A permanently weaker nation
By Justin Pyvis – Delivered on 21 Sep 2021

Good morning! ScoMo jetted off to the United States yesterday on what will be his second international trip while us ordinary folks have been prohibited from leaving. He's there for the "Quad", where he will meet US President Joe Biden along with the leaders of India and Japan. Given the attendees, you can be sure the subject matter will be about one thing and one thing only: China.

The other big news of the day was the rioting in Melbourne, with over 500 disgruntled construction workers protesting the state government's vaccine mandate outside the CFMEU headquarters, eventually breaking out into a "violent brawl".

The scenes prompted the government into "high-level meetings" until late last night, before eventually deciding it was all too difficult – in what it's calling a "reset", most construction sites in Victoria were ordered to close for at least two weeks, costing the state up to $A6.3 billion in lost revenue.

Moving on, whatever was said at Friday's national cabinet – which will forever remain a secret due to the government's new confidentiality laws – seems to have spooked a couple of state and territory leaders.

First up was ACT Chief Minister Andrew Barr, who said that the update on Friday showed "the clear advice is that it is prudent to wait until reaching 80% before making major changes", meaning the territory's lockdown could run well beyond the recent 4-week extension.

Then there was the previously optimistic SA Premier Steven Marshall, who seems to have changed his tune by remarking that "we're not going to have a freedom day where the borders are open and restrictions are removed at the same time", with "some public health measures remaining in place".

Finally, QLD Premier Annastacia Palaszczuk said that the NSW and VIC roadmaps out of lockdown "are actually less [freedom] than what we are enjoying in Queensland at the moment". Once again, barring an outbreak in the COVID-free states there's no way they're jumping on the National Plan until they're well above 80% vaccinated.

Fully vaccinated population (aged over 16)

56.3%

53.1%

52.2%

47.8%

44.1%

44.1%

41.8%

41.8%

ACT

NSW

TAS

NT

SA

VIC

WA

QLD

Markets

Daily % change

AUD/USD

72.5

-0.5%

10Y Bond

1.25

-6.0%

ASX200

7,248

-2.1%

Brent (bbl)

74.3

-1.3%

Gold (oz)

1,766

+0.7%

Iron ore (t)

93.3

-8.1%

Bitcoin

43,731

-8.0%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The US S&P500 shed 1.70% in what was its biggest daily decline since May, as fears about contagion from the Evergrande debt crisis in China and the looming debt ceiling in the US (see the Feature below) weighed on sentiment.

Locally, the ASX200 plunged 2.1% as the iron ore miners were smashed in-line with significantly weaker futures prices during the day. Notable non-materials news came from Transurban, whose shares were suspended after it announced it had purchased Sydney's WestConnex toll roads, snapping up the remaining 49% at auction. The NSW government is planning to use the proceeds to speculate on stocks (What Could Possibly Go Wrong?™).

Elsewhere in the region Hong Kong's Hang Seng index fell 3.4% on contagion fears, with its property index down 6.8% to a 52-week low (China Evergrande Group fell another 14.2% to an 11-year low). Markets in China, Japan and Korea were closed for a public holiday.

Economy

Lockdowns hurt: New research by the University of NSW found that the proportion of Australian households in mortgage stress has climbed to 42%, up from around 33% in February last year (i.e. pre-pandemic). People in Western Sydney – where much of the current COVID-19 outbreak is centred – have been hit particularly hard, with those in mortgage or rental stress above 70% in some suburbs.

Sizzlin': German producer prices (the prices factories charge wholesalers) came in at 1.5% in August compared to the previous month, nearly twice as hot as the expected 0.8% rise. If that rate were to be sustained for a whole year, prices would increase 19.6% in just 12 months. 🔥

Picking winners and losers: The expert forecasters in the federal government have decided that hydrogen energy is Australia's future, pumping an additional $A150 million of federal funds into the sector on top of the $A1.2 billion already committed.

Feature
A permanently weaker nation

Writing in the Wall Street Journal, US Treasury Secretary Janet Yellen once again warned Congress "that failing to raise the debt limit would produce widespread economic catastrophe". She added that a failure to do so in a timely manner – "Neither delay nor default is tolerable" – would cause the US to "emerge from this crisis a permanently weaker nation".

Congress has to raise the debt ceiling by October or the government, unwilling to raise additional revenue or cut expenditures, will "default on its obligations".

Stepping back: This is not the first time the US has run up against its legislative limit on debt. According to the Treasury Department, since 1960 "Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit".

The ceiling will be raised again but it always causes a great deal of theatrical huffing and puffing, with people often invoking the Washington Monument Syndrome to score political points.

Why this matters: Channelling her own version of the Syndrome, Yellen warned that "in a matter of days, millions of Americans could be strapped for cash... Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays".

All technically true, although if push came to shove presumably other parts of the $US6.8 trillion budget would be cut before funding for seniors (~17%), troops (~4%) and children (~1%).

Looking forward: Congress will eventually approve an increase to the US debt ceiling. But debt is now 100% of GDP and rising quickly, with no end in sight. The real threat to US solvency will happen if inflation proves not to be transitory, forcing the Fed to raise interest rates without any commensurate fiscal discipline.

At current debt levels even a single percentage point increase in interest rates would effectively add 1% of GDP worth of interest payments to the budget deficit, or roughly $US227 billion.

The Wrap Up
  • 😬 Surely this could have been handled better? France's President Emmanuel Macron was only informed of Australia's submarine decision one hour before the official announcement.
  • 🥊 Manny Pacquiao announced that he will run for Philippine President in next year's election.
  • 😳 A 73-year-old man "suffered extensive injuries" after he was attacked by "an enraged, and likely rabid, beaver", while out for a "leisurely swim in a remote Franklin County pond".
  • 🥝 Auckland's lockdown was downgraded to "Level 3" for at least the next two weeks, allowing many people to leave their residences for work that can't be done at home.
  • ✈️ Acting Prime Minister Barnaby Joyce announced a further $A183.65 million aviation support package, bringing total government support for the sector to $A5.1 billion.
  • 🏀 NZ Breakers player Tai Webster was released from his contract "because of his refusal to be vaccinated against COVID-19".
  • 🤔 North Korea's government warned that Australia's decision to build nuclear-powered submarines might "trigger off a chain of nuclear arms race".
  • 🚀 Elon Musk mocked US President Joe Biden for failing to acknowledge the four civilians who successfully made it to space and back, raising $US200 million in the process, tweeting "He's still sleeping".
  • 💉 The US will require international passengers to be fully vaccinated against COVID-19 from November before entering the country.
  • 🧒 Pfizer reported that a lower dose of its vaccine is safe and effective for children aged 5-11, producing antibody levels just as strong as teenagers and young adults who received a full shot.
  • 💰 Guess where all that stimmy flowed: A new report found that the number of global billionaires grew by 13.4% in 2020.
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