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)

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THE DAILY EDGE: 15 MAY 2020

VIRUS UPDATE
  • Spain imposes quarantine and extends restrictions to June 15
  • South Korea’s Centers for Disease Control & Prevention says coronavirus cases linked to a nightclub in Itaewon increased to 153 as of noon Friday. Among them, 90 are club visitors and 63 are their family members and co-workers.
  • Italy will allow citizens to move freely between its 20 regions starting June 3, according to a draft decree seen by Bloomberg, as Prime Minister Giuseppe Conte’s government opens up the country after more than two months of a stringent lockdown. Retail stores and other businesses will reopen on May 18.
  • Spanish antibody study suggests 5% of population affected by coronavirus Preliminary results from a nationwide coronavirus antibody study showed on Wednesday that about 5% of the overall Spanish population had contracted the novel virus – about 10 times more than the tally of diagnosed cases suggests. “There is no herd immunity in Spain.”
  • Texas cases see record spike 2 weeks into reopening. The Houston Chronicle reports that the state recorded 58 deaths yesterday, breaking the record of 50 deaths set late last month.
  • Gilead, the American pharmaceutical firm that created the antiviral remdesivir, licensed its production to five generic manufacturing companies, which will allow the drug to be in 127 countries. The deals are temporarily royalty-free.
  • China has a total of five possible vaccines for the coronavirus already in human trials and more will be approved next month, signaling the Asian nation’s rapid progress in the race for immunization. The five vaccines have been tested on more than 2,000 people in phase II trials which are expected to finish in July, said Zeng Yixin, vice minister of the National Health Commission, at a press briefing on Friday in Beijing. Phase II is the second of three phases of human trials that medications must go through before being approved for general use. No serious side effects have been reported yet among phase II patients, said Zeng, adding that more vaccine candidates will be approved to go into human trials in June.
  • The New York Stock Exchange will reopen its trading floor later this month, two months after the coronavirus pandemic forced its closure. Only a limited number of traders will return to the floor when it reopens May 26, and they will be required to wear masks and abide by social-distancing rules to limit the spread of Covid-19. People coming to work on the floor won’t be allowed to take New York City public transit to get there Thinking smile.
  • A new study by the National Institute of Diabetes and Digestive and Kidney Diseases and the University of Pennsylvania found that ordinary speech can emit small respiratory droplets that linger in the air for at least eight minutes and potentially much longer. These droplets are likely infectious, and help explain why the virus is so infectious in enclosed spaces like cruise ships and airplanes.
  • New study sheds light on how loud talks can spread virus
PANDENOMICS
China’s Cautious Economic Reboot Is a Warning for the World

China has a lesson for the world: An economy is harder to reboot than it is to shut down.

Fresh data for the month of April, covering a period when the government pushed hard to reopen the economy as the coronavirus came under control, show that retail sales continue to fall as consumers shun restaurants and curb spending on other non-essential items. (…)

Retail sales slid 7.5% though, more than the projected 6% drop, as shoppers preferred to avoid crowds and instead move their purchases online. Restaurant and catering receipts slumped by 31.1% from a year earlier, after a 46.8% collapse in March. (…)

Industry improves though retail still contracting

China's CPI moderated while PPI weakened further
PANDEMONIUM
Trump threatens to cut off relations with China New rhetorical blast comes as US increases criticism of Beijing over the coronavirus

The headline above is from the FT. This is from ZeroHedge:

Adding to the anti-China rhetoric this morning, President Trump allegedly mused to Bartiromo hat he “wonders what would happen if the US cut ties with China.”

Adding about his “good friend” President Xi: “Right now, I don’t want to speak to him…We could cut off the whole relationship, if we did, what would happen?” Trump says of China. “You’d save $500 billion”. In addition to once again hinting at cancelling Treasury debt held by China, Trump also said he would prefer “a stronger dollar” – sending the greenback higher, as it marked an unusual u-turn from Trump’s typical insistence that rates are too high and the dollar is too strong.

China Gives Fresh Details of Virus Response, Denies Cover Up

China said it did not know how infectious the new coronavirus was until Jan. 19, pushing back against accusations that it intentionally withheld information about the severity of the outbreak in Wuhan. While officials knew that there were signs of human-to-human transmission earlier, it was hard to ascertain the new virus’s level of contagiousness, according to Zeng Yixin, vice minister of the National Health Commission. There are diseases like HIV that while infectious, are not easily transmitted from person to person, he said.

It was only on Jan. 19 that Chinese scientists concluded that the virus spreads easily among people and China released that information to the world the next day, Zeng said. The comments come as China faces growing blame for a delay in sounding the alarm about the coronavirus, which allowed people to spread it unwittingly for some time. Zeng was responding to an Associated Press report in April that cited confidential documents showing Chinese officials waited six days before President Xi Jinping warned the public of the dangers of the virus outbreak.

Giving a rundown of events since the crisis began, Zeng said that China concluded on Jan. 9 that it was dealing with a novel coronavirus and began developing test kits the next day. On Jan. 12, it informed the World Health Organization about the outbreak.

On Jan. 14, a national meeting of provincial health officials was held. “Many uncertainties remained. We understood there’s more research needed on human-to-human transmission and we couldn’t rule out the chance of a further spread of the virus,” said Zeng. “But we couldn’t reach conclusions to many questions.” (…)

The English publication of a Chinese writer’s account of the early days of the coronavirus outbreak in Wuhan has stoked a fierce debate over what happened in the city where the pandemic began. (…) For many in China, her entries, written in direct yet restrained prose, quickly became the go-to unofficial account of events unfolding in Wuhan, capturing in real time the bungled early response of Wuhan officials and the suffering and despair that followed. On Friday, a collection of Ms Fang’s essays and social media posts will be published in English as an ebook by HarperCollins. The work is expected to be translated into 15 languages. (…)

Virus Revives Worst-Case Scenarios for U.S.-China Relationship
U.S. moves to cut Huawei off from global chip suppliers

(…) The U.S. Commerce Department said it was amending an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”

The department added the “announcement cuts off Huawei’s efforts to undermine U.S. export controls.”

The rule change is a blow to Huawei, the world’s no. 2 smartphone maker, as well as to Taiwan’s TSMC (2330.TW), a major producer of chips for Huawei’s HiSilicon unit as well as mobile phone rivals Apple Inc (AAPL.O) and Qualcomm Inc (QCOM.O). (…)

The Trump administration has taken a series of steps aimed at Chinese telecom firms in recent weeks. (…)

China’s Clout Loses Punch as Trading Partners Push Back Over Coronavirus Australia and other countries spar with Beijing over its handling of the pandemic

(…) In recent days, Beijing has threatened tariffs on barley—one of Australia’s top agricultural exports to China—escalating a trade dispute that began in 2018. On Tuesday, Chinese authorities banned four Australian slaughterhouses from importing meat into the country, citing inspection and quarantine violations. A Foreign Ministry spokesman denied the move was meant as economic coercion.

Beijing’s diplomatic and propaganda efforts have grown more aggressive in the wake of the coronavirus pandemic, but so too has the pushback.

About a dozen African countries summoned Chinese ambassadors last month to protest pandemic controls that allegedly discriminated against Africans in China. India recently stepped up scrutiny of Chinese investment, concerned state-backed entities could swoop on local firms weakened by the pandemic.

Japan, which counts China as its biggest trading partner, set aside $2.2 billion of its pandemic support package to help Japanese companies address chokepoints in their supply chains, which could help them diversify in cases where a product is sourced solely in China. (…)

China buys more than a quarter of everything Australia sells to the world. (…) A new poll by Sydney-based policy think tank the Lowy Institute this week found 68% of Australians now feel “less favorable toward China’s system of government” when thinking about China’s handling of the outbreak. (…)

“A lot of the business community has a long record of wanting to ignore Chinese behavior,” said Mr. Shoebridge, a director of defense, strategy and national security at the Australian Strategic Policy Institute, a security think tank. “It is harder to run those arguments with the public because of the pandemic. There is a public expectation that we reduce the leverage that China has over Australia.” (…)

Taiwan Firm to Build Chip Factory in U.S. Taiwan Semiconductor Manufacturing, the world’s largest contract manufacturer of silicon chips, said it would spend $12 billion to build a chip factory in Arizona, as U.S. concerns grow about dependence on Asia for the technology.

(…) Construction will begin next year with production targeted for 2024, the company said in a statement.

TSMC’s new plant would make chips branded as having 5-nanometer transistors, the tiniest, fastest and most power-efficient ones manufactured today. TSMC just started rolling out 5-nanometer chips at a factory in Taiwan in recent months.

TSMC said the plant would make 20,000 wafers a month, making it a relatively small facility for a company that made more than 12 million wafers last year alone. (…) TSMC said the factory would employ more than 1,600 people, the company said. (…)

TSMC had been talking to U.S. officials as well as to Apple Inc., one of its largest customers, about building a chip factory in the U.S. for some time, but the conversations gained momentum recently as concerns mounted about the fragility of the Asian supply chain, according to people familiar with the matter. (…)

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Sector Breakdown of 164 Companies that Discussed Suspending Buybacks and/or Dividends
Tesla’s secret batteries aim to rework the math for electric cars and the grid

Electric car maker Tesla Inc (TSLA.O) plans to introduce a new low-cost, long-life battery in its Model 3 sedan in China later this year or early next that it expects will bring the cost of electric vehicles in line with gasoline models, and allow EV batteries to have second and third lives in the electric power grid. (…)

New, low-cost batteries designed to last for a million miles of use and enable electric Teslas to sell profitably for the same price or less than a gasoline vehicle are just part of Musk’s agenda, people familiar with the plans told Reuters.

With a global fleet of more than 1 million electric vehicles that are capable of connecting to and sharing power with the grid, Tesla’s goal is to achieve the status of a power company, competing with such traditional energy providers as Pacific Gas & Electric (PCG_pa.A) and Tokyo Electric Power (9501.T), those sources said.

The new “million mile” battery at the center of Tesla’s strategy was jointly developed with China’s Contemporary Amperex Technology Ltd (CATL) (300750.SZ) and deploys technology developed by Tesla in collaboration with a team of academic battery experts recruited by Musk, three people familiar with the effort said. (…)

Power Struggle at Russian Newspaper Shows Kremlin’s Widening Influence One of the country’s last independent voices could soon be stifled as President Putin expands political control.

THE DAILY EDGE: 8 MAY 2020

VIRUS UPDATE

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  • The number of new cases in Germany rose the most in a week, just days after the government declared the first phase of the pandemic to be over. There were 1,268 additional infections in the 24 hours through Friday morning, according to data from Johns Hopkins University. That is the third day of rising cases and brings the total number to 169,430. Germany is preparing to open restaurants, hotels and all shops as well as to restart professional soccer games as Chancellor Angela Merkel on Wednesday declared some progress in fighting the virus, which so far has caused 7,392 deaths in the country. (Bloomberg)
  • New infections from the coronavirus have surged in Iran two weeks after it began easing restrictions on its population.
  • South Korea’s Health Ministry said 13 new coronavirus cases are linked to a patient who visited three nightclubs in Seoul on May 2. About 1,500 people visited the three clubs that day, and a ministry official said there is high chance more virus cases would be confirmed.
  • Coronavirus could infect 44 million people in Africa, WHO says
  • Coronavirus Hijacks the Body From Head to Toe, Perplexing Doctors More than a respiratory infection, Covid-19 wreaks havoc not just on lungs, but also the brain, kidneys, heart, vascular and digestive systems, and feet. Inflammation and abnormal blood clotting are likely culprits.
  • A drug for rheumatoid arthritis appeared to help improve lung function in hospitalized Covid-19 patients, a positive sign for treating those with severe inflammation in their organs. Treatment with anakinra, sold by Swedish Orphan Biovitrum AB as Kineret, was associated with a 90% survival rate and reduced respiratory symptoms, according to an observational study of 29 patients published Thursday in the Lancet Rheumatology journal.
  • Antimalaria Drug Hydroxychloroquine Doesn’t Help Treat Covid-19, Large but Inconclusive Study Finds
  • Few New Antibody Tests Judged Reliable Just 12 antibody tests have been granted authorization for emergency use after being reviewed by the FDA. No at-home antibody tests have been authorized, and researchers overall have expressed greater concern about their quality.
PANDENOMICS
China’s service sector conditions remain challenging as pandemic weighs on demand

(…) Total new business received by Chinese service providers fell for the third month in a row in April. That said, the rate of decline eased further from February’s record pace and was only modest. The reduction in total sales was widely linked to weaker demand conditions both at home and overseas. Notably, new export orders fell at the second-sharpest rate since the series began in September 2014 (…).

The sustained drop in total new work led to a further fall in employment across the sector. Moreover, the rate of job shedding was the quickest recorded since data collection began in late-2005. Despite lower headcounts, backlogs of work declined again in April as lower intakes of new business freed up capacity. (…)

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Consumer Activity Tracker Ticked Down in China, but Was Unchanged in the US (GS)

2. Our Coronavirus Consumer Activity Tracker Ticked Down in China, but Was Unchanged in the US. Data available on request.

U.S. Consumer borrowing plummets (ING)

Demand for Small Business Loans Cools Nearly two weeks after the federal government relaunched its small business aid program with an additional $310 billion, more than 40% of the money remains available.

(…) But the likely biggest reason for the slowdown is that many business owners have concluded that the SBA’s Paycheck Protection Program simply doesn’t meet their needs, lenders and others say, or they are waiting for the government to clarify the terms under which loans can be forgiven.

The program is generally aimed at companies with 500 or fewer employees, and it requires them to spend 75% of their loans on payroll to have the loan forgiven. Many small retail businesses, such as restaurants and hair salons, say that is a problem because they remain largely shut down and are operating with skeletal staffs.

“Since we can’t hire back our team, our current math is at most 10% [of the loan] will be forgiven for us,“ said Bob Garner, co-founder of Glory Days Grill, a Maryland-based casual restaurant chain with 21 locations. ”It’s basically a large loan we are going to be stuck with.”

For very small firms, especially in urban areas, payroll costs are eclipsed by other expenses, such as rent. (…)

CONSUMER WATCH

Via David Rosenberg:

  • The Washington Post/University of Maryland poll shows that only 56% of consumers intend to shop at the supermarket (I suppose that is a bullish data point for delivery services). Just 33% are comfortable entering a retail store. And a mere 22% say they are willing to dine in a sit-in restaurant.
  • In the U.K., an Ipsos Mori survey found eerily similar polling results. More than 40% are reluctant to shop or send their kids back to school, even after government officials allow for it. And more than 30% are worried about going back to work or getting together with friends.
  • A YouGov/CBS poll finds that 71% of Americans have zero intention of heading out to a restaurant or bar despite all these other feelings of being forlorn and claustrophobic and 85% say they wouldn’t get on an airplane even if they could.

From the NY Fed:

(…) Turning next to respondents’ expectations, we see a decline in median expected spending growth over the next twelve months to 1.5 percent, compared to 2.4 (2.6) percent reported in December (April) 2019—easily its lowest reading since the first reading of this series in the SCE Household Spending survey in August 2015.

As shown in the chart below, the decline in overall spending growth expectations is entirely driven by a sharp decline in expected non-essential spending growth (defined as spending on hobbies, leisure, vacation, and other items that one does not absolutely need). While the median expected growth in everyday essential spending (that is daily living expenses related to what one absolutely needs) increased slightly to 3.2 percent, the median expected growth in non-essential spending dropped to 0.2 percent in April, from 1.4 percent in December 2019, respectively.

There was also a big increase in the dispersion in non-essential spending growth expectations across respondents in April. For example, some 25 percent of respondents reported expected cuts in non-essential spending over the next twelve months of 6.8 percent or more. The declines in expected non-essential spending growth were comparable across age, education and income groups. (…)

Amid the COVID-19 Outbreak, Consumers Temper Spending Outlook

Finally, we consider expectations regarding making various large purchases over the next four months. The average probability of making a large purchase in electronics, home appliances, furniture, a car or other vehicle, or vacations and trips over the next four months all declined in April to new series lows (since this series’ start in April 2015). For most categories the magnitude of the decline was again increasing in income.

Amid the COVID-19 Outbreak, Consumers Temper Spending Outlook

CHINA

Some readers have been commenting/asking about investing in China, perhaps particularly if the U.S. market becomes less appealing (The Day After…). I am no expert on China. I post China-related items that I find relevant for the global economy and developed markets. Also

  • I am too old to invest in China, time is no longer on my side…;
  • I like to understand what I invest in and I cannot pretend to understand the Chinese economy;
  • I like to be able to invest with reasonably solid and dependable economic and financial data; I can’t rely on most government economic data from China, data that is so smooth and never revised for such a large and complex economy…

But that’s just me. At present, I am focused on return of capital and cash flow from investments in a world where capital gains will be more challenging and interest rates near zero for quite a while.

But for those who care, I will post or link interesting stuff on China. This is from Schroders:

U.S. and China Negotiators Pledge to Implement Phase One Trade Deal The top trade negotiators for the U.S. and China talked on the phone Friday, pledging to create favorable conditions for the phase one trade deal, China’s state-run Xinhua News Agency reported.
SENTIMENT WATCH
It’s JPMorgan vs. Citi as Wall Street Splits on Market Direction Wall Street’s biggest firms are divided on where markets are heading next.

(…) Citigroup Inc., for one, doesn’t get the “puzzling” rise in stocks.

“Extensive policy response, led by ample liquidity provided by central banks, likely contributed to the move in the markets,” economists including Igor Cesarec and Catherine Mann wrote in a note Thursday. “However, since it is not clear that markets can be propped up indefinitely, caution is warranted. Risk assets could be fragile once the cold, hard economic reality hits again.”

On the other hand, JPMorgan Chase & Co. sees the stock market advance as justified — and one which can continue.

“While the collapse in economic activity is historic, so too is the global policy response to cushion the impact and support a recovery,” strategists led by Marko Kolanovic wrote in a note Thursday. “We expect risky assets to continue to recover as economies reopen and given the unprecedented policy support, though we expect a moderation in the pace of gains.” (…)

Goldman attributes the market rise to a stabilization in virus infection rates and an improvement in measures of funding and liquidity stress. The firm has already said that equities price in macroeconomic performance over a two-year time horizon and investors may look past huge economic damage.

“Markets will continue to look through bad news about the depth of the economic downturn if they can continue to hold on to their view that a sizable chunk of the recent damage will be reversed by the end of next year,” strategists including Zach Pandl wrote in a note Tuesday.

And Morgan Stanley is also comfortable with the disparity between asset price performance and fundamentals, noting that markets tend to lead the economy and care more about rate of changes than absolute levels.

“Divergences between the market and economy are common at economic extremes,” wrote strategists including Andrew Sheets in a note Thursday. “Rate of change is key – a ‘U’ shaped recovery is fine, a ‘W’ is not.”

Measuring forward looking, SocGen’s Albert Edwards says this is insane (ZeroHedge)

Buybacks in 2020J.P. Morgan

SentimenTrader notes that measures of investor pessimism are at or near all-time lows, normally a dependable contrarian signal. Jason goes on showing that individuals are selling this rally across the world and that hedge funds of all kinds, including market timers, also seem to be sidelined.

So…who’s actually doing all the buying? I dunno. It seems to be a broad mix of groups, adding back modestly to whatever they sold during the plunge. There doesn’t seem to be any single group that’s helping to drive prices higher, at least not a group that’s large enough to show an impact.

spy

Contact: edgeandodds [at] gmail.com