Daily Comment (March 4, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EST] | PDF
We have published our latest Weekly Geopolitical Report, which is Part I of a two-part series on the Western Sahara. We also have several other recent multimedia offerings. There is a new chart book recapping the recent changes we made to our Asset Allocation portfolios. Here is the latest Confluence of Ideas podcast. A new Asset Allocation Weekly, chart book, and podcast are also available. This week’s Weekly Energy Update is available. You can find all this research and more on our website.
Good morning. U.S. equity futures are weaker this morning but off the worst levels of the session. We start with comments on policy and the economy; we have had a number of Fed speakers this week, and Chair Powell will top the list. Next up is China news as it prepares for CPC meetings and the next five-year plans. International news follows, and we close with pandemic news.
Economics and policy: We look at Fed speakers and the Beige Book. There is some tweaking to the stimulus bill as it moves through the Senate.
- The Beige Book had an optimistic tone; although current conditions have not improved all that much, there are great hopes that vaccinations will open the economy. We continue to sift through comments from Fed officials, and there does appear to be an evolving narrative. The FOMC members are watching the rise in Treasury yields. But, for now, they are willing to allow the rates to rise because they are rising for the “right” reasons, namely, a better economy. At the same time, they are in no hurry to raise rates because they don’t expect inflation to become a problem. In addition, the patience on policy is part of the regime change where the Fed will no longer focus policy on inflation suppression.
- As we suspect will be detailed in the full transcripts of the current FOMC meetings when they are released in 2026, there is likely a robust debate underway about interest rate increases and financial stability. One thing we are watching for is a return to “Operation Twist,” where the Fed skews its purchases to the long-duration Treasury curve in a bid to slow the rise in yields.
- On the fiscal and regulatory front, the stimulus bill is in the Senate. To make the bill more acceptable to centrist Democrats, eligibility for stimulus payments has been narrowed, giving less money to the more affluent. The populist wing of the Democratic Party isn’t pleased but probably will go along. It doesn’t appear that the overall size of the spending will decline, however. The funds will shift to other parts of the bill. In the end, we would not be surprised to see the overall bill fall to around $1.6 trillion.
- An interesting sidelight has emerged on the state fiscal situation. In the last downturn, the recovery was hampered; state governments were forced to cut spending due to declines in tax revenues. Politicians, like generals, tend to fight the last war. There has been great concern that state governments would be forced to repeat the same pattern as seen in 2010-12. However, so far, that isn’t the case. For the most part, revenues have held up better than expected. If the economy bounces back, it may turn out that these concerns over state cutbacks were overblown.
- Political capital is being spent by the White House. We may be seeing the first casualty in policy triage. It looks like immigration policy is being shelved. Although some hope that it can be revived later, in reality, there will be less political capital later on. This looks like immigration is being sacrificed for pandemic stimulus.
- The $15 minimum wage looks like it won’t make it either. But we would not be shocked to see a $12 level passed with some bipartisan support.
- One of the key goals of the Biden administration’s foreign policy is to rebuild coalitions. We have our doubts this goal will work for two reasons. First, other nations have no idea whether this goal will last beyond the current administration, so committing to it may not make much sense. Second, one of the primary reasons foreign governments accepted U.S. hegemony is that they derived economic benefits. The U.S. accepted large current account deficits which supported foreign economies. The Biden administration is talking about bringing manufacturing back to the U.S. and “buy American first.” There isn’t much incentive to join a coalition with few economic benefits. Still, the administration has issued a preliminary document on its policy goals.
- As we see a retreat from globalization, one glaring problem is semiconductors. We have been documenting for weeks the travails of the auto industry as it grapples with the lack of chips. Large trucks are the latest victim of this shortage. When one looks at the supply chain for semiconductors, one is struck by the geopolitical risk of having the world’s largest chip foundry in Taiwan. The U.S. is talking about creating conditions to build capacity in the U.S., which is a wise move. It will be a long-term process, one that will require the policy to remain in place for multiple administrations, something difficult to accomplish in the current political environment.
- We are seeing increased corporate interest in single-family home rentals.
- The Texas regulatory bodies are urged to suspend collections in the wake of the recent electricity crisis.
China: CPC meetings dominate the news.
- Major CPC meetings will be held over the next two weeks. These meetings will confirm the politburo standing committee’s policy goals. The broad goal, as part of the “dual circulation” narrative, is to create conditions of independence in key industries, primarily technology. Part of this goal is the move to shift growth from investment to consumption. Although this idea has been around for some time, it never gets executed because there are fears that the “handoff” won’t be smooth. Environmental concerns should also be discussed.
- New controls on Hong Kong are expected to be unveiled as Beijing steadily ends the separate nature of the former colony.
- The U.S. is being singled out as Beijing’s most potent threat, a claim mirrored by American policymakers.
- As part of meeting preparations, controls on dissidents are being increased.
- Non-performing debt is a persistent problem for China. This is mostly due to the fact that much of China’s growth is driven by investment which is funded by debt. If the investment goes sour, the debt then becomes a problem. For much of China’s development since the late 1970s, the debt was held internally. But, as China has started to internationalize, some of the defaulting debt is held offshore, sometimes in foreign currencies. China Fortune Land Development (600340, CNY, 7.7) is the most recent to default. Property development is of particular concern.
- There are reports that General Secretary Xi is instigating a purge of domestic security agencies. This is a bit of a surprise given that Xi’s first term had numerous purges. On the other hand, to maintain his position, periodic purges may be necessary.
- As the U.S. increases restrictions on technology exports and transfers, China has moved to importing earlier versions of chipmaking equipment. This pattern bears watching. China may be opting for less cutting-edge technology that is easier to find and deciding that older technology may be “good enough.” China is also taking added steps to avoid U.S. restrictions, primarily domestic production.
- China has worked out a deal to buy second-generation chipmaking equipment from ASML (ASML, USD, 543.60). We will be watching to see if the U.S. tries to stop this sale.
- There are reports that Jack Ma is defying government demands for customer data.
- The new USTR appears to be maintaining pressure on China.
- Gallup reports that U.S. views of China are at historic lows.
- Lithuania is considering leaving China’s 17+1 forum and expanding links with Taiwan.
- There is a growing chorus of nations considering either boycotting or calling for the 2022 Winter Olympics to move away from China.
- If there was ever any doubt that the Belt and Road project is neo-colonization, this report on Pakistan tends to relieve those reservations.
International news: The U.K. plans for the post pandemic economy, and the AfD is under investigation.
- The U.K. budget is the first major economy post-pandemic blueprint. In a clear departure from the Thatcher era of Tory policy, tax increases are the primary feature. As we saw in the U.S. in the late 1980s, the GOP plan to narrow deficits was always about revenue and spending cuts in the future. This budget is the same. It remains to be seen if the policies will actually be enacted when the future becomes the present.
- The German government has opened surveillance on the AfD, the right-wing populist party. The concern is that elements of the party may be harboring neo-Nazi sympathizers. This is the first time the German government has surveilled a sitting party in its legislature since WWII.
- OPEC+ continues to meet. Although the KSA and Russia appear to support a 1.0 mbpd increase in production, there is support for maintaining production discipline.
- Italy is opening a major trial where organized crime is engaged in massive corruption targeting agricultural support payments.
- Myanmar protests are becoming increasingly violent. Yesterday, 38 protesters were killed. China is worried because it sources rare earths in Myanmar, and in the past, unrest has disrupted that supply chain.
- Another rocket attack hit a military base in Iraq that houses U.S. troops.
- It looks like North Korea may be ramping up its nuclear program again. Pyongyang often causes trouble for first-term presidents.
COVID-19: The number of reported cases is 115,297,267 with 2,561,937 fatalities. In the U.S., there are 28,760,267 confirmed cases with 519,867 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 107,028,890 doses of the vaccine have been distributed with 80,540,474 doses injected. The number receiving a first dose is 52,855,579, while the number of second doses, which would grant the highest level of immunity, is 26,957,804. The FT has a page on global vaccine distribution. The Axios map shows some increases in infections.
- The Brazilian variant of COVID-19 shows signs of infecting those who have already contracted the disease.
- Those who have been vaccinated or infected have shown a strong T-cell response, which may offer hope that reinfections may not be significant.
- China and Russia have moved rapidly to provide vaccines to the emerging world. The West is starting its own program of supplying vaccines.
- India’s vaccine has been found effective.
- Egypt is charging so much for vaccinations that a large element of the population may not be able to afford it.
- Chinese and South African police have seized thousands of doses of fake vaccines.
- One outcome of the pandemic is an apparent baby bust; birthrates in the West are showing signs of falling.