Daily Comment (May 19, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment opens with another broadside from Larry Summers against the current stance of U.S. monetary and fiscal policy.  Inflation hawks will likely be quite satisfied with his latest criticisms.  We next examine a new threat to private cryptocurrencies out of China in addition to various other international news developments.  We end with the latest news related to the coronavirus pandemic (spoiler: it looks like you could make that trip to Europe this summer after all!).

U.S. Monetary Policy:  In comments before a conference sponsored by the Federal Reserve Bank of Atlanta, Former Treasury Secretary and Harvard President Larry Summers said the Fed is seriously underestimating the risk that continued loose monetary policy could drive inflation higher and destabilize the financial markets.  According to Summers, the problem is that the Fed could be forced into a knee-jerk tightening of monetary policy that would spook markets and even hurt the real economy.

  • The comments build on Summer’s earlier criticism of the massive fiscal stimulus proposals submitted by President Biden.
  • Taken together, the comments by Summers could exacerbate recent investor concerns about a prolonged rise in inflation or the formation of asset bubbles.  If so, there would be the potential for further volatility in the stock and bond markets, along with a potential further rise in inflation-hedging assets such as precious metals.

Global Cryptocurrency Market:  In a joint statement issued in conjunction with the central bank, Chinese banking and internet industry associations said financial and payment institutions should not accept cryptocurrencies as payment or offer services and products related to them.  According to the statement, virtual currency “is not a real currency,” and its recent price surge represents nothing but speculation.

  • The statement indicates Chinese regulators are intensifying their crackdown on the use of cryptocurrencies by financial institutions as the People’s Bank of China prepares to launch its own digital money.
  • The statement, therefore, marks a shot over the bow of the rapidly developing market, reminding participants that sovereign countries will probably want to monopolize the space with their own virtual money (discussed in our recent WGRs on the issue).  In response to the statement, the price of Bitcoin dropped 14% to approximately $38,500, reaching its lowest level since early February.

United States-China:  Speaker of the House Pelosi has become the highest-ranking U.S. politician to call for a diplomatic boycott of the 2022 Beijing Winter Olympic Games over China’s human rights abuses in Xinjiang.  Pelosi urged the U.S. and other nations not to send high-level delegations, in a bid to boost pressure on the Chinese government over its persecution of the Uyghur ethnic minority in the region.

China-Taiwan-Honduras:  The head of the Honduran government warned that his country may switch diplomatic ties from Taipei to Beijing to gain access to Chinese coronavirus vaccines.  Honduras hasn’t been able to buy sufficient stocks of any coronavirus vaccine, and it has suffered delays in receiving those it did order, leaving less than 1% of its population vaccinated.  Honduras could well be bluffing in order to procure vaccines, but the statement is likely to be taken seriously in Taipei.  Since Taiwan has diplomatic relations with only about 15 countries, losing Honduras would be a major blow to its geopolitical position and likely further encourage Beijing in its quest to reunify the island with the mainland.

Israel-Hamas:  Israeli warplanes continued to strike Hamas tunnels and other targets in the Gaza Strip overnight, despite growing international concern and UN accusations that Israel is using disproportionate force.

  • As the Israeli warplanes target Hamas tunnels, they are reportedly bombing roads and streets, destroying infrastructure such as sewage and water pipes, electricity cables, and telephone lines.
  • Meanwhile, France, Egypt, and Jordan have been pushing a UN Security Council resolution for a ceasefire to end the bloodshed, and EU foreign ministers urged an end to the hostilities at an informal meeting on Tuesday.
  • Early this morning, a senior official said Israel’s military is now to the point where it is assessing whether it has made enough progress to begin exploring a ceasefire with Hamas.  The official said Israel wants to see an agreement to end fighting which includes international pressure on Hamas to address its ability to build up its forces and the return of the bodies of two soldiers who went missing in the 2014 war.

COVID-19:  Official data show confirmed cases have risen to 164,314,577 worldwide, with 3,406,720 deaths.  In the United States, confirmed cases rose to 32,997,870, with 587,225 deaths.  Vaccine doses delivered in the U.S. now total 346,672,525, while the number of people who have received at least their first shot totals 158,365,411.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • Newly confirmed U.S infections fell to 27,851 yesterday, back below the seven-day moving average of 32,032 and the 14-day moving average of 35,520.  New deaths related to the virus came in at 851.  Meanwhile, the nation’s mass vaccination program continues.  According to CDC data, 47.7% of the U.S. population has now received at least one dose of a vaccine, and 35.5% of the population is fully vaccinated.
  • Even though regulators have now approved giving the vaccine to children as young as age 12, the patchwork of state laws that govern whether minors can receive shots without their parents’ permission brings a new wrinkle to inoculation efforts. For example, vaccine providers are trying to figure out how to navigate situations in which children want the shot, but their parents say no.
  • In an Axios virtual event airing later today, top Biden administration pandemic official Dr. Anthony Fauci said many Americans are “misinterpreting” the CDC’s new mask guidance as an approval to forego masks indoors.  According to Fauci, “People are misinterpreting, thinking that this is a removal of a mask mandate for everyone. It’s not.  It’s an assurance to those who are vaccinated that they can feel safe, be they outdoors or indoors . . . It did not explicitly say that unvaccinated people should abandon their masks.”
  • Just a day after his government relaxed restrictions on international travel from the U.K., Prime Minister Johnson urged Britons not to travel to countries on the government’s “amber list,” including France and Spain, except under exceptional circumstances.  The warning came after reports on Monday that approximately 150 flights had already departed from the U.K. to such destinations.
  • In contrast to Britain’s caution regarding much of the Continent, ambassadors from the 27 nations of the EU today recommended a loosening of the EU’s travel restrictions.  The move could open the EU to visitors from the U.S. as early as this summer, although it still needs to be approved by the EU’s national leaders, and details still need to be worked out.  In any case, bringing back visitors from the U.S. and other wealthy, non-European countries could provide a significant boost to many tourism-dependent countries in Europe.
  • Despite the positive trends in the U.S. and several other Western countries, infections are rebounding again in some Asian countries that had previously looked like success stories in combatting the pandemic, including Taiwan, Vietnam, and Singapore.  Amid rising infections in southern Japan, the head of Okinawa Prefecture asked the central government to add it to the list of nine other local administrations currently under a state of emergency because of the pandemic.
  • European Commission Executive Vice President Dombrovskis said members of the World Trade Organization should use existing rules to make it easier to share intellectual property for coronavirus vaccines, rather than expand the ability of governments to override patents as proposed by the U.S.
    • The WTO’s longstanding “Agreement on Trade-Related Aspects of Intellectual Property Rights” already allows a government to license a patented invention to a third party without the consent of the patent holder. Under the rules, negotiations with rights holders can also be bypassed in a national emergency.
    • Critics say the mechanism is overly complex and not fit for rapidly expanding access to vaccines.  But then, the Biden proposal to override patents has also been criticized as unlikely to help less developed countries very quickly.

 Economic and Financial Market Impacts

  • Ahead of an expected surge in tourism as the economy opens up again, hotels and resorts are finding it especially difficult to lure workers.  Among the challenges:  potential workers held back by health concerns, lack of childcare as schools remain closed or partially closed, enhanced unemployment benefits, higher wages on offer by competing industries, and the simple unattractiveness of physical work like cleaning rooms and making beds.
  • Illustrating the supply chain problems holding back the global economic recovery and feeding into inflation concerns, Danish logistics data firm Sea-Intelligence said in March, only about 40% of container ships globally were arriving on time at ports.   Average delays stretched to more than six days. The slowdowns improved from February, but they remained far behind reliability levels of the previous two years when over 70% of ships arrived on time.
  • All the same, the budding recovery in Europe and the quickly improving finances of its companies have started to encourage European firms to boost share buybacks, replicating resurgent share buybacks in the U.S.  If the buybacks continue, it will add to the allure of European stocks if the dollar continues to weaken as we expect.

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