12 January 2022: Endemic or still pandemic?: Clumsy politicians; BJ’s demise; Ditto the EU?: & Other stuff.

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Night’s candles are burnt out, and jocund day stands tiptoe on the misty mountain tops

Spanish life is not always likeable but it is compellingly loveable
Christopher Howse: ‘A Pilgrim in Spain’


The WHO says not but others – including the Spanish prime minister – feel that Covid is reaching endemic status. Some argue that the UK is close to having the disease as endemic as the other 4 coronaviruses and that, amid high population immunity, it’s the closest of any northern hemisphere country to exiting the pandemic. 

Cosas de España/Galiza

See this on the pandemic/endemic issue in Spain, and the EU.

But meanwhile  . . . Spain’s 6th wave is increasing pressure on hospitals

Though, notwithstanding that . . Spain is adapting its flue surveillance system to Covid, as is being discussed in the UK. Said the Voz de Galicia yesterday: Covid’s tentacles are still long, but are now less restrictive. Cases are on the rise, but symptoms are milder and last fewer days. The government is beginning to play down the pandemic, as are scientists, and is preparing a new protocol to treat it like any other flu.

Confused? Who wouldn’t be?

A harsh verdict? Or one that won’t surprise many in Spain?  . . .Politicians coming into office usually trust the advice of professional civil servants, preventing ill-judged decisions or blunders. This is the case in Germany, the UK and France. Alas, in Spain, they seldom follow that pattern, preferring to surround themselves with friends and inexperienced party colleagues. If they also lack any common sense, disaster looms ahead. The Spanish Minister in charge of consumer policies has recently provided a fine example of sheer recklessness.

The UK

Boris Johnson’s greatest asset in his life to date might well be his ability to avoid looking guilty – let alone shifty – when he’s banged to rights. He does this via a mixture of bonhomie and distractive humour. But it’s beginning to look like – though this might have been effective with various teachers and employers – it ain’t working now with the majority of the British public. Yesterday, one columnist wrote of his smile twitching and his eyes swivelling when confronted about his latest crime. So, should I stick with my 3 month forecast?  Maybe not, given that Richard North writes this morning: Time after time, when Johnson has seemingly faced certain disaster, he has emulated the matinée action hero’s “with one bound, he was free!” You can never bank on the Teflon King not doing it again, even if it does seem unlikely at the moment. The question therefore, must be, if not now, when? There must surely come a point when even the Tories can no longer tolerate this man as a leader any more. Whether this is the moment is anyone’s guess.

Or, as someone else put it here yesterday: As a lot of people in Boris Johnson’s life have discovered, there is a point where he has simply broken too many things for the relationship to be put back together again. Is he at that point with the British public, or even with the Conservative party?

The EU

Says one British historian: Russian and American representatives are discussing, and perhaps deciding, the future security of Europe. But Brussels has been excluded from the talks, and the significant thing is that nobody is surprised. The EU is now a geopolitical irrelevance. What does this tell us about the EU’s repeated ambition to be a major independent actor on the world stage?

The writer – Robert Tombs – adds: EU politicians have clearly given up on winning popular support for the “European project”. Instead, they rely on the Court of Justice, the Central Bank and the secretive Council to build an unaccountable technocracy. Such a shallow system is doomed to weakness. And to death, in my view.

Tombs adds: British Rejoiners still flourish every anecdote, however trivial, to prove that “Brexit is a failure”. At no point do they discuss the EU’s direction and whether we would ever again want to be part of a faltering and increasingly post-democratic system. Indeed.

The Way of the World

Is concern about inflation going to lead to a sea change in fiscal policies, at least in the USA? See the article below. Taster. A hint of serious tightening has already burst multiple bubbles, in cryptocurrencies, leveraged private equity, and a swath of less plausible tech companieS. The QE winners are turning into preemptive QT losers. 

Finally . . .

Magawa, the famous mine-clearing rat who was awarded a gold medal for heroism, has died at the age of 8. I’d love to know how an animal with no sense of danger could ever be a hero.

There’s a woman called Amy Evans who emails me daily, saying she represents various companies and offering me positions in them. I’d possibly find her more credible if she didn’t keep calling me Frank. What’s surprising is that she gets past Gmail’s spam filters. As is increasingly the case with what appear to be genuine companies making offers, all of whom I then have to block.

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The end of the ‘liquidity supernova’ from central banks. The US Federal Reserve is finally tightening monetary policy, but is the world now sitting on a time bomb?: Ambrose Evans-Pritchard: The Telegraph

Hell hath no fury like a central bank fighting to regain lost credibility. If 2021 was the year of ultra-loose money and rampant inflation, 2022 is the year of retribution when chickens come home to roost.

The US Federal Reserve has switched almost overnight from friend to foe. The latest Fed minutes compound the policy shock, with tremors spreading through the global bond markets and the interlinked nexus of credit contracts and exchange rates. Everything is tightening. 

Morgan Stanley says investors were assuming just five months ago that there would be no US rate rise until April 2023. Today markets are pricing the first rise within a couple of months, the start of four staccato hits in rapid succession this year.

Worse yet for tech stocks levitated by quantitative easing, the Fed is not only itching to end fresh bond purchases vivacissimo, but also intends to start selling down its $8.8 trillion portfolio within months. Quantitative tightening (QT) is coming much sooner than expected.

Krishna Guha from Evercore ISI expects the Fed to start QT in June and quickly to reach cruise speed of $750bn a year. If inflation persists, there could be a rate rise every meeting. This is what happens when a central bank falls badly behind the curve.

Omicron is almost a market irrelevance at this juncture. Investors can see what the health establishment seems curiously determined not to see: that the clinical data is benign; that T cell memory is holding up just as fundamental immunology would suggest; that all but a small minority in most countries is either vaccinated or has comparable cell immunity from prior infection; and that we are no longer looking at the same disease – as Oxford’s Sir John Bell put it.

There could still be a surprise from zero-Covid China as an unstoppable variant meets a defective vaccine in a ‘virus-naive’ population. That aside, the critical economic and market variable as we head into 2022 is what central bankers do about a wage-price spiral of their own making.   

The jump in US headline inflation to 6.8pc is what finally caused the dam to break at the Fed, complemented by the 23pc rise in house prices over the last year, more extreme than the subprime bubble before 2008. 

It is as if the Federal Open Market Committee looked into the mirror and collectively asked itself how it could justify injecting further emergency stimulus into a red-hot economy growing near 7pc (on the Atlanta Fed’s instant GDP tracker).  Or asked how it can justify the most steeply negative real rates in modern history when the economy has hit capacity constraints and unemployment is at 3.9pc. 

Stock markets normally cope fine when the Fed starts to raise rates, interpreting it as a sign of economic health. Deutsche Bank says the S&P 500 has risen 7pc on average over the first nine months during post-war episodes. Markets climbed steadily higher for three years after the Greenspan Fed first raised rates in 2004 and kept raising them 13 times.

But debt ratios are higher today and QE has changed market chemistry. Chairman Jay Powell’s attempt to unwind asset purchases by $50bn a month in late 2018 set off violent moves on Wall Street and led to global contagion. He capitulated.

The optimistic view is that this time is different. Goldman Sachs says there is a safety cushion of $1.5 trillion of commercial bank liquidity parked in short-term ‘reverse repos’. This could be used to soak up US Treasury bills and cover some of the US government’s vast funding needs.

Matt King, Citigroup’s global market strategist, begs to differ. What drives asset prices in our brave new world of QE is the ebb and flow of fresh purchases. “Markets are more sensitive to changes than to levels. As the flow of new money creation has dwindled, the rally has become dangerously narrow. It’s best not to linger too long in crowded spaces,” he said.

Michael Hartnett from Bank of America says we’re seeing the end of the “liquidity supernova”. Central banks have been buying $26bn in assets for every trading day since Covid began. They added $10.5 trillion from 2020-2021. They will subtract $0.6 trillion this year. 

Stock market breadth has been deteriorating. Two thirds of global equity indexes are currently trading below their 50-day and 200-day moving averages, a sign that the late bull market is gradually breaking down.  

Mr Hartnett said a hint of serious tightening has already burst multiple bubbles, in cryptocurrencies, leveraged private equity, and a swath of less plausible tech companies, with Cathy Wood’s Ark Innovation down 47pc, the Hang Seng tech index down 51pc, the SPDR biotech index down 42pc. The QE winners are turning into preemptive QT losers. 

The FAAMG quintet of Facebook, Apple, Amazon, Alphabet, and Microsoft have yet to buckle but they too are vulnerable to a profits squeeze. They have ballooned to $10 trillion of market capitalisation during Covid. Apple alone is up $2 trillion since lockdowns began. The five together almost equal the combined GDP of Japan, Germany, and the UK. 

Mr Hartnett says they have not paid much tax and therefore enjoy scant political goodwill. They will face a triple headwind: tight money, a regulatory sledgehammer, and tax collectors. When these giant redwoods wobble, we will find out whether this is a correction or a secular bear market.

Bank of America says the European Central Bank will be forced to follow suit, given that German inflation has reached a post-Reunification high of 6pc. It thinks European equities will end the year 10pc lower than they began, calling a “rates shock” by the ECB and the Bank of Japan the “most underappreciated risk of 2022”. 

But first the world has to deal with the Fed, and with fallout across the dollarised system of international finance. 

At some point there will be a soul-searching interrogation of its staff model and the New Keynesian Weltanschauung of its academic economists. The 1970s-esque wage-price spiral so adamantly denied all through last year is now in plain view. 

Cynics think Jay Powell was politically captured last year by the White House, acting as a fiscal agent for Joe Biden’s $6 trillion spending plans. The Fed set a threshold for monetary tightening – regaining all the jobs lost during Covid – that could not plausibly be reached before inflation was already out of control. My view is that Mr Powell was misled and is now determined to prove that he is not a political stooge.

The root problem in Fed culture runs deeper. Lord Mervyn King, ex-Governor of the Bank of England, says “the intellectual foundation of central bank policy” has been found wanting. The economic fraternity has fallen in love with its ideas, like the ‘scholastic’ monks of the Middle Ages, impervious to the radical uncertainty of the real world.  

The masters of money have ignored money itself. The Fed has disregarded the implications of a 30pc rise in the broad M3 aggregates since the onset of the pandemic. “Money has disappeared from modern models of inflation. Common sense suggests that when too much money is chasing too few goods the result is inflation,” he said.

The Fed itself published a paper in September that marks the moment when the New Keynesian ideological order began to crumble from the inside. The paper began with a quote from Dashiel Hammett: “Nobody thinks clearly, no matter what they pretend. That’s why people hang on so tight to their beliefs and opinions.”

It said mainstream economics is “replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense”. Among the false beliefs is the Fed assumption that inflation expectations give prior warning of actual inflation. The paper said they do not. This error is why US inflation is today running at a 40-year high.

Deutsche Bank says the Fed has led the world up the garden path and is now “sitting on a time bomb”, with potentially “devastating effects” for the most vulnerable in society. 

That is a little harsh. You could argue that the Fed – like the Bank of England – has cleverly inflated away the explosive debt costs of the pandemic. Steeply negative rates under financial repression amount to wealth confiscation from bondholders, who have broad shoulders.

If inflation subsides again this year, the central banks may just get away with it. Right now it looks as if their Faustian bargain has closed in on them.