Author: Rebekah Stovall

Daily Comment (November 30, 2021)

Posted on by Rebekah Stovall

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

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with highlights from the U.S. labor market, U.S. relations with China and Russia, and a small number of other international developments.  However, the bulk of our report deals with the new Omicron variant of the coronavirus, which today has again sparked sharp volatility in the world’s financial markets.

U.S. Labor Market:  Against the backdrop of a nationwide labor shortage that is driving up wages and encouraging labor action, an official with the National Labor Relations Board ruled that Amazon (AMZN, 3,561.57) improperly impeded an April unionization vote that ultimately failed and ordered that the vote be held again.  The company will have the right to appeal the ruling to the full NLRB, but the body could schedule the re-vote before that happens.

United States-China:  Vice Admiral Karl Thomas, commander of the U.S. Seventh Fleet, called for as many as eight U.S. and allied aircraft carriers to be deployed to Asia-Pacific waters in order to deter China and Russia from making aggressive geopolitical moves in the region.  That would mark a huge increase in allied carrier deployments in the region, underscoring the seriousness with which at least some U.S. military leaders see the challenge from China and Russia in the coming years.

China:  In a sign that the government’s crackdown on big, powerful technology companies has not yet ended, six different regulatory agencies today announced a raft of new rules to rein in the country’s ride-hailing industry.  Among other things, the new rules will limit the fees companies can earn from each ride they dispatch, incentivize them to make some drivers formal employees, and urge them to provide benefits such as insurance for their drivers.

NATO-Russia-Ukraine:  Foreign ministers from the NATO countries are meeting in Latvia today to forge a response to Russia’s troop buildup around Ukraine, which U.S. intelligence officials have warned could point to a Russian invasion in the coming months.  The ministers will need to strike a difficult balancing act between sending a tough warning to Moscow while not over-committing to the defense of Kiev.

Iran Nuclear Deal:  At the latest round of talks to re-implement the 2015 deal limiting Iran’s nuclear program, Iranian negotiators yesterday doubled down on the tough demands they would require before agreeing to a renewed deal.  For example, the Iranians continued to refuse to talk directly with the U.S. side, and they demanded that any resumption of the deal would require the U.S. to first dismantle all sanctions imposed since it walked away from the agreement in 2018.  Prospects for a renewed deal appear slim, raising the prospect of future destabilizing moves ranging from an Iranian break-out to a nuclear weapon or an Israeli-led attack to prevent that from happening.

Barbados-United Kingdom:  Barbados officially became a republic today, nearly 400 years after the English first set foot on the Caribbean island.  As a result, Queen Elizabeth II is now head of state for just 15 realms, including the United Kingdom, Australia, Canada, and Jamaica.

COVID-19:  Official data show confirmed cases have risen to 262,312,703 worldwide, with 5,211,147 deaths.  In the U.S., confirmed cases rose to 48,440,107, with 778,653 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 232,792,508.  The data show that 70.1% of the U.S. population has now received at least one dose of a vaccine, and 59.3% of the population is fully vaccinated.

Virology

Economic and Financial Market Impacts

  • In testimony prepared for the Senate Banking Committee this morning, Fed Chair Powell says the new Omicron variant could intensify the supply-chain disruptions that have fueled this year’s surge in inflation.  The testimony highlights how the new variant could put the Fed in a difficult position in the coming months if it exacerbates inflation, while also holding more workers back from seeking employment, which could lead wages to continue accelerating.
  • In an address to the nation regarding the new Omicron variant, President Biden yesterday said the mutation is “a cause for concern, not a cause for panic.”  He also said he would unveil a plan on Thursday for tackling the virus this winter “not with shutdowns and lockdowns, but with more widespread vaccinations, boosters, testing, and more.”
    • The commitment to not focus on new economic lockdowns underscores the fact that many world leaders will be politically constrained from using such an approach to battle the Omicron mutation, at least unless it proves to be much more lethal than now known.  Not only has the long battle against COVID-19 spawned intense popular backlash against lockdowns, but the rollout of vaccination programs has probably also made lockdowns less necessary.
    • New lockdowns could be imposed in some places, as they already have been in some European nations, but for now it looks like we won’t see the widespread, nationwide lockdowns seen earlier in the pandemic.  Indeed, global lockdowns have continued to trend downward throughout the period since the pandemic first began, as shown in the chart below.

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Weekly Geopolitical Report – The Geopolitics of the Strategic Petroleum Reserves (November 22, 2021)

Posted on by Rebekah Stovall

by Bill O’Grady | PDF

(NB: Due to the Thanksgiving holiday, the next report will be published on December 6.)

During the 1970s, the world economy suffered through two oil shocks.  The first, in 1973, was caused by the Yom Kippur War.  The U.S. supported Israel, and the Arab states retaliated with an oil embargo.  In 1979-80, the Iranian Revolution and the Iran-Iraq War disrupted oil flows from the Middle East, leading to another oil spike.  Due to these events, the OECD, through the auspices of the International Energy Agency (IEA), created a member Strategic Petroleum Reserve (SPR) system.  This system was designed to be an emergency backup supply of oil and oil products that could be shared to prevent panic buying of oil and to ensure that the economic damage that was suffered due to the 1973 and 1979 oil shocks would never be repeated.

However, as the world moves away from fossil fuels, these SPRs could be holding inventory that will no longer be needed.  Simply put, governments that hold reserves could find themselves with worthless inventory.  Merchants often find themselves in this situation; a seasonal item remains on the shelf when a season is winding down.  A decision has to be made—cut the price to sell out the item before the season ends and lose margin or hold the good and hope that buying emerges to maintain margin.  With the SPRs, governments may face the problem of what to do with this oil in the face of falling demand.  The decisions that these governments make will affect oil prices, consumers, and producers in the coming years.

We will begin our analysis with a history of the SPRs, explaining how they work, who has them, and how much oil they contain.  From there, we will discuss the difference between a buffer stock and a reserve.  Next, we will examine the role of climate change policy on SPR management.  How OPEC+ manages its production policy in light of SPR releases will follow.  We will close with market ramifications.

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Weekly Geopolitical Report – The Special Relationship (November 15, 2021)

Posted on by Rebekah Stovall

by Thomas Wash | PDF

Ever since the United Kingdom defeated the Spanish Armada in the 16th century, it has typically kept Europe at arm’s length. The victory not only showed that the British could successfully defend itself from invasion, but that it was an important power in Europe. This newfound confidence along with the Commonwealth’s growing manufacturing prowess gave it an air of superiority over its continental colleagues. After defeating France in the Napoleonic Wars in 1815, therefore becoming the world’s superpower, this sentiment became deeply entrenched into the British psyche.

However, British sentiment took a hit after World War II. As the second war on the continent in forty years, it pushed the U.K. to the brink of collapse. Humbled, the British pursued peaceful coexistence with the rest of Europe as they attempted to rebuild their country. They not only sought collaboration with the rest of Europe but also supported greater integration. That being said, the U.K. has struggled to accept a subordinate role within Europe as it seems to believe it is superior. As recently as December 2020, Education Secretary Gavin Williamson joked that the U.K. was the first developed country to approve the coronavirus vaccine because it “was a much better country” than others.

Understandably, British hubris has often rubbed other European countries the wrong way. The underlying friction between the two sides came to a head after the European Union rejected the U.K.’s request to be exempted from the EU’s immigration program. This decision not only paved the way for Brexit but may have also set the stage for a potential trade war. In this report, we will examine the history of British-EU relations, discuss the Brexit vote and fallout, and briefly review how the relationship has changed since the U.K. left. As always, we will end with a brief discussion of market ramifications.

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Weekly Geopolitical Report – Meet Fumio Kishida (November 8, 2021)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA | PDF

Whenever a big, rich country gets a new leader, there could be potential investment implications, and Japan is no exception to this rule.  When former Prime Minister Suga announced last summer that he wouldn’t seek reelection as head of the ruling Liberal Democratic Party, the first step in Japan’s political transition to a new leader was the party’s vote in mid-September naming former Foreign Minister Fumio Kishida to take over as LDP chief and, upon a later majority vote in the Diet (Japan’s legislature), as the head of government.  Facing a legal deadline to hold new elections by the end of November, Kishida called for the next ballot to be on October 31.  Now that the LDP has won that election, giving Kishida a full four-year term as prime minister, it’s a good time to review his background, leadership skills, and likely policies going forward.  At the end of this report, we also explore the likely investment ramifications as Kishida takes power.

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Weekly Geopolitical Report – Approaching a Traffic Light in Germany (November 1, 2021)

Posted on by Rebekah Stovall

by Patrick Fearon-Hernandez, CFA | PDF

Germany’s parliamentary elections in late September were momentous for several reasons.  Perhaps most important, the elections set the stage for a new leader to take power as Chancellor Angela Merkel decided not to stand for another term after leading Germany since 2005.  However, even though the retiring Merkel is likely to see her left-of-center rivals take control of the country, the coalition they’re forming may leave Germany’s key economic and financial policies relatively unchanged, with big implications not only for Germany itself but also for the broader European Union.

In this report, we parse Germany’s party structure and discuss how past coalitions have run their economic and financial policies.  We next focus on how those economic and financial policies have played out in Germany and beyond during the 16 years of Merkel’s rule, and why the current coalition talks may leave many of those key policies in place.  We conclude with a discussion of the investment ramifications if that turns out to be the case.

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