Good morning.disappointed Economic data Going out of China may be the biggest news on the market on Monday, but it is not surprising that everyone (including Unhedged) has been talking about China topics considering the tightening of credit/lower liquidity. So I focus on other things. Send me your thoughts: [email protected].

Afghanistan and the future of interest rates

Regret for the fact that domestic and international policy mistakes in the United States did not have much impact on the stock market. This is a standard news metaphor. I experienced the opposite surprise: I was always surprised when the U.S. got into a stupid budget showdown, or embarked on a dangerous international adventure too confidently, or (as happened this week) coming home from one place, the U.S. stock market Did not rise more, was humiliated, and left instability.

When the United States makes mistakes, the world becomes more dangerous, and when the world becomes more dangerous, American assets should be settled. It may be clumsy, but it is the richest country, with the deepest market and the most powerful companies. However, perhaps Afghanistan is small enough and the risk of infection is small enough. The botched withdrawal of the United States and the collapse of the Afghan government are not enough to increase the premium on American assets. We will see.

I asked Ed Al-Hussainy, an emerging market interest rate and currency expert at Columbia Threadneedle, whether the events of the past few weeks have created risks or opportunities for investors. He scored two points, one long-term and one short-term.

In the short term, Pakistan’s sovereign bonds are weak (Reported by the Financial Times) here) Created an opportunity to deal with the collapse of its neighbors. Al-Hussainy pointed out that Pakistan is negotiating a “progress review” with the International Monetary Fund on the country’s US$6 billion aid package. Now, the International Monetary Fund will have more reasons to support Pakistan’s stability, thereby improving the credit prospects of its bonds.

“The IMF is ultimately a political animal,” Al-Hussainy said. “Historically, this is in their interest. [to increase support] When the goals of foreign policy are aligned.” He pointed out by analogy that, despite the terrible economic fundamentals of Argentina, the International Monetary Fund supported Argentina when Venezuela was on the verge of collapse in other parts of the region.

In the long run, the question is to what extent the collapse has exhausted the Biden administration’s political capital reserves, and what this means for US interest rates.

“Earlier this year, people were generally optimistic that all this financial support will become a normal response to the recession, and higher spending between the two recessions will become the standard… But now everyone will be short-term stimulus and Inflation and long-term factors are linked [eg the ‘soft’ infrastructure spending package] Is dying on the vine. If you have an optimistic view of higher interest rates, you must now ease that optimism. ”

This makes a lot of sense to me.

China Shipping

This is a great chart:

Of course, the increase in shipping costs from China is important because it will cause the price of everything from that country to increase, that is, most things. Will this key price, like the price of wood, withdraw quickly after various bottlenecks are eliminated? Or will this be an ongoing problem?

The two most mentioned bottlenecks are the shortage of ships and containers (under-built during the panic in the first few months of the pandemic) and the shutdown of key ports due to the virus, such as Ningbo.

Shipping indices are notorious for their unreliability and poor representation (for example, pointing out that the failure of the Baltic Dry Index is a bit like cottage industry among financial journalists). The data is imperfect, and the prices of contracts of different types and durations vary greatly.

To get some background information, I talked to my friend Noah Janssen, who is JB Metal Craft. For about 15 years, Noah has been purchasing metal industrial equipment from China and selling it to American miners, road builders, etc. He confirmed the information of the benchmark chart and added some new angles:

“I did hear from Chinese suppliers that everyone there is facing a labor shortage. One explanation is that the delivery economy has driven many low-wage workers out of the factory… Workers would rather ride a bicycle than be in the factory.

“Prices really started to rise at the end of last year. I have been expecting them to fall, but this is not the case… Sea freight in June was about three times the normal situation, and it doubled in July, so for sea freight [part of the equation] About six times the original.

“Metal parts are heavy but not cumbersome, so this has little effect on us [more volume-intensive] Shipper.Previously, total shipping [ocean plus land] It is a very small part of our total cost-I would say about 3%. But this month, shipping costs forced us to increase prices to customers. I should probably finish it in July, but I always thought that the price would fall back and there is no end in sight, because we are entering the peak shipping season, which is driven by American retailers to stock up for the Christmas season, from now to October. “

Are his customers complaining about price increases? “There is rarely a counterattack because people can be seen everywhere.”

If Noah’s experience is representative, my conclusion is (1) China’s labor shortage, which has nothing to do with Covid, may be more important than people generally believe-it may be “tricky” (2) transportation costs are still The way to play a role through the supply chain, and (3) mitigation in the coming months seems unlikely.

Banks are the worst cartels in the world (part 2)

on Monday I wrote about the statement that banks are cartels. Yes, very large banks may mess up catastrophically in the core work of managing risk and serving customers, but they are still very large banks (see, for example, Credit Suisse and Wells Fargo). However, I think that over time, banks’ low returns and generally weak stock market performance indicate that they are hardly a cartel that suppresses competition.

Today, there are two more reasons for rejecting the cartel label, especially for Bank of America.

First, there are many banks in the United States (4,987 are insured by the Federal Deposit Insurance Corporation). Although there are only a few very large banks, their position in the market is not entirely dominant. Data from FDIC:

Second, we know what a bank cartel (or at least a bank oligopoly) looks like, because there is one in Canada, and the top five banks control about 80% of deposits.This is the resulting performance (hat hint Carl Samota):

All five have outperformed the Toronto Stock Exchange index, and four of the five have outperformed the best-performing U.S. bank over the long term. These are the rewards that a truly non-competitive market should provide!

But if Bank of America is not a cartel, why are they so resilient in the face of their own awkwardness? I think there are three main reasons:

• The banking industry is largely a scale business. The conference brings huge economic advantages and helps the poorly managed big banks continue to falter.

• Federal deposit insurance means that the cost of deposit liabilities does not reflect the bank’s risk or management capabilities. At the same time, there is not much difference in the pricing of assets such as loans. Basically, customers never change banks.

• Regulatory burdens and capital requirements have indeed reduced the number of new entrants, which may be the least important of the three reasons. People did start new banks (nine new bank charters approved in 2020) according to Standard & Poor’s Global Market Intelligence).

I think these factors are sufficient to explain the amazing flexibility of big banks. But the third factor is too much. The regulatory system seems to be onerous because the fundamentals of the business are not so good. Who wants to be a bank? This product is a commodity, and unlike OPEC, the bank does not have any major control over the supply of (for example) loans. The wider economy does this by providing a certain number of creditworthy borrowers. As a bank, it is difficult to make excess profits without taking too much risk, which helps explain why banks tend to fall into so much chaos in the first place.

The US banking industry-at least the core of its ordinary deposits and loans-is not a cartel. This is just a strange business.

Mistake

Two mistakes were made in the past two days. In the letter on Friday, I misspelled the name of the US FTC commissioner: it was Khan, not Kahn. On Monday, I named a notorious trade finance company Greenhill; it was Greenhill. I think both are stupid. Apologize.

A good book

I like Ruchir Sharma’s Pillar The British “Financial Times” believes that, like the dominant companies in the past, huge American technology companies will be overwhelmed by competition. I also didn’t believe it for a second. Today’s economy is different. Get used to having a lot of Google, Apple, Amazon and Microsoft in your life. Their dominance may last longer than yours.