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Morning Cents: June 16, 2020

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June 16, 2020 – The Federal Reserve gets ready to spend, Apple’s antitrust troubles and Trump’s massive infrastructure proposal.

Today’s newsletter is 1,143 words, a 6-minute read. Let’s get to it:

Fed’s Corporate Bonds Spending Spree Starts Today

The Federal Reserve announced updates to the Secondary Market Corporate Credit Facility (SMCCF) Monday, saying it will begin buying a broad and diversified portfolio of corporate bonds. The move comes 85 days after the Fed first unveiled the purchase policy. So far, the Fed has spent $5.5 billion on ETF purchases.

Why It Matters

It’s all part of the path to economic recovery.

The Fed launched the SMCCF as an emergency reaction to improve market function in the wake of the coronavirus pandemic — setting a floor for risk assets, assisting valuations in rebounding from pandemic-induced lows, improving market liquidity and enhancing the availability of credit for large employers. And the market’s upward swing following the announcement represents the kind of confidence a move like this can instill in investors.

The U.S. central bank also opened its “Main Street Lending Program” Monday, according to Markets Insider. The move offers banks the opportunity to apply for loans to eligible small- and medium-sized businesses.

Numbers to Consider

  • $250 Billion – How much in bonds the Fed plans to take in from eligible issuers. The Fed can also tap an additional $25 billion in funding, thanks to the CARES Act.
  • $500 Billion – The Fed’s debt buying capability once its Primary Market Corporate Credit Facility is operational.
  • 95 Percent – The share of loans the Boston Fed will start buying through the Main Street program.

Dive Deeper: (MARKETS INSIDER) (REUTERS)

European Union Opens Competition Probe into Apple

Oh boy. Apple’s got some heat on its tail.

The tech giant is now under formal investigation by antitrust regulators in the European Union. Turn out Apple’s rivals, including Spotify, have been dissatisfied with the alleged rules Apple uses to restricts developers within the App Store. The EU has also received complaints saying Apple has abused its control over Apple Pay.

Why It Matters

Well, any antitrust violation isn’t good. It’s not cheating per se, but if the allegations are true, Apple’s been significantly distorting the playing field. If found guilty, Apple could “face a fine of up to 10% of its annual revenue and be forced to adjust its business practices,” according to The Wall Street Journal. Apple defended its practices and denied it was hurting its rivals.

This marks Apple’s second battle with the EU. In 2016, Apple was forced to pay Ireland a massive sum in back taxes, at the direction of EU Competition Commissioner Margrethe Vestager.

Numbers to Consider

  • 30 Percent – The cut Apple takes from the App Store, a practice heavily criticized by its rivals.
  • $14.7 Billion – The tax benefits Apple had to pay back to Ireland in 2016.
  • $1.2 Billion – How much Apple was recently fined by French competition regulators.

Dive Deeper: (TECH CRUNCH) (WALL STREET JOURNAL)

Trump Team Weighs $1 Trillion for Infrastructure to Spur Economy

In a move to try and jumpstart the U.S. Economy, the Trump administration is working on an almost $1 trillion infrastructure proposal. Most of the money would be reserved for traditional infrastructure work and expanding 5G wireless capabilities.

Why It Matters

According to Bloomberg, sources close to the proposal say this is a chance to push a broader package after an existing U.S. infrastructure law expires in September. It’s the most recent sign of government momentum toward infrastructure spending.

The real play here is all about Election 2020. If President Trump can rev up the coronavirus-ravaged economy, it could be a big boost to his chance of returning for a second term. He currently trails Democratic nominee Joe Biden in most national polls, but an emphasis on growth-fostering initiatives, such as infrastructure spending, could improve Trump’s re-election efforts.

It’s important to remember Trump called for similar policies during his last presidential campaign. And when the economy faltered in March, he “urged as much as $2 trillion in new investment in U.S. roads, bridges and tunnels.”

Obviously, the government has to figure out how to pay for a proposal like this, or any other economically soothing measure in the wake of the pandemic for that matter. But with interest rates near zero, additional spending government spending is more feasible.

“Now is an especially good time to take on this type of debt,” said Mary C. Daly, president of the Federal Reserve Bank of San Francisco, according to Bloomberg. “Even before the crisis, we were in an environment of low-interest rates – and that is expected to continue for the foreseeable future. This makes public spending relatively cheap and easy to finance.”

Numbers to Consider

  • Sept. 30 – When the FAST Act expires, opening a window to pass a broader spending policy.
  • $305 Billion – The funding authorized by the FAST Act, which operated over the last five years.
  • $500 Billion – The amount of funding levied to infrastructure in the Democrats’ plan, also unveiled this month.

Full Story: (BLOOMBERG)

A Quick Look

Oil Demand Is Headed for Record Rebound in 2021

  1. While the International Energy Agency said the world’s demand for crude will drop by 8.1 million barrels a day this year, demand in 2021 is projected to rebound by a record 5.7 million barrels a day.
  2. With the worst effects of lockdown now in the past, the IEA cited French Observatory of Economic Conjunctures data showing a 27 percent drop in global value-added transport, half of the worldwide oil demand, during the quarantine. Manufacturing, which is about a quarter of the world’s energy demand, took a 30 percent hit.

Full Story: (WALL STREET JOURNAL)

Worth Your Time

No More Emergency Authorization: After previously issuing an emergency use authorization, the U.S. Food and Drug Administration has reversed course on chloroquine and hydroxychloroquine. The hope was the malaria/rheumatoid arthritis drugs would be effective against Covid-19. Now, conflicting studies poke too many holes in the drug’s effectiveness. (LINK – TECH CRUNCH)

Inflation is Coming: Investors are convinced inflation will remain subdued and they assumed the same thing in 2009. But the political landscape has shifted significantly in the last decade, and many governments have found ways to create money without central-bank help. As a result, a new inflationary era might be on the way. (LINK – WALL STREET JOURNAL)

Testing is Still Key: San Francisco-based health technology firm Color released the results after testing more than 30,000 people for Covid-19. Most individuals who came up positive displayed either mild or no symptoms. The results are reinforcement that the key to any true recovery program is widespread testing. (LINK – TECH CRUNCH)

A Couple Cents Content

In case you missed it, tune in to Justin Oh’s conversation with Hindon CEO Noah Krimm (YOUTUBE)

Read my eight thoughts on Shopify’s skyrocketing trajectory (POST)

Dive in as Austin Hankwitz’s recaps the most common questions he gets from investors (POST) and why he’s buying FMCI (POST)

Watch Justin Oh return to the FYP page and explain how to solve a Rubik’s Cube (TIK TOK)

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See you tomorrow!

— Justin Birnbaum

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