conventional politicians” would eventually do something good for him had vanished. “They’re all the same. Let’s see what happens with Trump. We can always boot him out in 4 years.”

I can’t be sure but I suspect Bill voted Trump again.

THE DAILY EDGE: 5 NOVEMBER 2020: Gridlock!

Biden risks being a lame duck president
Biden Faces Prospect of Gridlock Presidency After Party Losses

Joe Biden may have the inside track on Donald Trump to win the White House, but his party’s otherwise poor performance on Election Night sets up a gridlock presidency, with faint hopes of achieving liberal policy aspirations.

If he prevails, Biden would become the first president since George H.W. Bush to enter office without control of both the House and Senate — promising him at least two years of stasis and gridlock. (…)

Republicans have already telegraphed that they’re likely to rediscover religion when it comes to deficit spending, after adding nearly $4 trillion in debt during Trump’s first term. (…)

The silver lining for Biden is that he may face less pressure from his party’s left flank. He was reluctant to embrace more radical proposals offered by popular figures like Bernie Sanders, the Vermont senator, and Alexandria Ocasio-Cortex, the New York congresswoman, such as their “Green New Deal” or expanding Medicare, the insurance program for the elderly and disabled, to cover all Americans.

Now, Biden can justifiably say that the votes simply aren’t there. (…)

(…) Markets run on narratives. So do human minds; it’s easiest to think in terms of stories. What makes markets in general, and stock markets in particular, so special is (first) their ability to shift from one narrative to another in a nanosecond and (second) the ability to make sure that any prevailing narrative is good news for stocks. (…)

We now know that there will be no Blue Wave, and so there is a new narrative, that markets love gridlock (which has been a Wall Street staple for generations), and that the risk of higher taxes and more onerous regulations under a Biden administration has been averted. (…)

How well does the new narrative work? History suggests that stock markets actually prefer periods of harmony, when the White House and Congress are controlled by the same party. That is when things get done. It is only bond markets that like gridlock, because there is far less risk of excessive spending — and it is a while since excessive deficits deterred anyone from buying bonds. (…)

With no fiscal help coming from a Republican Senate, there will be no inflationary pressure. The Fed will have no choice but to keep propping up the bond market, and possibly even resort to yield curve control. That at least is the narrative. (…)

In brief, it is probably best to brace for a repeat of the trends we have all grown to know and love in the last year or so. With rates held on the floor, and a deflationary, largely growth-less environment, duration becomes the be-all and end-all. The FANG stocks have run riot because they are seen as reliably profitable and immune to the economic cycle. Low discount rates make their future earnings streams ever more valuable. So far this year, the FANGs and long-dated bonds (represented by the TLT ETF) have done far better than the stock market as a whole. (…)

A Republican Senate means that there will be no “Bidencare” expansion of Obamacare. That is mighty good news for the managed care sector. (…) The Republican Senate means there is no way to adjust Obamacare to render it safe from being ruled unconstitutional by the Supreme Court. There is now a real possibility of the program being overturned with nothing to replace it. That could be a serious mess, particularly if it arrives before a Covid-19 vaccine.  (…)

Simple narrative: slower, if not anemic economic growth triggers a stampede towards companies which can grow rapidly amid a weak growth environment and near zero interest rates boosting P/Es , assuming any E is present. This chart from Ed Yardeni is dated Nov. 4. Should we mind the gap?

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McConnell Says Congress Should Pass Economic Relief Bill This Year Senate majority leader says he supports aid to schools, hospitals and small businesses, but not a more sweeping Democratic proposal.

Congress should pass a new economic-relief package this year, Senate Majority Leader Mitch McConnell said on Wednesday, as prospects for Democrats’ multitrillion-dollar stimulus bill faded along with their chances for full control of the government. (…)

Mr. McConnell said he would support including more funding for schools, hospitals and a popular small-business loan program, but not a more sweeping proposal that Democrats have sought. (…)

“If Republicans weren’t willing to spend more than $1 trillion even in the heat of a re-election battle, where it could benefit President Trump, I see almost no chance they would support a trillion-dollar plan after the election or next year, when there’s less political heat,” said Brian Riedl, a senior fellow at the right-leaning Manhattan Institute for Policy Research.

House Minority Leader Kevin McCarthy (R., Calif.) said in an interview Wednesday that Republicans’ likely gains in the House and likely continued control of the Senate would shift power away from Mrs. Pelosi in coming negotiations. (…)

Now, the administration and House Democrats may have less interest in cutting a deal, particularly with Democrat Joe Biden leading in the presidential race.

Lack of interest from a lame-duck Republican administration could push relief talks into early 2021, delaying aid for months just as growing numbers of coronavirus infections raise the prospect of renewed lockdowns. Millions of unemployed Americans could also see their benefits disappear at the end of December, when enhanced measures that Congress enacted in March are due to expire. (…)

A narrow Democratic margin in the Senate could result in a $3 trillion aid package in January, which could add roughly 4 or 5 percentage points to gross domestic product, he estimated. But as a Democratic majority looks less likely, so do the chances of such a large measure.

Even so, Mr. Tedeschi said it’s unlikely that Democrats and Republicans could reach agreement in the next couple of months—a near-term risk for the economy and households facing missed bill payments, evictions and rising poverty. (…)

Bank Stocks Fall as Stimulus Hopes Fade Shares of some regional banks fell as much as 11% even though the broader market rose

The KBW Nasdaq Bank Index finished 5% lower. The broader S&P 500 rose 2.2% in volatile trading. (…)

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Other market indicators pointed to souring bets on a quick economic bounce. The yield on the 10-year Treasury note was down by more than one-tenth of a percentage point on Wednesday. The benchmark U.S. debt finished at a yield of 0.77%.

Lower long-term yields also weigh on the amount banks earn from lending. A drop of half a percentage point in the 10-year yield, for example, could hit regional banks’ annualized per-share earnings by 1% to 4%, according to John Pancari, a banking analyst at Evercore ISI.

Firms that rely less on consumer and commercial banking and more on Wall Street trading and investment banking outperformed the rest of the sector. (…)

After the election results are complete, bank investors might find more to like, Mr. Mayo said in a note to clients. For example, if Democratic nominee Joe Biden wins the presidency but Republicans hold on to the Senate, it would be more difficult for a Biden administration to raise the corporate tax rate or impose more financial regulations.

October Vehicles Sales decreased to 16.2 Million SAAR

The BEA released their estimate of light vehicle sales for October this morning. The BEA estimates sales of 16.21 million SAAR in October 2020 (Seasonally Adjusted Annual Rate), down 0.5% from the September sales rate, and down 3.3% from October 2019.

This was below the consensus estimate of 16.5 million SAAR. (…) Sales-to-date are down 17.3% in 2020 compared to the same period in 2019. Since April, sales have increased, but are still down 3.3% from last year. (…)

BTW, during the last 3 months, both domestic autos (-22.3% vs -17.3%) and domestic light trucks (-0.7% vs +2.5%) have fared much worse than imports.

Imports’ share of the U.S. vehicle market rose slightly last month to 23.2% and has been trending higher since 19.9% during all of 2015. Imports’ share of the passenger car market eased to 28.0% from 28.5%. Imports share of the light truck market improved to 21.6% and has been trending up from 14.7% in 2014. (Haver Analytics)

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U.S. Trade Deficit Narrowed in September

The U.S. trade deficit in goods and services narrowed in September to $63.9 billion from a slightly revised $67.0 billion in August (initially $67.1 billion). Exports increased 2.6% m/m (-15.7% y/y) following a 2.2% monthly gain in August. Imports edged up only 0.5% m/m (-6.5% y/y) in September after rising 3.2% m/m in August.

The nominal deficit in goods trade narrowed to $80.7 billion from the record $83.8 billion recorded in August. The September reading was slightly larger than the $79.4 billion deficit in the advance report. Exports of goods increased 3.1% m/m (-9.8% y/y) versus 3.0% m/m in August. The September increase was led by to a 14.4%s surge in exports of foods and feeds, which consisted mostly of a jump in soybean shipments (presumably to China), and a 3.8% m/m rise in exports of capital goods.

Imports of goods rose just 0.3% m/m (-2.2% y/y) in September after a 3.3% m/m gain in August. Imports of autos and parts jumped up 11.3% m/m while imports of industrial supplies fell 3.5% m/m and imports of consumer goods declined 3.6% m/m. With their September increase, auto imports have now regained their pre-COVID level.

The real goods trade balance also narrowed in September–to $87.6 billion (2012$) from a record $92.4 billion in August. The widening real trade deficit in Q3 subtracted meaningfully from the rebound in GDP. The sharp narrowing in September sets the stage for some possible improvement in Q4.

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Double-Dip Moves From Risk to Reality in Major Economies

Alternative, high-frequency data show that economic activity in advanced economies weakened in October amid renewed outbreaks of the coronavirus, and the latest readings suggest the downtrend continued at the beginning of November, particularly in major European countries. Activity in France and Italy turned down sharply as lockdown restrictions took effect, according to Bloomberg Economics gauges that integrate data such as mobility, energy consumption and public transport usage. Activity in the U.S., U.K. and Canada also declined.

Double-Dip Ahead

Eurozone September retail sales correction doesn’t bode well… The decline in Eurozone retail sales brings them back to the level seen before the pandemic, but things are likely to get much worse before they get better, as new lockdown measures will hit the retail sector heavily

(…) From here on, retail sales are likely to dip further though.

The new restrictive measures announced will impact retail stores and their sales significantly, especially in November. Countries like France, Ireland and Belgium have closed non-essential retail stores to limit the spread of the virus.

The consumption outlook for the last quarter of the year has therefore turned negative again and so has the outlook for GDP in general.

US tops 100,000 Covid-19 cases in a single day Record tally of infections comes as hospitalisation levels reach their highest in three months

New coronavirus infections surged by roughly 20% over the past week as cases continued to climb in every region of the country, Axios’ Sam Baker and Andrew Witherspoon report.

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TECHNICALS WATCH

The 13/34–Week EMA Trend Chart remains positive, though extended:

Pointing up CMG Wealth also shows this 13/34–Week EMA Trend Chart for 10-year Treasury yields which broke above 0.70%:

San Francisco voters approve taxes on CEOs, big businesses

Under the new law, any company whose top executive earns 100 times more than their average worker will pay an extra 0.1% surcharge on its annual business tax payment. If a CEO makes 200 times more than the average employee, the surcharge increases to 0.2%; 300 times gets a 0.3% surcharge and so on.

Voters also agreed to sweeping business tax changes that will lead to a higher tax rate for many tech companies, and a higher transfer tax on property sales valued between $10 million and $25 million. (…)

The CEO tax is expected to generate between $60 million to $140 million per year, and Haney said he wants most of the money directed towards health services. He dismisses fears that the surcharge will drive companies out of the city, saying the tax is modest in comparison to the cost of moving a business. (…)

Although the surtax is annual vs moving once…

Illinois Tax Repudiation Voters may force needed reform by rejecting Gov. Pritzker’s tax hike.

The U.S. electorate Tuesday declined to endorse sweeping progressive change, and that sentiment extended even to deep-blue Illinois. Democratic Gov. J.B. Pritzker, supported by liberal luminaries like Sen. Dick Durbin, exhorted voters to pass a referendum that would repeal the state’s 4.95% flat income tax to allow for higher top rates. Voters declined.

Like other progressive defeats across the country, this one was more marked than polling might have suggested. Gov. Pritzker ran on the “fair tax” in 2018 and a March 2020 poll showed 65% support. But the measure was defeated 45% to 55% as a critical mass of Democratic voters broke with the party’s state leadership.

The state Legislature had passed tax changes set to go into effect if the referendum succeeded. The rate would have risen 2.8 percentage points, to 7.75%, on income above $250,000 for individuals and couples. For individuals earning $750,000, a 7.99% rate would kick in. For income under $250,000, the rate would be cut by a fraction of a percentage point.

Yet the usual rhetoric about only raising taxes on “the rich” fell flat. Perhaps voters recognized that it would hurt Illinois’ already-flagging competitiveness, and that lifting the flat-rate restriction was an invitation for union-dominated Springfield to ratchet up rates again and again to pay for its fiscal mismanagement. (…)