Market Thinking

making sense of the narrative

A switch to half full?

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Is the Glass half empty or half full? It depends on whether you are pouring, or drinking.

Bill Cosby

The biggest uncertainty in markets remains Covid Policy (as opposed to the virus itself) since it defines the underlying economic situation. This means that a lot of people are worried about ‘the vaccine’, concerned that should the vaccine somehow ‘fail’ then the crisis would escalate. We would view it somewhat differently, in that we see the real benefit of the vaccines as being their political efficacy rather than their medical efficacy; they are a route by which the politicians can switch from presenting the glass as half empty to being half full. As such, the vaccines can’t really fail, since all they promise is a lowering of the fatality rate and that should be enough to allow the government to switch from drinkers (half empty) to pourers (half full).

But why would governments do this? As is usually the case, we need to look for guidance to the state of play in Washington. We may be clutching for straws of comfort amid the, seemingly never-ending, lockdown but we note that while Bill De Blasio, New York’s lockdown-fanatic Mayor is busy punishing Trump’s companies for being, well, owned by Trump, the formerly equally lockdown-fanatical New York State Governor, Andrew Cuomo, is talking about opening up the economy again, even as the vaccine rollout there is delayed. This is not, we feel, a coincidence. Indeed it will be interesting to see just how much of the Democrat adherence to strict lockdown, with its long-acknowledged detrimental effect on the economy and its justification for mass mail-in ballots, was actually a calculated political tactic to ensure the eviction of Donald Trump. After all, without the pandemic it would have seemed impossible to prevent a second term for Trump, given the (then) state of the economy and the widespread support he enjoyed outside of the coastal elites and the Never Trumpers in Washington. Covid, or rather the official response to it, changed all that as we now know. To be consistent, Joe Biden needs to ‘own the recovery’ as America is seen to bounce back.

Given it is now in the Democrat’s interests to be rid of Covid, perhaps the glass will start to be half full?

This is not to dwell on US politics, other than to acknowledge that they are also driving most other western politics (officially co-ordinated or otherwise) and that the Covid Policy is such that the pandemic will continue until the establishment say it has gone. As previously noted, a switch to only testing people with symptoms and to only reporting deaths from Covid, rather than with Covid present, would eliminate the pan(dem)ic overnight – especially if spun with the line about the marvelous vaccines. Thus with an equal and opposite sleight of hand, and using exactly the same data, politicians could present the glass as half full rather than half empty, which in turn could lead to an immediate rebound in activity and positivity. Thus, while it was easy to see why at least half the politicians in the US actually actively wanted Covid to have a second wave in ‘the fall’ (to get rid of Trump), it is hard to see who would want that now. Cui Bono?

For us to get out of this, the designated experts have to see a risk free way for themselves to escape the Precautionary Principle

There is, of course, another factor at work here which, on reflection, should be familiar to anyone in the Financial Markets who has watched how the precautionary principle has distorted insurance markets and largely destroyed defined benefit pensions. When politicians demand an impossible risk/reward trade off and hide behind ‘experts’ it is no surprise that those experts seek to minimise their own personal risk, even if it makes for a terrible return outcome. Thus in pensions and insurance policies, an official policy framework of almost zero risk-tolerance drove most defined-benefit pension funds to invest almost entirely in low yielding fixed income, which, inter-alia, distorted bond yields, forcing many funds into accounting deficit. As a result, not only did many companies have to divert free cash flow to ‘top up’ their pension funds (to buy more bonds) but also many closed their funds entirely. In addition, by following the officially defined low risk strategy of buying illiquid and highly leveraged structured products such as Credit Default Swaps simply because they were labelled as low volatility and fixed income, the fund managers and trustees took on enormous amounts of actual risk for their clients – if not themselves. Thus the precautionary principle that led to the zero risk tolerance in the wake of the 2000 dot com crash led in turn to the 2008 Global Financial Crisis, the response to which, sadly, has been simply to do more of the same, only this time with ‘alternatives’ such as Private Equity and leveraged loans.

The parallels with Covid are clear; politicians panicked and then hid behind experts, the Medics, who like the actuaries before them only had the incentive to minimise the risk that they themselves would get blamed and thus a de-facto zero covid strategy has emerged, even though nobody signed up to it. As such, there is no risk-reward being assessed for the wider economy, the cost to the populace, like the damage to the pension fund, is not taken into account. All that matters is that nobody is seen to have taken any ‘risk’. The ‘experts’ are not going to change, what has to happen is that the politicians have to engage in pursuit of a positive outcome. That, sadly, is why we have to think about politics.

Elsewhere though we might struggle to see US Politics as a potential positive. The Cold War with China has led to a new embargo list on companies apparently linked with the Chinese military, leading a number of the major ETF providers (and others) to sell out to avoid sanctions – and thus presumably to no longer track their benchmarks. The evidence suggests that the Chinese mainland (official or otherwise) were happy to pick up the stock in China Mobile, Tencent etc, but the US equivalents may not be so lucky. As previously discussed, a number of US companies operate under ‘license’ from the Chinese authorities, most obviously the Macau casinos and it is difficult to see why the Chinese might wish to extend that arrangement. With founder and Trump backer Sheldon Adelson having died last week, it is perhaps not surprising therefore to see Sands China trading down heavily, although this will presumably be viewed as collateral damage by the State Department.

Meanwhile, the re-appearance of Victoria Nuland – former deputy to Hilary Clinton at the Department of State and revealed by Wikileaks as being behind the ‘color revolution’ in the Ukraine – suggests that the Neo-Cons are back in power, which is worrying leftist publications like Salon , but should really concern everyone, as it suggests further aggressive Anti-Russian (and Anti -Iran) attitudes to go alongside the Anti -China attitude. Her husband Robert Kagan, is a prominent ‘Neo-Con’ from the Dick Chaney school of ‘international engagement’ and behind the Project for a New American Century and is very much of the ‘Bomb Back Better’ faction.

Finally and on a more positive note, something worth keeping an eye on is nuclear energy and (even more exciting) Fusion energy and this is coming from a renewed obsession with Space. We know that the two richest men in the US – Elon Musk and Jeff Bezos – are heavily focused on Space Travel, while the Pentagon (which has more money to spend than almost anybody) is equally directing huge resources into space once more. Obviously space travel requires ‘alternative energy’, with the most obvious solution being small nuclear plants. However, there is already a tremendous amount of work being done on commercialisation of Fusion, notably at MIT, as highlighted in this important series of papers. The commercialisation of Fusion within the next decade could, quite literally, be one of the biggest positive technological changes for a hundred years since the arrival of electricity and we will be looking at this in a lot more detail. Meanwhile, don’t forget small nuclear – you can be sure China hasn’t.

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2 Replies to “A switch to half full?”

  • Interestingly in the HK Standard this morning

    Social discontent is on the rise and putting pressure on the government to adjust anti-epidemic policies, Secretary for Labour and Welfare Law Chi-kwong said.
    With regards to the dinner dine-in ban, Law said various bureaus are discussing with businesses the potential adjustment of opening hours and caps on customer numbers. The ban will still continue from January 21 to 27 from 6pm to 5am

  • Thank you. As ever, a very insightful post.

    I totally share your view on the vaccine: it will be seen to work because it is the only way out of this that does not require governments to admit that their response was the disaster that it was. Instead they can declare victory.

    Hopefully, Biden is teeing up a cynical 100 Days type campaign to “defeat the virus” and will then declare that victory has been achieved. Governments then need to agree behind the scenes to exit collectively so that the conditions of social proof are met. After all, it was follow thy neighbour that led us into this mess.

    Future historians will pour over the historiography of 2020 for centuries, I expect!

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