Here is our take on the articles summarized below:

The pillars of the free market are under duress. One of the greatest free-market inefficiencies – environmental conservation – has brought forth the bitter fruit of its negligence, as a monumental report from the UN indicates. Xi Jinping’s vision of China continues to throttle private enterprise, startling Western markets. Mass protests over the mishandling of the coronavirus in many countries demand radical change and shifts of governance. And even the world’s most secure asset – US Treasury bonds – have shown weakness in an atmosphere of rehypothecation, as we wrote about on Tuesday. In such a world, principles are often sacrificed for pragmatism in the face of grave danger, yet without these principles, the fight would be for naught. Let us hold firmly to that which we know is true while doing what is necessary to see that truth prevail.

“Landmark” U.N. Climate Report a Wake-Up Call 

The Climate News is About to Get a Lot Worse – Ishaan Tharoor, Washington Post
Humans Have Pushed the Climate into ‘Unprecedented’ Territory, Landmark U.N. Report Finds – Brady Dennis and Sarah Kaplan, Washington Post
5 Takeaways from the Major New U.N. Climate Report – Henry Fountain, New York Times

Two hundred and thirty-four authors from the UN’s Intergovernmental Panel on Climate Change (IPCC) released a major assessment of over 14,000 climate studies in a report on Monday, which came to several sobering conclusions. The report – which was ominously released as a summer of wildfires, floods, storms, and historic heatwaves continues to devastate Asia, Europe, and North America – states that humans are “unequivocally” responsible for much of the climate change we see in the world and that even the most aggressive countermeasures on the table today will not prevent the planet from warming by 1.5 degrees Celsius (the bar set by the Paris climate agreement in 2015) by 2050. The effects of even the best-case scenario are dangerous for both biodiversity and human flourishing: droughts become more long-lasting, widespread, and severe; sea levels rise, and oceans become more acidic; deadly heatwaves and catastrophic events become commonplace. Even with this dire outlook, all hope is not yet lost. While the movement to renewable, net-zero-carbon energy sources are necessary to mitigate the rise in atmospheric greenhouse gases, there is still some capacity in the atmosphere for emissions in the inevitable interim period between traditional and renewable energy. If the world is aggressive in controlling its carbon output, there is a reasonable chance that some of the warming trends will begin to reverse by the end of the century. Still, such an undertaking is expensive in both monetary and social capital terms, and most world governments have been unable to muster the political will to pay the cost.  Unless the political and economic incentive structures around climate preservation change soon, the world will be in for a difficult century.

Xi Jinping’s Capitalist Smackdown Sparks a $1 Trillion Reckoning

Tom Hancock and Tom Orlik, Bloomberg

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In recognition of China’s communist origins, President Xi Jinping has been focusing on restructuring certain industries with priorities set on social stability and national security. In an attempt to limit out-of-school tutors to replace the government-trained teachers, China declared private education was “hijacked by capital,” which resulted in a $1.5 trillion selloff from Chinese stocks affecting some of the biggest portfolios in global finance. Historically, China’s leaders have had no problem shutting down the interests of the private sector, as seen in the increased regulations in the technology industry. The shift in focus has been named the “three big mountains,” namely education, healthcare, and property

The burning question has moved from: “Will they continue to regulate?” to “Which sector will they regulate next?” This could be predicted by looking at which sectors have become profit-driven like the education industry and the food delivery services, yet these changes remained a surprise. China’s anti-monopoly efforts are proving to apply to almost every sector and may ultimately abolish private and foreign capital entirely. These movements are driving larger wedges into the U.S. and European relationships, as shown in the turbulence in Chinese IPO’s. China seems unbothered by these actions as they believe this will not hinder their economy, and thus far they have not been proven wrong as Chinese exports to the U.S. continue to rise. Even though China’s Communist Party is expecting the economy will continue to grow, their shift in focus could well prove counterproductive.

The Pandemic has Exacerbated Existing Political Discontent

The Economist

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Many middle-income countries are finding their voices against their governments and are looking to hold someone accountable for how the pandemic has been handled in their country. For instance, Thailand is experiencing protests due to its government failing to secure enough vaccines and opening too quickly to foreign tourists. Both of these have contributed to the recent wave of COVID-related deaths. While the virus has limited the number of ongoing protests, its chilling effect may be at an end as civil unrest is on the rise.  Indeed, social unrest has begun to accelerate now that we are more than a year past the beginning of an epidemic. The reasons for these protests typically spawn from economic hardship, which often painfully accentuates government shortcomings. Cubans are beginning to fight for necessities, and South Africans battle inequalities between the poor and the rich. Belarussians took the pandemic response into their own hands when President Lukashenko refused to take it seriously. The pandemic is not over, and governments are not yet done establishing new rules and regulations. This could open the door for governments to do more for the safety of their citizens, or civil unrest could worsen. One thing is certain, locking people indoors does nothing to quarantine unrest.

World’s Biggest Pension Fund Cuts U.S. Bond Weighting by Record

Masaki Kondo and Shigeki Nozawa, Bloomberg

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The Japanese government’s pension fund cut its exposure to US Treasury bonds from 47% of its foreign debt holdings to 35%.  The shift comes as the fund looks to reduce its dependence on Japanese government debt and pivot to equities and foreign debt, which post higher returns. Given that the fund manages over $1.7 trillion in assets, the move has many wondering why the managers chose to rotate out of the most secure asset on earth. Some have suggested that the fund was simply seeking returns in higher-yielding European sovereign debt, while others postulate that the move was incidental to US Treasuries’ weighting in global indices. With the dollar strengthening in recent weeks and interest rates improving, the Treasury yield may dip still further. Japan’s pension fund may not be the last to rotate out of US government bonds in favor of other issuers.