Tuesday Morning Reads
- Shrinks by 7.3% in 2020-21
- Panic Over Dogecoin Price
- The Covid Trauma
- How the World Ran Out of Everything
- What Germany Can Teach America
- Unloved 60/40 Strategy
- Chasing Yield
- Americans Are Done
- Cybersecurity Attack Hits World’s Largest....
- The Radical Modesty
- 200+ Years of Asset Class Returns
The latest OPEC+ gathering takes place via videoconference today as pandemic travel continues to prevent the usual meeting spot in Vienna. The group is now holding monthly meetings, giving it more immediate power to make decisions on current oil market conditions, as well as room to maneuver. It's also a signal that OPEC+ producers are wary about how things might play out in the months as they try to balance expectations of a recovery in demand against a possible supply increase from Iran, the world's fourth-largest crude producer.
Backdrop: OPEC+ decided in April to return 2.1M barrels per day to the market from May to July, anticipating rising global demand despite surging COVID cases in India. Since the announcement, crude prices have risen from $60 toward the $70 level, and are up more than 30% in 2021 alone. Oil has still been trading in the tight $60-70 range for the past three months as talks continue on the future of the JCPOA (a deal revival would lead to higher Iranian output). WTI crude futures (CL1:COM) climbed another 3.1% overnight to $68.34/bbl ahead of the OPEC meeting.
Russia is expected to "seek to accelerate the pace of the ramp up" in output, but the Saudis may call for "keeping the more conservative increase given the high COVID case counts in India and Japan, as well as the looming return of Iranian exports in the back half of the year," said RBC Capital Markets, outlining that OPEC+ is set to "stick with its cautious production return schedule." The group is also unlikely to decide on output policy beyond July, since the outlook for Iran is not yet clear and OPEC has another meeting planned for June 24. Yesterday, OPEC's Joint Technical Committee revised global supply down by 200K bpd, and now expects a deficit of 1.4M bpd in 2021 (from 1.2M bpd previously), meaning inventories will decline faster than expected.
Thought bubble: Western oil majors are under pressure to cut carbon emissions faster, especially after the courtroom and boardroom defeats seen last week at Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (RDS.A, RDS.B). New energy policies proposed by the Biden administration are also discouraging the production of fossil fuels, meaning more business for OPEC+ and the likes of Saudi Aramco (ARMCO), Adnoc and Rosneft (OTCPK:RNFTF). "It looks like the West will have to rely more on what it calls 'hostile regimes' for its supply," joked a high-level executive from Russia's Gazprom (OTC:GZPMF).
While it will take time to boost America's renewable power grid - which could lead to higher oil prices in the interim - some say the U.S. may have the last laugh. If fossil fuel-dependent economies fail to shift away from oil and gas in the future, they could be susceptible to economic instability and stagnation in the decades to come. However, many wealthy countries have still outsourced a large chunk of their carbon pollution overseas for quite some time and that could continue in a future world where price differentials play out in the energy mix. (12 comments)
Traders are returning from Memorial Day with renewed optimism as stock index futures point higher following the holiday weekend. Dow futures are up 0.5%, while contracts linked to the S&P 500 and Nasdaq ahead by 0.4%. More records? While the benchmark S&P 500 is starting June after notching its fourth consecutive monthly gain, the inflation debate continues to remain in the headlines.
Quote: "Overall, given the market’s reaction to [Friday]'s PCE release, investor concerns about inflation may have been exaggerated - or perhaps already priced in," said Chris Hussey, a managing director at Goldman Sachs. "Consensus may be building that the inflation we are seeing today is 'good' inflation - the kind of rise in prices that accompanies accelerating growth, not a monetary policy mistake."
Many are still concerned about the risks of a market crash. Short interest in SPY recently hit its highest since December and the CBOE Skew Index rose to the highest level since August 2018. Hedge funds have also slashed their holdings in 20 of the 23 commodities tracked in the Bloomberg Commodity Index by the most since November, while the extreme volatility in crypto and tech stocks has sparked worries of a broader selloff.
Up next? May's non-farm payrolls report, set to be released on Friday, is likely to be the next catalyst for the markets. Depending on the figure, it could support stocks or change perceptions of the economy's strength or coming stimulus measures. Following the employment number, investors will be watching the Fed's latest comments about inflation at an FOMC meeting scheduled for mid-June.
President Biden unveiled his first budget before the weekend that detailed $6T in spending for FY2022, including two infrastructure proposals, an increase in military resources, as well as domestic programs like scientific research and renewable energy. In total, the plan would raise federal spending to $8.2T per year by 2031, meaning annual deficits of over $1.3T (and $1.8T in 2022). While the plan is only a blueprint for the administration's fiscal priorities - and is subject to Congressional debate - other policy promises that weren't included in the budget may add to the weighty costs: student loan forgiveness, lowering the Medicare age to 60, creating a public healthcare option and reducing prescription drug prices.
Bigger picture: Long gone are the days of austerity conversations, the Tea Party movements or the balanced budget talk that made some political brownie points. In fact, the U.S. has already returned to the record debt-to-GDP ratio last seen in the aftermath of World War II. One of the biggest fears among stock market investors is if the spending will lead to a sustained rise in inflation, which is hard to get rid of and would require the attention - and possible intervention - of the Federal Reserve.
In the economic textbooks of yesteryear, big deficits were said to lead to price pressures and a possible overheating of the economy. However, a growing number of economists and the White House feel that the current circumstances call for a different economic plan, citing historically low borrowing costs, the need to get millions of Americans back to work and guaranteeing that the nation remains competitive with China. The Fed has also signaled it wouldn't raise rates before 2024, while investors are still eager to scoop up U.S. government debt and Treasury Secretary Janet Yellen has argued that any risk of inflation and overheating can be controlled.
Quote: "The president's budget improves the long-term fiscal outlook because his policies are more than paid for over the long run," Acting Budget Director Shalanda Young told reporters on Friday. "Failing to make these investments at a time of such low interest costs would be a historic missed opportunity that would leave future generations worse off."
How much is too much? There's no magic number or level for when a government's debt begins to hurt its economy. As long as interest rates stay low and the U.S. can borrow cheaply, the country can handle a much heavier debt load than was once thought possible. However, the federal debt cannot grow faster than the economy indefinitely. Once confidence erodes in Treasuries or the dollar's reserve currency status is threatened, borrowing can get more expensive and servicing that debt would cancel any budgetary forecasts that were made in a previous lending environment. The same scenario could happen if the U.S. would be also forced to raise rates as inflation heats up, or by private borrowing getting crowded out, though we could still be a long way away from that point despite all the doom and gloom. (369 comments)
Employers can require their workers to get vaccinated against COVID-19, according to the latest update to the guidance issued by the U.S. Equal Employment Opportunity Commission. The mandatory vaccination requirement applies to “all employees physically entering the workplace," with only a few exceptions permitted under law, such as medical reasons, the workforce is unionized, or if taking it is against a "sincerely held" religious belief. Employers must also comply with the reasonable accommodation provisions of the ADA and Title VII of the Civil Rights Act of 1964 and other EEO considerations.
Better to use carrots? Companies can also offer incentives to get workers vaccinated, "as long as the incentives are not coercive,” a move likely to open up a floodgate of lawsuits according to some experts. "What is 'coercive' is unclear because, just as with anything else, one person's view of what is a coercive incentive is not the same as another person's," said Helen Rella, an employment attorney at a New York-based law firm. The revised EEOC guidance was issued as the U.S. COVID-19 immunization drive reached a major milestone with more than 50% of the population getting at least one dose.
Meanwhile, the World Health Organization is renaming coronavirus variants after letters of the Greek alphabet, instead of the place of their first discovery. The four types of coronavirus known by the public as the U.K., South Africa, Brazil and India variants have now been assigned the Greek letters Alpha, Beta, Gamma and Delta. Other variants of interest will continue down the alphabet.
Quote: "No country should be stigmatized for detecting and reporting variants," WHO epidemiologist Maria Van Kerkhove declared. "To avoid this and to simplify public communications, WHO encourages national authorities, media outlets and others to adopt these new labels." (634 comments)
Married couples in China are now allowed to have up to three children, according to the Communist Party's Politburo, as the nation looks to mitigate risks to its long-term economic prospects. The policy change will come with "supportive measures, which will be conducive to improving our country's population structure, fulfilling the country's strategy of actively coping with an ageing population and maintaining the advantage, endowment of human resources", per the state-run Xinhua News Agency. The government is also set to gradually raise the national retirement age, but did not provide further details.
Bigger picture: Data published several weeks ago showed China's population growth expanding at its slowest pace since the 1950s, with the numbers on mainland China increasing 5.38% to 1.41B. The working-age population - people aged 15 to 59 - was on the decline as well, after hitting a 2011 peak of 925M, while the fertility rate was only 1.3 children per woman during 2020, missing a target of 1.8 that Beijing had set in 2016 (after replacing its one-child policy). China's statistics agency even took an unusual step by announcing that the population did grow in 2020, but gave no total, prompting some to speculate it was an effort to pacify investors and corporations.
At issue is whether the world's second-largest economy may already be in irreversible population decline before accumulating the household wealth of G7 nations. While China has eased birth limits, couples have been put off by the high cost of living (especially in cities), cramped housing (many share apartments with their parents) and career choices (job discrimination faced by mothers). Childcare is also expensive, maternity leave is short and most single mothers are excluded from medical insurance or social welfare payments.
Investing angle: Consumer companies seen potentially gaining from less restrictive family planning policies include Hasbro (NASDAQ:HAS), Mattel (NASDAQ:MAT), Danone (OTCQX:DANOY), Nestle (OTCPK:NSRGY), Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB) and Reckitt Benckiser (OTCPK:RBGLY). Asian companies such as kid-focused Goodbaby International (OTC:GBBYF), Japanese baby bottle producer Pigeon Corp. (OTCPK:PIGEF) and diaper maker Unicharm (OTCPK:UNCHF) may also benefit. Disney (NYSE:DIS) is getting some further attention, while carmakers that sell to the Chinese market may get a boost: SAIC-GM (NYSE:GM), Volkswagen (OTCPK:VWAGY), Geely (OTCPK:GELYF), Li Auto (NASDAQ:LI), Nio (NYSE:NIO), XPeng (NYSE:XPEV), Guangzhou Automobile (OTCPK:GNZUY), BYD Company (OTCPK:BYDDF), Great Wall Motor (OTCPK:GWLLF) and Brilliance China Automotive (OTCPK:BCAUF). Add your own ideas in the comments section. (323 comments)
What else is happening...
White House gives Republicans a week to show infrastructure progress
EU to lift quarantine restrictions for vaccinated on July 1 - Guardian.
China's factory activity slips, consumer spending holds up.
Quiet Place Part II leads pandemic-best box office weekend.
Are they enough? Texas legislature passes power grid reforms.
Barron's touts 10 ways to cash in on shortages in materials, labor.
In Asia, Japan -0.2%. Hong Kong +1.2%. China +0.3%. India flat.
In Europe, at midday, London +1%. Paris +0.8%. Frankfurt +1.5%.
Futures at 6:20, Dow +0.5%. S&P +0.4%. Nasdaq +0.4%. Crude +3.1% to $68.34. Gold +0.1% at $1907.90. Bitcoin -1.7% to $36316.
Ten-year Treasury Yield +2 bps to 1.62%
Today's Economic Calendar