Macro Hive: COVID: Second Waves / Measuring Progression + Top Blog Picks

After a tumultuous Q1 comes to an end, markets are braced for historic declines in economic activity in Q2 with a large chunk of the global economy now in lockdown. Unprecedented levels of policy support are now in place but the timeline on the virus remains far from clear. For our latest COVID tracker we focus on the second surge in cases been seen in several Asian countries. This is particularly worrying given even low growth rates now come from a high level of cumulative cases.

We also feature Dominique Dwor-Frecaut on a more nuanced picture of COVID progression via the slope of the epidemic S curve, or the number of days required for the cumulated case number to double.

For our regular Top Picks we feature the St Louis Fed with some alarming back-of-the-envelope calculations on US unemployment and Greg Mankiw on ex-post fiscal targeting in the US. We also include pieces from Carmen Reinhart on the weak spots in EM and BlackRock on portfolio rebalancing.

Enjoy!

Bilal

• The problem with a second surge in growth rates is that as the overall level of cases is already high – even a small percentage increase will lead to a big increase the number of daily cases. This is why it is important to bring the growth rate to zero (as China has).

(Bilal Hafeez | 31st March, 2020)

Here’s the problem with case counts. First, they are driven by countries’ populations: the US has more cases than Italy but once adjusted for population, US cases are 25% of Italy’s. Second, the figures are highly dependent on the testing capabilities of countries. The more countries run tests, the more cases they find. The percentage of positive test results would be more informative. But that’s also problematic. With most countries experiencing test kit shortages, they have opted to test the most exposed segments of their populations, which creates a strong upward bias in the results.

Thankfully, the COVID tracking project provides data on US states’ confirmed cases, tests numbers and test results, providing some sense of the measurement biases involved in looking at the number of cases alone.

(Dominique Dwor-Frecaut | 31st March, 2020)

How to rebalance back to 60/40 and why muni bonds are still a good investment

Why We Favor Re-balancing Portfolios (BlackRock, 3 min read) Falling stock prices and declining bond yields have pushed portfolios even further from the 60/40 benchmark than in 2008. Rebalancing can be done by, buying US equities rather than Japanese, given the high quality and large fiscal support, and in fixed income by reducing TIPS to neutral.

Municipals Versus Treasuries – a Tale of Two Cities (Advisor Perspectives, 3 min read) High-quality muni bonds with limited duration risk remain a viable investment despite the recent dislocation between municipal bonds and treasuries driven by Fed stimulus.

The ESF backstop and why ECB action is not enough

Olli Rehn: Economic Effects of the Corona Crisis and Measures by the Central Banks (BIS, 10 min read) The ECB’s timely and targeted stimulus can help the European economy withstand the COVID-19 crisis, according to the Bank of Finland governor, but a coordinated European fiscal response is also vital for small open economies like Finland.

The Fed Has Announced Unlimited QE to Include Many Asset Classes (Credit Writedowns, 2 min read) The Fed is now “buyer of last resort” for all investment grade assets and with the Treasury, via the ESF, backstopping this lending the government and central bank are now acting together.

Did the Fed’s Term Auction Facility Work? (Liberty Street Economics, 3 min read) An old blog but nevertheless relevant as the Fed reactivates much of its crisis toolkit, but not yet the TAF.  This facility was found to work as intended with the announcement of term loans triggering a decline in banks’ liquidity premium.

The case for YCC in the UK and ex-post fiscal targeting

COVID-19 Crisis: Fiscal Policy Should Lead and the Bank of England Should Follow for the Duration of the Crisis (VoxEU, 5 min read) With the UK’s conventional monetary policy space limited the BoE can support the government’s ‘whatever it takes’ pledge through Yield Curve Control or by temporary monetary financing of the deficit. Permanent money creation through a helicopter drop is another option.

A Proposal for Social Insurance During the Pandemic (Greg Mankiw, 2 min read) As targeted fiscal support takes time one solution is to provide everyone with monthly payments now and tax it later contingent on how much income has fallen. Where earnings don’t fall this will amount to a loan which will be fully repaid.

Sicken Thy Neighbor Trade Policy (Marginal Revolution, 2 min read) Export bans on health equipment are misguided as both the globalised production process means equipment relies on imported parts and such bans can lead to lower domestic production.

The case for non-pharma interventions and some projections for US unemployment

Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu (Liberty Street Economics, 6 min read) Areas implementing early and extensive non-pharmaceutical interventions during the Spanish flu saw no medium-term economic damage from the pandemic. By contrast, areas badly hit saw a large and persistent decline in activity.

Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate (St Louis Fed, 4 min read) US unemployment could hit 32% (or almost 53mn) by the end of Q2 based on assumptions using data on the number of workers in jobs which are in close proximity to others and on those in jobs deemed to be at high risk.

This Time Truly Is Different (Project Syndicate, 4 min read) The current health crisis is likely to have a bigger economic impact than the global financial crisis and could yet have systemic consequences. Both corporate and EM sovereign balance sheets are weaker than in 2008 and Fed rate cuts are not helping to ease financial conditions in EM given risk aversion and collapsing in oil prices.

Europe’s COVID-19 Crisis and the Fund’s Response (IMF, 3 min read) Most of the nine non-EU emerging economies of CEE have sought IMF help as limited access to capital markets, underdeveloped local markets and less developed banking systems makes it difficult to finance large increases in budget deficits.

How Sunak will dominate in Johnson’s absence and why US states should preparing now for postal voting

Boris Johnson’s Coronavirus Diagnosis: What History Teaches Us About Prime Ministers and Illness (The Conversation, 3 min read) Boris Johnson is not the first British PM to continue with his duties despite illness, in his case the coronavirus, and the UK’s parliamentary system means that Dominic Raab, the first secretary of state is the next in line. But in reality Chancellor Rishi Sunak will dominate over Raab.

This Isn’t The First Time America Has Weathered A Crisis In An Election Year (FiveThirtyEight, 7 min read) Past US elections have been disrupted by disease (in particular the Spanish flu in 1918), war and natural disaster with turnout lower than normal. States should start preparing legal and logistical challenges now to ensure more people can vote by mail.

How to increase IMF resources and stress in the non-bank sector 

The IMF Will Need More Resources to Fight the COVID-19 Pandemic (Peterson Institute for International Economics, 5 min read) As only half of the IMF’s $1.2trn is available for lending the fund must mobilise resources through either; asking members to increase bilateral lending, expanding central bank swap lines with some IMF role in triggering their use, using repos to put country holdings of foreign government debt to use or the IMF issuing $500bn in SDR.

A Cost-effective Way to Help Emerging Markets Fight COVID-19 (FT, 3 min read) An IMF-funded scheme to guarantee fx-denominated debt service in EM (ex China) is needed to counteract looming BoP crises given unprecedented capital outflows from EM, collapsing commodity prices and the economic disruption triggered by quarantines.

Non-banks Failing Coronavirus Stress Test (OMFIF, 3 min read) Regulators must reassess the risks from leverage in the non-bank financial sector and its interconnectedness with the wider economy to determine why the Fed has had to resort to its GFC crisis toolkit despite a more robust banking system.

China’s regressive tax system and the dangerous bid for global leadership

China Needs More Progressive Taxes and More Spending on Public Health (CFR, 6 min read) China’s regressive tax system can be improved by; collecting more income tax versus the current 1.3% of GDP, creating a national system for social security and unemployment insurance, and increasing spending on public health and other social spending.

The Problem With China’s Victory Lap (The Atlantic, 4 min read) China’s desire for global leadership may lead to the authorities to prioritise the economy over public safety. Promoting success in defeating the virus despite reports of ‘hidden infections’ in the country risks a second wave of infections.

Coronavirus to boost ESG mandates

Coronavirus Will Trigger ‘Skyward Surge’ in ESG (Markets Media, 3 min read) Increased awareness of the need to protect all stakeholders due to the coronavirus should accelerate the shift towards ESG and see funds continue to outperform.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)