Almost a year ago when we wrote Spring but not sprung we were worried that the government was too risk averse, but never thought we would still be in lockdown as a second spring arrives with most of the West still ordered to remain at home. This week marks the first Anniversary of Lockdown, a completely unprecedented response to a pandemic that essentially led the West to abandon all existing protocols and lock up the healthy to protect the sick and the vulnerable. Started by Italy and then rapidly copied by France and then the UK, politicians of all stripes rushed to adopt the sort of totalitarian measures and restrictions on individual liberty that they habitually decried in the source of their new policy, China. Over the last year the blog has picked up on a number of issues around this that we thought worth linking to such that many of the links in blue below are to previous posts (that still remain relevant).
Over the last 12 months, students trying to work from home have seen a re-writing of their textbooks in real time, especially in the areas of Economics, History and Politics. In Psychology meanwhile they have experienced a series of live tests of famous Psychology experiments on a massive scale, from the Stamford Prison Experiment, to Milgram’s experiments on empathy to the Five Monkeys experiment. Science students, however, are more likely to be confused than thrilled, as will those who have done their best to get up to speed with areas like virology, epidemiology and immunology. For, despite repeated calls that they are ‘following the science’, it is clear that the Politicians are largely doing the opposite, while mathematicians and data scientists are equally baffled as to why with the data available (albeit often largely ‘hidden’ from the public) the decisions being taken are what they are.
From an economics viewpoint the study has not been the virus itself, but the policies that have followed. While the economic impacts of what are officially referred to as Non Pharmaceutical Interventions or NPIs are admitted not to be acknowledged by the scientific advisors in their planning, they are nevertheless very real and dominated the initial market response. The biggest hit was to small businesses and the gig economy while a number of the big tech companies and internet giants actually took huge market share leading to very strong rallies in their share prices. At the same time the moves by the Fed to inject massive liquidity into the systems almost exactly a year ago, thus underwriting the system, highlighted to students of the markets that market mechanics can be far more important than so called economic fundamentals.
Students of the markets therefore, will in many cases have had to revise their models of market behaviour, as the last 12 months saw first the ‘predictable’ crash in equities and rally in gold, but it was followed by an explosive rally that initially took in a lot of ‘meme’ stocks such as Zoom and other perceived ‘lockdown beneficiaries’ to record highs, while pushing gold to the sidelines to be replaced by bitcoin as a new portfolio balancing asset. Subsequently the market has indeed looked at fundamentals, especially with respect to supply and demand and a commodity cycle, meaning that as the noise traders disappeared we found that as the chart shows, since October the likes of BHP have risen 30% while Zoom et all have fallen by a similar amount. Those who exploited the meme stocks early did very well, while those who got in when the story was probably the most compelling, ie back in the autumn, rather less so.
Chart 1. Zoom v BHP – the Lockdown versus Reflation trade has been going on longer than you might think
The enduring (and in some ways endearing) thing about markets is that they are not in thrall to the ‘experts’ and will merrily defy the ‘rules’ as determined by what are in reality no more than glorified models of “what happened last time’. This is why great investors and true students of markets are usually very humble; they know that the job is to listen to what the markets are telling us, rather than take it upon ourselves to tell the market what it should do according to our models.
Would that the Scientific advisors/mathematical modelers advising governments on the epidemic, were so humble. To them the Scientific method is to be overlooked and the data carefully selected to fit the model. And if all else fails then the government PR machine can be relied upon to shut down any criticism. When it comes to virology, epidemiology and immunology, we noted right at the beginning that we are no experts in this, but then worryingly neither it appears are most of the people advising government. In the UK we noted that the Strategic Advisory Group on Emergencies (SAGE) is actually packed with government health officials, behavioural scientists and mathematical modelers – especially the (we thought) widely discredited team at Imperial College whose catastrophic predictions for previous epidemics such as Foot and Mouth, Bird Flu, Swine Flu and mad Cow disease were so exaggerated (and incorrect) as to be, well catastrophic. Interestingly the promotion of the disaster scenarios of Professor Ferguson et al was not simply part of the logical fallacy of Appeal to Authority, as we noted at the time (Oxford or Imperial), many distinguished experts in the areas of virology, epidemiology and immunology disagreed both with the modelling and especially the policy advice. This culminated in the Great Barrington declaration that we discussed in October, where in effect a Red Team came forward to challenge the Blue team that were dominating NPI policy. It is at this point that students of Politics may have recognised that this was nothing to do with Science and everything to do with Politics. The Great Barrington Declaration was largely ignored/dismissed by a mainstream media that had become little more than a Propaganda Machine. History students would see elements of the USSR or Nazi Germany in this, but as we noted in one of our most popular posts (From Dad’s Army to Blackadder goes forth) these techniques can be traced to Edward Bernays, the nephew of Sigmund Freud who literally wrote the book on Propaganda back in 1928 and was subsequently known as the Father of PR.
Here the Psychology Students started to notice some familiar things from their coursework. Almost a year ago, we noted that we appeared to be living in a Real Life Stamford Prison Experiment (something very much in evidence at the moment in zero-Covid Hong Kong) as well as the fact that one of the sub committees of Sage was called the rather sinister sounding SPI-B, or more formally the Scientific Pandemic Influenza group on Behaviours, who quite literally have a member called Professor Fear (as we noted when we also introduced the concept of Warden Hodges from Dad’s Army)
PR and Spin was very much to the fore in the August to November period of course because of the US Presidential Election. There is no doubt that the European lockdown measures emboldened many Democrat US governors and Mayors to shut down their cities and crash the local economies, while blaming the Trump administration and also for the Democrat machine to demand the types of mail in voting for the Election that suited them best (and which still remain highly controversial in their lack of transparency and other irregularities). The public were ‘given their opinion’ by the Mainstream Media and this of course required that Covid should be so terrible as to a) require a new President and b) to require massive mail-in voting to help ensure that this happened. Masks became a political statement. It is certainly no coincidence that the atmosphere around Covid, including the media reporting, changed markedly once ‘their man’ had been elected. This was obviously further helped by the fact that the Medical Industrial Complex waited until the day after the Election to announce the arrival of the vaccine ‘cavalry’.
It is not to be a conspiracy theorist to note that, as in any crisis, vested interests emerge to advance their own cause. Thus those looking to make huge returns from vaccines were evidently amongst those advocating against the concept of herd immunity – indeed the WHO even changed its definition of herd immunity to exclude naturally acquired immunity. Meanwhile, those looking to make money from testing advocated mass testing as (somehow) a solution to the crisis, while those with access (even with no experience) to PPE, especially masks, were no doubt ‘delighted and surprised’ when politicians switched from saying masks did not work to making them compulsory without any supporting evidence. Indeed, one of the standard features of Western Government policy has been to require their critics (assuming they can even be heard) to prove that the governments’ measures don’t work, rather than the government having to prove that they do.
The main and enduring lesson for economic students over the last year however has been the effective adoption by Western Governments of Modern Monetary Theory, known as MMT (which some suggest stands for Magic Money Tree). Massive fiscal spending paid for by money printing has always been attractive to politicians (which is where the history and Politics students start getting involved) and is a reason why MMT is neither Modern, Monetary or a Theory (as we pointed out last year in the blog). At the same time the politicians effectively ceded power to the Health Authorities and the Medical Industrial Complex, allowing the precautionary principle to run riot and a huge budget to be diverted towards testing and, ultimately vaccines.
As markets celebrate the upcoming anniversary of the market low, the enduring question for them has now become what to do about Bond portfolios and what if anything it means for equities. If you believe that the so called bond vigilantes can force the central banks and the Governments to crush any growth and thus concerns about inflation, then there may be a case for a rally in fixed income, but if we have learned anything from the last year, it is that once given power, politicians are extremely reluctant to give it up. The $1.9trn stimulus from the Biden Administration is the most enormous source of political patronage and is going to lead to huge revenue growth for many corporates and in very different ways from the previous ‘cheap money lending’ regime. The Bond enthusiasts largely know that the game is up, but are currently all singing the same tune; that equities must also fall because of the logic of the valuation calculation. But that presupposes that equities were previously being valued off a ‘risk free rate’ of 50bp. Looking at measures such as the discount rate applied in M&A or any other corporate activity, or the implied discount rate from an Internal Rate of Return calculation (taking projected cash flows and working out what discount rate would be needed to generate the current share price) suggests – in our view correctly – that equities have never been pricing off the artificially low QE inspired rates. There is always the risk of volatility, but ultimately while the new Post Pandemic Period may see many changes, equities will continue to price off cash flows.
