less crackpot epidemiology, more market analysis please

Eoin Treacy's view

Thank you for this email. I have never considered myself a crackpot but who does? The reality today is there is a war going on for the hearts and minds of the global population. A connected world has not allowed every voice to be heard, only the loudest and best funded. The raw appeal of emotional rhetoric animates the online mob in the same way as it has always done for crowds of agitated people.

I agree there is crackpot epidemiology everywhere but there is far less commentary on crackpot epistemology. The basis of reason and thought are under outright attack today and the other side is winning.

Anyone who questions the prescribed narrative on the response to the virus, environment, race, entitlement, sexuality and any of a host of topics is vilified, cancelled and/or doxed. Crowds are powerful discriminatory and are vicious towards doubters. That hasn’t changed but the crowds are bigger today and physical proximity is not a limiting factor.

In this service my role is to lay out what I believe are relevant considerations for a rational investor as we act as judges at an international beauty competition.

Let’s lay out some of the main arguments being offered.

The CDC are saying there is a strong possibility that we are already in a fourth wave of COVID-19. This one is being driven by the, much publicized, Delta variant.  

It is also looking increasingly likely the FDA will approve the Pfizer vaccine for general use. That’s a big step for a lot of people who are hesitant about taking an unapproved drug. 

On Monday we also heard President Biden’s objective of getting 70% of the population vaccinated has been reached. That puts the USA among a handful of countries that vaccinated most of the population.

With fear of breakthrough infections and a so-called “pandemic of the unvaccinated”, it is reasonable to think about whether more stringent social distancing guidelines will be introduced again?

If we dig a little deeper in to the COVID statistics, the vast majority of vaccinated individuals are well protected. Even those who do develop breakthrough infections don’t tend to end up in hospital.

The US government’s answer is clear here. Get as many people vaccinated as possible and carry on as normal. The UK is following the same strategy.  

That means we are moving into a new phase of the recovery. Public officials are no longer jumping at shadows. We are just going to have to live with the virus. Any future mutations will be dealt with on an individual basis. That’s why it has less power to influence markets.

Coronaviruses like the common cold, flu and COVID-19, mutate all the time. That greatly increases the potential we are going to be getting annual booster shots.

News out of Israel tells us that Pfizer’s vaccine loses its efficacy after about six months. That’s great news for investors. The company will be selling new doses every year. Maybe even every six months. The fact Sinovac’s vaccine much less effective is doubly good news for Pfizer and Moderna.

The USA’s moratorium on evictions expired over the weekend. That opens up a lot of uncertainty for vulnerable people and malingerers alike. It only makes sense to remove supports if the economy were to fully open up.

The Congressional Budget Office also announced on Monday that they estimate the Federal deficit will shrink from $3 trillion to about $1.2 trillion next year. That’s a massive decline in spending and suggests the government is confident another lockdown will be avoided.

The big question is how dependent is the wider stock market on that extra government spending? This has been a liquidity fuelled rally for more than a decade and the process went into overdrive with the pandemic. The economy will need to do a lot of heavy lifting to make up for the loss of nearly $2 trillion in stimulus. At the first sign of trouble it is very likely more money will be printed. 

If there are fewer bonds being issued, there will be fewer bonds for the Federal Reserve to buy. If the US government no longer needs to borrow as much the Fed won’t have much choice. They’ll have to reduce their purchases or they’d end up buying most of the market. That’s bullish for bonds.

That’s why the Delta variant might be the goldilocks threat for markets. It’s serious enough to cause concern but not serious enough to lockdown. That should ensure the Fed remains cautious about tapering and particularly if the stocks market weakens from its recent peaks in what is looking increasingly like potential for a reversion towards the mean.