MIKE TOWNSEND: Memorial Day weekend seemed to mark a kind of turning point in the country’s battle against the coronavirus pandemic, with some parts of the country reopening—with varying degrees of aggressiveness—and other areas remaining shuttered. Images of beaches crowded with sunbathers and swimmers in some states contrasted with empty public spaces in other parts of the nation.
Here in the nation’s capital, the stay-at-home order remains in effect, as the greater Washington, D.C., metro area is still one of the nation’s hotspots for the virus. Yet work continues in Congress on the next emergency spending bill. Work continues at the regulatory agencies to make sure the markets operate efficiently. And work continues at the Federal Reserve to stand up new programs to support the economy.
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to help investors sift through the avalanche of news and information to better understand how what happens in D.C., including the government’s response efforts to this unprecedented crisis, is affecting the markets.
On today’s episode, I’ll be exploring the prospects for the next big coronavirus aid package in Congress. The House of Representatives passed the HEROES Act, a $3 trillion relief bill, earlier this month, but Senate Republicans have said the bill is dead on arrival in that chamber. A compromise will happen eventually, but what will that look like, and when will it happen? I’ll discuss that in just a few minutes.
But first, let’s take a look at the other stories making news right now.
After three consecutive weeks of being in session in Washington, the Senate is in recess this week. But the House of Representatives, which has seen the full chamber meet in Washington for just three one-day sessions over the past two months, will be in session for two days this week to conduct regular business.
The session is particularly notable because it will be the first time the House has employed its brand new proxy voting rules. These rules were approved on a party-line vote on May 15. They allow any member who does not want to travel back to Washington, D.C., to designate a proxy to cast votes on his or her behalf.
Members wishing to use the new rule submitted letters to the Clerk of the House designating the member who will be voting their proxy. As of the evening of May 26, 59 House members have filed such letters, while more could still opt to do so, meaning that at least 59 members are opting not to travel to Washington this week.
Now this is the first time this has been allowed in the House, and it will be interesting to see the reaction of constituents and the media in the home districts of those members who have chosen not to travel to the Capitol for this week’s votes. Will they be praised for making a sensible health choice, or criticized for shirking their duties to be involved in shaping public policy in the nation’s capital?
This is uncharted territory for House members. The new rules also allow members to participate in committee activities, including hearings and votes on legislation, remotely. If that works well, and if lawmakers get comfortable with missing out on voting in person, we could see the House operating with a significantly diminished number of elected representatives in Washington in the weeks ahead.
In terms of the substance of the House’s work this week, one expected vote stands out. Lawmakers are scheduled to vote on a bill that would change some of the rules of the Paycheck Protection Program, the small-business loan program that was a key element of the CARES Act.
The Paycheck Protection Program’s rules have been a subject of intense discussion in the last few weeks. The original wording of the program, which was launched April 3, allowed businesses with 500 or fewer employees to apply for a forgivable loan as long as they used 75% of the loan amount to keep employees on the payroll.
But the requirement has turned out to hamstring some businesses if their other fixed costs, like rent and utilities, were greater than 25% of the loan amount they received. Some small businesses are finding that they have to close because they can’t pay the rent, and the assistance isn’t enough to help them.
Another issue is that the program was designed to provide two months’ worth of assistance—and for some early recipients, that two months is expiring as soon as next week. But many businesses are not yet allowed to re-open, so the money will run out before they can get back to business. The bill would extend the amount of time businesses that received loans have to put that money to use. Moreover, the entire program is set to close down to new applications at the end of June—the legislation would extend the program to the end of the year, allowing more time for businesses that haven’t even applied for assistance yet to do so.
Pretty much everyone in Washington realizes that fixes are needed—Treasury Secretary Steven Mnuchin said as much in testimony before the Senate Banking Committee last week. Expect a bill easing the rules to pass the House this week and then be considered in the Senate as soon as next week. Whether the changes can be implemented in time to help struggling small businesses remains to be seen.
One of the reasons for the urgent action to bolster the program is the dramatic slowdown in loans in recent weeks. When the program was first created in April, it was overwhelmed with loan applications, and it blew through the entire $349 billion that Congress had allocated to it in just 13 days.
Congress quickly passed legislation to allocate an additional $320 billion to the program, and it restarted in late April. Since then, however, only about $200 billion of that second round of funding has been loaned—a startling slowdown that is worrying policymakers in Washington. One part of the explanation is positive—the average loan size has decreased from $206,000 in the first round to about $70,000 in the second round, meaning that the smaller businesses are getting the aid they need.
But there are worrisome interpretations of the slowdown in loan output. There are concerns that many small businesses just gave up—either because the program was too complicated or because the rules only delayed for a couple of months the inevitable permanent shuttering of these businesses. The hope is that the easing of some of the original restrictions will result in a surge of applications by small companies that could survive with a more flexible program.
Meanwhile, there’s great interest in another program that is about to launch in Washington to help businesses. One of the new programs being created by the Federal Reserve is called the Main Street Lending Program. It’s designed to provide as much as $600 billion in credit for mid-sized businesses, with anywhere from 500 to 15,000 employees.
Members of Congress and business owners have been eager to see the program launched, and Fed Chairman Jerome Powell testified last week that he expected the program to be running by next week.
Because there are many publicly traded companies in this mid-size range, investors should watch how the program unfolds, because it could be a key lifeline for some struggling businesses.
Elsewhere, another issue that investors are asking about is a fast-moving bill that could force some Chinese companies listed on American stock exchanges to delist if they don’t increase the transparency of their financial records.
The bill would require companies to certify that they are not controlled by a foreign government. If U.S. financial regulators cannot review a company’s financial audits for three consecutive years, the company would be banned from trading on the New York Stock Exchange, the Nasdaq, or any other U.S.-based exchange. The bill was approved unanimously by the Senate last week and has now been introduced in the House of Representatives.
Last week, House Speaker Nancy Pelosi said that the appropriate committees in the chamber would review the bill and decide whether to move it to the House floor for a vote. But she did not commit to a timeline.
With the House planning to be in town this week, action could come quickly if the bill picks up momentum in that chamber. The chairman of a key House subcommittee said that the bill may need some technical fixes to win his support, and he indicated it may be a month or two before the bill is finalized.
The issue has been simmering for years, as some policymakers in Washington have complained that Chinese companies listing on American stock exchanges are getting special rules, since the transparency of financial records, including audits, is a core elements of U.S. accounting rules.
But the speed with which this issue arose in recent weeks is seen as directly related to the rising tensions between the U.S. and China over China’s role in the coronavirus outbreak.
Investors who hold shares of Chinese companies should keep an eye on the bill, but there’s an important factor to be aware of—even if the bill passes Congress, it will be multiple years before a Chinese company could actually be delisted for failure to comply. That’s because the bill would first require a new SEC rule to be written, and the rule-making process, which involves a public comment period, is not a quick one. And even then, any regulation would be forward-looking, so it would take three years of a company failing to submit an audit for that company to actually be threatened with delisting. Still, the sudden interest in the topic is indicative of the rising tensions between the two countries.
On my Deeper Dive this week, I want to provide an update on the development of the next round of coronavirus aid in Congress—what that might look like and when it could happen.
The House of Representatives passed its proposal, the Health and Economic Recovery Omnibus Emergency Solutions Act, better known by its much simpler acronym as the HEROES Act, on May 15. But this bill has a huge fundamental difference from the first four aid packages that were approved by Congress in March and April. Those bills, including the $2.2 trillion CARES Act, were negotiated in a bipartisan manner, and all four were approved by both the House and Senate by unanimous or near-unanimous votes.
This time around, however, Democrats in the House went it alone. The HEROES Act was drafted without input from the other party, and, in the end, just a single Republican voted for the bill in the House. The bill was narrowly approved by a 208-199 vote. Fourteen Democrats voted against it.
The centerpiece of the bill is a massive influx of aid to state and local governments—about $900 billion. As we talked about on the last episode of this podcast, state and local budgets are coming under increasing pressure, with budget shortfalls running into the billions of dollars and tough decisions around the trimming of services and the laying off of government employees becoming more and more frequent. The HEROES Act aims to alleviate some of that pressure.
The bill also includes another round of payments directly to low- and middle-income taxpayers, similar to April’s round of stimulus payments. The payments would amount to $1,200 per adult, but one change from the last round is that the bill would increase the per-child payment from the $500 that was in the April payments to $1,200 per child for up to three children.
The HEROES Act includes a host of other provisions, including a $200 billion fund for hazard pay for front-line workers; $175 billion to help people struggling with payments for rent, mortgages, and utilities; $100 billion for hospitals and an additional $75 billion for coronavirus testing; $25 billion to support the Postal Service; money for nutrition programs; money to help students with their student loan payments; and much more.
While the bill did pass the House, even Speaker Nancy Pelosi acknowledged that it was just a “starting point” for negotiations with the Senate. But Senate leaders have not even begun discussions internally, let alone with the other party, on what a bill would look like.
So what’s behind the delay in the Senate? Most Republicans, including Senate Majority Leader Mitch McConnell, have said that a further aid bill is necessary and will get approved eventually.
But many Republicans senators have suggested that much of the money that was allocated in the CARES Act has not yet made it out into the economy. And there is some truth to that. For example, while the IRS raced to get more than 130 million of those $1,200 stimulus payments out to Americans who qualify, there are still an estimated 30-40 million taxpayers who are waiting for their checks.
And many of the large programs that Congress authorized the Treasury to work with the Federal Reserve on are still getting up and going. As I mentioned earlier, for example, the Main Street Lending Program for mid-sized businesses has not even begun operations yet.
Republicans are also split from Democrats on a fundamental question underlying the next round of aid—should it be focused entirely on the immediate crisis, or should it include some forward-looking initiatives that would help stimulate the economy. An example of this would be investments in infrastructure, which many Republicans are saying should be a core element of the next bill.
Now infrastructure is actually an issue on which both sides generally agree—pretty much everyone in Washington knows that major investments in roads, bridges, tunnels, ports, broadband access, and the like—those were needed long before the pandemic. And both sides agree that infrastructure spending could help jumpstart the economy by getting people back to work. Many of these jobs are outside, where it is easier to social distance and avoid spreading the virus—which is another appeal of spending now.
But Democrats argue that should wait for another bill later this summer, that the need to get emergency aid out to address the immediate situation should be the top priority.
So what could an eventual compromise look like? Many Senate Republicans have said they support aid to state and local governments—that’s the top goal of Democrats. It is unlikely that Republicans will agree to the number that Democrats set out in the HEROES Act of nearly $900 billion, but a lower number is likely to be a centerpiece of a deal.
Republicans have said their highest priority is providing some kind of liability protection for businesses, something that would allow a business to know that if it followed certain protocols and standards for re-opening, it would not be subject to lawsuits if an employee contracted the virus.
Now this is an area that Democrats tends to object to, but Republicans have said it is critical to their support. A narrowly written provision along these lines, balanced with significant aid for state and local governments, that would allow both parties to claim victory on their highest priority and could form the basis of a deal between the two parties.
The final tussle will come over the size of the package. The HEROES Act has a price tag of about $3 trillion. Senate leaders have expressed hope of keeping the bill under $1 trillion. As with much in Congress, there’s probably a happy medium. So don’t be surprised if the final deal ends up to be around $1.5 to $2 trillion.
My sense is that a deal will get done—but it will probably take most of the month of June to reach consensus. But I’ll go on the record now to say I’ll be surprised if we get to July 4 without another major round of emergency aid being signed into law by the president.
For my Election 2020 update, the next couple of weeks are shaping up to be critical ones for the two parties to make decisions about whether they can hold their national conventions at the end of the summer. Democrats, who were originally supposed to hold their convention in Milwaukee in mid-July, moved the convention to the week of August 17. And Republicans are scheduled to hold their convention in Charlotte, North Carolina, during the week of August 24.
The political conventions typically bring 10 to 15 thousand delegates, party leaders, activists, and media members together for four days of speeches, rallies, debates over party platforms, and parties. While there are formal processes of determining the party platforms and for the accepting of the nominations for vice president and president, the days of any drama in actually choosing the nominee at the convention are decades in the past. While they have become little more than messaging platforms for the two parties heading into the fall election season, conventions remain an important part of the political tradition of the country.
But the fundamental question of holding a political convention—of gathering 10 to 15,000 people for four days inside a basketball arena—well, that question is about to come to a head.
The internal debates over how to proceed are becoming in some ways a microcosm of how the two parties are approaching the broader issues of reopening the economy in the face of the ongoing pandemic.
For Democrats, signs are pointing towards a move to a “virtual” convention that limits the number of people actually gathering in Milwaukee.
But Republicans have been pushing to hold a full in-person convention in Charlotte—something the governor of North Carolina has been saying would violate the state’s current prohibition on mass gatherings, a stance that he’s becoming increasingly outspoken about. In recent days, President Trump has threatened to pull the convention from Charlotte and take it somewhere else, somewhere where the party would be allowed to gather that many people in one place.
But the question is, will people come to such a convention if it is held?
It’s a test of wills that will likely have to be decided in the next few weeks.
Finally, on my Why It Matters section, I look at a story you may have missed and tell you why I think it is important. Today’s story has two parts, moving in opposite directions. The first is the reopening this week of the New York Stock Exchange’s trading floor. And the second was an announcement last week by the SEC that its employees will continue working remotely until at least mid-July.
The New York Stock Exchange closed its iconic trading floor in March and has been operating as an all-electronic exchange since then. This week, about a quarter of the traders are returning to the floor under strict protocols that include daily temperature checks, strictly enforced social distancing, required mask wearing, and a ban on taking public transportation to work, among other steps.
But the daily opening and closing bell-ringing ceremonies won’t return, nor will the financial reporters who discuss the news from the exchange floor.
And some firms have reportedly balked at sending personnel back to the trading floor, but a number of smaller brokerages that play an important role facilitating trades for large banks and asset managers, are expected to return.
The tough question is whether this is a necessary risk. The markets have generally been operating smoothly during the pandemic, with hundreds of thousands of industry employees working at home. And the days of the crowded and chaotic scenes of the trading floors are now years in the past, as the market is now almost entirely electronic. Whether the trading floor is open or closed matters little, perhaps not at all, to the average investor—our trades are executed electronically anyway.
Yet there is something important about the symbolism of the New York Stock Exchange trading floor reopening.
On the other hand, the SEC’s decision to keep the vast majority of its employees working from home for at least two more months, and perhaps longer, illustrates just how well this working-from-home thing is going. The chief regulator of the capital markets has determined that it can remain effective with its watchdogs working remotely.
To its credit, the SEC has been showing its ability to be a strong regulator from afar. It has been aggressively cracking down on fly-by-night companies trying to take advantage of the pandemic by engaging in fraud, particularly in the area of promising miracle cures or equipment that can aid in the fight against the virus. On the other side of the coin, it has eased some rules to allow flexibility for public companies in their reporting, and for things like holding board and shareholder meetings remotely.
So as the stock exchange trading floor opens, the SEC remains shuttered—but both seem to be finding a way to make sure that the markets are operating smoothly.
That’s all for this episode of WashingtonWise Investor. We’ll be back with a new episode in two weeks.
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For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.