Daily Comment (November 9, 2021)

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

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with a range of U.S. news, including new details on a corporate tax hike in the Democrats’ proposed health, education, and climate bill.  The U.S. news also includes the latest opening on the Federal Reserve’s board that President Biden will get to fill, as well as the Fed’s most recent Financial Stability Report.  We next turn to several foreign news items.  We wrap up with the latest developments related to the coronavirus pandemic.

U.S. Fiscal Policy:  Now that President Biden’s “hard” infrastructure program has passed Congress, there is increased scrutiny regarding the promised health, education, and climate bill.  One tax provision that hasn’t gotten much attention to date is a proposal to tighten limits on the amount of interest expense that multinational companies can deduct from their U.S. taxes each year, based on where they record profits.

  • To boost tax collections, the idea would be to allow interest deductions in the U.S. only to the extent that a company is doing business and generating profits here.
  • Illustrating the importance of the issue, some three dozen major companies sent a joint letter to lawmakers in late October asking that the provision be dropped.

U.S. Monetary Policy:  The Fed said Vice Chairman for Supervision Quarles will resign around year’s end, opening yet another seat on the seven-member Board of Governors for President Biden to fill.

  • Biden is close to announcing whether or not he will nominate Chair Powell for a second term.  Renominating Powell, a Republican, would likely be positive for the markets, but it would also likely spawn pushback from Democrats in Congress.
  • If Biden could name Democrats to the other open seats, it might reduce the political heat he would take from his own party, making it easier to renominate Powell.

U.S. Financial System Risks:  In its semiannual Financial Stability Report, the Fed said a new resurgence of the coronavirus pandemic is one of the biggest risks to the U.S. financial system, especially if there was another wave of mass business closings and further supply chain disruptions that could drive down asset prices.  Among other risks, it also said stresses in the Chinese financial system have the potential to spill over into the U.S.

  • Nevertheless, the report said many parts of the financial system appear resilient.
  • Banks remain well capitalized, and key measures of vulnerability from business and household debt have largely returned to pre-pandemic levels.

U.S. Housing Market:  According to securities advisor Green Street, built-to-rent single-family homes now make up the hottest sector of the U.S. housing market.  In the private market, the sector is now offering expected risk-adjusted returns of approximately 8% versus about 6% for all property sectors.  As a result, many traditional, publicly traded homebuilders have made building homes for rent a major part of their business.

United States-China:  U.S. military planners are testing Israel’s “Iron Dome” anti-missile system as one way to defend Guam against a Chinese attack.  The system would likely be most appropriate against China’s slower-flying cruise missiles, but other systems still need to be developed to counter weapons such as hypersonic cruise missiles and longer-range ballistic missiles.

China Debt Crisis:  Real estate developer Kaisa Group Holdings (1638 HK, HKD, 1.01), which last week admitted that it missed payments on wealth management products that it guaranteed, issued a statement late yesterday asking investors for “more time and patience” as it rushes to raise cash from asset sales to meet its obligations.  Kaisa isn’t nearly as big as the teetering Evergrande (EGRNY, USD, 7.33), but its troubles are significant because they suggest China’s developer debt turmoil is spreading to higher-rated businesses.

  • Meanwhile, Fitch cut Kaisa’s credit rating further to CCC- from CCC+, two weeks after cutting the rating two notches from B+.
  • Separately, the government’s Development Research Center met with a range of mainland property developers and financial institutions to address the crisis,

Japan:  An advisory body Prime Minister Kishida set up to flesh out his “New Capitalism” program recommended fresh fiscal stimulus to help the economy get over the impact of the coronavirus pandemic and improved financial incentives for companies to hike wages.  The panel also recommended subsidies for the buildout of broadband internet in rural areas and support for companies building advanced semiconductor factories.

  • The economic package will total over ¥30 trillion (about $265 billion) in spending.
  • It is expected to be approved by the Cabinet in the next two weeks.

Russia-European Union:  Data show Russian natural gas flows to Germany have increased modestly in recent days, prompting a slight pullback in prices.  However, the increase is still limited.  Europe’s massive gas crunch and high prices still show little sign of being resolved.

Poland-Belarus:  Poland has deployed thousands of troops, border guards, and police to its border with Belarus to stop thousands of mostly Middle Eastern migrants trying to enter the country on their way into the EU.  Poland accuses the Belarusian government of instigating the crisis in retaliation for EU sanctions on the country over its political repression.

COVID-19:  Official data show confirmed cases have risen to 250,511,488 worldwide, with 5,059,656 deaths.  In the United States, confirmed cases rose to 46,614,298, with 755,724 deaths.  Vaccine doses delivered in the U.S. now total 534,086,695, while the number of people who have received at least their first shot totals 223,944,369.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • According to the latest CDC data, 67.5% of the U.S. population has now received at least one dose of a vaccine, and 58.4% of the population is fully vaccinated.
  • Infections are rising again in Europe, as colder temperatures and the fading of vaccine-induced immunity drive renewed caseloads.
    • Germany and some smaller countries in Central and Eastern Europe are experiencing large increases.
    • Germany registered over 37,000 new cases on Friday, the country’s highest daily number on record.
  • Over the weekend, Russia reported a record daily total of 41,335 new cases, as well as 1,180 deaths.
  • While China and Hong Kong maintain their strict “zero COVID” policies, other Asian states are starting to relax their restrictions.  They’re still generally more strict than Western countries, which are largely learning to live with the virus, so the Asian states are essentially adopting a “third way,” a slower route that is midway between harsh restrictions and something resembling pre-pandemic policies.

 Economic and Financial Market Impacts

  • One of the major impacts of the pandemic has been the huge wave of “COVID retirees” who left the labor market and helped touch off the current labor shortage.  Some of those retirees, particularly the more highly educated, quit working because the liquidity-fueled surge in the financial markets significantly boosted their retirement portfolios.  However, it now appears that the bigger share of retirees were relatively less educated seniors who presumably were more at risk if they caught the disease.
  • The post-pandemic inflation surge has driven real interest rates negative or more negative throughout the world, essentially supercharging low policy rates and helping drive risk assets higher.

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