A trader works on the floor of the New York Stock Exchange in New York City, March 10, 2020. (Andrew Kelly/Reuters)

There is more than a faint feeling of futility about writing this week’s Capital Letter (but read on, read on) given that something is happening on Tuesday that will (possibly) change if not everything, then quite a lot.

We also had the big economic news (the third quarter GDP number) yesterday, something we have already discussed in the Capital Note here.

As for the markets, well, the less said the better, but I’ll let (not for the first time) the Financial Times do the heavy lifting:

Global equities are on track for their worst week since the ructions in March, with Wall Street’s tech titans among the latest casualties in a sell-off attributed to caution over coronavirus and the US election.

Renewed virus-related lockdowns across much of Europe and the final stretch of the hotly contested US presidential campaign have contributed to an uptick in financial market volatility this week, with further losses on Friday.

The MSCI All World index of global equities fell 1.5 per cent, leaving it down 5.7 per cent since last Friday in its steepest weekly sell-off since concerns about coronavirus gripped markets in March.

And as I write (2:50 p.m: It’s been a busy day), the decline appears to be accelerating.


Stocks fell on Friday, led by major tech shares, as Wall Street wrapped up a difficult week in which coronavirus cases rose, U.S. fiscal stimulus talks broke down and traders braced for next week’s presidential election.

The Dow Jones Industrial Average traded 451 points lower, or 1.7%. The S&P 500 dipped 2.1% and the Nasdaq Composite pulled back 3.1%.

The Dow and S&P 500 are down 7.5% and 6.4%, respectively, for the week and were on track for their biggest weekly losses since March. The Nasdaq has lost more than 6% over that time period and was also headed for its worst one-week performance since March.

If the sell-off was partly due to the failure to agree a stimulus package before the election that says more about the eternally optimistic attitude of some investors than reality.

The Fed (already unhappy at the way things were not going) stepped up today (via the Wall Street Journal):

The Federal Reserve announced Friday its latest round of changes to boost participation in its $600 billion lending effort targeting small and midsize businesses amid difficulty by Congress and the White House in reaching agreement on a new round of relief measures.

The Main Street Lending Program, which is jointly run with the Treasury Department, has seen muted demand from borrowers and banks and is designed to encourage more lending to businesses that were in a solid financial condition before the coronavirus pandemic hit this year. Under the program, the Fed will purchase 95% of eligible loans made by banks.

Friday’s changes reduced, for the third time, the minimum loan amount under the program—to $100,000, from $250,000. The loan amounts had earlier been lowered from $1 million to $500,000 and then from $500,000 to $250,000.

The changes also revamped the fees banks can charge borrowers to encourage greater production of smaller loans. For loans below $250,000, the Fed will waive the 1 percentage point fee it collects, and it will allow banks to double to 2 percentage points the fees it charges borrowers to make these smaller loans.

I wonder if that is not also a signal that the Fed expects that the revival in the coronavirus will be accompanied by a revival in “hard” lockdowns, a method of dealing with the disease that seems set to be given a chance to fail again (please note that that snarky comment does not apply to the initial lockdowns designed, some readers may be old enough to remember, merely to “flatten the curve” and prevent health-care systems from being overwhelmed.) Smaller businesses have, of course, been disproportionately hurt by the lockdowns.

Back to CNBC:

Shares of Apple fell 5.5% after the tech giant reported a 20% decline in iPhone sales and failed to offer investors any guidance for the quarter ahead. Amazon dropped 4.8% even after the e-commerce giant reported blowout third-quarter results with a big beat on the top line.

Meanwhile, Twitter lost more than 15% after the social media company reported user growth that fell short of expectations. Facebook was off by 6.6% amid a surprise decline in active users in Canada and the U.S.

Shares of Alphabet bucked the negative trend for tech stocks, rising 4.1% after the Google parent company posted quarterly results that topped Wall Street expectations.

The rise in Google’s stock price suggests that investors are not too worried about the grotesque antitrust lawsuit launched by the Department of Justice (which will surely be accompanied by something similar from Washington’s co-belligerents in Brussels). That may be being too complacent, although typically antitrust cases take a long, long time to come to a conclusion.

The fall in the Amazon share price was also surprising. If what is driving the broader sell-off are the new surges in the coronavirus (on both sides of the Atlantic), Amazon, one of the disease’s “winners”, should be moving another leg up. Maybe growing concern about a tech bubble is beginning to weigh. Zoom (another pandemic winner) is, I note, off around 6 percent on the day.

Of course, one incentive for investors (beyond valuation) to take money off the table when it comes to their big winners is the prospect of significantly higher capital gains tax rates should Joe Biden prevail, something that is being discussed less than it should.

And unease over, not the result of the election, but electoral chaos has not gone away.

The Financial Times:

The Vix index, a measure of expected volatility in the US stock market over the next month, climbed to almost 40 on Friday, double its long-run average. Analysts say the increase in the so-called “fear gauge” reflects uncertainty over the outcome of next week’s presidential election.

“As election week approaches, markets are now focused on what could go wrong,” said Joyce Chang, global research chair at JPMorgan, in a note to the Wall Street bank’s clients.

And Walmart has not exactly calmed things down:

“The market has to prioritise its anxieties and right now it’s on overload,” added Quincy Krosby, chief market strategist at Prudential Financial. She pointed to Walmart’s decision on Thursday to remove guns and ammunition from sale as giving credence to concerns in the market that a contested election may lead to civil unrest.

“We could see pockets of civil disobedience. That has been feeding into an already jittery market,” Ms Krosby said.

Ruger, intriguingly, has been all over the place today, although is down around 3 percent as I write. Smith and Wesson has been selling off more consistently and has fallen by 6 percent.

Treasuries have also been struggling (relatively speaking).

The Wall Street Journal:

U.S. government yields climbed Friday, lifted toward monthly gains by expectations that government spending will boom after the election. The yield on the 10-year U.S. Treasury, a benchmark for borrowing costs on everything from mortgages to student debt, traded at a recent 0.853%, according to Tradeweb, up from 0.834% on Thursday.

Nevertheless, ten years at 0.853 percent is still, for anyone with memory longer than that of a mayfly, a remarkable number (as is the insulting yield I am getting on my “high yield” savings account), a reflection that leads me to this article by Liz McCormick for Bloomberg (my emphasis added):

Near zero rates for potentially a decade raise the specter of financial stability risks. Fund managers are once again predicting asset bubbles and stock “melt-ups,” a debased U.S. dollar and a destabilizing acceleration in inflation, reigniting a debate about the dark side of easy monetary policy that raged after the 2008 crisis. There is already evidence that some of the risks are materializing with investors now questioning the classic 60/40 asset allocation strategy amid concerns that holders of long-term Treasuries could be in store for major pain.

“The Fed is both the arsonist and fireman,” said James Athey, fund manager at Aberdeen Standard Investments, which oversees more than $500 billion. “It’s fixing the prices of the assets that would normally be used to express concern in the informed-investor community about what the Fed is doing.”

The Fed is “creating massive financial instability problems for the future,” Athey said.

Indeed it is. This isn’t going to end well.

On a cheerier note, we opened the week on Capital Matters with Sean Higgins writing about how:

A [Californian] state appeals court has ruled that app-based ride-sharing companies Uber and Lyft must comply with state law AB5 and classify all of their drivers as employees rather than contractors. The ruling raises the possibility that the companies will simply end operations in the state altogether, both having stated previously that their business model depends on the flexibility of using contractors.

Okay, perhaps not a cheerier note.

An ill-conceived law can cause great damage. A good example can be found in the case of AB5 itself. In addition to scaring off many employers who use contractors, the law reined in contract work generally, strictly limiting what even traditional freelancers like photographers or musicians could do. State lawmakers were forced to amend the law and carve out exemptions for numerous professions. That’s clear proof that they had overreached. Freelancers still claim it’s too restrictive.

It may yet get worse for Californians. If the state ballot’s Proposition 22 to roll back AB5 fails and the panel’s ruling stands, the companies have…

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