• GB Davis

Congress needs to stop Acting and start Initiating - 9/26/20

On August 7, 2020, in "It's the Economy Stupid, Jobs are the Economy Stupid, Not the QQQ," we indicated (or rather relayed, adding our own emphasis), in part:

"The poor July jobs numbers should be enough to convince Congress and the Trump administration they need to quickly agree on another substantial fiscal rescue package. We are assuming they will agree to a $1.5 trillion package before Congress goes on its August recess. Of this package, just over one-third will go to more unemployment insurance and another round of stimulus checks, just under one-third to various to help fill state and local government budge holes, and the remainder to a range of needs from more testing and tracing to additional funds for PPP. This will be just enough support to offset the ill effects of the ongoing pandemic and ensure the economy doesn’t slide back into recession with outright job losses and rising unemployment. However, this assumes that infections don’t continue to mount from their current rate close to 65,000 per day. A good rule of thumb is that for every 10,000 increase in daily confirmed infections, an additional $100 billion in fiscal support is needed to forestall recession." (Moody's) "What lawmakers do in the next week or two is also critical to stock and bond markets and, by extension, the broader economy. Stock investors have bid up prices nearly to their pre-pandemic highs, and bond investors are aggressively buying the debt of even low-rated companies, in large part on anticipation of more government support. Companies with Baa-rated debt—the lowest investment grade rating—were able to borrow last week at the lowest interest rate recorded in the 65 years of available history. The Federal Reserve’s zero-interest policy, quantitative easing, and credit facilities are necessary backstops for investors, but they also have fully discounted another large round of fiscal support. If this support isn’t forthcoming, markets will almost surely sell off, which will have its own serious economic knock-on impacts. Negative wealth effects—the pull-back in spending by well-off households spooked by their declining net worth—were a serious concern early the pandemic, when markets were selling off. They haven’t been much of an issue recently as markets rallied, but that will quickly change if Washington doesn’t come through soon. Wealthier households, particularly baby boomers in their 50s, 60s and 70s who are already skittish given the health risks posed by the virus to their age group, are especially important to driving consumer spending. Boomers account for almost half of all spending, and thus broader economic growth." (Id.) Of course, lower- and middle-income households will suffer the most if lawmakers fail to come through.  Even prior to the pandemic, when the economy was at full employment, more than one-third of households were living paycheck to paycheck.  Now, those without jobs have no option but to stop paying their bills and curtail what spending they are doingunless they receive more income support from the government. Seeing that happen will unnerve many of those who are still working. They will rightly worry what would happen if they lost their own jobs or hours, the possibility of which is real as long as there is a pandemic." (Id.) and commenting: "SO, gentle reader, this is an interesting time indeed - and not a time for complacency.  My own view is that the lockdowns have been too Draconian, at the expense of severe economic damage - especially in places like California - and ironically, the very constituents who stimulus will help are being hurt by their representatives - LOOK $1.5 T is in the cards; the White House is prepared to move with or without agreement - that is noble in the context of this recession - and as always, I prefer to see people cross the aisle and do their jobs without using constituents as political livestock for slaughter or feasting."

YET - that has not happened, has it? and why, not?

September 18, 2020


  • Goldman Sachs indicates that stimulus unlikely to happen pre-election


September 20, 2020

  • China Beige Book indicates that August trade data is outpacing China, ts economy relies on subsidizing firms at the expense of households & stimulus supports production rather than consumption...Excess supply then gets dumped on world mkts"

September 21, 2020

  • Rabobank indicating that the Fed and Congress were signaling lack of stimulus

  • DB: "unified government accompanied by larger fiscal deficits will set in motion a sharper deterioration in the external accounts driving an even weaker USD. Crucially, and in contrast to the 2017 stimulus, the Fed will accommodate rather than crowd out any stimulus" (via FXStreet)

  • Across the pond, "ECB President Christine Lagarde reiterates a vow to ramp up monetary stimulus again if needed" via Bloomberg

  • "Supreme Court battle damages already-slim prospects for another round of U.S. fiscal stimulus" (Bloomberg Asia)

September 22, 2020

  • UBS: "US Fed Chair Powell and US Treasury Secretary Mnuchin testify to Congress (Mnuchin actually has a degree in economics). We know what Powell will say—there are statements of the obvious about employment and output being below normal, and a call for fiscal stimulus," and "n our base case, we think equities can still move higher in the medium term given support from the likely development of a successful vaccine, an end to election uncertainty, likely passage of new US fiscal stimulus, and continued extraordinary global monetary support." (via FXStreet)

  • Across the Pond, "ECB'S PANETTA: THE RESULTS OF THE ECB STIMULUS IS NOT SATISFACTORY YET." (via FinancialJuice)

  • "MEADOWS ON STIMULUS: LOOKING AT DOING PIECEMEAL RELIEF"

  • "FED'S EVANS: I AM OPEN MINDED ABOUT FURTHER BOND-BUYING, BUT THE BIG QUESTIONS AT THE MOMENT ARE ABOUT FISCAL STIMULUS, AGGREGATE DEMAND." (via FinancialJuice)

  • "Morgan Stanley see the end of September as the deadline for another fiscal stimulus package from the US, and continue to forecast that some sort of package will be agreed upon." (via Bovell Global Macro)

  • ECB’s Panetta Lays Out Case For Preemptive Monetary Stimulus (via Bloomberg Asia)

September 23, 2020

  • "US DEMOCRAT HOUSE MAJORITY LEADER HOYER: WE ARE PUSHING FOR A VOTE FOR AN ALTERNATIVE STIMULUS BILL NEXT WEEK." (via FinancialJuice)

  • "FED'S ROSENGREN: QE WILL PROVIDE LIMITED ADDITIONAL STIMULUS BECAUSE RATES ARE ALREADY LOW." (via FinancialJuice)

  • "Lack of Stimulus Package Could Cost Economy 5 % Points Off of 4th Qtr GDP - according to Bloomberg @economics - due to fall in personal income" (h/t Patrick Hill)

  • "Federal Reserve officials call for more fiscal stimulus to get the economy out of its "deep hole"" (via Bloomberg Asia)

September 24, 2020

  • "GOLDMAN: “We think it is now clear that Congress will not attach additional fiscal stimulus to the continuing resolution. ... We are lowering our Q4 GDP growth forecast from 6% to 3% on a quarterly annualized basis ..” (CNBC)

  • "ECB’S LANE: AMPLE STIMULUS IS STILL NEEDED TO RETURN TO THE INFLATION TO GOAL." (via FinancialJuice)

  • "HOUSE REP. SPEAKER PELOSI: DEMOCRATS ARE READY FOR NEGOTIATION ON STIMULUS." (via FinancialJuice)

  • "Democrats in the U.S. House of Representatives are working on a $2.2 trillion coronavirus stimulus package that could be voted on next week" (Trading Floor Audio)

September 25, 2020

  • "Democrats Crafting New $2.4 Trillion Stimulus Bill to Spur Talks " (Bloomberg)

  • "Congress is skeptical that a new stimulus deal could be reached and made law by Election Day" (Bloomberg Asia)

In addition, other Global IBs see the BoE and ECB announcing their own respective stimulus in (likely) December.  IF we get more than $1.5 T - the number derived by Moody's with certain mathematical precision, withstanding these are economic models, then smooth sailing - previously Trump was at $500m - now he is at $1.5T, himself, and the DEMS in response have dragged their feet and grabbed for more ($2.2T to $2.5T in discussion).  Treasury Secretary Mnuchin is the go between to make this happen and ensure that the markets don't implode - that's his role here.  Shame on the DEMS for dragging this out.


ALSO - there will be Infrastructure, just by virtue of this alone (via Fitch, below) - but the larger the stimulus now, the longer this probably gets put off until February, becoming, once again, politicized.


Wed 23 Sep, 2020 - 11:25 AM ET


Fitch Ratings-New York/San Francisco-23 September 2020: Transportation projects that rely on federal funding are at risk of being delayed or cancelled unless Congress reauthorizes federal spending from the Highway Trust Fund (HTF) and provides resources to support the fund, Fitch Ratings says. HTF funding uncertainty discourages investment in substantial, multi-year infrastructure projects as these require long-term planning and funding commitments. The HTF and state transportation budgets depend on federal fuel tax revenues, which were declining even before the coronavirus pandemic due to improved fuel efficiency and the static fuel tax, which has not changed since 1993. HTF spending exceeded fuel tax revenues by about 26% in 2019.


Gas consumption and gas tax revenues declined dramatically at the height of the pandemic, resulting in a meaningful reduction in HTF funds. While gas sales rebounded in June from their historical low in April 2020, consumption is still below typical summer levels according to the US Energy Information Administration (EIA). Factors including a reduction in travel and commuting due to high unemployment and the increase in remote working are expected to keep motor gasoline consumption below 2019 levels through 2021 according to the EIA's September 2020 Short- Term Energy Outlook, further pressuring fuel tax revenues. Many states increased fuel taxes and toll revenues in recent years to help fill transportation infrastructure revenue gaps but these taxes may not be sufficient considering federal funding comprises approximately a quarter of spending on highways.


The Fixing America’s Surface Transportation (FAST) Act, which will expire on Sept. 30, 2020, allocates billions of dollars from the HTF to state governments, and the Act also provides for federal general fund transfers to the HTF. Federal transportation allocations to the states will halt, and the HTF could become insolvent as soon as federal FY 2022 unless Congress takes action. Based on the history of HTF reauthorizations, Fitch expects Congress will eventually reauthorize the program and maintain HTF solvency.


The HTF historically received uninterrupted funding even during past short-term authorization lapses, although it relied on federal general fund transfers to remain solvent. The March 2020 Congressional Budget Office (CBO) baseline projections indicate the HTF highway subaccount would run out of money in FY 2022 absent additional subsidies or a structural shift in the fund. Fitch notes the CBO projections are based on pre-pandemic budget and economic projections so insolvency could actually occur sooner absent Congressional action.


Raising federal fuel taxes going forward under the program to cover shortfalls or broader reform of HTF revenues and spending will be difficult in light of the weak economic environment, a ballooning federal deficit the CBO projects will be $3.3 trillion in 2020, and pressing infrastructure demands. Given increased vehicle fuel efficiency, alternative taxes have received more attention. Registration fees and taxes on fuel efficient or electric vehicles, while more feasible, would generate a relatively small amount of revenue compared to HTF spending. Other taxing options that could support the HTF, such as a tax on vehicle miles travelled or a highway freight tax, may be difficult to implement because of the costs of implementing and enforcing a new tax system. An additional tax burden would also be unpopular during the nascent economic recovery.


Congress has not arrived at a consensus on bills proposed earlier this year that would extend the FAST Act, and these bills do not include a long-term structural solution for the HTF. Fitch recognizes there are competing policy and funding priorities placed on the federal government as a result of the coronavirus pandemic. This potentially makes funding decisions regarding the HTF more difficult. Congress may choose to reduce federal highway spending or postpone a longer-term commitment to stabilizing HTF funding.




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