September 16, 2021

Today's newsletter is 1,271 words, 5 minutes.

🚨Situational awareness: The August retail sales report will be released at 8:30am ET. Economists expect a modest decline amid shortages and the resurgence in COVID-19 infections.

1 big thing: Macau stocks reel as China flexes

Data: YCharts; Chart: Axios Visuals
Data: YCharts; Chart: Axios Visuals

Macau casino stocks imploded Wednesday on news that gaming companies on the island are now squarely in China's regulatory crosshairs, Axios' Felix Salmon and I write.

Why it matters: Macau historically operated at arm's length from Beijing, developing a reputation as a Wild West not only for casino gambling but also for money laundering and loan-sharking.

  • Now, the Chinese Communist Party apparently wants to rein in Macau's excesses even more than it already has.

What happened: Gaming licenses in Macau, which will expire in June 2022, are undergoing an expected renewal process. What was unexpected was Macau officials announcing a review of how the gaming industry is regulated. The process includes a 45-day consultation period starting Sept. 15.

  • “Among the topics being covered: how many licenses — known locally as ‘concessions’ — will be allowed, how long their terms will be, and the level of supervision by the government,” Bloomberg reports.
  • Shares of Sands China and Wynn Macau tumbled by a third amid the prospect for tighter regulation. Las Vegas Sands, MGM Resorts International and Wynn Resorts International also traded lower.

The big picture: China is unlikely to do to Macau gamblers what it did to teen gamers. There are still going to be casinos on the island — and they are still going to be owned largely by foreign companies.

  • Investors are worried, however, that Sino-American geopolitical tensions will result in U.S. operators being penalized, either by being forced to lower their profit margins or by being forced to partner with Chinese companies.

What they’re saying: "Fear of the unknown is the dominant narrative,” Deutsche Bank analyst Carlo Santarelli wrote on Wednesday. "Investors have taken note of other sectors in China that have been hit hard by Government intervention and increasing control.”

The bottom line: Investors are acutely aware that the Chinese government sees capitalism and profit as a means to an end, rather than a goal in itself. The CCP has already made it a lot harder for Chinese people to gamble in Macau. This week's announcements suggest that process is far from over.

2. Catch up quick

Democratic leadership are working on a short-term funding bill that includes a debt-limit increase, which would prevent the U.S. from potentially defaulting on its debt. (Axios)

Canadian Pacific Railway reached a $27 billion deal to acquire Kansas City Southern after rival Canadian National Railway ended its pursuit of the company. (Reuters)

Transportation costs continue to be a growing problem for companies. Container shipping rates from Asia to the U.S. West Coast are five times higher than they were a year ago. (WSJ)

3. Milestone: Pre-pandemic production levels reached

Data: FRED; Chart: Axios Visuals
Data: FRED; Chart: Axios Visuals

Industrial production joins metrics like GDP and consumer spending that have returned to and surpassed pre-pandemic levels.

Why it matters: The pandemic has caused a wide array of disruptions that have gummed up the links along the supply chain. The fact that industrial production still continues to grow suggests the supply chain, while troubled, is at least improving.

By the numbers: Industrial production rose by 0.4% in August month over month, according to Federal Reserve data released yesterday.

  • While this was below expectations for 0.5% growth, the level of activity was above pre-pandemic levels.

Between the lines: “Late-month shutdowns related to Hurricane Ida held down the gain in industrial production by an estimated 0.3 percentage point,” the Federal Reserve noted.

What they’re saying: “Even with the hurricane-related disruptions in August and continued supply chain issues in the auto sector, overall manufacturing output has been able to climb at a solid rate on net in recent months,” JPMorgan economist Daniel Silver wrote.

State of play: We recently learned U.S. manufacturers had a backlog of unfilled orders worth $1.2 trillion, as businesses invest in growth and replenish their inventories.

  • “Growth in manufacturing going forward is likely to be supported by low inventories,” HFE chief U.S. economist Rubeela Farooqi says.

Yes, but: “With the Delta variant causing renewed disruption to global supply chains and Hurricane Ida weighing on oil production, a further slowdown looks likely in September,” says Andrew Hunter, Capital Economics senior U.S. economist.

What to watch: Regional manufacturing surveys will offer updated views on what’s going on in America’s factories.

  • The Empire State manufacturing survey, the first of the regional surveys, unexpectedly showed a significant jump in activity in September.

4. Biden turns to business leaders in vax push

President Biden at a meeting with business leaders Sept. 15. Photo: Oliver Contretas/Getty Images

President Biden convened a meeting of top business leaders Wednesday to build support for a sweeping vaccine mandate that will affect most of America's workers.

  • The message: Vaccines work and the stalled uptake is holding back the economy, Axios' Kate Marino writes.

Why it matters: As vaccination rates have flattened across the country, business leaders have the power to impact their employees’ decisions. Many corporate leaders had been looking for stronger federal guidance to lean on.

  • “Everyone present was lauding the government [for] giving us employers a level playing field,” Columbia Sportswear CEO Tim Boyle, who attended the meeting, told CNBC.
  • Columbia's stores are located in numerous geographical areas with different rules as it relates to the pandemic. "How are we supposed to manage that? This is a point of clarity ... it’s a path forward," Boyle said.

Change of heart: After Wednesday's session with Biden, attendee Molly Moon Neitzel, founder and CEO of Seattle-based Molly Moon’s Homemade Ice Cream, tells Axios the debate over whether or not to require the vaccine for her 180 employees has ended.

  • Now, she will — after the Labor Department issues rules on the matter.

Keep reading.

5. The crypto carry trade

Illustration: Sarah Grillo/Axios

The invention of stablecoins means that there are now currencies that claim to have no risk of depreciating against the U.S. dollar, Felix writes.

Why it matters: Those currencies also have yields vastly higher than anything seen in the bond market — setting up all the ingredients for an enormous carry trade.

How it works: On Sept. 7, Coinbase CEO Brian Armstrong wondered, "How can lending be a security?"

  • Exactly one week later on Sept. 14, Coinbase issued $2 billion of bonds, paying 3.375% on the 7-year tranche and 3.625% for 10 years.
  • The pricing was expensive by U.S. corporate bond standards, and even expensive by junk-bond standards: Coinbase ended up paying about 0.65 points more than most other companies carrying the same BB+ credit rating. But by crypto standards, the funding was dirt cheap.

By the numbers: Coinbase, in a lending product it contemplated, was promising to pay a 4% yield on USDC, the dollar-linked stablecoin it's associated with. Other companies pay much more: BlockFi, for instance, pays as much as 8% interest on USDC, which is roughly what Gemini pays on its Gemini dollar.

Between the lines: The people borrowing dollar-proxy coins at 8% are doing so because the traditional banking system is still very uncomfortable lending against crypto assets. (All crypto lending is overcollateralized and set up with automatic margin calls; according to the lenders, that makes it very safe and minimizes any credit risk.)

  • For players with access to fiat borrowing markets, like Coinbase, that sets up a very simple carry trade: Borrow U.S. dollars, lend USD stablecoins, and make free money on the spread between the two.

Be smart: There's no such thing as a free lunch. There are all manner of risks involved in such a trade, and in fact there's no indication that Coinbase is going to lend its dollars out in the form of USDC, rather than putting them to any number of alternative corporate uses.

The bottom line: The spread between USD and USDC yields is incredibly large at the moment. If crypto succeeds in maturing as an asset class, that won't last long, and it's worth jumping on now. Just be sure you're OK with the risk of your stablecoin imploding.