Daily Comment (September 16, 2021)

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  It looks like an “everything down day” so far, although the retail sales data (see below) offered some relief.  U.S. equity futures currently are mixed after opening lower.  Treasury prices are down a bit, and commodities are weaker as well.  The dollar is higher, which is likely behind the weakness.  Our coverage starts with China news.  Australia will join the U.S. and the U.K. in sharing nuclear submarine technology, and Beijing is going after gaming.  Up next is economics and policy; the budget and debt ceiling turmoil continues.  The international roundup follows.  The EU discussed its state of the union, and PM Johnson shuffled his cabinet. We close with pandemic news.

 China:  Australia will acquire U.S. nuclear sub technology, and Chinese gambling takes a drubbing.

Australia was once a major supplier of coal to China but has been losing share to Indonesia.  Obviously, this year, the changes are stark.

  • Macau is one of the world’s gambling hubs. By some accounts, it’s second only to Las Vegas.  After Beijing announced new rules and regulatory oversight, gaming equities tied to the former colony plunged 23%, the largest negative one-day performance in history.  Regulators announced a 45-day consultation period, during which they will take public comments related to revising its gaming laws.  We suspect there at two themes tied to this announcement.  First, General Secretary Xi has been implementing social control measures.  He has attempted to limit children’s video play and has pressed against excessive wealth.  Pushing back against gaming would fit into that policy trend.  Second, Macau has been a conduit for capital flight and money laundering.  As Beijing cracks down on the wealthy, limiting their ability to move money offshore would be expected.  The aggressive closing of bitcoin mining was likely part of this goal as well.
  • The property market remains in turmoil. Evergrande (EGRNF, USD, 0.40) is essentially in default after failing to make some debt payments.  The firm has hired advisors who have previously worked on notorious failures.  Other real estate developers are suffering along with Evergrande, and there appear to be spillover effects to other parts of the economy.
    • One interesting sidelight—in a recent Odd Lots podcast[1], Dan Wang made an interesting comment, suggesting Beijing is adopting the German business model for development. Although he didn’t develop the thought, the German model relies on two factors.  First, it is heavily dependent on manufacturing; the recent crackdown on social media firms dovetails into that idea.  Beijing wants to promote making things, not talking about them.  Second, the model heavily depends on exports (read: the U.S. buys your stuff).  Although China potentially has a large internal market and may try to use the Belt and Road project to colonize nations and dump exports on them, the German model only truly works if you have an accommodating hegemon.  China doesn’t have that.
  • Taiwan is boosting its military spending on items better designed to fend off a mainland attack.
  • Ximalaya, a Chinese podcast platform, is canceling its U.S. IPO and will list in Hong Kong.

Economics and policy:  Budget and debt ceiling matters continue, and the Treasury is looking at stablecoins.

International roundup:  The EU held its State of the Union address, and PM Johnson changes his cabinet.

COVID-19:  The number of reported cases is 226,453,332, with 4,661,290 fatalities.  In the U.S., there are 4,323,121 confirmed cases with 666,627 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 461,117,525 doses of the vaccine have been distributed, with 382,294,795 doses injected.  The number receiving at least one dose is 210,361,099, while the number receiving second doses, which would grant the highest level of immunity, is 179,695,287.  For the population older than 18, 65.2% have been vaccinated.  The FT has a page on global vaccine distribution.  The Axios COVID-19 map shows some improvement, although as the weather cools, we are seeing an uptick in cases in the northern part of the nation.

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[1] IOHO, one of the top 5 financial podcasts out there, only topped by the Confluence of Ideas and the Asset Allocation Weekly Podcast.