Daily Comment (August 31, 2021)

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with the latest news on the U.S. pullout from Afghanistan and the damage from Hurricane Ida on the Gulf of Mexico.  We next review the latest sign that China has fully embraced President Xi’s new “Common Prosperity” program to rein in the rich and powerful and redistribute resources to lower-income citizens.  We close with a review of other foreign and U.S. news and the latest developments related to the coronavirus pandemic.

Afghanistan:  The last U.S. troops flew out of Afghanistan yesterday, just one minute before the August 31 deadline established by President Biden and almost 20 years since they first arrived in the wake of the 9/11 terrorist attacks in 2001.  Despite what U.S. military officials described as “very pragmatic and businesslike” cooperation from the Taliban throughout the evacuation, it appears that 200 or so U.S. citizens and thousands of Afghans who had helped the U.S. effort were unable to be evacuated.  The U.S. and other Western countries have indicated they will now pursue diplomatic efforts to secure the exit of their citizens and allied Afghans.  It will be an important test of whether or not the Taliban have moderated their governing approach after being out of power for the last two decades.

  • Regardless of how messy the exit was, President Biden could, in the long run, get credit for extricating the U.S. from Afghanistan after Presidents Trump and Obama failed.  In the near term, however, the unartful and casualty-plagued evacuation will likely undermine much of Biden’s domestic and international agenda.
  • In the coming weeks, our Weekly Geopolitical Reports will take a close look at the implications of the U.S. exit from Afghanistan, especially for major regional powers such as China, Russia, and Iran.

Hurricane Ida:  Government and industry officials continue to assess the damage Hurricane Ida caused in Louisiana, with some warning that 400,000 residents in the suburbs south and west of New Orleans could be without electricity for three weeks.  They could also be without water and sewer services for up to five days.

China:  At a central leadership meeting yesterday, President Xi called on officials to do more to “guide and supervise” society in general and the economy in particular.  He stressed that Beijing’s campaign to “prevent the irrational expansion of capital” and address “barbarous growth” in China’s technology sector is beginning to bear fruit and would help promote his “Common Prosperity” program to redistribute resources toward lower-income citizens.

  • As further evidence that Beijing’s clampdown on big, fast-growing technology companies is part of the broader Common Prosperity program, an influential nationalist blogger has published a tirade calling on the government to intensify and expand its program to target areas such as the high cost of housing, education, and healthcare.
    • The tirade has been shared by China’s largest state and party-controlled media outlets, including the Xinhua News Agency, the People’s Daily newspaper, and the CCTV television network, indicating a broad degree of state support.
    • Here’s one choice quote from the article: “The capital market will no longer become a paradise for capitalists to get rich overnight . . . the cultural market will no longer be a paradise for sissy stars, and news and public opinion will no longer be in a position worshipping western culture.”
  • Despite some officials’ efforts to calm investors in recent days, it still appears to us that President Xi’s economic and social policy (“Xiconomics?”) has turned decisively toward greater government regulation, income redistribution, and party control over society.  These increased regulatory risks will likely continue to weigh on Chinese assets over time.

Russia:  As the September 19 parliamentary elections approach, police continue to ramp up their persecution of opposition activists, especially those allied with jailed lawyer Alexei Navalny and his “Smart Voting” system that encourages voters to cast their ballot strategically in order to defeat President Putin’s party.

Global Retail Employment:  Although we tend to think of automation being a greater risk to manufacturing and industrial workers, it can even displace jobs in an industry like retail.  In some places, QR codes (those funny-looking matrixes you scan with your phone) are being used to inform potential buyers about a product instead of relying on a salesperson.  If that change becomes more widespread, it could reduce the need for retailers to hire sales staff.

COVID-19:  Official data show confirmed cases have risen to 217,257,194 worldwide, with 4,513,251 deaths.  In the United States, confirmed cases rose to 39,058,704, with 638,844 deaths.  Vaccine doses delivered in the U.S. now total 440,026,945, while the number of people who have received at least their first shot totals 204,742,648.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


Economic and Financial Market Impacts

  • In China, the services sector suffered an unexpectedly severe blow in August as a wave of coronavirus infections sparked new lockdowns across the country.  The official August Purchasing Managers Index for the services sector plummeted all the way to 47.5 from 53.3 in July.  Like most such indexes, China’s official PMI is designed to show readings below 50 will point to contracting activity.
    • China is one of the few major countries willing to impose mass lockdowns again, so the impact of the news on investors may be limited.
    • All the same, the steep drop in activity could highlight the economic risks as the Delta variant spreads rapidly around the world, especially among unvaccinated people.  If services continue to slow in response, risk markets in the U.S. and other countries could start to weaken.
  • As investors begin to worry more about an economic slowdown sparked by the Delta variant or a stock-market pullback sparked by tighter monetary policy or excessive valuations, many are ramping up their purchases of buy-write funds as a hedge.  That comes on top of other signs of greater investor caution, such as the recent outperformance of utility and healthcare stocks.
  • As home prices continue to rocket upward in response to the pandemic and the policies put in place to combat it, rental prices for single-family homes are rising rapidly as well.  According to real estate data firm Yardi Matrix, asking rents for houses rose nearly 13% for the year to date through July, the highest annual increase in at least the past five years.

Foreign Policy Responses

 View PDF