Daily Comment (August 20, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning on this August Friday.  Equity markets remain under pressure this morning as worries about the economy and monetary policy weigh on sentiment.  Our coverage begins with China, where regulatory conditions are changing fast and Taiwan is also in the headlines.  Up next is our update on Afghanistan.  Economics and policy are next as the FTC returns to tech and the rules for banks regarding gold are changing.  Our international roundup follows, and we close with pandemic coverage.

China:  The crackdown on tech and big business expands, and credit issues dominate.  Taiwan is also in the news.

STEPHANOPOULOS: You talked about our adversaries, China and Russia. You already see China telling Taiwan, “See? You can’t count on the Americans.” (LAUGH)

BIDEN: Sh– why wouldn’t China say that? Look, George, the idea that w– there’s a fundamental difference between– between Taiwan, South Korea, NATO. We are in a situation where they are in– entities we’ve made agreements with based on not a civil war they’re having on that island or in South Korea, but on an agreement where they have a unity government that, in fact, is trying to keep bad guys from doin’ bad things to them.

We have made– kept every commitment. We made a sacred commitment to Article Five that if in fact anyone were to invade or take action against our NATO allies, we would respond. Same with Japan, same with South Korea, same with– Taiwan. It’s not even comparable to talk about that.

Afghanistan:  Here is what we are following:

 Economics and policy:  The FTC returns, and Basel III hits gold.

  • The FTC has refiled its antitrust lawsuit against Facebook (FB, USD, 355.39), arguing its “buy or bury” strategy is designed to eliminate competition. This suit has already been rejected in Federal Court.  The FTC has added details in the new suit.
  • Here is one we missed earlier. International banking rules are conducted in Basel; they establish how much capital a bank must allocate to various assets it holds.  The most recent rules, Basel III, change how banks must allocate capital to their gold holdings.  Physical gold—bullion, coins, bars—now get a zero risk rating, meaning that if a bank holds that asset, it no longer needs to allocate capital to it; gold becomes like government bonds or cash.  This type of gold is called “allocated.”  Unallocated gold, which is gold represented “on paper” such as swaps, futures, ETFs, and forwards, now needs to have capital allocated to it.  For most investors, this probably won’t make an immediate difference, but it could, over time, prompt banks to buy more allocated gold and may widen the spread between bullion and unallocated products.  It will also make the market less efficient.  Now, banks will have to move actual bars instead of swapping paper promises.  The rules come into effect in January 2022.
  • The SEC looks open to approving bitcoin ETF products that are based on futures as opposed to actual bitcoin. There is a race by financial product firms to build these products.  A warning to investors—these products, common in commodity markets, have a number of issues.  First, there is the “roll yield” problem.  If the spread between contract months goes into contango, the investor can be disadvantaged.  Second, unless the product is sourced in the Caribbean, it will generate a K-1.  Third, firms often use exchange-traded notes for these sorts of products because it is easier to keep the spread between the underlying and the cash market narrower and you avoid the K-1 problem.  But, you accept credit risk and these products often have out clauses in the fine print that can lead to automatic product liquidation at the most inopportune time.

 International roundup:  North Korea and Cuba are in focus today.

COVID-19: The number of reported cases is 210,108,036 with 4,405,174 fatalities.  In the U.S., there are 37,297,023 confirmed cases with 625,183 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.  The CDC reports that 422,175,735 doses of the vaccine have been distributed with 359,623,380 doses injected.  The number receiving at least one dose is 199,887,548, while the number receiving second doses, which would grant the highest level of immunity, is 169,592,873.  For the population older than 18, 62% of this population has been vaccinated.  The FT has a page on global vaccine distribution.

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[1] In an interesting twist, no participants in the trial who received the drug died; two receiving the placebo did.  This event shows that care must always be exercised when examining the results of treatments.