Virus surges

No need to wrestle with statistics on new cases of COVID-19. Or the results of testing. Or hospitalizations. Just look up Apple. No, not the share price, which is up 58% from its March low. Instead, for a sense of where the virus is re-emerging in force since many states began reopening their economies. Two weeks ago Apple announced the closing of eleven stores, six in Arizona and two in Florida among them. Late last week Apple said it would close an additional fourteen reopened stores in Florida and seven in Texas.

By weeks’ end the Governors of Arizona, Florida and Texas caught up with Apple. Arizona governor Doug Ducey hit the pause button on re-openings, and agreed to allow local officials to mandate the use of masks in public places. Florida governor Don DeSantis closed the bars and delayed promulgating rules that would allow Disney to re-open its theme parks. And Texas Governor Greg Abbott closed bars, reduced restaurant seating, paused further re-opening and announced that elective surgeries in major hospitals would be cancelled to make room for COVID-19 patients. The heavy presence of younger patients is believed to bode well for the recovery rate, but little is yet known about the enduring impact of the disease in later life.

These measures mark a slow-down in the pace of re-openings, which had been going rather well thanks to measures taken by congress and the President to create money to fund a variety of relief measures. The so-called CARES Act weighs in at about $2 trillion. Other relief measures bring total authorized spending to $3.6 trillion. Administrative actions taken by the President add another $380 billion of spending to a budget already headed to a trillion-dollar deficit. That brings the total to a staggering 20% of GDP, a level not seen since WWII.

Add the ability of the treasury to back $4 trillion in loans by the Federal Reserve Board, not all to the soundest of companies and you have overtime work at the Washington, D.C. and Fort Worth facilities of the Bureau of Engraving and Printing, where America’s fiat money is physically created.

Despite this cascade of red ink, the plea of “More please, sirs” is heard in our land. Trump wants $1 trillion for an infrastructure program. Democrats want another $3 trillion, $1 trillion to hand to hard-pressed state and local governments, many reduced to penury by past profligacy, the balance to extend existing relief measures beyond their expiration date of June 30.

Democratic leader of the House Nancy Pelosi and Republican secretary of the treasury Steve Mnuchin are negotiating the size and shape of the next package. Voters, their children and grandchildren will pay for all of this with higher taxes or, more likely, by a reduction in the value of the dollars in their pay cheques. Economists call that “inflation”.

But that payment will come due after many members of the current generation of politicians have moved to lucrative careers as lobbyists, making certain that any increased tax burden is borne by other than their clients. Meanwhile, the economic effects of the cash raining down on the battered economy, and of the re-openings are unmistakable. Sales of existing houses, and prices realized, are picking up, and in May purchases of new single-family homes (+16.6% over April), mortgage applications (+26%), and building permits (+14.4%) all rose sharply.

Consumers emerging from lock-down are spending cash they involuntarily stored up during their enforced time at home alone or with their families. Paint sales are booming as the home-bound spiff up their homes, driving the share price of paint supplier Sherwin Williams up 41% since its March low. With offices closed, no excuses for ignoring long-needed home repairs and improvements. Result: shares of home improvement retailer The Home Depot are up 59% from March lows. Little wonder so many people are eager to get back to their offices and resurrect the effectiveness of “I had too hard a day at the office to tend to that broken light fixture.”

But as the economy gains strength, so does the virus, due in part to inattention by young adults (median age of new cases seems to be 35, apparently not yet the age of personal responsibility) to social distancing rules when in bars and at demonstrations. Governors anticipated some increase in cases, even in deaths, but calculated those would be more than offset by the jobs created and the health benefits from the reduced incidence of depression, domestic violence and other ills associated with enforced home-detention.

They may have been right. After all, while cases are measured in the thousands, jobs created by a resurgent economy are likely to measure in the millions. Still, it is time to recalibrate. Although some governors are suspending further loosening of restrictions and making other adjustments, none have reverted to a total shut-down. So far.

Trump’s continued inability to frame a credible response to the persistence of COVID-19 is now Joe Biden’s major campaign theme. With reason. The President says face masks are unnecessary, that closely packed rallies are fine, and damn the virus, full speed ahead with re-openings. He also says the virus will “fade away”. (That might have been true of the “old soldiers” that General Douglas MacArthur said would “fade away”, but recent outbreaks suggest it isn’t the case with COVID-19.) All those positions are now believed to have contributed to a resurgence of the virus.

Any credit for the government’s reaction to the crisis is going to congress and Mnuchin, winning plaudits for the speed with which they hammered out compromise deals, imperfect arrangements to be sure, and poured relief funds into the economy. Federal Reserve Board chairman Jay Powell shares the applause for keeping credit markets open with a series of ingenious moves. The sounds Trump hears are not generally associated with approval.

A majority of voters prefer to have Trump manage the economy. But three recent developments suggest that the economy might not be in robust health when the election rolls around:

  • the slowdown in re-openings will dampen the pace of the recovery;
  • the recent downgrade in the economic outlook by the International Monetary Fund suggests the global economy is contracting more rapidly than had previously been thought, and
  • the Fed’s decision to force banks to preserve capital by extending to the third quarter the suspension of share buybacks and freezing dividends suggests the financial system is not quite as virus-proof as was previously thought.

Joe Biden, holed up in the basement of his Delaware home, is sitting on an overwhelming 14-point lead in national polls, and surprising and not insignificant leads in many battleground states. It is 89 days since his last press conference. There are two reasons for Biden’s success so far.

His supporters agree that one reason the gaffe-prone former vice president maintains his substantial poll lead is his inaccessibility. To which the candidate lent support on Friday, when in a short statement excoriating Trump for mishandling his response to the virus Biden accused the President of being responsible for the deaths of 120,000,000 Americans – one-third of the entire population.

The other reason for Biden’s lead is Trump, who is in a hole and furiously digging.