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

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we begin with the latest developments regarding the infrastructure spending bills making their way through Congress and the outlook for the Federal Reserve’s monetary policy.  We next review the latest signs of U.S.-China economic decoupling and geopolitical risks surrounding Taiwan.  We then turn to a range of other international news items of note, and we end with the latest news on the coronavirus pandemic.

U.S. Fiscal Policy:  Separate from the bipartisan “hard” infrastructure bill totaling approximately $1 trillion that is making its way through Congress, Democrats on the Senate Budget Committee are working to finalize their “soft” infrastructure bill, focused on programs like child care and climate change, which they will try to pass without Republican support.

• Rather than the price tag of $6 trillion proposed by Senator Bernie Sanders (D, Vt.), sources say the negotiators are coalescing around $3 trillion to $4 trillion.
• Democrats are also weighing a number of tax increases to help pay for the plan, including raising the corporate tax rate from 21%, tightening the net on U.S. companies’ foreign earnings, and boosting the capital gains rate.

U.S. Monetary Policy:  In an interview with the Wall Street Journal, St. Louis FRB President Bullard said he is ready to start slowing the pace of the Fed’s bond-buying as soon as his colleagues are.  It is in part because of concerns that the asset purchases risk overheating the housing market.  According to Bullard, “We do want to do it gently and carefully, but I think we’re in a very good position to start a taper. I don’t need to get going tomorrow, but I think we’re . . . in very good shape for this.”  Naturally, the statement has the potential to reignite concerns about higher interest rates and boost volatility in the financial markets again.

United States-China:  Administration officials say that President Biden, in conjunction with issuing new sanctions this week on China for its human rights abuses in Hong Kong and Xinjiang, will warn U.S. firms that it is becoming riskier to operate in Hong Kong because of Beijing’s growing control over the city.  In particular, Biden will warn about:  1) the Chinese government’s ability to access any data that foreign companies store in Hong Kong, and 2) a new law that allows Beijing to impose sanctions against anyone who enables foreign penalties to be implemented against Chinese groups and officials.  The move would mark the first time a U.S. administration has issued a business advisory relating to Hong Kong.

• The administration’s move clearly intends to make U.S. firms think twice about starting or maintaining business operations in Hong Kong, which in turn would tarnish the prize Beijing got when it took greater control over the city last year.
• More broadly, the move demonstrates that the U.S. has adopted the tactic of hitting China where it is vulnerable, i.e., exploiting its dependency on exports (with tariffs and other trade barriers, for example), its dependency on foreign portfolio capital (by discouraging U.S. investors from buying Chinese stocks, for instance), its dependency on foreign technology (by clamping down on sales of semiconductors, etc.), and now its dependency on foreign direct investment capital and business expertise in Hong Kong.
• Most broadly, the move is yet another step on the road toward economic uncoupling and the establishment of at least two major trade blocs, one centered on China and one on the U.S.  As shown by Beijing’s recent moves to block some of its companies from listing on foreign stock exchanges, China is moving in the same direction.  The continuing trend will undermine globalization and create a risk that the global economy will become less efficient over time.  As we have argued repeatedly, the moves could also impact investors as collateral damage.

Japan-China-Taiwan:  The Defense Ministry’s annual “Defense of Japan” white paper has for the first time said that Japanese national security depends on stability in the area around Taiwan.  According to the report, “The stability of the situation around Taiwan is important, not only for the security of our country, but for the stability of the international community . . . Our country must pay close attention to this, with an even greater sense of vigilance.”

• The statement follows a range of other Japanese government pronouncements showing it sees vital national interests in Taiwan’s security. This includes a statement by Deputy Prime Minister Aso last month that Japan would have to help the U.S. defend Taiwan in the event it is attacked by China.  The message is that Japan will be a key player in intensifying rivalry between the U.S. and China and the geopolitical tensions around Taiwan.
• Of course, the new Japanese white paper has already generated strong condemnation by China.  Given China’s traditional strong pushback against critics and threats, the statement is likely to worsen ties between the two countries and could produce economic or financial repercussions for Japanese assets.

Eurozone Monetary Policy:  In an interview with the Financial Times, ECB Chief Lagarde warned that the institution’s new “symmetric” inflation target of 2%, which would allow temporary moves above that level, could spark disagreement next week when ECB policymakers meet to consider readjusting their current forward guidance.  With the Eurozone’s inflation rate already surpassing the new target earlier this year, some policymakers will likely argue for tighter policy, while some will argue for keeping the current level of accommodation.  In any case, any adjustment to the guidance could spark volatility in European bond and stock markets.

Bulgaria:  The anti-establishment There is Such a People party, headed by pop star Slavi Trifonov, has reportedly won almost a quarter of the vote in last weekend’s elections, making Trifonov the likely leader of Bulgaria’s next government.  However, Trifonov has sent signals that he may try to lead a minority government, which would likely be unstable.

United Kingdom:  Citing the results of recent stress tests and lower-than-expected loan losses, the Bank of England has removed restrictions on bank dividends and share buybacks imposed during the pandemic.  The BOE determined the sector to be resilient enough to absorb any further COVID-19 shocks, and with the prospect of greater returns of capital, the move is likely to be positive for British financial services stocks in the near term.

Global Oil Market:  The International Energy Agency warned that if the OPEC+ group of major exporters doesn’t soon reach a deal to boost production, global oil markets will tighten “significantly” in the coming months, pushing oil prices higher and putting “a drag on the economic recovery, particularly in emerging and developing countries.”

• According to the IEA, global oil demand jumped by an estimated 3.2 million barrels a day in June to 96.8 million bpd, within about 3% of pre-pandemic levels.
• In its updated forecast, the agency expects global demand to continue recovering in the third quarter.  It expects demand to average 96.4 million bpd in full-year 2021 and 99.5 million bpd in full-year 2022, compared with the pre-pandemic peak of about 100 million bpd.

Cuba:  As we reported yesterday, protests against economic difficulties broke out across Cuba over the weekend.  Yesterday, the government began a sharp crackdown on the demonstrators.  The crackdown involved cutting off most communications with the outside world and deploying security forces across the country (including, for the first time, anti-riot equipment like tear gas and rubber bullets).  According to activists, police arrested more than 100 people, many of whose whereabouts remain unknown.  All the same, if the apparently spontaneous outpouring of anger signals that Cubans have lost their previous fear of protesting, instability could increase on the island.

Haiti:  Also in the Caribbean, Haiti is quickly devolving into chaos and criminality after President Jovenel Moïse was assassinated in his home last week.  Over the weekend, a group of U.S. officials traveled to Haiti and visited with no less than three politicians who claim they have the right to take power in the country.  One ray of hope is that interim Prime Minister Claude Joseph and Prime Minister Designee Ariel Henry are reportedly considering working together to stabilize the country and pave the way for fresh elections.

South Africa:  Protests and violence are also spreading in South Africa in response to last week’s jailing of Jacob Zuma, the former president, for contempt of court.  The government has deployed the army to help the police control the situation.  So far, six people have been reported killed.  One thing to watch will be whether the violence disrupts the country’s key mining sector.

COVID-19:  Official data show confirmed cases have risen to 187,412,467 worldwide, with 4,043,222 deaths.  In the United States, confirmed cases rose to 33,890,840 with 607,445 deaths.  Vaccine doses delivered in the U.S. now total 387,006,120, while the number of people who have received at least their first shot totals 184,365,333.  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, 55.5% of the U.S. population has now received at least one dose of a vaccine, and 48.0% of the population is fully vaccinated.
• In France, the government has responded to the fast-spreading Delta variant by imposing a fresh set of restrictions on people who aren’t yet vaccinated or haven’t recently tested negative for COVID-19.  Those people will not be allowed to enter businesses such as bars, restaurants, shopping malls, concert halls, and hospitals.  Vaccinations will also be made compulsory for all health workers.  The new restrictions highlight the economic risks arising as the Delta mutation spreads around Europe and many other regions.
• With the dangerous Delta variant spreading around the world, the Israeli government this week will begin offering third doses of the vaccine from Pfizer (PFE, $39.76) to adults with serious pre-existing medical conditions.  Israel will therefore become the first country in the world to officially offer a so-called “booster” of the company’s jab.  Other countries are also considering booster shot programs.
• The FDA ordered that the vaccine from Johnson & Johnson (JNJ, $169.48) carry a label warning that the shot has been linked to a very small number of cases of Guillain-Barré syndrome.  Guillain-Barré syndrome is a rare neurological disorder in which the immune system attacks nerves, causing temporary but potentially severe paralysis. The risk is a known one with vaccines, including some influenza vaccines and a leading shot to prevent shingles.
  • The vaccines from Johnson & Johnson and AstraZeneca (AZN, $60.50) have also been linked to a very small number of blood-clotting issues, although officials continue to argue that the benefits of the vaccine outweigh the risks involved with it.
  • Johnson & Johnson, AstraZeneca, the University of Oxford, and other outside scientists are conducting early-stage research into whether potential modifications of their vaccines could reduce or eliminate the risk of those blood clots.

 Economic and Financial Market Impacts

• As governments continue to grapple with the pandemic, their increased spending continues to drive up borrowing and debt levels, potentially creating economic risks down the road.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  The All-Star break is upon us, the unofficial marking of midsummer.  U.S. equity futures are mixed this morning, with the S&P 500 lower but the NASDAQ higher.  Another heat dome has emerged for the western third of the U.S.; Death Valley reached a high of 130^o over the weekend (we are aware it’s a dry heat…).  And, congratulations to Italy and Argentina for their wins in regional soccer tournaments.  Our coverage begins with comments on the international tax meetings.  We then discuss economic and market news.  The international roundup is next, followed by China news.  We close with the pandemic update.

The global tax meetings:  Finance ministers from the G20 met in Venice over the weekend to discuss a minimum global corporate tax of 15%.  The G20 all agreed to the measure and, so far, 130 nations have signed up for the pact.  There are several nations, all considered tax havens, that have refused to join.  Ireland is the most notable.  An enforced minimum tax would reduce the practice of firms moving profits to tax havens to reduce their tax bills.  Although the Biden administration has championed the measure, it faces an uncertain path in Congress.  The U.S. did get one item in the negotiations; agreeing to the corporate minimum has led the EU to delay digital service taxes, which would have targeted American tech firms.

Economics and policy:  Inflation forecasts rise, a budget compromise is brewing, and immigration is rising.

• It’s a busy week ahead. CPI data is out on Tuesday, and Chair Powell testifies before Congress on Wednesday and Thursday.
• A WSJ survey of economists shows their forecasts are suggesting an upward and more lasting shift to inflation. We tend to agree with this view.  At the same time, it is important to note that inflation running in a range of 2% to 3% isn’t 1970s inflation.  There is a tendency among some investors to see any backsliding as a return to the inflation crisis of that decade.  There is a chance of that occurring at some point in the future, but it could be over a decade away.
  • One generational pattern to watch is to see whether baby boomers still have the “muscle memory” of how to adapt to higher prices. Buying in bulk and doing more of the work within the household, whether it’s cooking, cleaning, or gardening, is part of the routine.  For generations that have lived in a low inflation environment for most of their lives, paying others for these things made perfect sense.  It may not be the case going forward.
• Senator Sanders (I-VT) has apparently caved on his insistence for a $6.0 trillion budget. According to reports, it looks like the starting point will be $3.5 trillion, and that will likely be trimmed through the process.  To paraphrase Hamilton, Sanders didn’t have the votes.
• As workers start returning to the office, clothing manufactures are reporting a rise in sales as the returnees deal with their post-pandemic bodies. Although some are buying smaller sizes, most are having to “upsize.”
• The U.S. labor markets have been both loose and tight, according to former NY FRB President Bill Dudley. There are widespread reports of firms being forced to pay signing bonuses and higher wages to fill positions.  An interesting development is that in response, we are starting to see a rise in immigration.

International roundup:  Cuba is facing widespread protests, and the outcome of the Bulgarian elections is unclear.

• Cuba is facing widespread protests as the economy falters. The pandemic weakened tourism in particular, and the collapse of the Venezuelan economy has hurt the Cuban economy as well.  Overall, Cuba has a two-sector economy, one for those with hard currencies and the other using pesos.  Like protestors everywhere, actions were organized over social media.  What makes these protests interesting is that the Castro family is no longer running the country.  Fidel and Raul had the revolutionary credibility to keep most citizens pacified.  It is unclear whether President Miguel Díaz-Canel has the same ability to sway.  Of course, he blamed the island’s economic woes on the U.S. embargo.  Although the embargo plays a role, it has been in place for decades, and it is hard to make the argument that the current problems are caused by the U.S.
• North Korea is intimated because international aid groups are interfering in the country’s internal affairs. That position does not bode well for North Koreans.
• Bulgaria held elections over the weekend. There does not appear to be a clear outcome to the vote, which may lead to instability.
• Three years ago, the EU launched the Permanent Structured Cooperation (PESCO) program, which promised to be a platform for European defense. A leaked report suggests that there has been little progress in achieving the program’s goals.
• International piracy is at its lowest level in 27 years.

China:  China tech firms continue to face listing restrictions, Beijing prepares to retaliate against a U.S. blacklist, and China’s South China Sea claims are rejected.

• Beijing regulators have been actively restricting Chinese tech company’s ability to list in the U.S. ByteDance is the latest firm to shelve its U.S. IPO.
• The U.S. recently blacklisted Chinese firms with ties to Xinjiang. China says it will retaliate, although nothing specific has emerged.
• Maintaining Trump policy, the Biden administration has rejected China’s South China Sea claims. The U.S. also reiterated its support for the Philippines in its ongoing tensions with China.

COVID-19:  The number of reported cases is 186,902,683 with 4,033,883 fatalities.  In the U.S., there are 33,854,127 confirmed cases with 607,157 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 387,006,120 doses of the vaccine have been distributed, with 334,151,648 doses injected.  The number receiving at least one dose is 184,132,768, while the number of second doses, which would grant the highest level of immunity, is 159,266,536.  The FT has a page on global vaccine distribution.

• As the Delta variant spreads in Europe, the reopening to tourism is in doubt. Increased infection rates are raising concerns about the path of the EU economic recovery.
• Malta becomes the first EU nation to ban all unvaccinated visitors.
• France, facing a rise in infections, is considering mandatory vaccination for health care workers and the wider use of vaccine passports.
• Taiwan’s tech giants are working to acquire vaccines for the island.

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

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities appear to be headed for a higher open this morning. Today’s report begins with a discussion of what happened in the financial markets yesterday. International news follows, with the EU’s decision to boost its anti-money laundering efforts and growing tensions within Mercosur. U.S. economics and policy news are up next, including an update on the Afghanistan withdrawal. China news follows, and we end with our pandemic coverage.

About yesterday: On Thursday, rising doubts about the global economy led to a rotation away from risky assets into safe haven assets. As a result, the S&P 500 closed lower and Treasury yields dropped to a three-month low. The rotation to risk-off assets may be attributed to fears of policy tightening and a reduction in stimulus. Earlier this week, the Federal Reserve minutes revealed that the central bank is considering tapering its bond purchases. Meanwhile, expectations that China will reduce its reserve requirements have led to speculation that its latest GDP numbers will miss forecasts. In short, the market pessimism can likely be attributed to investors moderating their growth forecasts for the global economy. Additionally, the rapid spread of the delta variant has likely raised concerns that the pandemic may be around longer than originally anticipated. San Francisco Fed President Mary Daly warned that she believed the biggest threat to growth is a premature declaration of victory over COVID-19. Countries have already begun reinstating restrictions following the spread of the delta variant.

We believe that forecasts of global growth were based on the best-case scenario, thus we are not surprised about yesterday’s market response. In January, investors likely assumed that by this time vaccination rates would be higher, COVID-19 cases would be lower, and the world would be closer to returning to its pre-pandemic normal. These assumptions may have led investors to hold elevated growth expectations. Halfway through the year, it seems this forecast may have been overly optimistic. Going forward, we think investors should be cautious about making drastic changes to their portfolios as there still appear to be a lot of unknowns about this recovery. Over the next few months, it will become more evident whether or not inflation is indeed transitory or permanent. Also, as demand starts to decelerate, we will see how firms and the labor market adapt. In short, we still believe it is too soon to tell when the economy will return to normal. As a result, we recommend a more cautious approach to managing portfolios in order to avoid any unwelcome surprises.

International news: European Union crackdown on money laundering, Brussels and London argue over Brexit bill, and Uruguay wants to find trading partners outside of Mercosur.

• The European Union is expected to introduce a new anti-money laundering agency. Following a series of failures that have led to consternation from U.S. officials, the new agency will look to improve efforts to crack down on dirty money entering the bloc.
• The European Central Bank announced a new policy change that will likely pave the way for monetary easing to continue for the foreseeable future. In a statement, the central bank said it will aim to keep Eurozone inflation at 2% over the medium term as opposed to the current target below 2%. The new move will likely allow the central bank to overshoot its 2% target whenever it is deemed appropriate.
• Brussels and London are currently in a dispute about the size of the Brexit bill. The EU has the figure being closer to £40.8 billion and the U.K. has the bill at £35-£39 billion. Although this situation is unlikely to lead to a major break in ties, we suspect if this issue doesn’t get resolved soon relations between the sides may deteriorate. Polls suggest that British people do not like the fact that the U.K. is paying more than £25 billion to break away from the EU.
• Uruguay has signaled that it would like to look for trade deals outside of Mercosur. The decision comes after Uruguay failed to come to an agreement with other members within the trading bloc to reduce trade barriers and allow the group to look at more trade deals with outside countries.

Economics and policy: U.S. withdrawal update, regulators to target shipping monopolies, and American frackers decide to pay down debt.

• The Biden administration announced that the interpreters that helped soldiers during the Afghanistan war will be transported out of the country. The move comes as U.S. troops begin their full withdrawal out of Afghanistan. On Thursday, President Biden announced that the U.S. military mission will conclude on August 31.
  • Fears of a Taliban takeover in Afghanistan are becoming apparent. On Friday, the Taliban delegation in Moscow announced that the group now controls 85% of the country. It has offered reassurances to Russia that it will not seek to attack others and has informed China that it will not interfere with its internal affairs.
• U.S. regulators are going to reduce rising shipping costs by targeting shipping companies that are operating as monopolies. The Biden administration will be targeting foreign-owned shipping alliances in ocean shipping and rail industries. President Biden is expected to sign an executive order that will ask the Federal Maritime Commission and the Surface Transportation Board to crack down on consolidation and aggressive pricing.
  • In addition to these measures on shipping companies, President Biden is expected to sign a series of executive orders designed to promote competition among big tech and agriculture firms. He will also look to curtail the use of non-compete clauses for employees.
• Seven states have now reported cases of mosquitos infected with the West Nile Virus, four of which have found cases that have been transmitted to humans.
• Shale companies have largely used profits from the rise in oil prices to repay debt as opposed to reinvesting the funds to expand drilling capacity. As a result, it is unlikely that U.S. oil production will pick up anytime soon.

 China:

• Regulators in China requested that Didi (Didi, $11.38) change its mapping function before its U.S. listing. The request was due to fears that the app could be a security risk as it may expose sensitive government locations. The request provides insight into why the Chinese government decided to come down on the tech company less than a week ago.
• The Cyberspace Administration of China is gaining more clout as it adapts to its new role of regulating U.S.-listed Chinese companies. Its growing influence has put investors on notice as it has shown that it will be undeterred by investor backlash in its regulation of companies it believes is a threat to China’s national security.

COVID-19: The number of reported cases is 185,663,348 with 4,012,659 fatalities.  In the U.S., there are 33,792,445 confirmed cases with 606,482 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 385,495,790 doses of the vaccine have been distributed with 332,345,797 doses injected.  The number receiving at least one dose is 183,237,046, while the number of second doses, which would grant the highest level of immunity, is 158,287,566.  The FT has a page on global vaccine distribution.

• Spectators will be banned from watching the Olympics games at stadiums. Rising cases in Tokyo forced the government to put the city under a state of emergency.
• A White House official announced that COVID-19 cases are expected to rise in the U.S. over the next few weeks due to the spread of the delta variant. The official also warned that “virtually all COVID-19 hospitalizations and deaths” are coming from people who have not been vaccinated.
• Pfizer (PFE, $39.25) has requested emergency authorization for the third booster shot of its COVID-19 vaccine. Early data shows that the booster can increase protection against the virus.
  • So far, the approval odds appear to be bleak as the FDA and CDC announced that fully vaccinated people do not need booster shots at this time.

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

[Posted: 9:30 AM EDT] | PDF

Good morning.  The Ever Given, the ship that blocked the Suez Canal, has finally been allowed to set sail!  U.S. equity futures are sharply lower this morning.  There doesn’t appear to be an exact cause, but equities have been strong recently, and with uncertainty on the rise surrounding monetary and fiscal policy, some degree of caution makes sense.  As stocks decline, long-duration Treasury yields continue their path lower.  Our coverage today begins with a recap of the Fed minutes.  There is an update on the situation in Haiti.  We also take a look at the U.S. response to the recent hacking events.  China news is up next, followed by the international roundup.  Economics and policy follow, with a tech discussion next, and we close with the pandemic update.

The Fed:  The Fed minutes didn’t contain any major surprises.  But that doesn’t mean the report didn’t detail concerns.  There is a group on the FOMC that is pushing for removing stimulus.  Throughout the report, there were comments from “district sources” that detailed the problems of hiring, supply bottlenecks, and other inflationary issues.  The regional presidents are hearing from their local boards that there are concerns about inflation pressures.  At the same time, members did note that the overall labor market has not fully recovered and questioned the idea of tightening.  To some extent, the Fed is dealing with the Tinbergen problem[1]; it has one policy tool and divergent problems.  The inflation data and supply issues do support tightening, but the overall labor markets would argue for continued stimulus.  The issue probably comes down to the assessment of the future.  If the current bottleneck problems are temporary, the Fed should do nothing.  In other words, if logistical problems will be fixed with time, and if the labor markets become less strained as schools reopen and income support is withdrawn, tightening now would be like raising the policy rate due to the inflation caused by a weather event.  On the other hand, if the current logistical issues will be long-lasting, the Fed should tighten.  Housing is a good example; logic would suggest the problem in housing is on the supply side.  The industry, due to the disruption triggered by the Great Financial Crisis, has probably under built new housing units by 500,000 per year since 2008.  Removing stimulus to dampen home prices by reducing demand doesn’t solve the under-building problem.  If the Fed tightens by tapering, it runs the risk of a policy error and recent market action, especially the decline being seen in long-duration Treasuries, suggests worries of premature policy tightening.

Haiti:  The turmoil continues.  As we noted yesterday, Haitian President Jovenel Moise was assassinated by unknown gunmen.  Security forces have killed four of the assailants and have arrested two others.  The country is currently being run by interim PM Claude Joseph, although it is unclear how much authority he has.  A state of emergency is in place.  It is still unclear who was behind the assassination.  There is a growing risk of civil unrest, which may lead to increased emigration.

The hack:  The problem with red lines is that if they are crossed, one must either respond or look weak.  Although there is no evidence that the Russian government was behind the recent Kaseya hack, it’s also obvious that these firms operate within Russia because they feel they are being protected.  President Biden threatened Russia if such support continued, and the recent hack is challenging that threat.  The president has been meeting with advisors to determine a response.  It is uncertain what the U.S. will do.  One area that clearly needs to be addressed is the paying of ransoms.  If the action did not involve money, the attacks would be less likely.  But as far as doing something against the Russian state, the actions are less obvious.  However, if something isn’t done, the president will look weak.

 China:  The U.S. confirms Taiwan policy, China cracks down on foreign IPOs, and LGBT groups are being restricted.

• Kurt Campbell, the U.S. coordinator for the Indo-Pacific, recently participated in an Asia Society Policy Institute event. A couple of notable comments emerged.  First, Campbell indicated the U.S. did not support Taiwan’s independence.  Second, he warned China against using force to unify the island with the mainland.  No big surprises here—this is an expression of U.S. policy since the late 1970s.  Recently, Japan warned that it would go to war against China if Beijing invaded Taiwan to reunify the island with the mainland.  As our recent WGR noted, China’s control of Taiwan is a significant geopolitical threat to Japan.  The Global Times warned Japan against such actions.
• The recent decision by Chinese regulators to interfere with Chinese firms launching IPOs in the U.S. continues to reverberate. Regulatory authority over Chinese companies that list in the U.S. has been given to the Cyberspace Administration, a group created by General Secretary Xi.  The appointment will undermine the Chinese firms’ ability to use a decentralized regulatory structure to list in the U.S.  Firms tended to “regulator shop” to get favorable outcomes.  That path appears to have been cut off by this action.  Regulators are also moving to end a practice where firms use Variable Interest Entities to list outside of China.
• The Xi government is moving to restrict social media accounts of LGBT groups. We suspect much of this is due to the usual Chinese worry about any organizing that occurs outside the scope of the CPC.  However, this action could trigger a response from the U.S. on the grounds of opposing discrimination.
• As the Chinese economy slows, we are starting to see calls for stimulus in the form of reserve requirement cuts.

International roundup:  The ECB loosens inflation policy, Zuma goes to jail, and Modi changes his government.

• The results of the ECB policy review have been announced, and, no surprise, the bank will no longer look to keep inflation at 2% or below, but will tolerate some deviation above 2%. The policy is a bit vague but looks similar to what the Fed did last year.
• Former South African president Jacob Zuma has been taken into custody for refusing to appear before a corruption commission. He will serve a 15-month sentence for contempt of court.
• As India struggles with COVID-19 and threats to its northern border, PM Modi announced a massive cabinet reshuffle. The new cabinet will expand to 77 ministers, up from the current 52.
• Sweden avoided elections as Stefan Lofven has put together another majority, but only one with a margin of three seats.
• Lithuania has reduced its diplomatic staff in Belarus, reflecting increased tensions.
• Despite international protests, Nicaraguan authorities arrested more opposition figures in the runup to November’s elections.
• As the U.S. withdrawals from Afghanistan, the professional class is starting to flee.

Economics and policy:  New York considers changes to labor laws, and the corporate minimum tax may not pass Congress.

• New York state is moving to weaken the rules regarding at-will employees. The action would make it more difficult to fire workers.  Such rules usually end up discouraging hiring.
• Although there has been progress on a global corporate minimum tax, it is still not certain that the proposal will pass the Senate. Meanwhile, the U.S. is using the tax proposal to get EU nations to drop proposed digital services taxes, which targeted U.S. tech firms.
• The Biden administration is preparing to issue an executive order to address industry consolidation in railroads and shipping. This action is another element of the changing environment for antitrust.
• The EU has lifted its economic forecasts as vaccinations expand. The EU expects 8% real GDP growth in 2021.
• Although it hasn’t shown up in the official data yet, industry reports suggest that household borrowing is rising. If rising borrowing becomes a trend, it will argue for tighter monetary policy.
• A study in Iceland suggests that a four-day workweek did not adversely affect productivity.

Technology:  Thirty-six states are suing Google (GOOG, USD, 2529.48) for anti-competitive practices tied to its app store.  This action is another element of the broader antitrust actions being taken against the tech industry.

COVID-19:  The number of reported cases is 185,206,396 with 4,004,305 fatalities.  In the U.S., there are 33,771,942 confirmed cases with 606,220 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 383,068,740 doses of the vaccine have been distributed, with 331,651,464 doses injected.  The number receiving at least one dose is 182,896,080, while the number of second doses, which would grant the highest level of immunity, is 157,908,171.  The FT has a page on global vaccine distribution.

• The Chinese city of Ruili, which is on the border of Myanmar, has implemented lockdowns due to a rise in infections.
• The CDC reports that the Delta variant is now dominant in the U.S. This variant, which is more transmissible than earlier forms, has led Israel, which led the world in vaccinations, to re-institute some restrictions, such as requiring masks on public transportation.
• Hospitals are increasingly mandating vaccinations and are facing resistance from employees.
• Japan announced that the current state of emergency related to COVID-19 will be in place during the Olympics. This action will likely restrict attendance at events.

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[1] Jens Tinbergen argued that a policy body needs an equal number of policy tools for each concern.  The problem develops when there are fewer tools than issues.

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

[Posted: 9:30 AM EDT] | PDF

We begin today’s Comment with U.S. politics and some new developments regarding U.S. relations with China and Russia.  We then touch on the imminent release of a new strategy paper from the European Central Bank before addressing a few other international developments.  We end with the latest news related to the coronavirus pandemic.

U.S. Politics:  The Associated Press has called New York City’s Democratic mayoral primary, declaring former police captain Eric Adams, currently the borough president for Brooklyn, the winner.  The win would put Adams on track to become only the second Black mayor in the history of the nation’s largest city.  Against a backdrop of rising crime rates around the country, the election of the law-and-order Adams could potentially help insulate Democrats from accusations of being soft on crime.

United States-China:  Responding to China’s crackdown on ride-hailing company Didi Chuxing (DIDI, $12.49) just days after its initial U.S. listing, Senator Marco Rubio (R, Florida) has lambasted the firm as an “unaccountable Chinese company” due to China’s refusal to subject its U.S.-listed companies to U.S. accounting standards.  The statement highlights the risk that the Didi fiasco could stoke efforts in Congress to clamp down on Chinese companies listing on U.S. exchanges.  As we have continually warned, such efforts show how the worsening U.S.-China rivalry and decoupling could pose risks for U.S. investors.

• Last year, after a groundswell of support from lawmakers, former President Trump signed legislation imposing tougher accounting standards on Chinese entities that sell shares in the U.S.  The law in effect bars companies from listing in the U.S. if they fail to submit to audits from the Washington-based Public Company Accounting Oversight Board for three consecutive years.  China critics in Washington believe the legislation should also serve as the starting point for a broader decoupling of capital markets between the countries.
• The attack on Chinese companies is not limited to those listed on U.S. exchanges and not following U.S. auditing standards.  There is also increased scrutiny of U.S.-listed Chinese companies with ties to the People’s Liberation Army.  Finally, reports say the federal government’s Committee on Foreign Investment in the U.S., or Cfius, is taking a closer look at Chinese firms trying to invest in the U.S. and is seeking to coordinate its actions with U.S. allies.

United States-Russia:  With smaller companies around the world reacting to another major ransomware attack seemingly perpetrated by a Russian criminal gang, the White House has announced that U.S. officials will meet next week with their Russian counterparts to discuss cybersecurity.  We have seen no details on the meeting, but it could be designed to emphasize President Biden’s warning to President Putin at their summit last month, in which Biden said the U.S. reserves “the right to take action, on our own” if the Russian government cannot or will not hold cybercriminals accountable.

European Union:  The 25 members of the ECB’s governing council are meeting today to finalize the agreement on an updated strategy after a 19-month review.  Although the strategy review was scheduled to last into September, the recent agreement on key points has prompted ECB Chief Lagarde to push for a deal that could be published as early as Thursday.

• The most fundamental change expected is regarding the way the ECB defines its core mandate of “price stability.”  After years of failing to lift inflation up to their objective, the policymakers are expected to ditch their target of “close to, but below, 2%” on the grounds that it is too opaque and implies a cap on price growth.
• There is widespread support on the council for a more straightforward 2% target, which the policymakers would likely describe as symmetric.  In other words, the ECB would be as concerned about exceeding it as being below it. The target would be a medium-term objective with the flexibility to fluctuate in either direction in the short term.

France:  Seeking to burnish his reformist credentials ahead of his reelection campaign next year, President Macron is considering reviving a controversial overhaul of France’s costly pension system that was abandoned last year because of the pandemic.  Yesterday, he met with labor union and business leaders to discuss options, including a suggestion by Finance Minister Le Maire to raise the retirement age from the current 62.

Haiti:  President Jovenel Moïse, who had been ruling by decree for over a year and refused to step down after the apparent end of his term in February, was reportedly assassinated by a group of gunmen at his residence overnight.  In addition, the swearing-in of a new prime minister scheduled for today has not happened, which could point to the involvement of the current prime minister, Claude Joseph.  In any case, Haiti’s long history of political turmoil looks poised to continue.

COVID-19:  Official data show confirmed cases have risen to 184,720,810 worldwide, with 3,995,703 deaths.  In the United States, confirmed cases rose to 33,748,698 with 605,932 deaths.  Vaccine doses delivered in the U.S. now total 383,068,840, while the number of people who have received at least their first shot totals 182,714,064.  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, 55.0% of the U.S. population has now received at least one dose of a vaccine, and 47.5% of the population is fully vaccinated.
• As the highly transmissible and more dangerous Delta variant of the virus drives infections higher again, especially in areas with low vaccination rates, President Biden announced a series of measures designed to encourage more people to get a shot.  The new measures include setting up vaccination clinics in workplaces, establishing more mobile vaccination clinics, and improving access for adolescents aged 12 to 18.  The administration will also supply more doses to doctors’ offices and send advocates to visit people on their doorstep to provide information about the vaccines.
• In Spain, the rapid spread of the Delta mutation, especially among younger, unvaccinated people, has quickly pushed the country’s new infection rate to the highest in Europe.  In fact, the seven-day rate of new infections almost tripled from 58 cases per 100,000 on June 29 to 156 on Tuesday.
• In Japan, politicians continue to spar over whether or not to allow spectators at the Summer Olympic Games in Tokyo starting on July 23.  Meanwhile, the government plans to declare a fresh state of emergency for Tokyo through August 22, and it will extend the emergency for Okinawa Prefecture and the quasi-emergencies for Osaka, Saitama, Chiba, and Kanagawa to the same date.  Many observers believe the moves will force the government and organizers’ hands to ban spectators from the Olympics.
• Canadian researchers say they have pinpointed a handful of amino acids targeted by key antibodies in the blood of some people who received the vaccine developed by AstraZeneca (AZN, $59.90), offering fresh clues to what causes rare blood clots associated with the shot.

 Economic and Financial Market Impacts

• As a gradual relaxation of pandemic restriction boosts activity, the European Commission has hiked its forecast of EU economic growth this year to the fastest pace in decades.  The forecasts now call for EU gross domestic product (GDP) to grow 4.8% in 2021 and 4.5% in 2022.  After the 6.0% decline in 2020, that would suggest the EU’s economy will totally recover and begin a new expansion by the end of next year.
  • One major beneficiary of the budding recovery is European bank stocks.
  • So far this year, the Euro Stoxx Banks index is up 26%, compared with a 14% rise for the broader benchmark, and it has recently regained all the ground it lost during the pandemic.
• Despite the building recovery in Europe, the OECD issued a new report today showing that some 22 million fewer people are working in the world’s advanced economies now than there were right before the pandemic hit.  Moreover, the report forecasts that employment in advanced economies won’t fully recover until the end of 2022.
  • One reason the labor market recovery will be slow is that the low-skilled workers who most likely lost their jobs at the start of the pandemic are ill-equipped to move into the sectors where hiring is strongest.
  • Meanwhile, businesses are likely to bring back employees who are still being supported through short-time work schemes before they create new jobs at scale, risking the emergence of a gulf between those who have continued to work and those who have lost jobs and income.

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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 lengthy discussion of the Chinese government’s latest clampdown on its technology firms.  Importantly, we discuss the move’s implications for a range of geopolitical and economic issues.  We next turn to general international news, ranging from recent OPEC developments to rising protests against the Brazilian president.  We close with the latest news on the coronavirus pandemic.

China:  According to reports over the weekend, Chinese regulators are investigating the security of customer data at ride-hailing company Didi Global, Inc. (DIDI, $15.53) and have shut down the firm’s app just days after its U.S. IPO last Wednesday.  Subsequently, they also launched probes into data security at two other U.S.-listed companies that run truck-hailing and recruiting apps.  The regulators’ concerns ostensibly center on the possibility that troves of customer data at the firm could potentially fall into foreign hands as a result of greater public disclosure associated with a U.S. listing.  In fact, the reports indicate the regulators pressured the company not to go through with its IPO, although, with the absence of a formal order not to proceed, the company went ahead with it.  Given the regulatory threat to the company, we would expect its shares to face tough sledding when U.S. markets open on Tuesday.  At the same time, we would emphasize a number of broader, longer-term implications of the move:

• Chinese regulators may have legitimate concerns about Didi’s customer data being captured by foreign competitors or intelligence agencies.  If the concern is about foreign intelligence agencies, it could indicate that China has become aware of foreign spying operations making use of such data.  The regulatory crackdown could also aim at signaling that China will fight back against U.S. and allied moves to crack down on data capture by China.  One recent example of that has been the Chinese accusations that Tesla (TSLA, $678.90) and the autonomous driving system in its cars could transfer information about Chinese users to the U.S.; this may have been a kind of retaliation against the continuing U.S. clampdown on technology and information flows to China.
• The clampdown on Didi, just days after its U.S. listing, also shows that Chinese regulators are willing to crimp the global ambitions of high-profile Chinese companies in the interest of cybersecurity.  In other words, Beijing is unlikely to hold fire even if its regulatory moves risk the ability of Chinese firms to court international investors.  In fact, just this morning, China said it would tighten rules for companies seeking to list overseas and change its approval process for initial public offerings.  These are moves that could hinder attempts by homegrown firms to raise money from stock sales in the U.S.
• The clampdowns also point to a further severing of data flows between China and the rest of the world, which will further erode and reverse the globalization of the last several decades, thereby threatening to make the global economy less efficient and innovative.
• The move against Didi may also be a part of President Xi’s effort to cut technology power centers down to size, both in terms of their market power and their potential political influence.  Before the latest regulatory troubles, Didi was already facing a separate government investigation into whether the company—which boasts hundreds of millions of users in China—inappropriately muscled out smaller competitors by using big data. Agents from government agencies, including the country’s top antitrust watchdog, the cyber police, and tax authorities, have paid surprise visits to its office.
• In any case, the Didi situation underlines our oft-stated view that the growing U.S.-China rivalry and President Xi’s own clampdown on China present a risk that investors could be caught in the crossfire.  This isn’t to say that investors should steer clear of Chinese assets, at least not yet.  However, it suggests that we should all pay heightened attention to the growing risks.

China-Taiwan-Japan-United States:  Japanese Deputy Prime Minister Aso said that if China invaded Taiwan in order to reunify the island with the mainland, it could create a situation that threatened Japan’s survival and would require it to defend Taiwan along with the U.S.  Under Japan’s constitution, such a “survival threatening” situation would allow Japan to exercise its right of collective self-defense and come to the aid of an ally under attack.  As might be expected, the Chinese government has condemned the statement.

OPEC+:  OPEC and its Russia-led allies were forced to call off a Monday meeting that would have finalized a plan for the group to boost oil production after the United Arab Emirates balked at its quota.  In response, global crude prices have risen to fresh multi-year highs.  We note that if the deal falls apart completely, the UAE could unilaterally boost its output.

Global Supply Chain Management:  For the first time, Toyota (TM, $176.03) sold slightly more cars in the U.S. than General Motors (GM, $58.96), in large part because it abandoned its previous strict adherence to just-in-time inventory management.  In particular, the company’s earlier decision to stockpile several months’ worth of computer chips allowed it to out-produce GM earlier this year despite the global chip shortage.  Although Toyota may not be able to retain its lead when supply chains normalize, its victory in the second quarter is further evidence that companies are starting to understand the risks inherent in just-in-time systems, even if they are more efficient.  If more firms turn toward higher inventories, greater production redundancies, and the like, the world’s supply chains could become more robust, but costs and inflation could be higher.

Global Cybersecurity:  Suspected Russian cybercriminals launched a massive ransomware attack over the weekend against mostly small and medium-sized firms in at least 17 countries.  The attackers have demanded $70 million in Bitcoin in exchange for a decryption tool to restore the thousands of computers affected.  Companies and security experts continue to assess the extent of the damage.

United Kingdom:  British companies are facing a wave of buyouts by private-equity firms, and the buyout firms are staffing up to increase the pace of deals even further.  Consistent with our belief, the firms see new trade opportunities in post-Brexit Britain, even as company valuations remain in the doldrums because of Brexit and the coronavirus pandemic.

Mexico:  In another blow to the country’s private sector and its 2013 energy market reform, the government awarded control over the 700-million barrel Zama field to state-owned oil company Pemex despite the fact that it was discovered by private firms, which have invested hundreds of millions of dollars into the field’s development.

Brazil:  Thousands of protesters across Brazil demonstrated against President Bolsonaro over the weekend as pressure mounted on the populist leader over allegations of potential corruption in the procurement of COVID-19 vaccines.  The rallies, which took place in at least 13 state capital cities, came a day after the Supreme Court authorized a criminal investigation into whether Bolsonaro engaged in the crime of “prevarication,” the dereliction of public duty for reasons of personal interest.

Turkey:  The June consumer price index was up 17.5% year-over-year, surpassing expectations and marking the worst inflation in more than two years.  The jump in inflation came after the easing of pandemic restrictions last month boosted consumer spending, complicating efforts by the central bank to comply with President Erdogan’s demand to cut interest rates.

COVID-19:  Official data show confirmed cases have risen to 184,252,078 worldwide, with 3,986,701 deaths.  In the United States, confirmed cases rose to 33,723,804 with 605,567 deaths.  Vaccine doses delivered in the U.S. now total 383,068,740, while the number of people who have received at least their first shot totals 182,412,776.  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, 54.9% of the U.S. population has now received at least one dose of a vaccine, and 47.4% of the population is fully vaccinated.
• In Britain, Prime Minister Johnson said England is on track to lift almost all pandemic restrictions, as planned, on July 19, even as the highly transmissible Delta variant of coronavirus drives a new surge in infections.  Health Secretary Javid warned that new cases could quadruple to 100,000 per day from their current 25,000 per day once the restrictions end.  However, he insisted that the U.K.’s high vaccination rate will allow for much less stringent measures to deal with any such infection burst.
• In Japan, daily new infections in the Tokyo area have increased to about 600 from 400 in mid-June.  The increase is putting intense pressure on officials to reverse course and ban spectators from the Summer Olympic Games scheduled to start in the city in just three weeks.  The latest surge reflects both the presence of the Delta mutation and the fact that only about 24% of Japan’s population has had even one dose of a vaccine.
• In Russia, the government announced that new infections have hit their highest level since January, primarily because of the fast spread of the Delta variant.  Russia has now reported record numbers of coronavirus deaths for five days in a row.
• The fast-spreading Delta variant is also driving up infections in developing countries that are dangerously short on vaccines to battle deadly surges, putting increased pressure on their healthcare systems.
• In India, in particular, there is mounting concern about a potential third wave of infections driven by Delta Plus.  This variant has now been found in the prosperous state of Maharashtra, home to the country’s financial capital Mumbai, and in at least two other states.  Maharashtra has already reimposed tougher pandemic restrictions.
• A study by Israel’s health ministry found that the vaccine from Pfizer (PFE, $39.73) is 93% effective in preventing serious illness and hospitalization from the Delta mutation, but its effectiveness in preventing infection is only 64% compared with 94% for earlier variants of the virus.

 Economic and Financial Market Impacts

• As the post-pandemic recovery in demand and supply constraints continue to drive up prices, supermarkets are reportedly stockpiling everything from sugar to frozen meat to ensure they have inventory to sell and protect their profits.  In turn, those increased purchases are putting further upward pressure on prices.

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

[Posted: 9:30 AM EDT] | PDF

Good morning and welcome to the third quarter!  We are now in the second half of 2021.  U.S. equity futures are mostly marking time this morning, but commodities are starting the second half on a tear.  Tomorrow, we get the June employment data and, as a reminder, the Daily Comment will take Monday off; we will be back on Tuesday, July 6.  Our coverage today begins with the current heatwave in the Northwest, along with other temperature anomalies.  Economics and policy, China news, the international roundup, and pandemic updates fill out the rest of today’s comments.

Heatwave: More than 130 Canadians in the Vancouver area have perished in the unusual heat.  Lytton, BC temps hit a record high of 121.3^o on Tuesday.  The high temps aren’t just limited to British Columbia; southern Manitoba recorded 14 record highs this week.  The hot weather is triggering wildfires in Canada.  In the U.S., 76 fatalities related to the heatwave have been reported in Oregon and Washington State.  One of the problems with these sorts of events is that infrastructure wasn’t built for these temperatures.  For example, the Portland light rail system had to close due to power cables “frying” in the heat.  Because the region is historically temperate, air conditioning is installed less often.

As demand soars for fans and room air conditioners, prices have been rising and scammers are out in force.  Interestingly enough, we are also seeing soaring temperatures in Siberia with reports of 118^o.

One of the features of climate change appears to be that normal cycles become amplified.  Heatwaves become hotter, cold snaps colder.  Building codes are usually written using temperature ranges that reflect history.  As a result, when cycles become amplified, infrastructure isn’t built for the extremes.  The cold temperatures in Texas last winter caused mayhem mostly because, under normal conditions, winterizing doesn’t make much sense, no more so than buying an air conditioner in Seattle.  However, cities will need to rethink their building codes as unusual events become more “usual” and that will lift costs.

Economics and policy: There are rising expectations of tighter monetary policy, costs continue to rise, and regulators push back against decentralized finance.

• We continue to monitor the rising sentiment for tighter monetary policy. A recent survey of economists suggests at least two rate increases over the next 30 months.  Interestingly enough, we are seeing a steady decline in longer-duration yields, which would suggest a growth slowdown and less concern about inflation.
• Reports of rising wages, signing bonuses, and other hiring incentives are continuing. Although these increases raise fears of inflation, it is also possible that margins and future earnings will come under pressure as well.
• Amazon (AMZN, USD, 3457.05) has been demanding equity, often at a deep discount, from firms that use its platform to sell merchandise. This news will add to antitrust scrutiny of the firm.  We also note the company has asked that the new FTC Chair recuse herself from investigations of Amazon due to academic papers she has written.
• The lack of shipping capacity coupled with strong demand is sending shipping costs soaring. This is the time of year when retailers begin ordering for the winter holidays, meaning that either prices will remain elevated or margins will be under pressure.  There are indications that shipping firms are ordering new vessels, which means that we will likely see shipping costs normalize in a couple of years.  But that won’t help contain price levels in the near term.
• Ford (F, USD, 14.86) announced it would idle or reduce output in several plants this summer due to the lack of semiconductor chips.
• One factor we are watching is the rapid rise of non-defense capital goods orders. This lift should increase productive capacity and eventually help alleviate the current supply bottlenecks.

• The Consumer Financial Protection Bureau has finalized rules for foreclosures which are less onerous to mortgage creditors. Before foreclosure, the account must be delinquent for 120 days.  The borrower has no options available other than foreclosure, has abandoned the property, or has been unresponsive to servicer outreach.  On the one hand, these rules will probably slow foreclosures; on the other, it won’t completely prevent a delinquent borrower from relinquishing the collateral.
• One of the debates that occurs among cryptocurrency supporters is the idea of a closed versus open loop system. If an owner of a cryptocurrency could conduct economic activities (e.g., buying groceries, purchasing financial assets, using the currency to settle debts) solely among other users, in theory, they could operate completely independently of the regulated financial and economic system.  For example, a household could buy something without paying sales taxes.  In reality, though, the acceptance of cryptocurrencies is not sufficient to allow for a broad closed loop system.[1]  Therefore, holders of cryptocurrencies have to interact with the broader financial and economic system and they run the risk that their gains may be taken away by numerous means.  This situation was demonstrated recently when the U.K. cracked down on Binance (BNB, USD, 289.12).  Users with GBP accounts found they could not convert their holdings to local currency.  In other words, what is often characterized as a “currency” is more like an illiquid asset.
• Closely related to the crypto situation is decentralized finance, or “defi.” In listening to numerous podcasts on this industry, we have been struck by how, in the end, it’s really all about regulatory arbitrage.  The tech industry wants to do to finance what it did to taxis and hotels.  However, this “move fast and break things” mentality is running up against a regulatory wall.  For example, we took note of FINRA’s treatment of Robinhood; regulators hit the firm with $70 million in fines for causing “widespread and significant” harm to customers.  Society will tolerate disruption in some industries, but finance is probably too important for tech to have the same impact as it has had in other areas.  That doesn’t mean that new technologies won’t emerge but being able to engage in activities without regard for regulation isn’t likely to be tolerated.
• Higher input costs and rising exports are sending propane prices higher. High prices in the summer aren’t normal.  Usually, prices peak in the winter, when households are using the fuel for home heating.[2]
• We are monitoring the OPEC meeting. So far, the lack of a production increase from the U.S. is emboldening the cartel to keep prices elevated.

 China:  The CPC is gearing up for the 100^th anniversary of the founding of the party.  Fake souvenirs are proliferating.

• China is building more than 100 new missile silos in the Western desert. This development suggests China is expanding its nuclear deterrent.  Although this expansion does raise alarms, in some respects, a fixed silo is more for show than a danger.  After all, a silo can’t be moved and is visible by satellite.  In other words, this looks to us more like a signal of deterrence.  We are much more concerned about mobile launchers, such as the DF-26 or submarine launched missiles.
• The U.S. and Taiwan are preparing for new trade and investment talks. These negotiations will not be welcomed by Beijing.
• In our recent research[3] on Taiwan, we noted that Japan would be particularly vulnerable if Beijing were to take control of Taiwan. Japan’s leaders rarely make public statements about this problem but Japan’s Deputy Defense Minister Yasuhide Nakayama recently suggested that Japan should protect Taiwan “as a democratic country.”  Needless to say, the CPC was furious with the description of Taiwan as separate from China.  We also note that the U.S. and Japan are conducting military exercises in the South China Sea; these exercises are designed to prepare the U.S. and Japanese militaries to respond to Chinese military aggression against Taiwan.
• China remains well behind its Phase I trade agreement commitments.
• China’s “beige book” quarterly survey indicates increased caution by households and businesses. Households are reporting that they are reducing spending on non-essential items and businesses are complaining about tighter credit conditions.  Meanwhile, rising corporate spreads are raising concerns about defaults.
• China’s “wolf warriors” have taken a strongly nationalistic stance in diplomatic discussions to the point where it may be undermining Beijing’s ability to gain cooperation from other nations. Complicating matters is that Chinese social media has become increasingly nationalistic, meaning that toning down the wolf warrior rhetoric raises the risk that the government could face online criticism that is difficult to contain.
• Although the Fed has been rather sanguine about the introduction of the eCNY, the ECB is much more worried. It is unlikely a digital CNY will woo users to dump dollars, but the EUR, which is less used for reserve purposes, might be displaced.  These worries will likely push the Europeans to move quickly on a digital EUR.
• China is aggressively investing in Chinese metal mining which may give it an advantage in the electrification of transportation.
• YouTube (GOOG, USD, 2441.79) has taken down videos from Xinjiang that gave testimony to China’s repression.

 International roundup:  Mexico moves to legalize marijuana, Venezuelans are coming to the U.S./Mexican border, and we are watching North Korea.

• The Mexican Supreme Court has struck down laws that restricted the use of recreational marijuana. Mexico’s Senate has already passed a law legalizing recreational use.  The court decision paves the way for Mexico to potentially become the world’s largest legal cannabis market.  We are a bit surprised that the drug cartels haven’t moved to stop legalization; we suspect they don’t view marijuana as a lucrative enough market to become involved.
• The presidential vote count in Peru continues to be disputed. Pedro Castillo has claimed victory, but he won by only 44,058 votes.  His opponent, Keiko Fujimori, is refusing to concede.
• A record number of Venezuelans were met at the U.S./Mexican frontier by Border Patrol officers. According to reports, many of these refugees had already escaped Venezuela[4] and were living in other South American nations.  COVID-19 conditions led them to flee those nations.  Due to difficult relations between Washington and Caracas, Venezuelan refugees tend to receive favorable treatment by immigration courts.
• It is always difficult to know with certainty what is occurring in North Korea. It isn’t called the “hermit kingdom” for nothing.  We have been watching a number of recent developments.  First, it appears that North Korea is facing some level of food scarcity.  Grain prices outside of Pyongyang are rising.  Kim has ordered rice from military inventories to be released; his father tended to protect the military, so this decision suggests conditions may be worsening.  Second, we are seeing rather odd behavior in the forex markets, which may mean North Korea is about to engineer a devaluation or is trying to punish speculators.  Third, Kim has criticized officials who were in charge of public health, suggesting it was a “grave incident.”  This may indicate there are increasing problems with COVID-19.
• The German Green Party candidate for chancellor is facing allegations of academic plagiarism. This unwelcome news is coming on the heels of reports that Annalena Baerbock padded her resume.  Her party has been sliding in the polls after making a surge in early May.  We note that the recent German fiscal budget shows a narrowing of the deficit for 2022, which will tend to dampen growth.
• The U.K. and EU have deferred a ruling on the meat trade; this issue had caused a row recently.
• We continue to monitor the minimum global corporate tax. Financial services apparently have been granted a carve out, and the proposal is increasingly being seen as a win for U.S. tech firms.

COVID-19:  The number of reported cases is 182,285,056 with 3,948,970 fatalities.  In the U.S., there are 33,666,198 confirmed cases with 604,718 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 381,949,830 doses of the vaccine have been distributed with 326,521,526 doses injected.  The number receiving at least one dose is 180,674,739, while the number receiving second doses, which would grant the highest level of immunity, is 154,884,686.  The FT has a page on global vaccine distribution.

• Bloomberg has created a COVID-19 resilience rating system that rates how well a nation is reopening. The index has three major factors and four components for each factor.  The U.S., due to high vaccination rates, ranks #1.
• Meanwhile, overseas the pandemic continues:
  • Indonesia is seeing a surge in cases and rapidly rising oxygen prices. The government is likely to reinstitute lockdowns to curb the spread of infections.
  • Australia has implemented lockdowns in seven cities.
  • Southern Europe was counting on a return of tourists to lift economic growth. The return of the virus is undermining that goal.
• The Bolsonaro administration in Brazil is being hit with a vaccine scandal as it appears his administration overpaid for an Indian vaccine that had not emerged from its clinical trials. Allegations of corruption have emerged.
• China is using disinformation to undermine the government in Taipei over its management of the pandemic.
  • Singapore is preparing for a situation where COVID-19 is endemic; in other words, we live with it like other infectious diseases, such as influenza.  The plan mostly rests on widespread vaccination.

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[1] In theory, a group of users could create a closed loop for certain activities, such as buying contraband.

[2] We have seen concerns about higher propane costs for grills; we would note that real grilling involves wood or charcoal and using propane is merely using a gas oven outdoors.  It cooks, but falls short of real grilling.

[3] See our WGR series, “The Geopolitics of Taiwan: Parts I (5/3/21), II (5/10/21), and III (5/17/21).”

[4] We discussed this issue in 2018.  See our WGR series, “The Venezuelan Migration Crisis: Parts I (9/17/18)  and II (9/24/18).”