Daily Comment (August 26, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Risk assets are a bit weaker this morning.  The Jackson Hole meeting kicks off today.  Like last year, it will be virtual.  Tomorrow will be the big day when Chair Powell speaks.  We start our coverage with the latest from Afghanistan.  China news comes next as we continue to watch the policy adjustments from Beijing.  Economic and policy follow, and the international roundup precedes our coverage of the pandemic.

Afghanistan:  Here is what we are following:

  • Western embassies are issuing alerts to their citizens at the Kabul airport waiting for flights; they may be targets for terror attacks. It appears the Islamic State affiliated terrorists are the source of the threat.  The group opposes the U.S. and apparently the Taliban as well.  It isn’t clear what those seeking exit are expected to do, but the warnings highlight the deteriorating security situation at the airport.
  • Turkish troops, who have been defending the airport, are starting to leave the country. Initially, President Erdogan promised to keep around 500 soldiers at the airport, but talks with the Taliban to allow them to stay have apparently failed.  Their exit will add to the current level of disorder.
  • The Taliban leadership is trying to create a narrative of a “new Taliban” that is less socially rigid than its earlier iteration. In an interview, the group’s spokesman, Zabiullah Mujahid, attempted to reassure the West that retaliation and repression would be limited.  Although it is possible that the Taliban will be less restrictive, we suspect the West will want to see proof.
  • There are worries that a collapse of the economy will lead to a refugee crisis. In the immediate term, the Taliban has been denied access to most of Afghanistan’s foreign reserves and official aid.  The Treasury has signaled that aid to groups providing goods and services to Afghans will not violate U.S. sanctions.
  • In the past, groups in northern Afghanistan have opposed the Taliban. The Taliban, likely anticipating that this region could be a hotbed for rebellion against its rule, has surrounded the region.  Although the Taliban will struggle to bring these groups under its control, it is also difficult to see how these groups can mount an effective resistance.  It will be challenging to bring in resources from outside Afghanistan, hampering these tribes from pushing back against Taliban rule.

China:  We are watching property taxes and income policy.

  • An important area to watch in terms of Chinese economic policy is if the Xi government implements a property tax. For the most part, the national government has avoided property taxes because they would be profoundly unpopular.  Chinese households have few places to hold savings.  Banks, by design, usually offer deposit rates below inflation, foreign investment is restricted, and stock markets are volatile.  Faith in the value of property has led to widespread investment in apartments and houses.  In addition, there are rumors that CPC members are heavily invested in property, meaning that the tax would fall on the powerful.  If a property tax is implemented, it will signal a sea change.
  • When Beijing started cracking down on tech firms and their wealthy CEOs earlier this month, there were concerns we were seeing a wholesale drive to attack wealth accumulation. Recent speeches suggest the policy leaders are trying to modify the message.  The “common prosperity” policy is said to not be a “robin hood” policy of taking from the rich.  However, that doesn’t mean nothing has changed.  One term we see used now is “three allocations.”  The first allocation is what comes from the market.  The second allocation is how government policy modifies that outcome.  The third allocation is when the wealthy “voluntarily” give their wealth back for the social good.  Social control without direct coercion appears to be the goal.
  • One hallmark of the Xi regime has been persistent anti-graft and anti-corruption activities. The CPC secretary of Hangzhou is being investigated.
  • The U.S. is allowing Huawei (002502, CNY, 5.09) to buy U.S. semiconductor chips that will be used in auto components. Such chips are usually not the most sophisticated, which is likely why the sales were allowed.
  • Chinese courts have ruled that cryptocurrency disputes are not protected by law, essentially saying that assets and transactions are effectively illegal.

Economics and policy:  The budget process grinds on.

International roundup:  Israel comes to visit.

COVID-19:  The number of reported cases is 214,058,844, with 4,466,841 fatalities.  In the U.S., there are 38,225,849 confirmed cases with 632,283 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 430,118,615 doses of the vaccine have been distributed, with 364,842,701 doses injected.  The number receiving at least one dose is 202,500,853, while the number receiving second doses, which would grant the highest level of immunity, is 171,773,370.  For the population older than 18, 62.7% of the population has been vaccinated.  The FT has a page on global vaccine distribution.  The majority of states are seeing increasing cases of COVID-19.

What is becoming increasingly evident is that COVID-19 isn’t going away.  Like the common cold and influenza, it looks like it won’t be eradicated.  Vaccination reduces the risk of infection but doesn’t prevent it outright.  Societies are going to have to figure out how to deal with this disease over the long run.  The good news is that as the virus circulates, its lethality will likely diminish over time.  Vaccines can help speed this process.  But we will probably have to move from doing everything possible to avoid infection broadly to selective protection.

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