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.
  • The U.S. believes around 1,500 Americans remain in Afghanistan, and only about 500 have contacted the American embassy. American forces are still searching for some Americans in the country.
  • Several European nations have finished their evacuations.
  • Initially, Russia didn’t intend to evacuate its nationals. However, the deteriorating security situation has prompted Moscow to send military personnel to extract Russians from Afghanistan.
  • The Taliban has blocked all the roads leading to the Kabul airport and is “acting aggressively” towards those trying to escape.
  • This map shows where refugees are being processed.
• 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.
  • Turkey is warning the EU that it won’t take an influx of Afghan refugees.
• 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.
  • Iran has started to sell oil and products to Afghanistan; the Taliban is apparently using hard currency gained from opium sales to pay for these products.
• 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.
  • Although the government hasn’t taken this step yet, there are signs it views high property prices as a problem. The move against tutors is related to an attempt to bring down property values in preferred school districts.  There are reports that the end of tutoring has brought down property values in these districts.
• 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.
  • We note investors are starting to “bottom fish” Chinese tech after the recent selloff.
• 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.

• Sanders (I-VT) is sticking to his $3.5 billion budget pledge. We expect this number to come down, despite his insistence.
  • We are also seeing more work being done on a global corporate tax.
• The administration held a meeting on cybersecurity. This was the first high-profile meeting between tech executives and the president.  There are growing concerns that cracking down on the use of cryptocurrencies in ransomware could lead to “darker” payment methods.
• The distribution of rental assistance remains sluggish; the inability of state and local governments to distribute aid could trigger mass evictions.
• SEC head Gensler has hired Barbara Roper, a consumer advocate, as an advisor. This will be taken as a hostile signal by the financial services industry.

International roundup:  Israel comes to visit.

• Israel’s PM Bennett is scheduled to meet with President Biden today. Although it appears Bennett will try to strike a conciliatory tone, the substance of U.S./Israeli relations won’t change much.  Israel wants the U.S. to not return to the Iran nuclear deal and is making noise about using its military to prevent Iran from getting a nuclear weapon.  The U.S. is getting increasingly concerned about China’s deepening economic relationship with Israel.  We expect a friendly front to be made for the media, but tensions will remain elevated.
• The SDP has overtaken the CDU in recent German polls. Although we don’t expect the SDP to win outright, a shaky coalition government is looking more likely.
• El Salvador is about to kick off its program of using bitcoin as legal tender.

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.

• U.S. intelligence agencies have finished their report on the origins of the virus. Due to the lack of cooperation from China, the results are inconclusive.  Beijing continues to aggressively attempt to shape the narrative.
• The influx of cases is leading some states to ask for help. ICU utilization is running high, especially across the south.
• The U.S. is set to approve booster vaccines for those who received their first dose six months ago.
  • Studies suggest that a second shot of the Johnson & Johnson (JNJ, USD, 174.23) triggers a strong immune response.
• One of the reported risks from COVID-19 vaccines is myocarditis, inflammation of the heart. A recent study from Israel suggests that this condition is more common from infections of the virus itself relative to the vaccine.  In effect, there is a risk from the vaccine, but it appears to be less than being infected.

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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