Daily Comment (October 20, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  Comments will be brief today due to a mix-up on coverage (blame Bill—senior moment!).  Risk markets are mostly marking time this morning.

China and property taxes:  As we have been reporting at length recently, the real estate sector has been under pressure due to regulatory changes designed to limit leverage.  However, to date, Beijing has avoided the most aggressive action to curb real estate, which would be the implementation of a property tax.  Apparently, President Xi is considering taking this step.  He is facing stiff resistance from within the CPC.  A property tax would almost immediately lead to a decline in property prices which would directly affect household debt.  To some extent, this is the clearest test of just how serious China is regarding dealing with its overvalued and overleveraged property sector.  Although it looks like the government is backing down, for now, this idea is worth watching.  It isn’t out of the ordinary for a government to run “trial balloons” to see reactions to policy.  There is one positive factor to a property tax; it could fund local governments that would become less dependent on property sales and thus less interested in rising property prices.

Bitcoin trading:  The bitcoin ETF started trading yesterday.  ProShares launched its product (BITO, USD, 42.14), and we expect others to follow.  The U.S. products are based on futures contracts, and with the calendar structure in contango, the ETF will face a negative roll yield, which will adversely affect performance.

Fiscal packages:  It appears serious negotiations are occurring, and a scaled-back budget with means testing of programs looks like where the legislation is heading.  The president is talking about $2.0 trillion, which is probably about right.

Monetary Policy:  Bundesbank head Weidmann has resigned.  Although he has cited personal reasons, he may have concluded that the new coalition is going to force the German central bank to accept easier monetary policy, and rather than fighting, he decided to leave.  Fed Governor Waller has indicated the Fed may need to accelerate rate hikes in the face of persistent inflation.

COVID-19:  The number of reported cases is 241,718,224, with 4,916,060 fatalities.  In the U.S., there are 45,140,220 confirmed cases with 728,313 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 495,844,635 doses of the vaccine have been distributed with 409,438,987 doses injected.  The number receiving at least one dose is 219,161,368, while the number receiving second doses, which would grant the highest level of immunity, is 189,487,793.  For the population older than 18, 68.6% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

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