Buyer beware
By Justin Pyvis – Delivered on 22 Sep 2021

Good morning! Anti-vax street protests intensified in Melbourne yesterday, with chants of "f**k the jab" roaring out as construction workers marched across the city, at one stage even blocking the West Gate Freeway in both directions.‍

Workers are angry with the Victorian government's recent decision to mandate COVID-19 vaccination for those who work in construction by this coming Friday (first dose). The clash was inevitable, given that – as we wrote last week – mandates are "unlikely to work", as "opponents tend to be vociferous in their displeasure, and a mandate only confirms their suspicions that it's not about health but control".

But then again when has a bad idea ever stopped a government, especially in Victoria? 🤷

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

The US S&P500 edged down 0.08%, with investors no doubt eager to see what happens in Chinese markets on what will be the first day of trading this week following the Mid-Autumn Festival holidays. There's also a two-day Fed meeting that kicked off last night which will set the tone for US monetary policy when it concludes tomorrow.

Locally, the ASX200 bounced around before eventually finishing 0.35% higher, as energy prices rebounded and early US S&P500 futures trading showed the jitters surrounding China Evergrande may have cooled.


Lockdown blues: The weekly ANZ-Roy Morgan Consumer Confidence survey was almost unchanged in mid-September, with slightly weaker confidence in both NSW and Victoria offset by gains in both Queensland and South Australia. Western Australia remains "higher than anywhere else", at well over 110 (a reading over 100 indicates positive sentiment).

According to ANZ Head of Australian Economics David Plank, "A notable development was the jump in inflation expectations to 4.7% for a second time this month."

Prolonged rises: The OECD warned that "the speed of the recovery has increased inflationary pressures, quickly pushing up prices to where we expected them to be before the pandemic", and that managing inflation would be "a very difficult balancing act". It's forecasting G20 inflation to average 4.5% in the December quarter.

Follow the leaders: The RBA released the minutes of its last monetary policy decision (9 Sept), revealing that it seriously considered maintaining bond purchases at $A5 billion a week. However, it ultimately decided to reduce it to $A4 billion and extend the period out to February, as even at that reduced rate "the Bank's bond purchase program is expanding faster relative to the stock of bonds outstanding than that of many other central banks".

The election nobody wanted: Except Justin Trudeau, who will form the next government in Canada but missed out on the majority he was seeking. Elections Canada estimated the whole process cost taxpayers $C610 million. 😬

Buyer beware

Writing in yesterday's WSJ, chief China correspondent Lingling Wei noted that "Xi Jinping's campaign against private enterprise, it is increasingly clear, is far more ambitious than meets the eye":

"In Mr. Xi's opinion, private capital now has been allowed to run amok, menacing the party's legitimacy.
In Mr. Xi's version, the government would have a level of control that would allow it to steer the economy and industry along a path of its choosing, and channel private resources into strengthening state power."

Stepping back: The issues facing China's property sector and Evergrande in particular are somewhat self-inflicted, part of Xi's attempt to "show who is boss in China".

One of the first sectors targeted was real estate, where runaway debt and soaring prices – stoked by Xi Jinping's loose monetary policy and expansionary fiscal policy – were clearly unsustainable. So earlier this year China's government introduced credit control measures via a 'three red lines' policy, limiting property developer liability to asset ratios to less than 70%, net gearing to below 100% and cash to short-term debt ratios of more than 1x.

Why this matters: The move effectively destroyed Evergrande's business model, which was driven by the 'three carriages' of high turnover, high gross profit and high leverage. According to Caixin, "even in good years, the company usually had negative operating cash flow, with not enough cash on hand to cover short-term loans due within a year with and presale revenue not enough to pay suppliers".

Looking forward: Xi Jinping won't want to bail Evergrande and its wealthy, reckless owners out, but he also won't want its failure to reverberate through China, given that real estate accounts for somewhere around 70% of Chinese households' assets, is a big contributor to GDP growth and most of Evergrande's debt is owed domestically (only ~$US19 billion of Evergrande's liabilities are offshore bonds).

But regardless of Xi's approach (most likely some kind of restructuring of Evergrande only to prevent contagion that could cause a recession or financial crisis), this saga should make it clear that Xi Jinping's China – Xi is expected to break the system of succession to stay in power next year – will continue to deviate away from the one the world has known since Deng Xiaoping rose to power over 30 years ago. As Lingling Wei wrote:

"The big risk for China and Mr. Xi is that the push winds up suppressing much of the entrepreneurial energy that has powered China's boom and years of innovation."

Buyer beware...

The Wrap Up
  • ☠️ "Covid-19 has now killed about as many Americans as the 1918-19 Spanish flu pandemic did — approximately 675,000."
  • 🌋 A volcano erupted on Spain's La Palma island (Canary Islands), spewing a spectacular stream of lava forcing some 5,000 people to be safely evacuated.
  • 🤓 Modelling done by the University of Western Australia found that "moderate" lockdowns would still be required in the state at an 80% fully vaccinated rate (people aged over 12), unless "kids aged five to eleven" are also vaccinated.
  • 🥝 A very Kiwi problem: Two men were arrested trying to enter Auckland with a "large amount" of KFC. Takeaway food is currently banned under Auckland's lockdown rules.
  • 📜 Annastacia Palaszczuk won't reveal Queensland's reopening plan until she receives "further modelling from the Doherty Institute", due in two weeks.
  • 🕺 Dancing is legal again in South Australia but only for up to 50 people and only at private venues. People are now also allowed to stand up and drink a beer in licensed venues.
  • 👷‍♀️ The NSW government will allow its construction industry to return to 100% capacity on Monday, even if some workers are unvaccinated.
  • 🌎 El Salvador's 40-year-old, Bitcoin-loving President Nayib Bukele changed his Twitter bio to "El Dictador más cool del mundo mundial", which translates to "the coolest dictator in the world".
  • 🎆 The City of Sydney cancelled its NYE family fireworks display. The midnight fireworks display will go ahead but will be "centred around Circular Quay and the inner harbour only".
  • 🐱‍💻 A data breach in Thailand means any foreigner who has travelled there in the last decade "might have had their information exposed".
  • 😷 Only in Texas (well, maybe Florida too?): A couple were kicked out of a restaurant "for wearing face masks, which they say they wore to protect their immunocompromised 4-month-old son".
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