The Omicron Economic Threat

Blain’s Morning Porridge 20^th December 2021 – The Omicron Economic Threat

“Rats and sinking ships have history – you’d think the rats would have learnt by now?”

This morning – Lockdowns and travel restrictions highlight the economic damage Omicron has done to the whole European Economy. Corporate resilience will be severely tested – whatever governments decide. The likelihood of stagflation has risen, but markets are likely to benefit from buy-the-dip mentality as investors weigh-up renewed government support if/when it turns nasty!

Apologies for lack of Morning Porridge last few days – I was “travelling”. What joy. There was a time I loved flying – the glamour of it all. A chance to pick up Christmas presents in duty-free, sophisticated airline lounges and luxury in the air as one jet-setted around the globe.

I appreciate I have become a grumpy old man… but travel has changed, and not for the better. Pandemic flying is a scramble to complete PCR test documentation, passenger locator forms, but it’s also become an excuse for lowest common denominator service in tired uncomfortable cabins. Business class is the new economy. BA don’t even let Business Class passengers in the lounge anymore – apparently, it too small for A380 flights…

Back in Blighty I was confronted with modern reality – going straight from plane to test centre. 30 minutes queuing outside to get a PCR test. In the “luxury testing centre” – in reality a swiftly repurposed bankrupt shopfront, three young girls wearing branded medical uniforms were trying to cope with a crowd of angry passengers who hadn’t got their test results back in time to fly that morning. Eventually I got in for the test I’d pre-booked. The poor girl was nearly in tears – she just did the tests and didn’t know anything about how the test process worked. As she was wearing the full gear, I asked about her medical qualifications – a 10 min training course. The uniform is all for show.

Someone is milking it big on Covid Testing. (Clue: who knows who in parliament…)

Back to the markets…

The next few days will see 2021 markets wind down ahead of Christmas and the New Year, but it’s looking an absolutely critical week for the European economy in terms of Covid and Energy.

• A cold snap is approaching and there are signs the current gas price could head stratospheric – exactly as predicted in this porridge from September: The looming energy crisis: People are Going to Die this Winter.
• Holland has joined the list of lockdown nations. Germany has followed France in locking out British travellers – as if that might stop the spread of the new Omicron variant. The UK cabinet is riven between a new lockdown versus the economic mayhem it may cause.

I was intrigued to read about calls for the UK government to update the list of symptoms people should look out for on Omicron: runny nose, headache, fatigue, sneezing and sore throat. Is it just me, or does that sound that a common cold?

Meanwhile, the cascading collapse of the Boris premiership continued with the resignation of Lord Frost, Frosty the No-Man, apparently furious at dither and retreat on Europe. He will be replaced by Tank-girl Liz Truss who I frankly know little about – except she was a remainer, but is now a reborn whatever will appeal to the voters. She is, I suppose, another name to put in the successor hat. (Personally, Javid will get my vote!)

Whatever happens at Christmas – and whether the Blain Clan will gather for our first family event since Mum’s funeral, (my brothers and all our immediate families) rather depends on decisions likely to be taken this week. It’s not looking good – but stuff the rules; the Blain’s shall feast!

Troubles come not singly, but in mighty battalions. In addition to Energy, the bleak reality of how authorities around the globe have reacted to the Omicron variant has already ensured a stagflationary open for 2022. Restaurants, pubs, ski-slopes and high streets across Europe are empty. Multiple businesses stand on the brink of disaster – and this time there are no covid loans or furlough schemes to see them through. The damage has been done.

Corporate resilience to renewed lockdown is low. They already face supply chain inflation, wage pressures, and now a collapse in demand. Omicron is shaking already tottering economies. Populations are increasingly divided. Out walking at the weekend, it’s clear many mask-wearing folk will happily jump into the traffic rather than get too close to other pedestrians. On the other hand, protestors and anti-vaxxers are proving fertile ground for the far-right.

The economic multiplier effects of de-facto lockdown are going to be huge.

Last week, my daughter felt fluey. She did a negative test, but called her work to say she was going to stay home with a cough and temperature – they insisted she came in. She spent two days spluttering while dealing with the Christmas orders before the inevitable positive Covid test. The company then put her on immediate “statutory sick pay” – a fraction of her salary – arguing she will be off for days.

It’s pretty appalling corporate behaviour – but what’s their choice? Missing Christmas orders means the company goes bust. They don’t have the financial reserves to pay salaries of non-workers. But, losing 1/3 of her monthly wage the week before Christmas for the crime of catching Covid means my daughter will struggle to pay her rent. She’s certainly not saving for a house, her future and a pension is a complete unknown. It’s looking highly unlikely her job, or the company, will survive long into next year.

• A hard-nosed economist will say that’s a positive for the economy – a whole cohort of young, highly educated workers without any wage-pricing power available to fill whatever jobs emerge on the next economic reopening.
• A realist might say it’s a whole generation seeing the confidence in any kind of future shattered. That has enormous political, social and business consequences.

Meanwhile, the market is looking interesting.  When is the best time to buy? When everyone else is selling… With a sell-off underway this morning in Asia, maybe its time to get your buying boots ready?

We’ve got a very split market: the big-tech large stocks making the gains, while small caps have sold off (for all the reasons discussed above.) What are central banks going to do if the weakness deepens? If we see a slew of business closures and suddenly highly indebted young consumers find themselves jobless? How big a risk is taper and higher rates in such circumstances?

The West’s flirtation with easy money looked to be coming to an end. The Bank of England acted early with last week’s 15 bp rate hike. Not a lot in the grand scheme of themes, but a curious call as the Government dithers about how to handle Omicron. The Fed will hike early next year. Bond buying programmes are closed. It looks increasingly unlikely the Biden administration will get Build Back Better spending over the line in a meaningful way. The ECB remains accommodative – trying to balance soaring inflation vs lethargic southern economies by dint of doing nothing.

Meanwhile, China is going into full easing mode in the interests of “stability” as it tries to weather the unfolding property and energy shocks.

There are a number of reasons to wonder about the upside market potential even as economic weakness increases.

• A number of market reports note the amount of cash that’s sitting on the sidelines. That seems kind of crazy when US and European inflation has risen to 30 year highs.
• Corporate cashpiles are earmarked for buy-backs – rather than building new factories and plants. (Corporate boards have approved record buy-back volumes in 2022 – the fact they are doing so is another indicator of how weak the real outlook is.)

Basically, all that cash is waiting to buy the market. It feels like there is at least one more uptick to come.

Housekeeping Note:

The porridge will be irregular till end of the year. If anything exciting happens expect a note.

I am planning a couple of Porridge Specials over the next few days – look out for them on the website or your inbox (if you a subscriber.)

Full Porridge will resume in the new year..

Five Things to Read This Morning:

WSJ – Sen. Joe Manchin Says He Won’t Vote for “Build Back Better” in Blow to President Biden

FT – Financial Regulators likely to agree Crypto framework in 2022

BBerg – Omicron Fears Ignite Market Selloff as Traders Clear Books

BBerg – Turkey Can’t Take Much More of Its Currency Crisis

Guardian – David Frost’s resignation leaves PM even more isolated in government

Out of time, and back to the day job!

Bill Blain

Strategist, Shard Capital