Tighten Your Belts: The Rationale

To adapt the old gag about buses to the business of containing the virus, three (sic) weeks of waiting for something to ‘flatten the curve’ and now, nine months later, three come along all at once. Having spent the past several months playing the role of amateur epidemiologist, as we try to make sense of the world around us, it now looks as though we shall have to become lay immunologists as well.

But, as the weeks have gone by and more and more empirical evidence has mounted up, we have been offered the simpler task of comparing what has happened to what was predicted would happen (sorry: what was projected to take place!) in terms of fatalities, excess deaths, recovery rates, and demographics.

There are still those fully in thrall to the narrative of fear to which we were all, to some extent, susceptible in the early days when all we had to go on were (possibly manipulated) images coming out of Wuhan but there is also much more belated realism in the air.

We have all spent countless hours consulting the various graphs and charts made publicly available, so I will not tax your patience by being overly exhaustive here, but I should like to make a few brief points concerning both the disease as a whole and the progress of the so-called ‘second wave’.

The first point to make is that while the spike in all-cause deaths in the Spring was undoubtedly substantial by recent standards, the EuroMOMO, European mortality monitoring system, shows that the last few weeks’ increase may be anomalously early but is no greater than that experienced in the past several years’ influenza surges (against which vaccination programmes are already conducted, one hastens to add).

Moreover, for anyone below the age of 45, the current readings are decidedly below the norms; for those in their fifth decade they are now back close to those norms; and while the older cohorts continue to suffer highly regrettable losses, even here the Grim Reaper has not been noticeably busier than in recently preceding years.

The second issue is the highly concentrated nature of disease susceptibility among the most elderly – a fact which should surely have some bearing on how the authorities respond and upon whom they are imposing the most onerous restrictions.

Taking the case of Switzerland, the difference is stark. By the 17^th of November, just 16 people less than 50 years of age, out of a total known to be infected of 165,819, had died: a known case fatality rate (CFR) of 0.01% or 1 in 10,360. As a member of the subset, 5.19 million strong (c.60% of all Swiss and Liechtenstein residents) in that age bracket, your chances of dying were a vanishingly small 1 in 324,378.

The Black Death this was not.

Now, true, for every decade older our sample rose from there, the known CFR rate went up more than fivefold: 0.134% for people in their 50s; 0.793% for those in their 60s; 3.88% for the septuagenarians; and a heavy 13.16% for those in their ninth decade and above. That latter group – who comprise 5.3% of the total population – have so far suffered over 70% of all deaths with or from COVID19.

To put this into context, while YTD all-cause deaths for those over 65 are now 0.66 sigma above the expected mean (+2.5%), those younger than that are an insignificant 0.21 sigmas above theirs. When we plot these numbers in a so-called ‘Florence Nightingale’, radial chart, the two spikes among the old are all too cruelly apparent, but, in the young, are totally indiscernible.

Now these coldly anonymous numbers are comprised of just as many very human tragedies, of course, but the plain fact is that even among the oldest (and usually the sickest), some 87% of known cases survived the disease while, in the next lower tranche, over 96% did. Note that these are fractions already comparable with the effectiveness being claimed in ‘alleviating symptoms’ among the small numbers of fit, young test subjects upon whom the new, radically experimental vaccines have been tried and upon whose presumably fully-functioning immune systems we might expect them to have the greatest effect.

For all the hype attached to this mRNA delivery method, therefore – and given the expense and difficulty to come in their mass distribution – one wonders just how we are supposed to gauge their efficacy in practice, much less perform a meaningful risk assessment with regard to any as-yet undiscovered side-effects and adverse reactions (the latter reportedly something that has long frustrated the search for a similar counter to SARS and MERS).

Be that as it may, the very fact of having a vaccine may at last offer a face-saving way out to those governments not wholly wedded to a further, cynical exploitation of a crisis largely of their own making. To that extent, the fact that it does little real good (and hopefully does no substantial harm) would offer a cure for some of our present societal and economic ills, if not necessarily for our pathological ones.

Though there has been some tempering of the initial wave of enthusiasm, the sudden hope of release from house arrest did initially move markets – not least the most beaten-down victims of the Corona Crash. Energy, which had lost nearly half its value from pre-epidemic levels vaulted up by 25% (still leaving it heavily in the red, of course), while financials – under threat from both low interest rates, debt moratoria, and fears of looming default made a 10% gain from what had been a 20% loss. As a result, Value indices – heavily weighted to these laggards – at last made up some ground on Tech-heavy Growth.

But joy was not unqualified, for renewed governmental crackdowns in response to the ‘second wave’ – of whatever that is truly composed – have already consigned much activity to the deep freeze, once more, further frustrating attempts to restore income and further depleting reserves of capital, as well as of mental fortitude.

Worse yet, the Berias of Biosecurity who hold so much of the world in their pitiless grasp have seized upon the promise of an effective counter to the virus to extend their Reign of Terror by insinuating that masks and (anti-) social distancing must persist indefinitely; that harsher and longer lockdowns are now justified by the very imminence of inoculative relief.

Pecunia non fluit

Compounding all this, we have the sorry spectacle of America’s electoral – not to say societal – disarray. We are to assume that challenger Biden has indeed won – whether by fair means or foul – yet we cannot quite suppress the suspicion that President Trump may yet confound his many detractors, gratify his mass popular base, and overturn the odds, once more.

Thus, while we look forward – not necessarily with unbounded joy – to a world run by AOC, Stephanie Kelton, Michael Mann, and Tom Steyer (hence to vast fiscal expansion in the service of profound structural upheaval), meanwhile we are back to relying on good Ol’ Jay Powell to keep things ticking over and so have once again abandoned the attempt to price bonds a little more rationally – with all that implies for other markets.

Reinforcing this are trends in Europe, where political schism is as hard-edged as ever; where the streets of the various capitals are filled with often brutally-suppressed protests against the Draconian laws and punitive diktats daily being promulgated, and where, in consequence, the awful ECB and its Peter Principle President are fully determined to pursue their decade-long folly à outrance.

“We cannot go bankrupt and we can never run out of money”, is what passes for wisdom chez Madame Lagarde:  pronouncement made in utter ignorance of the fact that the institution she pretends to skipper is already morally and intellectually bankrupt in the eyes of many of those who suffer its reign or that, while the Bank may not run out of money, per se, it can all too easily exhaust people’s willingness to accept it in exchange for their necessarily more scarce quota of goods or offerings of labour.

As we have long warned, however, one must not be too mechanistic in one’s thinking about what might trigger such a rejection and when. For one, much of the current forced money creation is substituting for more organic processes, not always catalysing an extra output from them. Secondly, at a time of the vanishingly low – if not actively negative – returns available on more traditional savings vehicles, at the individual level at least, money is not just being held for its primary, transactional purpose but also as a savings vehicle. Thirdly, and overlapping with this, there is evidently a heightened element of precaution at work, especially on the part of businesses.

If you do not know when and where – or even if – you will be able to resume normal operations; if you cannot rely upon any consistent programme of state support; if you remember all too well from the Lehman collapse that market-based funding can be cut off at any time, why would you not draw the maximum down upon your existing credit lines, issue as many bonds as a duration-starved market will digest, and park the surplus on deposit or stuff it in a low-risk money market fund while you await developments?

The corollary, of course, is that while all this has gone on, the ‘lender of last resort’ – a central bank long since grown accustomed to dashing into the phone booth at the first hint of trouble and stripping off to its underlying spandex suit of bright blue and red before leaping tall buildings at a single bound – has all too eagerly turned to funding the ‘spender of first resort’ – the state.

This has not only dulled popular perception of just how debilitating the current Cat-and-Mouse game of lockdown and let-out really is, but it has also cultivated a far more deadly pathogen than anything SARS-Cov2 might represent: viz., the illusion that anything the Executive and its technocratic Wormtongues wish to decree can be instantly and seemingly costlessly implemented.

Ca ira, ça ira ça ira!

“Never waste a good crisis” was the cynically opportunistic mantra of the last great financial dislocation in 2008. “Never shy from creating a crisis to exploit”, seems to be the watchword of this one.

Though all of this has far greater import that whether Stock A climbs further or falls faster than Stock B; whether currency X will lose value more or less rapidly than currency Y; or whether one might continue to supplement the vanishingly small income on one’s bond portfolio with a systemically unrealisable, notional capital gain, such possibly nugatory concerns are those with which we are charged to deal.

Right back at the beginning of this, largely man-made disaster, we emphasised two key issues. The first was the fact that the complex, adaptive Gordian Knot which is the modern economic apparatus could not just be switched on and off at the politicians’ whim like a microwave oven. Thus, the hidden complexities in such an exquisitely interconnected, productive ecosystem as ours would mean co-ordination failures were inevitable and that the wilful proliferation of these could ultimately prove to be very damaging indeed.

The prevalence of “Long COVID”, the medical syndrome, may be a matter of some contention, but “Long COVID-response”, the economic malaise, is all too likely to be widespread.

The second feature was the danger that, once released from incarceration, the postponed expression of demand could easily swamp a much constrained capacity to supply and so profoundly challenge many of the cosy preconceptions upon which today’s asset valuations and policy frameworks are predicated.

Such difficulties have if anything, become even more considerable as governments have both become more insistently, yet at the same time more erratically, interventionist AND more enamoured of the illegitimate authority conveyed upon them by an economic disaster which is largely of their own making. They have begun all too nakedly to revel in the scope it offers them to have their petty little careers permanently emblazoned in the history books of tomorrow.

For the reasons we have alluded to above, it is far too trite to say, “central banks are printing money, ergo we are on the road to Weimar”, yet it is also inarguable that no-one in power – whether elected or appointed – recognises any binding constraints – moral, constitutional, economic, or financial – upon their actions.

It has become somewhat wearisome to compare today’s events with Orwell’s ‘1984’. It is perhaps too obviously provocative (if nonetheless not wholly inapposite) to draw parallels with the Reichstag fire and the Notverdornung of 1933, but we should not overlook a further unfortunate precedent: the France of 1792.

As Andrew Dickson White described that latter era in his magisterial “Fiat Money Inflation in France”:

“Taking possession of the nation [was]… the idea that the ordinary needs of government may be legitimately met by the means of a paper currency; that taxes may be dispensed with.”

MMTers: are you listening?

“As a result, it was found that the …printing press was the one resource left to the government and the increase in the volume of paper money became every day more appalling.”

“It will doubtless surprise many to learn that, in spite of these evident results of too much currency, the old cry of a ‘scarcity of circulating medium’ was not stilled: it appeared not long after each issue, no matter how large.”

We also read, with chilling contemporary resonance, that:

“This vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance. This is a grave error.”

“The men …who made these experiments, which seem to us so monstrous, in order to rescue themselves and their country from the flood which was sweeping everything to financial ruin were universally recognized as among the most skilful and honest financiers in Europe.”

While one cannot directly speak to their personal integrity, this does rather bring to mind a whole roster of contemporary economic luminaries become apologists for monetary extremism, including the likes of Kenneth Rogoff, Larry Summers, Olivier Blanchard, Peter Praet, and Andy Haldane.

Where IS John Galt?

Against this background, genuine entrepreneurship is under threat, both from the immediate temptations to make emergency intervention into a more permanent programme of nationalisation and co-option and from this pernicious, Davosian idea of ‘re-inventing’ capitalism and superseding the rights of the shareholders with the righteousness of the ‘stakeholders’.

While no-one can argue that a business should operate in a manner which utterly disregards the norms, legalities, or human and environmental sensitivities of the milieu in which it operates, to suggest that most currently do so is a straw man of the most outrageous proportions.

To use such a canard as an excuse to suppress the property rights of that business’ owners and to substitute the rigour of profit accounting for the wishy-washy wokeness of accommodating the whims of every busybody virtue-peddler who demands a say in its affairs is a recipe for a vast misuse of scarce resources which we can afford even less well than we could a year ago.

Klaus Schwab may well be sincere in his twisted belief that his vision of global Corporativismo, of technocratic dirigisme, and of a sweeping Sinification of Western society is the way ahead. But the idea that a few, well-connected, giant firms, doubling as unofficial agents of policy, are allowed to dominate commercial life while the rest of us are tracked, monitored, and correspondingly rewarded or punished for our compliance or otherwise with the diktats percolating down from above is not one we should be willing meekly to accept.

Aside from the dreadful implications this all has for individual freedom, for the range and quality of debate, for the human spirit itself,  it will turn out to be – as have all attempts at following a “Commanding Heights” approach – expensive, inefficient, and profoundly corrupting. The bleak choice would be between slow, Soviet decay and rapid, inflationary recession.

Though it has not been couched in such Apocalyptic terms as these, the general tenor of this gloomy conclusion has begun to be shared by various high-profile practitioners. Moreover – and with due caveats about the proclamations of the snake-oil selling machine which constitutes any investment bank – those quintessential surfers of the Zeitgeist, Goldman Sachs, have also started to pump the idea of a new bull market in commodities.

These are not yet mainstream ideas, by any means, but the seed has been planted in a soil which may prove to be unusually fertile for their nurture. If it does take root, the resulting growth could prove very hard to eradicate once more.

We wrote here, some months back, that the time would soon come when those playing the markets would stop obsessing about ‘electrons’ – the Tech giants who have been this panic’s unlikely ‘safe havens’ – and start worrying about ‘neutrons and protons’ – the material substance on which our would is built and with which our bodies are nourished – instead.

Nothing we have seen in either the knee-jerk hyperactivism of governments and central banks in the wake of the coronavirus outbreak, or in the Ecojacobin schemes of ‘decarbonisation’, ‘energy transition’, and Green New Deal being avidly foisted upon us persuades us otherwise.

Though one hopes that practice will fall far short of political rhetoric when it comes to the implementation of such vast, aery schemes, the very fact of their being proposed tells us that those in charge will actively conspire to frustrate supply while concentrating demand in the hands of those for whom the word ‘budget’ conjures up nothing more than a hazy image of a struggling car-rental company.

The Fourth Industrial Revolution or the First Deindustrialisation? Either way, things are inevitably going to get tight.

PART II OF THIS EDITION – IN WHICH WE RUN THROUGH FINANCIAL MARKET DEVELOPMENTS – CAN BE ACCESSED BELOW