Daily Comment (November 22, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
N.B.: HOLIDAY SCHEDULE – The Daily Comment will go on hiatus after Tuesday’s report and will return on Monday, November 29. A Weekly Geopolitical Report will be published today, and the next report will be available on December 3. There will be no Asset Allocation Weekly Report or podcast this Friday; it will return next week. There won’t be a Weekly Energy Update report either. It will return a week from Thursday.
From all of us at Confluence Investment Management, have great Thanksgiving.
Good morning and happy Monday! We have breaking news; Fed Chair Powell has been renominated (see below). Equity futures were higher before the news and have moved to new higher levels in the aftermath. Our coverage begins with comments on the renomination. Up next is China news. Economics and policy come next, with cyber news to follow. The international roundup comes after, and we close with the usual pandemic update.
Fed nominations: The president has been quite deliberate in making a decision on the fate of the FOMC. But breaking reports indicate that the president will renominate Jay Powell as Chair and Lael Brainard as Vice-Chair. We note Brainard was named Vice-Chair, replacing Richard Clarida, meaning the Quarles position of Vice-Chair for supervision remains open. The early market reaction appears positive; equity futures and Treasury yields are up. We also note the dollar is up as well, while commodities have reacted negatively to the news.
Although left-wing populists wanted to replace Powell, in our view, President Biden simply doesn’t have the political capital to make that move. Replacing Powell, who is quite dovish, would have been difficult, whereas even with progressive opposition, Powell will likely breeze through renomination. He cultivates relations on Capitol Hill and is quite popular. This means that Biden has two governor open positions to fill on the FOMC.
China news: Lots of news on semiconductors, and there was an apparent prisoner swap last week.
- A number of stories are circulating about semiconductor chips.
- A South Korean firm, SK Hynix (000660, KRW, 107,500), had planned an overhaul to its chipmaking facility in Wuxi, China. The plant, which makes memory chips, wanted to improve the efficiency of the facility, but U.S. pressure has led the company to reconsider. One worry was the company was considering using some of the leading-edge lithography machines from ASML (AMSL, USD, 857.17). The U.S. is uncomfortable with China having access to these advanced machines.
- AMSL expects to see $2.3 billion of sales to China this year. It will be interesting to see how its sales to China will fare in the future.
- Intel (INTC, USD, 49.52) has decided not to take over a GlobalFoundries (GFS, USD, 62.11) abandoned chip plant in Chengdu. It is a bit tone-deaf to see how the company thought this was a good idea. The U.S. pressured Intel to abandon the project.
- The Chinese firm SMIC (0981, HKD, 22.20) says the lack of semiconductor talent will undermine China’s goal of self-sufficiency.
- Although it wasn’t necessarily advertised or discussed, it appears that a prisoner swap of sorts occurred. Daniel Hsu, who has been blocked from leaving China for more than four years, was apparently swapped for seven Chinese nationals who were convicted of crimes in the U.S. The administration continues to insist that there was no swap per se, but just before Xi and Biden spoke last week, the aforementioned people returned home.
- China has started a new anti-monopoly bureau. One characteristic of bureaucracy is regulatory capture. The sector being regulated eventually gets control of the regulator. When governments want to overcome capture, they sometimes just start a new regulatory body. That may be the case here.
- China has downgraded its relationship with Lithuania over the latter’s warning relations with Taiwan.
- As the U.S. continues to investigate China’s hypersonic missile test from last summer, they have found that Beijing has made very important and unexpected strides in the development of the technology.
- Peng Shuai, the Chinese tennis player who seemed to disappear after being linked to a sex scandal tied to a senior CPC member, has resurfaced. It is still unclear how safe she is.
- Self-imposed austerity is being touted by “young Chinese,” at least according to state media.
Economics and policy: Inflation dominates the newsflow.
- Richard Clarida, the outgoing vice-chair, suggests the FOMC could accelerate tapering. We are seeing a chorus of FOMC members pushing for faster tightening, which will complicate Chair Powell’s renomination.
- Although it doesn’t look like supply issues will be resolved by Christmas, there is some evidence to suggest that conditions are slowly improving.
- As home prices soar, manufactured housing is quietly staging a comeback. In general, site-built homes tend to dominate the homebuilding industry, although it is less efficient. Factory-built homes have the benefit of assembly-line construction in a controlled environment. Because of their efficient construction, prices are usually less. However, manufactured homes also have a less than desirable reputation.
- The recent house bill contains tax measures to narrow cross-border corporate tax differences.
- The Senate leadership is quietly trying to prevent a debt ceiling crisis in December.
- Saule Omarova’s nomination to be the next head of the Office of the Comptroller of the Currency appears to be in trouble.
- Small business is a favorite group in Washington. Big Tech and its opponents are both trying to woo the small business lobby to its side in the antitrust fight. Big business is actively working to curb the power of the FTC on antitrust issues.
- Walmart (WMT, USD, 142.39) is experimenting with drone package delivery.
- Vietnam is sitting on a $5.0 billion stockpile of aluminum, part of a U.S. dumping investigation that began in 2019. At that time, the world was amply supplied with the metal. But now, supplies are tight and are forecast to tighten further in the coming years. Aluminum is critical in the energy transition; light and strong, it is used to reduce weight in vehicles to improve their efficiency. Although this hoard would go a long way in reducing the excess inventory issue, it remains tied up in litigation. Furthermore, it may have sat for so long that some of it may have to be scrapped (a problem that exists with commodity storage in general).
- Pension cash has fallen to low levels. If there is a liquidity squeeze, it could trigger fire sales in liquid assets.
- Nebraska has the nation’s lowest unemployment rate of 1.9%. It is the lowest state unemployment rate on record.
Crypto news: Hackers are apparently getting mobile phone numbers and using them to drain accounts of cryptocurrency. Given the nature of cryptocurrencies, there is little hope of recovering the asset. There has been a large shift into stablecoins, which may suggest crypto investors are looking for safety.
International roundup: The U.S. warns of Russian activity, Modi backs down with farmers, and elections were held in Chile, Bulgaria, and Venezuela.
- The U.S. continues to warn the EU that Russia may be considering military action against Ukraine.
- After more than a year of protests, Indian farmers forced the Modi government to back down and withdraw legislation designed to improve efficiency in India’s farm sector. Agriculture in India is inefficient. There are too many small farms, and the only way they can function is with price guarantees, which then leads to overproduction. About 60% of the population works in agriculture, a sign of India’s slow development of manufacturing. The usual pattern of development is that farming efficiency leads to fewer agriculture jobs. These workers are then absorbed in the rising manufacturing sector. Although the farmers have won this round, reforms are still necessary. We expect the government will have to reduce the cost of adjustment to farmers in order to make this change.
- Last week, we noted Belarus removed refugees from the border and is apparently willing to send some of them back home if the EU will accept some of them. Germany and the EU have flatly rejected the proposal. So far, Belarus has returned just under 400 refugees to Iraq. However, as it becomes apparent the EU isn’t going to relent on letting refugees into Europe, we may see more return to the Middle East. Meanwhile, Poland PM Morawiecki has been traveling in the Baltic states to boost support for Poland’s position on refugees.
- It looks increasingly likely that Iran won’t return to the Obama-era nuclear deal. Iran has been moving rapidly to enrich uranium beyond the restrictions of the agreement and is reluctant to return to it. The Biden administration won’t relent on sanctions until Iran returns to the original agreement. We have been monitoring negotiation in the Weekly Energy Update for the past few months, and the pattern suggests that no return will be forthcoming. Although the “no deal” outcome is bullish for crude oil, for the most part, Iran is increasing its sales to nations like China, which will tend to ignore sanctions.
- There were a number of elections over the weekend:
- In Chile, the first round of presidential elections was held. The two most popular candidates were Jose Kast and Gabriel Boric. The former is a right-wing figure who has defended the Pinochet regime; the latter was a former student protestor. Essentially, when Chileans go to the polls on December 19, they will be choosing between two extreme candidates.
- Regional elections were held in Venezuela over the weekend, with opposition participation. The fact the opposition participated suggests they felt comfortable that the process would be at least modestly fair. It will take several days for the results to be confirmed.
- Bulgarian President Radev won a second term.
- The junta in Sudan has relented, bringing the former PM back into power. After ousting Abdalla Hamdok earlier this year, the government has restored him to power over the weekend. However, it is not clear that this move will satisfy the protestors, who seem to indicate they view Hamdok’s return as a ploy by the military to blunt unrest.
- The military in Myanmar is dealing with falling morale as soldiers oppose the repression of their fellow citizens.
- The growing standoff between the U.K. and EU continues. The latest round of talks ended with little progress.
- North Korean hackers have been actively stealing credentials.
- The collapse of the Turkish lira is causing economic turmoil for the country.
COVID-19: The number of reported cases is 257,674,519, with 5,153,373 fatalities. In the U.S., there are 47,731,237 confirmed cases with 771,118 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 566,964,025 doses of the vaccine have been distributed with 451,453,834 doses injected. The number receiving at least one dose is 230,298,744, while the number receiving second doses, which would grant the highest level of immunity, is 196,284,442. For the population older than 18, 70.9% of the population has been fully vaccinated, with 59.1% of the entire population fully vaccinated. The FT has a page on global vaccine distribution. In the U.S., 2021 fatalities from COVID-19 surpassed levels seen in 2020.
- As cases surge in Europe, governments are responding with restrictions on movement. The resumption of lockdowns has triggered widespread and, in some areas, violent protests.
- After Belgium implemented new rules, some 35,000 people took to the streets. The demonstration moved past authorized areas and led to tear gas being used.
- In the Netherlands, Dutch police opened fire on protestors. The protests were described as an “orgy of violence.”
- Austria has implemented lockdowns and mandatory vaccinations, leading to widespread civil unrest.
- Italy has also implemented new restrictions, using an electronic vaccine passport to manage movement. The new measures have dented the popularity of Mario Draghi.
- Although western Europe is seeing a rapid rise in cases, central and eastern Europe have been dealing with rising cases for weeks. Years of communist rule have undermined trust in government, leading to lower vaccination rates and less compliance with restrictions.
- Australia has maintained strict restrictions on movement; we are starting to see an expanding protest movement against these measures.
- In general, what we are seeing in Europe and Australia indicates that the use of lockdowns to curb infections has probably reached its limit. As we detailed last week, the surge seen in drug overdoses fatalities in the U.S. may be due, in part, to social isolation. There are costs to lockdowns, and increasingly, citizens are pushing back against them. If lockdowns are no longer going to be tolerated, governments will be forced to manage the stresses on the medical care system.
- Meanwhile, Asian nations, with the exception of China, are easing travel restrictions.
- Perhaps the most hopeful development in managing COVID-19 is the advancement of antiviral treatments. It is becoming increasingly clear that vaccination, by itself, probably won’t end the pandemic. Breakthrough infections remain a risk to the most vulnerable. Immunity seems to wane over time, and boosters will likely be necessary. Like influenza, COVID-19 looks to become endemic. But the antiviral treatments, at least so far, look very promising. If taken in the early stages of an infection, the chances of hospitalization decline notably. The combination of testing, vaccination, and antivirals holds the promise of making COVID-19 a manageable, if not persistent, malady.
 An in-depth look at AMSL can be found here.