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

[Posted: 9:30 AM EDT] | PDF

Good morning!  U.S. equity futures are higher this morning as the market digests the continuing Evergrande (EGRNF, USD, 0.40) issue and the Fed meeting.  Our coverage begins with the FOMC meeting.  Evergrande is up next, followed by China news.  We then discuss technology and cryptocurrency news along with economics and policy.  We conclude with the international roundup and a pandemic update.

The FOMC meeting:  As expected, the Fed didn’t change policy rates.  But the bank is clearly signaling that the balance sheet will be reduced soon.  In examining the statement, the FOMC has acknowledged that the economy is improving but noted that the pandemic continues to act as a drag on growth.  The committee also admitted that inflation is elevated but continues to hold the opinion that it is transitory.  The biggest change indicates that “If progress continues broadly as expected…a moderation in the pace of asset purchases may soon be warranted.”  There were no dissents.

In the median economic projections, real GDP for 2021 was lowered to 5.9% from 7.0%, with next year lowered to 3.3% from 3.8%.  The unemployment rate projection for this year was raised to 4.8% from 4.5%, with no change in the out years (the FOMC expected 3.5% by 2023).  Core PCE was raised to 3.7% from 3.0% for 2021, 2.3% for next year compared to 2.1% and 2.2% from 2.1% in 2023.  The primary message from the projections is that growth is expected to weaken and inflation to rise, but the latter is expected to decline steadily, consistent with the transitory messaging.

The dots plot has become more hawkish.  In June, seven members wanted to raise rates next year, now nine do.  So, the 18-member committee is now split on rate hikes in 2022.  For 2023, five members expected a steady fed funds rate through that year.  Now, only one lonely member expects the policy rate to remain steady.[1]

The financial market’s initial reaction seemed to lean dovish; equities rose, Treasury yields declined, and the dollar fell.  This appeared to be quite odd given that the report seemed to be rather hawkish, but perhaps the market thought it would be worse.  So far, Chair Powell is managing expectations rather well, but inflation will likely be a greater challenge in the coming months, so will the growth sentiment toward rate hikes in 2022.

On a related note, calls for Dallas FRB President Kaplan and Boston FRB President Rosengren to resign are rising due to their trading activity.  This situation bears watching.  There has been a call for requiring Senate approval for FRB presidents, and this event might just lead to that outcome.

Evergrande:  It’s now a foregone conclusion that Evergrande is going to default and will need to restructure.  In any restructuring, creditors are ranked by their claims and then fight over what remains.  In a normal restructuring, bondholders are usually the highest ranked, with equity holders last.  That isn’t likely how this one will go.  One way that Evergrande financed itself was through pre-sales.  Future homeowners would put up a portion of the value of the property and wait, sometimes for years, to take possession.  Since much of what Evergrande sold was considered a form of saving, waiting wasn’t seen as an issue.  For social reasons, these creditors will be first in line, even though in the West, they would be considered unsecured and farther down the line of claimants.  We are not sure who would come next; it might be local governments.  We feel rather confident that foreign bondholders will be last in line.

Although the immediate issues surrounding the collapse of Evergrande are front and center, there are longer-term ramifications that are also important.  One of the more insightful observers of China is Michael Pettis.  His recent missive points out that addressing China’s debt problem most likely means that economic growth is going to be weaker going forward…perhaps much weaker.  The growth of China’s debt has been a problem for a while.  China’s trend growth is probably 2% to 3%, so any growth above that required investment funded by debt.  If that avenue for excess growth is lost, the world will have to cope with much weaker Chinese growth.  Since the CPC has made its name by facilitating growth, some other reason for its existence has to emerge.  We suspect the growing “cult of Xi” is the substitute.  We will see how it works.

The ripple effects of the Chinese debt crisis will be closely watched and could trigger some unexpected downside surprises.  Some of this is because of tighter regulations.  Another problem will be that debt crises have a habit of unveiling previously hidden problems or triggering new ones.  To address the debt problem, for example, overindebted firms will start liquidating assets to raise liquidity.  As they dump assets, their prices fall, triggering fears of further declines and causing prices to fall in other parts of the economy.  For example, iron ore prices have plunged on fears of falling Chinese property development.  We note the PBOC has been aggressively injecting liquidity.  Another problem that often develops is that the groups protected in the bailout become a source of moral hazard emboldened to take on more risks due to the perception of safety.

Although we can’t rule out a Lehman-style debt crisis, the odds of that outcome are probably not elevated.  The bigger issue is that the world will have to adapt to a China with much slower growth, and the impact on the global economy will be significant.

China news:  China pledges to stop building coal plants overseas, and Taiwan wants into the CPTPP.

• At the U.N., General Secretary Xi promised to stop building coal-fired electricity plants Although the pledge was welcomed by environmentalists, it isn’t obvious whether China will stop building such plants domestically.
• In what will certainly cause a dust-up, Taiwan applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor to the TPP. Taipei made this request soon after Beijing applied to join.  If Taiwan were to be approved while Beijing refused, it would cause a diplomatic firestorm.  Imagine if California tried to join the TPP after the U.S. pulled out.
• Honor (300870, CNY, 72.00), the smartphone spinoff of Huawei (002502, CNY, 7.48) has not yet been blacklisted by the U.S. Washington is debating how it wants to proceed.  In related news, the DoJ is in talks over a plea deal with Meng Wanzhou.
• China is planning to expand its tax crackdown on high-profile entertainers.
• Ant Financial says it will fully share its customer data with the Chinese government.
• Lithuania has been in a diplomatic fight with Beijing over the Baltic nation’s relations with Taiwan. The Lithuanian government is telling its citizens to “throw away Chinese cell phones.”
• In our WEU (see link above), we have been tracking the natural gas crisis in Europe. Exacerbating the problem is aggressive Chinese LNG buying, which is tightening supplies further and lifting prices.

Technology:  Facebook (FB, USD, 343.21) has been facing a spate of reports that put the company in a bad light.  The WSJ had a series of investigative reports on the company’s actions, for example.  Apparently, it is fighting back by planting reports in Facebook’s news feed that put the company in a favorable light.

Cryptocurrencies:  Increasingly, regulators are moving to regulate the crypto market.  Of particular concern are stablecoins, which may be prone to bank runs.  There are increasing signs that regulators are going to move against stablecoins, which, if true, will weaken the ability of that market to function.  When holders of bitcoin or other cryptocurrencies want to “cash out,” they often purchase stablecoins, avoiding the traditional financial system.  The SEC’s Gensler is taking a particularly dim view of crypto, suggesting it is similar to the private wildcat banking of the 1800s.  Another area of concern is the use of crypto for ransomware payments; the U.S. is building regulations against such payments.

Economics and policy:  Talks on the budget and debt ceiling continue, and the administration nominates a professor for the position of Comptroller of the Currency.

• Budget negotiations and debt ceiling measures continue. Yesterday, President Biden met with Congressional moderates to try to work out a deal that will be acceptable to progressives.  Both sides are threatening to not vote for the other’s goals.  Meanwhile, the House passed a spending bill that will avoid hitting the debt ceiling.  It is unlikely that the bill would pass the Senate with 60 votes, although the GOP might not filibuster it.  After all, merely forcing the Democrats to vote on the debt ceiling gives them the political fodder they want without running the risk of a debt default.
• This one bears watching closely! The administration has nominated Saule Omarova, a Cornell law professor, to the position of the Comptroller of the Currency.  She supports a plan to create something similar to Japan’s Postal Saving system, where the Fed would provide households with deposit accounts, essentially moving retail deposits from commercial banks.  Such plans have been knocked around in Washington for years.  Creating this system would end the problem of the “unbanked,” the situation where low-income households can’t get workable banking services from the private sector.  This action might be the end of community banking.  Although large banks don’t really need deposits to fund themselves, small banks do.  We doubt she will pass through the nomination process, but the fact she was nominated at all is important.  If we see CBDC emerge, something similar to this would be possible.
• Inflation ripples continue to pass through the economy. General Mills (GIS, USD, 59.92) is expected to raise prices across a whole host of goods.
• Ireland appears to be softening its stance on a minimum OECD corporate tax. If Ireland complies, it increases the odds of a hike in the U.S. corporate tax.
• It is becoming increasingly evident that the U.S. needs increased home building.

International roundup:  Washington and Paris are trying to make up.

• The U.S. and France are trying to patch up the recent row over nuclear submarines.
• The U.K. is interested in some sort of trade deal with the U.S. Washington will tend to push Westminster to make a deal on Northern Ireland.
• There was an assassination attempt on a key aid to Ukrainian President Zelensky.
• The Norwegian central bank, Norges Bank, became the first major central bank to raise rates.
• Islamic State is becoming a key threat to Taliban rule in Afghanistan.

COVID-19:  The number of reported cases is 230,189,529, with 4,721,127 fatalities.  In the U.S., there are 4,182,893 confirmed cases with 681,222 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 468,248,675 doses of the vaccine have been distributed with 387,493,716 doses injected.  The number receiving at least one dose is 212,545,360, while the number receiving second doses, which would grant the highest level of immunity, is 182,387,840.  For the population older than 18, 66.1% have been vaccinated.  The FT has a page on global vaccine distribution.  The Axios map shows that the South is seeing a decline in cases.  As temperatures cool in the North, cases are rising.

• The FDA has approved Pfizer (PFE, USD, 43.95) booster shots of its vaccine to older and at-risk patients.
• Rising COVID-19 cases is leading to partial lockdowns in the northern Chinese city of Harbin.
• 2020 saw a surge in the U.S. murder rate, likely a result of the stresses caused by the pandemic.

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[1] Our guess?  Neil Kashkari, the Minneapolis FRB president, is likely the “lonesome dove.”

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

[Posted: 9:30 AM EDT] | PDF

Today’s Comment begins with a range of U.S. news, touching on monetary policy, fiscal policy, bond market regulation, and relations with China.  We next review the major international developments that could affect the financial markets today, including the latest information on the European natural gas crisis.  We wrap things up with an update on the coronavirus pandemic.

U.S. Monetary Policy:  The Federal Reserve wraps up its latest two-day policy meeting at 2:00 pm ET today, with a decision on interest rates and asset purchases due.  Many observers expect the policymakers to signal they will begin to taper the Fed’s bond purchases in the next few months.  That move might now be pushed off because of concerns about global financial contagion if Chinese property developer Evergrande defaults on its massive debt (see below).  In any case, Chair Powell has stressed that tapering bond purchases would not necessarily point to any hike in the benchmark fed funds interest rate in the near term.  The problem is that tomorrow the committee will also release its latest “dot plot” of economic forecasts.  If the dot plots indicate rates will be hiked earlier than anticipated, it would likely spark a renewed bout of volatility in the financial markets.

U.S. Fiscal Policy:  With less than two weeks to go before the federal government’s current funding ends on September 30, the House last night passed a measure to keep the government funded until December 3 and suspend its borrowing limit to December 2022.  The Senate should vote on the measure late this week or early next week, but Republicans have been strongly opposed to linking the two provisions, setting up the possible dual crisis of a government shutdown and a debt default.

U.S. Bond Market:  Lobby groups warn that activity in the U.S. bond market could grind to a halt at the end of this month without last-minute exemptions to an obscure 50-year-old rule that the SEC now wants to broaden beyond stocks to Treasuries and corporate bonds.  The rule change, which relates to issuer disclosures, was announced last year. Bond market professionals were apparently overconfident that it would be tweaked or they would otherwise be shielded from it.  Unless the rule is modified or trading firms are given more time to comply, the issue could feed into other bond market concerns related to inflation, Fed tapering, future interest rate hikes, and possible contagion related to Evergrande.

United States-China:  A federal team led by the Justice Department has launched a national security investigation into a proposal by Zoom Video ($278.24) to buy Five9 Software ($170.17), based on what it called concerns about the Zoom’s “foreign relationships and ownership.”  Zoom is already the subject of numerous other federal investigations related to its ties with China.  With the U.S.-China geopolitical rivalry intensifying, the new investigation could further exacerbate fears of technological and economic decoupling between the countries.

China Evergrande:  The flagship property business of Evergrande Group (EGRNY, $7.50) said it negotiated an “off-market” deal to make this week’s $35.9 million interest payment on an onshore bond, suggesting the payment may be made in kind rather than in cash.  The firm also has an $83.5 million coupon payment due Thursday on its U.S. dollar bonds but hasn’t said if it plans to make that payment.  The onshore interest payment may give the highly indebted conglomerate more time to work out what investors expect will be a lengthy and complicated restructuring.  However, we still see near-term risks of significant financial or economic impacts.

• With concerns about contagion rising, since last Friday, the People’s Bank of China has pumped the equivalent of $43.3 billion on a net basis into the country’s repo markets, which many banks rely on for short-term funding.
• That move may signal that the central bank is already taking steps to insulate the Chinese financial system from the effects of a possible Evergrande default.

United States-United Kingdom:  Even though some British officials this week floated the idea of the U.K. joining the U.S.-Mexico-Canada free trade pact (formerly NAFTA), it appears President Biden pushed back hard on trade issues during Prime Minister Johnson’s visit to the White House yesterday.  Most important, Biden warned Johnson not to let the U.K.-EU dispute over the treatment of Northern Ireland in the post-Brexit trade agreement result in a hard border between the U.K. and the Republic of Ireland.  The encounter appears to confirm that developing lucrative new trade relationships around the world after Brexit will be more difficult than Johnson thought.

European Natural Gas Crisis:  Soaring natural gas prices forced fertilizer plants in the U.K. to close.  One knock-off effect has been a worsening shortage of carbon dioxide, which is produced as a byproduct of those plants.  The CO2 shortage is threatening industries from healthcare to food processing, and it now appears that the shortage is spreading to the EU.

• Separately, the International Energy Agency called on Russia to send more gas to Europe to help alleviate the energy crisis.  That makes IEA the first major international body to address claims by traders and foreign officials that Moscow has restricted supplies.
• To the extent that Russia is perceived to be flexing its energy muscle in the crisis, it could have important implications in further souring European relations with Russia, perhaps further undermining Chancellor Merkel’s conservative party in the German elections and putting an even worse light on President Biden’s acquiescence in the completion of the Nord Stream 2 gas pipeline from Russia to Germany.

COVID-19:  Official data show confirmed cases have risen to 229,628,819 worldwide, with 4,710,758 deaths.  In the United States, confirmed cases rose to 42,415,398, with 678,517 deaths.  Vaccine doses delivered in the U.S. now total 467,249,715, while the number of people who have received at least their first shot totals 212,255,202.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.

Virology

• According to the latest CDC data, 63.9% of the U.S. population has now received at least one dose of a vaccine, and 54.8% of the population is fully vaccinated.
• A study led by Pfizer (PFE, $43.92) and BioNTech (BNTX, $341.35) evaluating their vaccine in expectant mothers has been complicated by slow enrollment, delaying results that could help inform physicians about how the shots affect pregnant women and their babies.

 Economic and Financial Market Impacts

• The Asian Development Bank cut its 2021 economic growth forecasts for countries including Thailand, Indonesia, the Philippines, and Vietnam, based on what it called their failure to administer COVID-19 vaccines fast enough.  According to the organization, countries that failed to administer vaccines fast enough and are suffering outbreaks of the disease are causing a growing regional economic divergence.  In contrast, the group raised its economic growth forecasts for China, Taiwan, and South Korea.

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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with a discussion of new global inflation forecasts from the OECD and include some notes on monetary policy and inflation.  We next turn to a range of U.S. and international developments that could impact the financial markets today.  We close with the latest news on the coronavirus pandemic.

Global Inflation:  In updated forecasts that will likely bolster concerns about consumer price growth, the OECD said it now expects inflation to be significantly higher in 2021 and 2022 than it had previously forecast for most G20 countries.

• The OECD economists now think the average inflation rate across the G20 economies will hit 4.5% in the fourth quarter of the year, with 1.5% of that caused by the effects of higher shipping costs and commodity prices.
• Separately, the U.K. reported that its public-sector net borrowing in August came in far above expectations, driven in part by higher interest payments on inflation-indexed borrowings.  We’ve seen little discussion of this issue, but we think it is a notable risk.  Traditional nominal bonds still account for the bulk of the debt issued by governments worldwide, but obligations that have their interest payments indexed to inflation are not insignificant.  As inflation rises, the interest payments on those existing obligations will go up, no matter what happens with the interest rate on new issuances.

European Energy Market:  As natural gas prices continue to surge in response to rising demand and crimped supply, the British government is reportedly considering state-backed loans to large utilities that take on customers from smaller energy companies that have collapsed.  It may subsidize fertilizer production after rising gas prices forced two of the country’s major fertilizer plants to suspend production.  On the Continent, several EU governments are being forced to discuss billions of euros in aid for households and stricken suppliers.

• The higher prices have already pushed four British energy suppliers, which buy wholesale and supply consumers, out of business.
• Many gas customers are on fixed tariffs, meaning their supplier must absorb the higher price. The U.K. government also has imposed a cap on energy prices for 15 million households, limiting the extent to which suppliers can feed higher wholesale prices through to customers.

United States-European Union:  The rift between the U.S. and Continental Europe continues to widen following the chaotic U.S. withdrawal from Afghanistan and the signing of the AUKUS submarine deal in abrogation of a French-Australian agreement.  It now appears that France tried to push Brussels to postpone the high-level U.S.-EU trade and technology council meeting due to take place in Pittsburgh later this month.  That’s on top of France recalling its ambassadors to the U.S. and Australia and the EU calling off free-trade negotiations with Australia.  In the words of Thierry Breton, EU commissioner for internal markets, “There is of course in Europe a growing feeling that something is broken in our transatlantic relations.”

U.S. Monetary Policy:  The Federal Reserve begins its latest two-day policy meeting today, with a decision on interest rates and asset purchases due tomorrow.  Many observers expect the policymakers to signal they will begin to taper the Fed’s bond purchases in the next few months.  However, Chair Powell has stressed that the move would not necessarily point to any hike in the benchmark fed funds interest rate in the near term.  The problem is that the committee will also release its latest “dot plot” of economic forecasts tomorrow.  If the dot plots indicate rates will be hiked earlier than anticipated, it would likely spark a renewed bout of volatility in the financial markets.

Canada:  Prime Minister Trudeau and his Liberal Party won yesterday’s elections, giving Trudeau a new mandate as leader of the country, but he fell short of his goal of securing an outright majority in parliament.  The Canadian Broadcasting Corporation projects the Liberals will win 156 seats, just one more than the 155 it had since the last election in 2019 and well short of the 170 needed for an outright majority.

• Meanwhile, the Conservative Party is projected to win 122 seats, up from 119.
• As they have over the last two years, Trudeau and the Liberals will probably rely on backing from the New Democrats, a socialist party to the left of the Liberals, on important legislation.

China Evergrande:  Even as risk markets today are recovering a bit from their plunge yesterday, which was driven in part by concerns that major Chinese developer Evergrande might default on its debts, the company still isn’t out of the woods.  Reporting today indicates Evergrande used billions of dollars raised by selling wealth management products to retail investors to plug funding gaps and even pay back other wealth management investors.

• Evergrande financial advisers marketed the products widely, including homeowners in its apartment blocks, while its managers persuaded subordinates to invest, the executives of Evergrande’s wealth management division said.  One executive suggested the products were too high-risk for ordinary retail investors and should not have been offered to them.
• The recent development will make authorities even less likely to save the firm.  However, it also means the government will face a costlier, more complex job in mitigating the impact of the firm’s collapse on homebuyers and other clients of the firm.  More broadly, the resulting slowdown in the property sector will likely have a significant slowing impact on the overall economy, which could put further downward pressure on Chinese assets.

Russia:  Preliminary results show the Kremlin-backed United Russia party maintained its constitutional majority in the lower house of parliament in elections last weekend.  United Russia candidates took 112 seats in the State Duma along with 198 single-mandate constituencies across the country.  That gives the party a comfortable two-thirds majority in the Duma’s 450 seats needed to make changes to the constitution.  The election was denounced by the West and described by an independent monitoring agency as “one of the dirtiest” in Russian history.

Digital Currencies:  Coinbase (COIN, 236.53) has dropped its plans to launch a new digital asset lending product, bowing to pressure from U.S. securities regulators, who had warned that it constituted an unregistered security that would have prompted them to take legal action.

COVID-19:  Official data show confirmed cases have risen to 229,170,561 worldwide, with 4,702,286 deaths.  In the United States, confirmed cases rose to 42,291,718, with 676,268 deaths.  Vaccine doses delivered in the U.S. now total 466,535,855, while the number of people who have received at least their first shot totals 212,035,328.  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, 63.9% of the U.S. population has now received at least one dose of a vaccine, and 54.7% of the population is fully vaccinated.
• Johnson & Johnson (JNJ, 163.81) said a late-stage clinical trial has indicated that a booster dose of its vaccine administered two months after the first shot increased protection against symptomatic illness to 75% effectiveness.  In addition, the company said a double dose of the vaccine provided participants with 100% protection against severe or critical COVID-19 at least two weeks after the second shot.  The results could not only set up the approval of booster shots for the Johnson & Johnson vaccine, but it could also buttress the argument for boosters among the broader population.
• The Indian government said it would resume exports of COVID-19 vaccines starting next month, in a move likely to aid developing nations that have struggled to vaccinate their populations after New Delhi restricted shipments amid a resurgence of cases at home.
• COVID-19 deaths in the U.S. yesterday surpassed the number of fatalities in the country during the 1918-19 flu pandemic.
• The Biden administration said yesterday it would dismantle the Trump administration’s outright travel ban for people from a range of foreign countries but keep in place the requirement to show proof of vaccination or a recent test showing they aren’t infected.
  • Officials admitted the modest easing of restrictions was partly to assuage foreign leaders angered by the chaotic U.S. exit from Afghanistan and last week’s abrupt breaking of a submarine contract between France and Australia.
  •  The change is due to take effect in November.

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

[Posted: 9:30 AM EDT] | PDF

Good morning on a rather blue (or, better said, red) Monday.  U.S. equity futures are down hard this morning as stocks appear to be in a corrective phase.  There is a lot of news this morning.  There was a volcanic eruption on the Canary Islands.  Ash from these eruptions can lead to cooler temperatures.  China’s markets were closed for the autumn holidays.  Canadians go to the polls today.  PM Trudeau called snap elections in a bid to build a majority government, but polling suggests the plan failed.  They voted in Russia yesterday, and despite severe restrictions and allegations of voting irregularities, Putin-aligned parties didn’t do very well.  There is no danger he will be pushed from office, but Putin uses these votes as proof of legitimacy, so his weak showing won’t sit well.  In a bit of a departure from our usual lineup, we will start today with a look at issues that are weighing on equities.  Next will be economics and policy, followed by international issues, and we will close with the pandemic update.

What’s weighing on equity sentiment?  We think the following items are causing investor concern:

• Is Evergrande (EGRNF, USD, 0.40) Lehman or LTCM[1]? There is little doubt that Evergrande is going to fail.

(Source:  Bloomberg)

It has interest payments due today and later this week and has already indicated it won’t make them.  As we have noted over the past couple of weeks, there are broadening ripple effects from the decline of Evergrande.  Contractors and workers are losing out and social unrest is rising.  Many employees were encouraged to buy Evergrande wealth management products, which can best be described as having preferred stock characteristics.  It now comes to light that executives cashed out early while they still had value.  The company’s biggest boosters are bailing out, usually a signal the end is near.

 The company is too big to fail.  It has 200,000 direct employees but creates 3.8 million jobs per year.  It has diversified beyond real estate, including EV’s and a theme park.  It currently owns 1,300 projects in 280 cities across China.  Evergrande is a classic “grey rhino.”  Unlike a “black swan,” which is an unpredictable event, the company and the real estate industry have had a problem for a long time.

So, what’s the difference between a Lehman event and an LTCM event?  The former creates a hard to control systemic event, while the latter is isolated and controlled.  The LTCM event was resolved by the Fed and the Treasury, forcing large banks to buy up LTCM’s positions and prevent the financial markets from locking up.  Both events are related; regulators were upset over the moral hazard caused by the LTCM bailout, and thus, allowed Lehman to fail and set an example.  We don’t think Beijing wants a Lehman event, and it has the power to prevent it.  However, by doing so, it creates a moral hazard.  It will be hard to argue that real estate speculators will be less open to continue speculating in the aftermath.  We expect some differences.  Evergrande executives will probably be arrested to act as a deterrent to others.  We doubt it will work.  If we are correct, the good news is that Evergrande won’t bring down the financial system, so market conditions from this event will improve in the next few weeks; the bad news is the rot caused by real estate malinvestment won’t be fixed either.  Investment-grade corporate bonds are not showing signs of stress, which suggests the Evergrande problem, so far, is contained.

• How will the infrastructure, debt ceiling, and budget work out? What we see at present looks like a mess, but it should be noted that the process is usually messy.  After all, Bismarck’s warning that one should never watch the process of making sausage and legislation still holds.  Still, what is happening now is a mess.  There are three moving parts—the budget, a $3.5 trillion behemoth, a $1.2 trillion infrastructure package, and the debt ceiling.  The root problem is that the Democrats have such a narrow majority that it gives power to small groups of lawmakers.  The fight is between moderates, who want to vote first on the infrastructure package and second on the budget.  Progressives fear, rightly, that if this is the sequence, the budget will fail or be much smaller.  Sen Manchin (D-WV) has already suggested that the budget be shelved until 2022, which will effectively doom its passage.  The infrastructure package is bipartisan and narrow, while the budget is a wish list of progressive goals.  We have seen enough legislation over our lives to think that what we are seeing may not necessarily be the usual brinkmanship before legislation gets passed.  However, due to the stark differences between the moderates and progressives, the expectation that the other side “has to cave” and the ambition of the legislation with such a narrow majority may lead to nothing getting done.  The uncertainty of these measures is a concern for markets.  As for the debt ceiling, the GOP will likely force the Democrats to put the hike into the reconciliation bill, giving the Republicans a potent campaign issue for the midterms.  

• Will the Fed start tapering, and who will be on the committee? The FOMC meets this week.  There is no doubt the committee will at least discuss the beginning of trimming QE.  We may see details on when the buying slowdown will begin.  Up to now, Chair Powell has been able to separate QE from rate hikes, but if the market starts to tie rate hikes to QE, the impact to monetary tightening will begin to affect equities adversely.  It should also be noted that if Powell is going to be replaced, Biden has to make that call in the next few weeks; we expect him to be renominated.  After all, Congress doesn’t have a lot of bandwidth for another issue.  But, again, monetary policy is another source of uncertainty.
• What about the economy? Growth is slowing, and it is difficult to sort out what is a secular change from the pandemic and what is merely cyclical.  For example, some elements of inflation may stay with us for a while.  Inventory management will change and be less efficient.  The labor force has contracted and may not fully recover for a long time.  Some items are not going to persist.  Auto prices will fall from current levels as supply returns, for example.  Supply chains should stabilize.  Although a recession is unlikely, as monetary policy will likely remain supportive, this recession/recovery/expansion is completely unique to our experience over the past 40 years.  Thus, some element of uncertainty is bound to weigh on sentiment. 

• What about the path of earnings? S&P earnings have been fabulous and will remain elevated, but the pace of earnings growth will very likely slow.  That fact is raising some caution among investors. 

• Aren’t we due for a correction? In a word, yes.  It has been 367 trading days since the last 10% pullback in the S&P 500.  The average since 1979 is 252 days.

Overall, we think equity markets are simply going through a correction.  What would change our minds?  If Evergrande is really a Lehman event or if monetary policy rapidly reverses.  Although both are possible, we don’t see them as likely.  Soon we will be in Q4, which is a seasonally positive period for equities.  A pullback in front of that period would set the market up for a year-end rally.

Economics and policy:  Overtime and revolving doors are an issue.

• Because companies are scrambling to find workers, they are relying on overtime to meet demand. Workers can become accustomed to higher pay and might rebel against normalization and/or burnout and leave the job, exacerbating the labor supply problem.  All this points to higher wages.
  • It’s not just a U.S. problem. Australia is looking for coal truck drivers and paying large bonuses to find them.
• Big tech is buying up smaller rivals; look for this practice to catch the attention of regulators.
• The White House is issuing new rules to deal with ransomware.
• There is a well-known practice in public administration known as the “revolving door.” Essentially, a regulator’s next job is usually in industry, so the regulator has a vested interest in currying favor from those he regulates.  The problem is known as “regulatory capture” and expresses why regulation always disappoints.  Apparently, there is a new twist on this problem; lawyers from top accounting firms are doing short stints for the Treasury and crafting favorable tax treatment for former clients.  They are then rewarded when they leave government “service.”

International roundup:  The French are angry.

• After the U.S., U.K., and Australia agreed to share nuclear submarine technology, Paris got really angry. Ambassadors were recalled, and there was talk of “stabbing in the back.”  Why such a strong reaction?  First, the deal France had with Australia was worth €60 billion, by far the largest that the country’s defense industry had with an outside power.  Losing that business will smart.  On the other hand, the program was plagued with trouble, and diesel submarines are just not the proper tool for containing China.  Second, France is upset because this affair is additional data showing just how inconsequential Europe is becoming.  There is much commentary about how the White House is struggling to maintain alliances, but since President Bush (the 2^nd), the U.S. has shown little regard for Europe.  In retaliation, the EU has called off free trade negotiations with Australia, but the trade amounts involved are small.
• With a week before the German elections, not much has changed, despite debates over the weekend.
• Islamic State is attacking the Taliban in Afghanistan, highlighting continued instability.

COVID-19:  The number of reported cases is 228,630,066, with 4,693,750 fatalities.  In the U.S., there are 4,291,156 confirmed cases with 673,768 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 466,561,785 doses of the vaccine have been distributed with 385,586,785 doses injected.  The number receiving at least one dose is 211,776,515, while the number receiving second doses, which would grant the highest level of immunity, is 181,382,976.  For the population older than 18, 65.8% have been vaccinated.  The FT has a page on global vaccine distribution.

• The Delta variant has slowed global growth.

The FDA has voted against Pfizer’s (PFE, USD, 43.89) booster shot plan, limiting boosters to at-risk patients.  Meanwhile, physicians are making vaccination decisions on who can get boosters.

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[1] For those younger readers, LTCM is Long-Term Capital Management.  It was a heavily levered hedge fund, loaded with PhD finance and economists that failed spectacularly in August 1998.  Perhaps the best book on the event is Lowenstein’s When Genius Failed:  The Rise and Fall of Long-Term Capital Management.

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equity futures are pointing toward a lower open this morning. It has been a fairly quiet news day so far. Today’s report begins with an international news roundup followed by U.S. economics and policy. China news is next, and we end the report with our pandemic coverage.

International news: 

• The World Bank will not release its “Doing Business” report over ethics concerns. International Monetary Fund Managing Director, and former employee of the World Bank, Kristalina Georgieva was accused of pressuring the authors of the report to boost China’s ranking. The controversy will likely hurt the World Bank’s ability to portray itself as unbiased.
• China accused the U.S., U.K., and Australia of igniting an arms race after they agreed to a trilateral security agreement. The deal will allow Canberra to build a fleet of nuclear submarines. The U.S. responded by accusing China of “aggressive” and “destabilizing” behavior within the South China Sea.
  • The U.S. also reassured France that it considers Paris a vital partner in maintaining stability in the Indo-Pacific region. The remark came as France had expressed outrage over the deal after its agreement to build submarines with Australia was scrapped. In response, France cancelled plans for a celebration of U.S.-France relations in D.C.
  • The European Central Bank may raise rates earlier than expected after an unpublished report showed that the central bank expects to hit its 2% target by 2025.
• Parliamentary elections in Russia are expected to favor the United Russia party. However, there is growing sentiment that there could be a sizable protest vote for an opposition candidate.
• In an open letter, former Argentine President and current Vice President Cristina Fernandez de Kirschner blamed President Alberto Fernandez for the ruling coalition’s loss in a primary election. She attributed the loss to the president’s decision to impose fiscal austerity and is urging him to move in another direction.
• European food supply is under threat as a shortage in natural gas, a key component in ammonium nitrate, has made it difficult for fertilizer companies to maintain production. Additionally, lockdowns in Asia have added to these woes. Key inputs such as palm oil, tin, and cocoa prices have soared as firms have been forced to close down.
• If you are looking to get away, Thailand is offering 10-year visas for rich pensioners and retirees. Under the scheme, pensioners would need to invest $500,000 into government bonds or real estate and have an income of $80,000 a year. Retirees would need to invest $250,000 in government bonds or real estate and have an income of $40,000 a year. The government has struggled to bounce back from the pandemic as its key industry, tourism, has been hit hard by the lack of travelers.

 Economics and policy:

• Federal Reserve Chair Jerome Powell has authorized a review of the central bank’s ethics rules regarding trading by policymakers. The review comes after financial disclosures of Fed officials Eric Rosengren and Robert Kaplan showed that the two traded securities while the Federal Reserve was implementing controversial policy accommodation.
• Transportation prices continue to be a problem for firms. Rising shipping costs are making it harder for firms to fill orders. So far, firms have been reluctant to push these prices on to consumers. However, if these problems persist, suppliers may have no choice.
• Democrats are considering a carbon tax to incentivize moderates to support the $3.5 billion spending bill.
• President Biden announced that his administration will look into why retail gasoline prices are so high. Gasoline prices rose $3.19 per gallon on Wednesday, the highest since October 2014.
• On Thursday, House Representatives Alexandria Ocasio-Cortez (D-NY) and Cori Bush (D-MO) pushed Congress to include an expansion of enhanced unemployment aid in the $3.5 trillion tax plan.

 China:

• China officially applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on Thursday. The deal is a revised version of the Trans-Pacific Partnership (TPP). China’s acceptance into the trade bloc is not certain given its ongoing disputes with two members, Australia and Canada. However, China’s strong growth during the pandemic may sway countries to admit it.
• Evergrande (EGRNF, $0.35) is on the brink of default and fears of contagion have spread throughout China’s financial system. Shares of Ping An Insurance (PNGAY, $14.75), China’s largest insurer, fell due to concerns that it may have some exposure to the property group. The company issued a statement on Friday to reassure investors that it wasn’t exposed; however, angst throughout China still remains. In response to the crisis, the People’s Bank of China has injected $14 billion into the financial system.
  • The world’s largest stablecoin, Tether, stated that it doesn’t hold any Evergrande commercial paper.

COVID-19: The number of reported cases is 227,089,247 with 4,670,690 fatalities.  In the U.S., there are 41,785,979 confirmed cases with 670,009 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 462,384,885 doses of the vaccine have been distributed with 383,038,403 doses injected.  The number receiving at least one dose is 210,700,361, while the number receiving second doses, which would grant the highest level of immunity, is 180,086,143.  The FT has a page on global vaccine distribution.

• Italy is making it obligatory for all workers to show proof of vaccination, a negative test, or a recent recovery from infection before going to work.
• Brazilian authorities have halted vaccinations of teenagers to investigate a reported death.
• Idaho has authorized hospitals to ration care as the healthcare system has become overwhelmed with COVID-19 cases.
• Public health officials in Africa have requested that the United Nations speed up delivery of the vaccines.
• The U.K. is considering easing COVID-19 restrictions for international air travel.
• A panel of independent vaccine advisors is set to meet on Friday to discuss whether the FDA should approve Pfizer’s booster shot for those 16 years and older. The FDA is not obliged to follow the advice of the panel; however, the panel does hold a lot of influence over the FDA’s decision to approve the shot.

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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.

• The U.K., U.S., and Australia have agreed to cooperate on several defense initiatives, including AI and cyber, but the item catching headlines is that the U.S. will assist Australia in acquiring nuclear submarines. This decision was something of a surprise—Canberra had already agreed to acquire these subs from France.  Paris was, in a word, “displeased,” although the program was struggling to work.  This decision is monumental.  Until yesterday, only the U.K. shared in U.S. nuclear propulsion technology.  Obviously, this decision won’t make anyone happy in Beijing.  Having nuclear subs will make Australia a potent military power in the region.  The following are a couple of takeaways:
  • By stiffing France, the U.S. is adding evidence that the EU simply isn’t that important anymore. This outcome was probably inevitable after the fall of the Soviet Union, but this action is just one in a growing list that shows Washington really doesn’t care all that much about the EU’s concerns.
  • Australia’s decision to take this step reflects its poisoned relations with Beijing. This chart shows the drift.

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.

• The Democratic Congressional leadership is trying to figure out a way to raise the debt ceiling by month’s end as the GOP refuses to participate. Although we expect something to be done at the 11^th hour, there is a possibility of a government shutdown.
• Regarding the budget, centrist Democrats have scuttled the leadership’s goal of increasing government control over drug pricing. Although this isn’t the last word on the subject, it shows how difficult it will be to meet the goals of centrists and progressives.
• We doubt this bill will gain traction, but there is a measure that would force the Fed to restrict the ability of banks to fund the fossil fuel industry. The bill itself may be a messaging device.  As we noted yesterday, Sen Warren’s (D-MA) call to break up Wells Fargo (WFC, USD, 46.64) could be used as a litmus test for Chair Powell’s renomination.  This bill might be seen as “see what we could do if we had a different Fed Chair.”  In other words, a sympathetic Fed Chair might enforce the goals of this bill without the bill even being passed.
• The Treasury is looking into the run risks of stablecoins, the crypto that acts like money markets. We view this as a serious risk.  It is always difficult to know in advance the fount of a financial crisis, but our best guess is that these products are the most likely to foster the next one.
• It turns out that the greatest risk for New Orleans from Hurricane Ida wasn’t the storm, but the loss of electricity after the storm was over. Heat-related deaths were the leading cause of fatalities.
• The “buy now, pay later” cards are becoming popular. To us, it looks like a way to charge more interest and fees than one can get from credit cards.
• The WSJ has been investigating Facebook (FB, USD, 373.92). Earlier reports showed how its subsidiaries were dangerous for teenage girls.  The most recent one shows how the company facilitates societal anger.

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

• European Commission President Ursula von der Leyen gave her State of the Union address Although such speeches are mostly a wish list of policies a leader wants, we saw two as notable. First, the EU appears to want a self-contained semiconductor industry.  If there was ever evidence that deglobalization was accelerating, this is it.  Second, the EU wants to build a foreign investment platform similar to the Belt and Road project.  We don’t see how that would work, but it does suggest the leadership is worried about China’s inroads into Eastern Europe.
• PM Johnson announced a cabinet reshuffling yesterday. For the U.K., there are many interesting stories, but for those outside the U.K., it doesn’t mean a whole lot.  The most interesting to us was the demotion of Dominic Raab from the position of foreign minister, who was likely hurt by the exit from Afghanistan.
• France claims it has killed the head of Islamic State in the Sahara.
• The Shanghai Cooperation Organization will hold meetings this weekend. Although China dominates this organization, India is also a counterweight.
• North Korea tested a couple of ballistic missiles yesterday. It appears Kim wants some attention.  It should be noted that South Korea also did.
• The South African government was hit with a large ransomware attack.
• Japan is conducting military exercises designed to prepare for the defense of its smaller islands. These islands would be particularly vulnerable if Taiwan fell under China’s direct control.
• There is great fear that Afghanistan may spiral into civil war. It appears that even the Taliban are fighting each other.

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.

• The booster shot debate is heating up. The drug companies seem keen on supporting another round of shots, but researchers say the data isn’t all that compelling.  For politicians, there is always a goal of doing something, but there isn’t a preponderance of opinion.  Some FDA scientists have resigned recently due to pressure to approve boosters.

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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.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  U.S. equity futures are exhibiting a familiar pattern of being stronger overnight and fading into the opening.  It is clear that market momentum is waning.  We think this action is a correction of sorts, but it will be difficult to push the market much lower with so much liquidity available.  Our coverage begins with a look at China, focusing on the continuing financial situation.  We then have a few political notes.  Economics and policy are up next, followed by the international roundup, and we close with the pandemic update.

 China:  Evergrande (EGRNF, USD, 0.40) remains in the news.

• Is Evergrande going to trigger a Minsky moment in China (and elsewhere)? The shadow of default is looming ever greater.  We have learned over the past 25 years that when financial systems are deregulated, the debt of a troubled company can end up in places regulators and market participants don’t expect.  U.S. regulators loath to bail out Lehman because they had already rescued Bear Stearns and thought other firms would take that experience as a warning.  However, bailouts create a moral hazard, and China has mostly avoided defaults.  Thus, investors really don’t take credit quality into account.
  • So how bad could it get? In reality, as one of my undergrad professors used to say, “it’s an empirical problem,” which is a polite way of saying, “hold my beer.”  Until we actually see default, we won’t know how bad it can get.  We know the company has over $300 billion in debt.  We are watching the following:
    • What has the debt been used for? We know Chinese banks hold much of the debt, meaning the government has mechanisms to manage a default.  The banks can restructure the debt over time.  A bigger concern is whether bonds and commercial paper are held in other non-bank entities.  Given the high yield on the paper, it is possible that other shadow banking entities hold it as an asset.  In that case, a default could ripple into other parts of the economy (including outside China).  There are rumors in financial, social media that Tether, the stablecoin, has Evergrande commercial paper as an asset.  This allegation is not confirmed, but if true, it could have widespread effects on crypto assets.
    • Another rumor is that more than 128 banks and 121 non-banks have some degree of exposure to Evergrande’s debt.
    • The problems of Evergrande could trigger similar concerns among other Chinese real estate developers.
    • “Behind every great fortune is a crime”—Balzac. Since Deng, there has been an undercurrent of corruption in China.  We have seen it described as “good” corruption, which includes bribes and gifts designed to overcome the web of regulation.  We have also seen “bad” corruption, which is doing, well, bad things.  Most in business have likely relied on some form of corruption.  Xu Jiayin, the chair of Evergrande, is known for his “gifts.”  If he goes down, he very well may take a large number of officials with him.
    • Yesterday, we showed clips of civil disorder among the holders of wealth management products. If Evergrande fails, not only will these holders become upset, but owners of real estate could as well.  Beijing is really good at quelling unrest, but this might be a challenge.
  • To conclude, we don’t know how this will play out, but there is the potential for dislocation. The dollar and Treasuries will likely benefit the most.
• As we note below, China’s economic data released overnight was weak. Spending activity slowed, perhaps due to the recent outbreaks of COVID-19.  Industrial output was also slow.  Under normal circumstances, we would expect the PBOC to start stimulating, but if Xi has decided to attack the bad debt problem, the response might be slow.
• It is reported that President Biden suggested a summit with General Secretary Xi. Xi demurred.
• According to reports, Chinese hackers attacked Israeli tech companies and the government. They took pains to masquerade as Iranian, even using Farsi in their coding.
• Over the past 18 months, we have noted the swings in China’s hog market, which was hit hard by the African Swine fever virus. As prices rose, new entrants entered the market, lured by low-interest rates and government subsidies.  U.S. microeconomic textbooks used to have a section on the “hog cycle,” describing how the price would rise, leading to herd expansion and resulting in lower prices.  That is what is happening in China; hog prices have plunged, and deeply indebted ranchers are in trouble.

Political notes:  Here are a couple of items that caught our attention.

• In Woodward and Costa’s new book, it is reported that SoS Blinken and SoD Austin tried to extend the U.S. presence in Afghanistan. It is clear the exit from Afghanistan was chaotic and poorly planned.  The opposition to exit from Austin and Blinken may have led to less than diligent efforts to exit on the assumption that there would be more time.
• One undercurrent we watch in American politics is gerrymandering, the process of shaping Congressional districts for a party’s advantage. Good government would argue that non-partisan allocation would offer better representation, but political parties exist for the sole purpose of winning elections.  Although the GOP is widely accused of gerrymandering, we note that Democratic leaders in New York appear poised to use the practice to their advantage.

Economics and policy:  Real household income declined last year, and there is a threat to banks.

• Real median household income fell last year, so did family income.

Household income measures all household groups, including those who are unrelated.  Family income measures incomes of households where the members are related by kinship or marriage.

• The tax proposal churn continues. There is an apparent proposal to apply the wash sale rules to crypto, currencies, and commodities.  The wash sale rule currently applies to equities.  Although the goal is to apply the rule to crypto, catching currencies and commodities is a new twist.  This action doesn’t make much sense for commodities.  Tax rules require the payment on unrealized gains at year’s end and making a trader wait would be a severe disadvantage.  We doubt this rule will be included, but it bears watching.
  • Meanwhile, progressives are starting to realize that most of their goals for taxes are not going to make it into the final legislation.
• Elizabeth Warren wants the Fed to break up Wells Fargo (WFC, USD, 46.05). It appears she wants to return to a Glass-Steagall world.  Under normal circumstances, we wouldn’t comment on such things, as the request would fall on deaf ears.  However, progressives want to oust Chair Powell, and this request could be a litmus test.  If he agrees with the proposal, she will support his renomination.  If he rejects or ignores it, she will oppose it.  We doubt we can return to a Glass-Steagall world, but this might be an interesting test case.
• Former intelligence officials argue that using anti-trust against tech firms will hurt the U.S. in the race against Chinese tech. We are not surprised to see such sentiment; the political establishment benefits from tech and doesn’t want to see it disturbed.  We are not sure this makes sense for either regulators or the firms themselves.  If it is imperative they be allowed to hold near-monopoly positions, it makes sense to regulate them similar to utilities.  It is not necessarily the case that breaking them up would hurt the U.S. technology effort.  It might hurt the companies but make the industry stronger (e.g., the breakup of Standard Oil).
  • Apparently, Facebook’s (FB, USD, 376.53) Instagram is bad for teen girls, and the company knows it. The Senate has questions.

International roundup:  We get the State of the EU today, and Russia holds legislative elections over the weekend.

• European Commission President Ursula von der Leyen will hold her State of the Union address today.
• Catalan independence has been on the backburner due to the pandemic. But the issue returns as talks begin today.
• The most recent Eurobond was oversubscribed 11 times.
• Russia will hold the State Duma elections this weekend. We see an aggressive crackdown on opposition parties, and it is unclear what Putin is worried about.
• The army in Myanmar is continuing its war against former protesters, which is evolving into a low-grade civil war.
• Lithuanian angered Beijing by effectively giving Taiwan an embassy. Slovenia says the EU should support Vilnius.  Germany would not likely help this effort.
• Islamic State is returning to Syria.

COVID-19:  The number of reported cases is 225,924,019, with 4,651,193 fatalities.  In the U.S., there are 41,367,771 confirmed cases with 663,963 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 458,771,465 doses of the vaccine have been distributed with 381,453,265 doses injected.  The number receiving at least one dose is 209,982,936, while the number receiving second doses, which would grant the highest level of immunity, is 179,289,983.  For the population older than 18, 65.1% have been vaccinated.  The FT has a page on global vaccine distribution.

• When India had a massive rise in cases earlier this year, it suspended vaccine exports. Now that its cases have declined, there is pressure on Delhi to resume exports.  India is a major exporter of drugs and vaccines.
• The U.K. will begin distributing booster shots next week.
• President Putin is in quarantine after being exposed to the virus by a member of his court.

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