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

[Posted: 9:30 AM EDT] | PDF

Good morning and happy Friday!  U.S. equity futures are marking time this morning.  The dollar is a bit lower, while gold, crypto, and oil are higher, and Treasury yields are easing.  Our coverage begins with economics and policy.  The Fed announced new restrictions on trading activity for FOMC members and other officials.  China news is next, with some reflections on the hypersonic missile tests.  The international roundup follows; EU and NATO talks continue in Europe.  We close with crypto news and the pandemic update.

Economics and policy:  The Fed announces new rules for FOMC members.

• The Fed announced new rules for members of the FOMC regarding their personal accounts. Going forward, governors and regional presidents can only purchase diversified investment vehicles (no individual shares or bonds) and are barred from derivative transactions.  To make a transaction, a member must give notice 45 days in advance, and no trades can occur under periods of financial stress[1].  We are somewhat surprised such rules were not already in place, but this new structure should reduce future controversies.  It remains to be seen if Powell can be renominated, although we are reaching a point in the calendar where an announcement must be made soon if a change is forthcoming.
  • There remains an underlying issue on this topic. If a member of the FOMC is wealthy, it puts that person in a quandary; what if the policy action taken has a negative impact on his wealth?  Nothing short of complete liquidation of financial assets would avoid this concern, and these rules don’t address that potential conflict of interests.
• Negotiations on the budget continue. There are reports that discussions between Sen. Manchin (D-WV) and Sen. Sanders (I-VT) became quite heated recently, with Manchin threatening to not support any funding increases.
  • On yesterday’s report that Manchin is considering leaving the Democrats, there is something to it. However, he isn’t thinking about joining the GOP but instead becoming an independent.
• How big a deal is the backup in container ships in California? It is estimated that $22 billion of goods is floating in the harbors of the Golden State.  Conditions are not getting better as the wait time to unload a vessel is up to 13 days.
  • The White House is considering activating the National Guard to help ease bottlenecks. We are not sure how much this would matter.
  • As goods pile up in the supply chain, warehouse space is becoming scarce.
  • Around the world, supply chain issues are crimping economic growth and lifting prices.
  • Whirlpool (WHR, USD, 207.90) says it expects the appliance shortage to persist.
• Due to labor shortages, Southwest Airlines (LUV, USD, 48.66) announced it would reduce its flight schedule.
• The CFPB is investigating how tech firms use financial data.
• Russia says it could increase natural gas supplies by 10% if Nord Stream 2 is approved.

China news:  We look at the recent missile tests, and the U.S. returns to the U.N. to thwart Beijing’s ambitions.

• We have been reporting on China’s recent hypersonic missile tests. There are usually two questions that come from such tests—why? And why now?  The likely answer to the first one is proof of concept; can China do this or not?  The second may be more important.  When my youngest took an AP history course in high school[2], he studied the Soviet test of a hydrogen bomb.  The thesis he developed was that nuclear weapons became the guarantee against unconditional surrender.  If two nuclear powers went to war, they could not completely vanquish each other conventionally because the party losing could decide to “go nuclear.”  If China is considering military action against Taiwan, it may want to preclude the U.S. from threatening to use nuclear weapons against China if it didn’t withdraw.  We have no proof of this theory.  But we remain puzzled as to why China would test this weapon now and try to frame the narrative, as this test had nothing to do with weapons.  The U.S. clearly didn’t see it that way.  Beijing may view this test as a signal to Washington that we shouldn’t think about using a nuclear threat in a Taiwan conflict because China can use these hypersonic missiles at will.  If we are correct in this assessment, it could be argued that China may be close to taking military action against Taiwan.
  • We noted that at yesterday’s town hall meeting, President Biden specifically indicated the U.S. would defend Taiwan from attack. Although the White House has suggested nothing has changed, this looks to us like a change in strategic ambiguity.  China appears to see it that way.
• Even though the U.S. was instrumental in creating the U.N., over the years, Washington has become frustrated with the latter and has tended to not cooperate with it. The position is defensible, but the U.S. has inadvertently created an opportunity for China to expand its influence at the U.N.  Beijing has taken advantage of that opening, filling leadership roles in many committees at the U.N., often with persons that the U.S. should oppose.  The Biden administration appears to be working to reverse this situation.
• The NBA is in hot water with China again. Enes Kanter, a center with the Boston Celtics, made posts supporting Tibetan independence.  The NBA has been trying to expand its popularity in China but keeps running up against players and others affiliated with management who speak out against China’s human rights violations.  China is refusing to air Celtics games for now.
• For years, when China would implement austerity or crack down on important sectors of the economy, there was a tendency to restore support at any hint of weaker growth. So far, that isn’t happening, and comments from the PBOC suggest that support for the real estate sector isn’t on the horizon.
• Surprisingly, Evergrande (EGRFN, USD, 0.34) has made a payment on some of its bonds, staving off default. Next Friday, another payment is due.
• We may see a “buy China” movement, as a key social media influencer is touting Chinese products.

International roundup:  EU/NATO talks continue.

• The EU and NATO meeting continued today. So far, there have been discussions, but there is only modest evidence that the dispute between Poland and the EU over the role of the courts has been resolved.  This situation has Merkel’s mark on it; she tended to support talks over decisions with difficult issues.  Her goal was to prevent disruption at all costs.  NATO talks did lay out a plan to counteract Russian aggression.
• The Pentagon and intelligence agencies have issued reports indicating that climate change challenges global security. The concern still includes how changes in climate affect military preparedness but now also includes analysis of how extreme weather can weaken regimes and create failed states.
• South Korea successfully launched its first rocket but failed to put a satellite in orbit.
• The ransomware group that hacked the Colonial pipeline has brazenly set up a fake firm to recruit hackers.

Crypto:  The immaturity of the crypto market is creating arbitrage opportunities.

• A contango calendar structure in a futures market creates an opportunity for an arbitrager to buy spot and sell the deferred contracts.  With stability, the higher-priced deferred futures contract will converge on the spot, earning the trader a profit.  Reports suggest that the new ETF may create opportunities to expand this trade.  The good news for ETF holders is that if this practice becomes widespread, the deferred contract spread to spot will narrow, reducing the cost of the roll yield.
• Worldcoin, a new crypto, has scanned the eyeballs of 100,000 people; in return, those scanned receive the new coin.

COVID-19:  The number of reported cases is 242,605,732, with 4,931,905 fatalities.  In the U.S., there are 45,302,004 confirmed cases with 733,226 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 498,702,405 doses of the vaccine have been distributed, with 411,010,650 doses injected.  The number receiving at least one dose is 219,624,445, while the number receiving second doses, which would grant the highest level of immunity, is 189,924,447.  For the population older than 18, 68.7% of the population has been vaccinated.  The FT has a page on global vaccine distribution.

• S. medical authorities have approved boosters for the current vaccines in use and will allow “mixing and matching” of the types.
• The U.K. is seeing a spike in cases related to a new mutation of the Delta variant. Westminster is adamant it won’t order new lockdowns.
• Belgium is reporting a “fourth wave” of infections.
• There is a growing shortage of rapid COVID-19 testing materials. The U.S. vaccine mandate is coming into effect on November 22 and will require testing in some circumstances.  If there is a shortage of tests, it isn’t clear how this situation will be accommodated.

   View PDF

[1] Thus far undefined.

[2] This is Bill talking.