The Pandemic doesn’t need to slaughter us in hordes to create ongoing economic mayhem.

Blain’s Morning Porridge – July 30^th 2021: The Pandemic doesn’t need to slaughter us in hordes to create ongoing economic mayhem.

“Trying to explain economics to a politician is a bit like explaining a guitar to a puppy..”

This morning: Markets and data have been posting strong numbers, but all around are warnings on future outlook problems. Politicians are keen to claim victory over the pandemic, but the science increasingly points to Covid becoming a very long-lived problem and long-term threat to global activity

It’s been a fascinating end to July. To balance the roller-coaster of uncertain Chinese policy, we’ve seen a slew of excellent US Big Tech results – leaving aside y’day’s damp-squib of the RobinHood IPO – but each with a sting-in-the-tail; warnings of more difficult conditions to come as chip shortages and other supply chain breaks.

In the UK, suddenly the buoyant housing market has spluttered post a stamp duty holiday. Despite superb economic numbers in the UK and US, predictions of record growth (and even talk again about v-shaped recovery), and businesses expansion – there are dark warnings of slower conditions to come. It’s the usual mix of uncertainties – the kind of stuff wizened old market watchers like me can warble on incessantly about..

The fly in the recovery ointment remains the Pandemic. (Conveniently brushing over any looming climate change threat…)

To be blunt – the Pandemic is not the one we expected. Films like Contagion and all the stuff we’ve read about the Black Death and the Spanish Flu had scared us and prepared us for shocking casualty rates, a decimated population and serious labour shortages. We were expecting something more brutal, more bloody and more apocalyptic than being told to wash our hands more often and being shouted at for not wearing a mask on an empty train.

We all saw the films of packed hospitals and exhausted staff, but they never were overwhelmed. The mood in the City has moved on from fear to “enough is enough, time to move forward”, but that’s a rarefied perspective. Down on the shop floor of the global economy, Covid is very much still with us, and will continue to exert its malign influence.

The critical thing is the Pandemic doesn’t need to slaughter us in hordes to create ongoing economic mayhem.

Covid works even better against our economic interests by establishing itself as a long-term break on global economic activity. Although we may be winning the opening battle versus Covid – the war is by no means over.

I read in the FT this morning there is a Goldman note out there saying economies with high vaccination rates could increasingly live with the virus, and “vaccinations have been a key factor that has kept hospitalisations low”. Across Europe there are “manageable Delta variant risks”, which all sounds very positive for 2021 growth and a strong recovery into next year.

The UK’s vaccine rollout has been extraordinarily successful. More than 70% of adults are now fully vaccinated and over 88% have had at least one dose. The numbers who are unvaccinated but have had the bug is unknown, but probably increases the underlying number who are presently immune; in other words the UK may well have reached “herd immunity”. That may prove a short-lived victory as we roll through the alphabet of variants yet to come.

Expectations of 100,000 new daily Delta infections have been turned on their head by infections actually falling for most of the last 10 days.. The scientists are baffled and at a loss to explain why their models didn’t predict slowing infections, but a good answer might be… the virus is running out of people to infect here in Blighty – in its current form.

However, while the UK’s vax rollout has succeeded, the same is not true everywhere else. Sydney is back in lockdown. In the US, Apple is insisting customers and staff mask up. The US saw 6.5% growth in Q2 and is set for 6.3% in Q3, but President’s Biden’s demand federal workers are vaxed risks further politicising the vaccine issue, and putting the nation on collision course. Some states are struggling to get vaccination rates above 40% in the face of increasing antipathy towards the programme.

Across the globe vaccine delays and refusal appear to be growing – problems range from fake news creating pushback, availability, deliberate government policy to focus on closed borders rather than rollout, logistics and the usual organisational clusterf*cks that characterise anything incompetent governments touch. Thankfully, most nations have vocationally driven and inspired health services who have done their incredible best to cope with whatever dross they’ve been thrown by those in power.

We are now at a peculiar nexus point between the Economy, Politics and the Science. It’s been a learning curve for us all. You have to give the West pretty high marks for the economic response; spending money to shore up corporates, furlough payments and support packages – unfortunately all that debt and rate distortion will have long-term consequences. Politics has danced a pretty jig between empathy for victims, aligning themselves with the medical heroes, and trying to keep economies functional.

However, it’s the science that really matters. The scientists had to play catchup – understanding the virus, anticipating how it will spread, modelling with basic information and predicting how it evolves. Now are we discovering there is a fourth component to the crisis – Time.

The virus timeline looks something like this: A new virus is detected and establishes itself. Efforts to contain it via lockdowns fail. The virus spreads and multiplies to become a global crisis. Countermeasures are established to treat (new therapies) and prevent (vaccines). But over time the virus mutates.

Over time you would expect any virus to mutate into a form that is easily transferrable, highly infectious, but low risk so that it maximises its opportunities to infect by not killing hosts. It takes time for virus evolution to occur.

At the moment it appears we are still in the early mutation phase. It has branched off into multiple variations – and that’s why we are all going to become overly familiar with schoolboy Greek – Beta and Delta being the ones we worry about today. Tomorrow it may be Lamda and Pi. The dominant virus types are those that have evolved to spread most easily – like Delta – but the virus has not evolved itself to be any less dangerous. One major success of the vaccine programmes has been to give enough immunity and prepare us for when we are infected with new variants our bodies are primed and ready to fight.

The virus is now so widespread and endemic in the population that Covid mutations are going to become increasingly random – new variants popping up everywhere and anywhere as it mutates. 99.9% of them won’t be any worse than the current variations, but the 0.1% may be more aggressive and more dangerous.

The wider spread of Covid also means it’s too late for us to contain it. If everyone was vaccinated tomorrow, we still could not stop a new variant emerging. As a result.. the war on Covid continues.. and that means booster shots, and the potential of further lockdowns.

Long-term Covid is here to stay. Long-term we will cope with it and it will mellow, but till then it’s got the potential of remaining an economic brake on activity – and I just wrote all that without even mentioning Covid will be occurring alongside long-term Climate Change…

Ouch. Indeed…

Five Things to Read this Morning

FT – Covid Surge creates fertile grounds for more dangerous new variants

Bberg – Robinhood Gets Cathie Wood’s Backing Despite Miserable First Day

Bberg – Looks like we might get that Infrastructure Week after all

WSJ – “Industrial Policy” is Back: An old idea to counter China

CNBC – The World’s Most Powerful tidal turbine starts to export power to the grid

Porridge Announcement

Next two weeks the Morning Porridge will be “intermittent” due to Cowes Week Regatta, The Wickham Festival, and having a bit of a break with She-Who-is-Mrs-Blain and the Puppy.

Out of time, back to day job and have a great weekend

Bill Blain

Strategist, Shard Capital