The Whole Earth Report

May 2020 High Level Summary

• COVID-19 Narrative Is in the Rearview Mirror: The outbreak is not over, but we see low odds that it will surprise to the downside. The Swedish experience tells us that a lower level of social distancing stringency does not produce overwhelmed hospital systems. It will increase number of infections and yes also deaths, but they will remain at a reasonable level that does not crush hospital capacity. Ageist nature of COVID-19 is beginning to become a policy-relevant datapoint. • Tactical Outlook Is Mixed: With the S&P 500 at ~2,850, the upside is limited in the near term. However, we can see markets staying flat or slowly climbing the wall of worry given the massive policy response that is about to become even greater. We expect another $1 trillion of fiscal spend, at the minimum. • But Risks Are Rising: We do recognize that there will be plenty of opportunities for sell-offs, particularly from early July to October. Our favorite three risks are: • Q2 Earnings: As the maniacally optimistic view on COVID-19 becomes priced-in, the odds are that the economic recovery and data will lag and disappoint. • China-US: It is clear that President Trump will campaign on a China-bashing platform. The question is whether his policy toolkit will be as impactful as tariffs in 2018 and 2019. • VP Pick: The market is completely ignoring the odds of a progressive VP pick. • Cyclical: All non-SPX questions – USD, EM, energy, commodities, etc. – depend on China. Policymakers appear hesitant to stimulate aggressively. We need more clarity on China before we declare open season on EM. • Secular: The Buenos Aires Consensus will make us all rich! Unfortunately, in a currency of no value. We think that markets are 12-24 months from a decade of carnage and pain.

Welcome to the Buenos Aires Consensus. When we look back on 2020 a decade from now, what chart will we remember? Is it a chart of unrealistic S&P 500 multiples? Or of COVID-19 deaths? Or of US tariffs on China? No. It will be the one below.

This Is What the Buenos Aires Consensus Looks Like on a Chart

The 30,000-foot view of the pandemic is that the global new daily cases – the first derivative of the global Epi Curve – have slowed. While outbreaks in the EM are still accelerating – and the US new daily case load remains stable at a high level – East Asia and Europe have stabilized.

Global Daily Increase Has Stabilized The First Derivative of the Epi Curve Has Declined

120,000 30%

GLOBAL COVID-19 DAILY CASES 5-DAY MOVING AVERAGE GROWTH OF GLOBAL COVID-19 DAILY CASES 25% 100,000

20%

80,000 15%

60,000 10%

5% 40,000

20,000 -5%

© CLOCKTOWER 2020 © CLOCKTOWER 2020 0 -10% 03-01 03-06 03-11 03-16 03-21 03-26 03-31 04-05 04-10 04-15 04-20 04-25 04-30 05-05 03-01 03-06 03-11 03-16 03-21 03-26 03-31 04-05 04-10 04-15 04-20 04-25 04-30 05-05 SOURCE: WIND SOURCE:WIND

Some countries experience severe outbreaks, others do not. The case of Thailand is instructive. Its close links with China suggest it should have had an outbreak. It did not. This means that idiosyncratic factors can both accelerate and decelerate the severity of the outbreak.

Risk of Epidemic Rises With Cold Weather and Good Infrastructure 0.12

CANADA 0.1 GERMANY SWITZERLAND BELGIUM KOREA UK US JAPAN 0.08 ITALY FRANCE

SPAIN 0.06

SINGAPORE ISRAEL GREECE KUWAIT AUSTRALIA I… MALAYSIA INDIA BRAZIL

0.04 ARGENTINA VULNERABILITY INDEX* VULNERABILITY PHILIPPINE THAILAND MEXICO R² = 0.4333 0.02

* VULNERABILITY INDEX IS CALCULATED THROUGH DIVIDING THE COUNTRY'S WORLD BANK INFRASTURCTURE INDEX BY ITS AVERAGE TEMPERATURE OF FEB. AND MAR. SOURCE: WIND, THE WEATHER CHANNEL, WORLD BANK

The US has not performed well in this outbreak. Along with Italy and the UK, its daily case load has proven to be stubbornly high. However, if we compared the US with Europe’s first derivative of the Epi Curve, it is largely in line with a general “Western experience.”

The US and Europe Are Largely in Line

45000

DAILY COVID-19 INFECTIONS: 40000 EU-5* SINCE FEB.21

35000 US SINCE MAR. 2

30000

25000

20000

15000

10000

5000

*INCLUDE ITALY, SPAIN, GERMANY, FRANCE, THE UK SOURCE: WIND

Thous. US: NEW YORK EMERGENCY DEPARTMENT VISITS 6 INFLUENZA AND RESPIRATORY ILLNESSES 30-DAY MOVING AVERAGE 5

Thous. US: NEW YORK EMERGENCY DEPARTMENT VISITS 6 INFLUENZA AND RESPIRATORY ILLNESSES 5

According to the modeling from the Institute for Health Metrics and Evaluation, US states representing ~85% of GDP relax social distancing by June 1. This is much more optimistic than the narrative from mid-March, when “flattening the curve” was promoted as an indefinite policy.

A Big Surprise: Flattenistas Were Wrong

Social distancing is not a binary concept. There is a nuance in the stringency of policies. Our forecast is that most developed markets will approach Swedish level of social distancing by the end of June. If Volvo, IKEA, and ABBA are good enough for export, why isn’t their epidemiology?

Moderation: Yet Another Great Import from Sweden!

COVID-19 RESPONSE STRINGENCY INDEX*: AUSTRALIA CANADA 100 FRANCE GERMANY ITALY SPAIN UK US 80 SWEDEN

* MEASURES GOVERNMENT RESPONSES BASED ON SCHOOL AND WORKPLACE CLOSURES, CANCELLATIONS OF PUBLIC EVENTS, PUBLIC TRANSPORT CLOSURES, COVID-19 PUBLIC INFORMATION CAMPAIGNS, RESTIRICTIONS ON INTERNAL MOVEMENT, AND INTERNATIONAL TRAVEL CONTROL.

Wrong.

Nothing to Write Home About on Deaths… … But Decent Job on Infections

700 COVID-19 DEATHS PER 1MN POPULATION COVID-19 DEATHS PER 1MN POPULATION 600

600

500 500

400 400

300

SWITZERLAND US SWITZERLAND 200

200

CANADA

CANADA GERMANY

100 DENMARK

GERMANY IRAN

100 DENMARK

AUSTRIA

IRAN

AUSTRIA

FINLAND

NORWAY

FINLAND

NORWAY

ITALY FRANCE NETHERLANDS KOREA

IRELAND NEWZEALAND INDIA

RUSSIA AUSTRALIA JAPAN SINGAPORE CHINA

SPAIN

BELGIUM UK

SWEDEN

IRELAND

RUSSIA AUSTRALIA JAPAN SINGAPORE CHINA

SPAIN ITALY FRANCE NETHERLANDS KOREA INDIA

NEWZEALAND

BELGIUM

SWEDEN UK 0 0 © CLOCKTOWER 2020 SOURCE: WORLDOMETERS. SOURCE: WORLDOMETERS. © CLOCKTOWER 2020

Sweden-haters focus on its elevated – but by no means world-leading – deaths per capita. However, Sweden’s error was in protecting its retirement homes. By no means is it alone on this front, suggesting that its overall strategy cannot be blamed for at least half of its deaths.

Swedish Care Facility Deaths Are in Line… … With Both EU and US Peers

% SHARE OF COVID DEATHS IN CARE HOMES US: LONG-TERM CARE FACILITY DEATHS AS A SHARE OF TOTAL 60% STATE DEATHS (AMONG REPORTING STATES)

60 50%

40% 40

30%

20 HUNGARY

20%

SINGAPORE DISTRICT OF COLUMBIA OF DISTRICT

10% CAROLINA SOUTH

NORWAY FRANCE DENMARK

ISRAEL AUSTRALIA

IRELAND PORTUGAL

CANADA GERMANY**

BELGIUM HONG KONG SWEDEN* 0

* STOCKHOLM REGION.

DELAWARE MASSACHUSETTS PENNSYLVANIA LOUISIANA

OKLAHOMA

COLORADO CAROLINA NORTH FLORIDA NEVADA

UTAH

GEORGIA TEXAS

VIRGINIA

KENTUCKY

CONNECTICUT

OREGON TENNESSEE

NEW YORK NEW

NEW JERSEY NEW ILLINOIS ** INCLUDES ALL COMMUNAL SETTINGS, SUCH AS CARE FACILITIES, HOMELESS SHELTERS, AND MISSISSIPPI ACCOMMODATION FOR 0% REFUGEES AND PRISONS. NOTE: DATA AS OF APRIL 23. STATES VARY IN REPORTING: SOME INCLUDE SOURCE: "MORTALITY ASSOCIATED WITH COVID-19 OUTBREAKS IN CARE HOMES: EARLY BOTH RESIDENTS AND STAFF IN NUMBER OF CASES. © CLOCKTOWER 2020 INTERNATIONAL EVIDENCE," A. COMAS-HERRERA ET AL., MAY 3, 2020. SOURCE: KAISER FAMILY FOUNDATION. © CLOCKTOWER 2020

Ultimately, Sweden is a model of what a post-opening world will look like. Cases and deaths will be elevated as US opens its states and reduces the stringency of social distancing policies. However, hospital capacity is unlikely to be breached.

Swedish Outbreak Is Significant and Stubborn… … But the Hospital Capacity Has Not Been Breached

30000 900 600 Sweden Sweden: ICU patients with COVID-19 Daily increase (RS) 800 25000 500 Total confirmed 700

20000 600 400

500 15000 300 400

10000 300 200

200 5000 100 100

… COVID-19 is ageist. It viciously attacks the older segments of the population. As such, a Vertical Strategy of containment can be adopted, discriminating by the age cohort. Not a Horizontal (Medieval) Strategy that is currently quarantining the entire population.

COVID-19 Is Ageist

COVID-19: DEATH RATE BY COUNTRY SPAIN ITALY SWEDEN SWITZERLAND KOREA JAPAN CHINA DEATH DEATH DEATH DEATH DEATH DEATH DEATH AGE AGE AGE AGE AGE AGE AGE RATE (%) RATE (%) RATE (%) RATE (%) RATE (%) RATE (%) RATE (%)

0-9 0.3 0-9 0.0 0-9 0.0 0-9 0.0 0-9 0.0 0-9 0.0 0-9 0.0 10-19 0.3 10-19 0.0 10-19 0.0 10-19 0.0 10-19 0.0 10-19 0.0 10-19 0.2 20-29 0.2 20-29 0.0 20-29 0.4 20-29 0.0 20-29 0.0 20-29 0.0 20-29 0.2 30-39 0.3 30-39 0.2 30-39 0.5 30-39 0.1 30-39 0.2 30-39 0.1 30-39 0.2 40-49 0.6 40-49 0.9 40-49 0.9 40-49 0.0 40-49 0.2 40-49 0.3 40-49 0.4 50-59 1.4 50-59 3.6 50-59 2.3 50-59 0.5 50-59 0.8 50-59 0.6 50-59 1.3 60-69 4.6 60-69 10.9 60-69 7.2 60-69 2.8 60-69 2.6 60-69 1.9 60-69 3.6 70-79 13.6 70-79 29.0 70-79 22.3 70-79 10.5 70-79 10.4 70-79 5.8 70-79 8.0 80-89 20.7 80-89 40.6 80-89 32.2 >80 25.2 >80 24.3 >80 13.6 >80 14.8 >90 21.2 >90 14.7 >90 35.7 AS OF APRIL 29. AS OF APRIL 27. AS OF APRIL 30. AS OF APRIL 30. AS OF APRIL 30. AS OF APRIL 29. AS OF FEBRUARY 11. SOURCE: SPANISH SOURCE: ISTITUTO SOURCE: PUBLIC SOURCE: FEDERAL SOURCE: KCDC. SOURCE: TOKYO SOURCE: CHINESE MINISTRY OF HEALTH. SUPERIORE DI HEALTH AGENCY OF OFFICE OF PUBLIC KEIZAI. CDC. SANITÀ. SWEDEN. HEALTH OF THE SWISS CONFEDERATION. © CLOCKTOWER 2020

The S&P 500 fell by 36% from February 19 to March 23. This represents the fastest drawdown of 20% (or more) in the history of markets. What took us six months in 2007- 2008, occurred in 32 days in 2020.

When Things Fall Apart

5% NUMBER OF DAYS IT TOOK FOR S&P500 TO DROP 20%

-5%

-10%

-15%

-20% 2007 1980 1966 1973 1968 1956 2000 1961 -25%

2020 1929 -30%

1987 © CLOCKTOWER 2020 -35% 1 32 63 94 125 156 187 218 249 280 311 SOURCE: YAHOO FINANCE, GOLDMONEY RESEARCH

On the pandemic front, there was uncertainty on how COVID-19 would evolve. Was Milan the fate of all G20 cities? Can a non-East Asian country contain the virus? On policy front, there was certainty as investors projected the 2009 playbook to 2020. Both concerns were misplaced.

Investors Projected 2009 to 2020

20 FISCAL STIMULUS AS A % OF GDP: COVID-19 RESPONSE* 2008-2010 FISCAL PACKAGES AS A % OF 2008 GDP**

12 3.5X... for now

0 GLOBAL JAPAN US AUSTRALIA CANADA FRANCE GERMANY UK KOREA SPAIN ITALY CHINA

* NOTE: KOREA ANNOUNCED AN ADDITIONAL 1% OF GDP WORTH OF STIMULUS, WHICH HAS NOT BEEN APPROVED YET. WE INCLUDE THOSE MEASURES IN THE CHART. SOURCE: POLICY RESPONSES TO COVID-19, IMF AND CLOCKTOWER CALCULATIONS. ** SOURCE: OECD ECONOMIC OUTLOOK INTERIM REPORT, MARCH 2009. © CLOCKTOWER 2020

Q2 earnings, due in early July, may catalyze a drawdown. Our maniacally optimistic view on COVID-19 is starting to become consensus. As such, expectations of economic recovery could be bid up, disappointing when US recovery proves to be tepid (especially relative to China).

What if US Data Disappoints Even Though the Economy Opens Up Earlier than Expected?

Ann% Chg GS COVID-19 CONSUMER ACTIVITY TRACKER:

20 CHINA (ADVANCED BY 7 WEEKS) US

-20

-40

-60

THE CORONAVIRUS CHINA CONSUMER ACTIVITY TRACKER TAKES THE AVERAGE YEAR-OVER-YEAR CHANGES IN TRAFFIC CONGESTION MOVIE BOX-OFFICE REVENUE, DAILY PROPERTY SALES, AND PASSENGER LOAD FACTORS ON DOMESTIC FLIGHTS. THE US CONSUMER ACTIVITY TRACKER INCLUDES HOTEL OCCUPANCY, MOVIE BOX OFFICE RECEIPTS, BROADWAY BOX OFFICE RECEIPTS, REDBOOK RETAIL SALES, COLLEGE BASKETBALL ATTENDANCE, AND COMMERCIAL AIRLINE AVAILABLE SEAT MILES.

President Trump will use China as his foil for the upcoming November general election. Americans, across demographic cohorts, now have an unfavorable view of China and so the strategy has political merit. The question is what will the White House do concretely.

Around 65% of Americans Don’t Like China… … The Feeling Is Uniform Across Demographic Cohorts % 70 % WHO SAY THEY HAVE A ____ OPINION OF CHINA % 65 US: FAVORABLE 80 PERCENT OF RESPONDENTS WITH AN UNFAVORABLE OPINON OF CHINA UNFAVORABLE 60

55 60

45 40

29 49

- -

TOTAL

COLLEGE COLLEGE GRAD+

NO COLLEGE NO COLLEGE DEGREE AGES 18 AGES 30

REP/LEAN REP/LEAN REP AGES 50+ 25 DEM/LEAN DEM 0

SOURCE: PEW RESEARCH CENTER

The most important risk on the calendar is May 15, when the US Department of Commerce must decide whether to extend Huawei’s Temporary General License for US exporters. We outline a set of policies, their probabilities, and likely market impact, in the diagram below.

Some Low Conviction Musings on Potential US Policies Against China

The view that bashing China is good politics is correct but must be nuanced by political constraints. Trump is not out of this race. His polling relative to Biden is better at this point in the race than against Clinton in 2016! Meanwhile, the median voter is stressed about tariffs.

Trump Is Not Sinking Against Biden… … And Thus Has Too Much to Lose By Going Nuclear

% 90 54% 2020 US ELECTION POLL BIDEN HOW CONCERNED ARE YOU ABOUT THE 52% TRUMP IMPACT OF RECENT TRADE POLICIES AND 50% 80 TARIFFS ON YOUR HOUSEHOLD EXPENSES?

48% CONCERNED NOT AT ALL CONCERNED 46% Biden has a 70 44% lead of 6%

42% 60 40% 2019-09 2019-12 2020-03 2020-06 2020-09

50 52% 2016 US ELECTION POLL CLINTON 50% TRUMP 40 48%

46% Clinton had 44% a lead of 30 7% 42% © CLOCKTOWER 2020 40% 20 © CLOCKTOWER 2020 2019-06 2019-09 2019-12 2020-03 38% 2015-09 2015-12 2016-03 2016-06 2016-09 SOURCE: CIVIC SCIENCE SOURCE: REALCLEARPOLITICS

For the first time in US history, the VP nomination is market relevant. Given Biden’s age and general weakness from a party leadership perspective, the VP is likely to matter for policy. Right now, the market is ignoring the possibility of a progressive pick.

The Market Is Giving Warren Low Odds of Becoming the VP Nominee

100% WHO WILL WIN THE 2020 DEMOCRATIC VICE PRESIDENTIAL NOMINATION 90% PROGRESSIVE* 80% ESTABLISHMENT**

70%

60%

50%

40%

30%

20%

10%

© CLOCKTOWER 2020 0% 31-Jan 10-Feb 20-Feb 1-Mar 11-Mar 21-Mar 31-Mar 10-Apr 20-Apr * INCLUDES WARREN AND ABRAMS ** INCLUDES HARRIS, KLOBUCHAR, CORTEZ MASTO, OBAMA, WHITMER, CLINTON, DEMINGS, DUCKWORTH, BALDWIN, GRISHAM, AND RICE SOURCE: PREDICTIT

Our low conviction forecast for the US GDP hole left by COVID-19 is somewhere between the ~4% (expected by pre-COVID-19 studies of the economic impact of pandemic) and ~11% (based on assumption of opening of most states by mid-June and the Chinese pattern of recovery).

Academic and IO Research Predicts 4-5% GDP Growth Hit 7% IMPACT ON GLOBAL GDP: 1918 SPANISH FLU-TYPE 6% SARS-TYPE MILDER INFLUENZA 5%

0% © CLOCKTOWER 2020 The World Bank* US Homeland Security Verikios et al.*** Lowy Institute**** Council** © CLOCKTOWER© CLOCKTOWER 2020 2020 *SOURCE: JONAS, OLGA B. PANDEMIC RISK, THE WORLD BANK (OCTOBER, 2013) **HOMELAND SECURITY COUNCIL, NATIONAL STRATEGY FOR PANDEMIC INFLUENZA: IMPLEMENTATION PLAN (MAY 2006) ***SOURCE: VERIKIOS, GEORGE ET AL. THE GLOBAL ECONOMIC EFFECTS OF PANDEMIC INFLUENZA, CENTRE OF POLICYSTUDIES/IMPACT CENTRE WORKING PAPERS (JUNE 2011) ****MCKIBBIN AND SIDORENKO, GLOBAL MACROECONOMIC CONSEQUENCE OF PANDEMIC INFLUENZA, LOWY INSTITUTE FOR INTERNATIONAL POLICY (FEBURARY 2006). NOTE: US ONLY, NOT GLOBAL GDP FIGURES

However, we expect that the US Congress will pass at least another $1 trillion (4.7% of GDP) of stimulus by the end of June. It may be as much as another $2.5 trillion (11.7% of GDP). Even just $1 trillion of additional spending would narrow the 2020 GDP loss to less than -2% of GDP.

The US Stimulus Could Be Much Higher – 2020 GDP Print Could Be… Flat Potential GDP Impact of US Fiscal Stimulus

Spending multiplier* under

Scenario 1 Scenario 2 Scenario 3 Scenario 4

0.71 0.67 0.64 0.62

$2.1 trillion*** 7.0% 6.6% 6.3% 6.1%

Nominal size of discretionary $3.1 trillion**** 10.3% 9.7% 9.3% 9.0% fiscal stimulus**

$3.6 trillion***** 11.9% 11.3% 10.8% 10.4%

*Spending multiplier is calculated based on the yoy growth of money velocity and the assumption that the multiplier equals 0.8 in a normal recession. ** Excluding loan guarantees *** Phase 3 and 4 (as of April 22) **** Phase 3, 4, 5 (potentially by the end of May) ***** Phase 3, 4, 5, 6 (potentially by the end of August) Note: the numbers in the white area show how much GDP the fiscal stimulus is able to generate under different assumptions of money velocity and different size of fiscal packages. SOURCE: CLOCKTOWER CALCULATION

The fulcrum variable to monitor in order to get the policy move right is the median voter. The median voter favors a dramatic policy response. The stimulus is a feature of America’s evolution away from the Washington Consensus and towards the Buenos Aires Consensus.

40% Americans Supported Socialism pre-COVID! The Tea-Party Is Dead % 80 % U.S.: US: FAVORABLE VIEW OF OPINION POLL REGARDING STIMULUS 70 CAPITALISM 100 SUPPORT OPPOSITION SOCIALISM 60 80

60 40

30 40

20 20

10 0 © CLOCKTOWER 2020 TOTAL REPUBLICAN/ DEMOCRATIC/ TOTAL REPUBLICAN/ DEMOCRATIC/ 0 LEAN REP LEAN DEM LEAN REP LEAN DEM OVERALL 18-29 30-49 50-64 65+ COVID STIMULUS 2009 STIMULUS

SOURCE: GALLUP (2018). SOURCE: PEW RESEARCH. © CLOCKTOWER 2020

The current Zeitgeist of the median voter is to favor massive fiscal stimulus. As such, the view that central banks are “out of bullets” is massively wrong. The median voter is the price maker in the political marketplace. The politician is a price taker.

Fiscal Prudence, Fiscal Schmrudence Give the People What They Want!

US: OPINION POLL ON STIMULUS MEASURES STRONGLY SUPPORT SOMEWHAT SUPPORT DON'T KNOW SOMEWHAT OPPOSE STRONGLY OPPOSE

CANCELLATION OF ALL STUDENT DEBT

$2000/MONTH CASH PAYMENTS

EXPANDING MEDICARE TO LAID OFF AMERICANS

FREE COVID-19 HEALTH COVERAGE

UNIVERSAL PAID SICK, FAMILY, AND MEDICAL LEAVE

HALTING EVICTIONS, FORECLOSURES, AND UTILITY SHUT OFFS

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% © CLOCKTOWER 2020 DATA AS OF APRIL 2, 2020. SOURCE: DATA FOR PROGRESS.

We think that the US fiscal stimulus will likely be around 20% of GDP. This would be four times larger than the 2009 ARRA package. Globally, we expect around 10% of global GDP, five times larger than in 2008/2009. Great Depression? No way.

Why Was the Great Depression Great? Learn History, Not Economics

% % For All Panels: Great Depression 12 U.S.: Contributions To Percent Change In Real Gross Domestic Product 3 Government Consumption Expenditures And Gross Investment 8

1 0

0 -4

-1 -8

© CLOCKTOWER 2020 © CLOCKTOWER 2020 -12 -2 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 1930 1932 1934 1936 1938 1940 NOTE: SHADED AREA DENOTES NBER-DESIGNATED NOTE: DATA UP TO 1947 SHOWN ANNUAL. DATA SINCE 1947 SHOWN AS A 1-YEAR MOVING AVERAGE. WW2 RECESSIONS. DATA SHOWN TRUNCATED AT -10 AND 10. SHADED AREA DENOTES NBER-DESIGNATED RECESSIONS. SOURCE: BEA.

The stringent lockdown policies have resulted in a total collapse of the Chinese economic activity, with GDP, retail sales, and investment all dropping to record lows. How China recovers from its downturn will tell us much about what to expect for US and DM.

Extrapolate Chinese Data… … To What Will Happen in the US 20 Ann % Chg Ann % Chg 40 60 CHINA GDP GROWTH (IN %) 50 15 30

20 10 30

10 20 5

10 0

0 0 -10 CHINA:

RETAIL SALES (LS) -10 -5 FIXED ASSET INVESTMENT (RS) -20 -20

SOURCE: WIND SOURCE: WIND

Unemployment is surging due to domestic economic malaise and the collapse of external demand. The current employment situation is worse than the peak of the 2008 Global Financial Crisis and the peak of the US-China trade war.

Extrapolate Chinese Data… … To What Will Happen in the US % 6.30

6.10 CHINA: URBAN UNEMPLOYMENT RATE 5.90

5.70

5.50

5.30

5.10

4.90

4.70

A second, major outbreak in China is unlikely as the government has maintained many draconian measures, including aggressive contact tracing, testing, and severe reduction in international flights. The West is not applying the same level of stringency.

China Has Defeated the Outbreak… … Small Surges in Cases Are Dealt With Efficiently

6,000 90

14,109 due to DAILY CASES: DAILY CASES: 80 one-time CHINA NATIONWIDE HEILONGJIANG PROVINCE 5,000 adjustment 70

4,000 60

50 3,000 40

2,000 30

20 1,000 10

Government policies to stem a second outbreak are weighing on the economic recovery. While the industrial and construction sectors have largely returned to normal, the service sector continue to suffer given the changes in consumer behavior.

Chinese Recovery Has Been Relatively Muted 180% ACTIVITY AS % OF 2019 Q1 LEVELS 2/9/2020 (FIRST DAY AFTER EXTENDED SPRING FESTIVAL, 5-DAY MOVING AVERAGE) 160% 3/6/2020 (FIRST DAY WHEN DAILY COVID-19 CASES FELL BELOW 100, 5-DAY MOVING AVERAGE) 4/30/2020, 5-DAY MOVING AVERAGE 140%

120%

100%

80%

60%

40%

20%

© CLOCKTOWER 2020 0% REBAR BLAST PROPERTY COAL SUBWAY AUTO RAILYWAY AIRLINE BOX OFFICE PRODUCTION FURNACE SALES CONSUMPTION TRAFFIC SALES PASSENGER PASSENGER SALES UTILIZATION VOLUME VOLUME SOURCE: WIND, CLOCKTOWER CALCULATION

From high frequency data and conversations with our onshore manager network, we believe that the Chinese economy is running at 75% level. It is very likely that further recovery will be gradual. Policymakers have staked their reputation on handling the outbreak.

Aggregate Economic Output Is Just At 75% of Pre-COVID Levels

% CHINA: AGGREGATED DEMAND TRACKER (DEMAND AS A % OF LAST YEAR)

AGGREGATE CONSUMER STAPLES (FOOD & BEVERAGE) UPSTREAM (COMMODITY & ENERGY) MIDSTREAM (PRODUCTION ACTIVITIES) 140 CONSUMER DISCRETIONARY FOOD PRICES (PROTEIN & GRAINS)

100

SOURCE: GOLDMAN SACHS GLOBAL INVESTMENT RESEARCH, GAO HUA SECURITIES RESEARCH.

Based on the stock performance since the reopening of the economy, consumer staples and healthcare are the two sectors that are having the best rebound. This Chinese experience should be applicable to other countries.

Defensive Sectors Have Outperformed

% 25 STOCK PERFORMANCE SINCE THE CHINESE SPRING FESTIVAL BY INDUSTRY 20

-5

-10

SOURCE: MACROBOND, CSI

Policymakers feel unrushed to surge fiscal spending and credit. As such, Chinese experience is diametrically opposed to the American. Beijing is also cautious on relevering Chinese consumers, given high level of private sector debt in the system.

China Is a Laggard on Fiscal This Time Around… … As It Faces Its Own Debt Supercycle Limits % of GDP 20 FISCAL STIMULUS COMPARISON 18 2009 16 2020

Instead of expanding credit via banks, policymakers prefer to utilize capital markets, especially the equity market to fund economic recovery. Land reform is being accelerated to stabilize property investment while keeping housing prices in check through increased land supply.

China Intends to Use the Equity Market to Recapitalize While Expanding Land Supply % of GDP In ratio 20 CHINA: CHINA: 200 FINANCIAL ASSETS AS % OF GDP 18 WEALTH GAP BETWEEN 2007 URBAN AND RURAL AREAS (RURAL REBASED TO 1) 2018 16 URBAN 14 RURAL 150

100 8

4 50

0 © CLOCKTOWER 2020 © CLOCKTOWER 2020 PER CAPITA WEALTH* LAND PRICE** 0 BANK LOANS BONDS EQUITIES * SOURCE: CHINA ECONOMIC DAILY, 2018 CHINESE HOUSEHOLD WEALTH SURVEY. SOURCE: PBOC **SOURCE: WIND, CENTRAL POLICY RESEARCH OFFICE

What happens in China will ultimately determine the trajectory of global assets, including the DXY, commodities, and high-beta plays like Europe and EM assets. EM fiscal stimulus matters for the performance of EM assets. But so does Chinese stimulus.

EM Responds to Domestic Fiscal Stimulus… … But Also to the Chinese/Global

The four post-WWII macro paradigms that we have identified are Hydrogen (high growth, high inflation), Goldilocks (high growth, low inflation), Secular Stagnation (low growth, low inflation), and Stagflation (low growth, high inflation). Enjoy Goldilocks/Hydrogen while it lasts.

Now We Know How This Cycle Ends

SOURCE: FRED, CLOCKTOWER CALCULATION

Even if Biden defeats Trump, we still expect US policies to move to the left, given that the median voter is increasingly rejecting laissez-faire policies. This marginal move towards more left-leaning policies will set in motion a decade of carnage for US equities.

The Youth Is Ready to Revel The US Will Move to the “Left”

30% LEFT-RIGHT NET WORTH OF PEOPLE UNDER 35 AS A % OF ECONOMIC INDEX IN 2019* NET WORTH OF PEOPLE BETWEEN 65-74 25%

20%

SPAIN ITALY FRANCE GERMANY U.K. U.S. 15%

-2.0 -1.0 0.0 1.0 2.0 SWEDEN 10% LEFT WING RIGHT WING

© CLOCKTOWER 2020 © CLOCKTOWER 2020 0% * CALCULATED AS AN EQUAL-WEIGHTED INDEX OF 5 STANDARDIZED 1962 1983 1989 1998 2007 2016 COMPONENTS: LABOR PROTECTION INDEX, GOVERNMENT REVENUE AS A NOTE: DATA AFTER 1989 (INCLUDE 1989) CAME FROM THE 2016 FED PERCENT OF GDP, ALL-IN AVERAGE INCOME TAX RATE AT AVERAGE WAGE, SURVEY OF CONSUMER FINANCE. DATA USED ARE MEAN VALUE OF REDISTRIBUTION EFFECT ON GINI COEFFICIENT, AND EASE OF DOING NET WORTH FOR FAMILIES WITH HOLDINGS BY AGE OF HEAD. 1983 DATA CAME FROM THE 1983 FED SURVEY OF CONSUMER FINANCE. BUSINESS RANKING. DATA USED ARE MEAN VALUE SOURCE: OECD, WORLD BANK, BCA RESEARCH, CLOCKTOWER CALCULATION

Political pressures in the US have already seen the median voter move to the left. Domestic policy will turn starkly anti-business, leading to the reversal of a decade-long trend that has favored corporates over labor. De-globalization and supply-chain concerns will aid labor.

What Is Unsustainable Will Stop

Vice President Biden is already campaigning on a more left-leaning platform than President Obama. He has, for example, called for taxing capital gains and dividends at the top marginal income level. We expect higher taxes on individuals and corporations going forward.

Alexandria Ocasio Cortez Will Get What She Wants

% TOP MARGINAL INCOME TAX RATE: FRANCE 100 GERMANY UK US

SOURCE: CAPITAL IN THE 21ST CENTURY, T. PIKETTY, 2014 UNTIL 2003, AND KPMG FROM 2003 TO PRESENT.

It is a good exercise to remind ourselves how equities performed in a populist, inflationary, environment. Like the 1960s, we are experiencing high levels of deficit spending, entitlement expansion, and public strife. What followed that era was the 1970s.

Is the Next Cycle Going to be Terrible for US Equities?

Well… what about them? Higher inflation is a great equalizer that will resolve both income inequality (mainly by making savers poorer) and high debt levels. Democracy is inflationary. We are about to see why.

Give the People What They Want!

80000

U.K.: Era of LONG-TERM CONSUMER PRICE INDEX* universal suffrage

8000

800

Mo' votes, Mo' money, Mo' problems

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