Omicron may be our best hope of taming the pandemic

Almost a year before Omicron appeared, Paul Ewald, an evolutionary biologist, predicted that the COVID virus would evolve in the direction of a highly contagious but less deadly variant.

Omicron is certainly proving more contagious than earlier variants.

Omicron Spread

Source: Bloomberg

But the hospitalization rate — for those above 30 years of age at least — is far lower than the earlier Delta variant.

Omicron Hospitalization Rate

Source: Bloomberg

The higher rate of hospitalizations among children under 9 may not be as concerning as it first seems:

Professor Mignon McCulloch, who is the Chairperson of the SA Paediatric Association, has urged people not to panic during her appearance on CapeTalk. Around 20% of new admissions for COVID-19 in Tshwane have been in children aged nine or under, whereas similar spikes have not been seen in any other age groups.

However, it doesn’t mean that Omicron is more dangerous, or even more deadly for children. According to McCulloch, it’s very likely that the children admitted to hospital are actually there for reasons other than the virus – and it is ‘coincidental’ that they have also tested positive for COVID-19 when checked by hospital staff. (The South African)

Evolutionary path

Earlier, researchers at the University of Exeter found that the most virulent variants of a pathogen may transmit the fastest, but tend to lose out in evolutionary terms to less virulent strains:

Pathogens have a single evolutionary goal – to produce more of themselves. “Virulence will evolve towards a level that optimizes their ability to transmit,” Dr Bonneaud said.

If the pathogen meets resistance to transmission — in the form of a recovered and immune or vaccinated host, or social distancing — then highly virulent forms die out with their host, and natural selection favors less virulent forms.

If there is no such resistance, the pathogen can kill its existing host at no evolutionary cost and will remain highly virulent…..

Paul Ewald, at the University of Louisville in Kentucky, said humanity had drawn a short straw with Sars-CoV-2 because it was both highly virulent and highly transmissible when it emerged.

Over time it is likely to reduce its virulence – in fact, that may already be happening, as reflected in falling mortality rates.

“I would expect it to evolve to a virulence that is very much like [seasonal] influenza,” Prof Ewald said in November last year.

“And containment measures, properly implemented, should accelerate that process.” (The Guardian)

Host mobility

Paul Ewald’s research focuses on the dependence of disease organisms on the mobility of their host for transmission. A patient (host) who is bed-ridden or dies is less likely to transmit the infection — unless the disease has another means of spreading other than personal contact/close proximity. A host with mild symptoms is far more likely to move around in the community and spread the disease.

If a disease organism is very dependent on healthy hosts moving around [and] contacting susceptible hosts, then we expect natural selection to favor extreme mildness in those disease organisms. If, however, the disease organism is not dependent on host mobility — for example, if the disease organism is transmitted by mosquito, or contaminated water, or because it’s durable in the external environment — then we expect that natural selection will favor high levels of harmfulness in those disease organisms…..

When we look at the population of disease organisms in any given area, we see both mild and harmful strains….. all we need to do is tip the competitive balance in favor of those mild strains.

We can look at the experience in South America and Central America as a kind of a natural experiment that allows us to evaluate these ideas. In 1991, cholera came into Peru and then quickly, within a couple of years, spread all throughout South and Central America. Some countries had clean water supplies, and other countries had contaminated water supplies. What we find is that when the organism invaded countries with clean water supplies, the organism dropped in its harmfulness.

In contrast, the organisms that invaded countries with poor water supplies — countries like Ecuador — evolved increased harmfulness over time. They’ve actually become more toxigenic. (Paul Ewald: Infectious Disease and the Evolution of Virulence)

Conclusion

We can use evolution to encourage diseases to evolve into milder forms that are not as harmful and also create resistance to more virulent strains. Use of vaccines, handwashing, masks and social distancing help to restrict more virulent forms of the virus and encourage milder versions like Omicron to take over, developing herd immunity.

Opening up populations to a pandemic — in the misguided hope of creating herd immunity — are likely to have the opposite effect. Unhindered transmission would encourage evolution of more virulent strains, with far higher hospitalization and death rates.

Acknowledgement

Hat tip to Macrobusiness for the images

Doug Kass | 50 laws of investing

Doug Kass wrote these 50 laws, incorporating many of Bob Farrell’s 10 rules, in an article in Barron’s. Doug is founder and president of Seabreeze Partners, with more than 45 years experience in financial markets.

  1. Common sense is not so common.
  2. Greed often overcomes common sense.
  3. Greed kills.
  4. Fear and greed are stronger than long-term resolve.
  5. There is no vaccine for being over-leveraged.
  6. When you combine ignorance and leverage – you usually get some pretty scary results.
  7. Operate only in your area of competence.
  8. There is always more than one cockroach.
  9. Stocks have a gravitational pull higher – over long periods of time equities will rise in value.
  10. Long investing generates wealth.
  11. Short selling protects wealth.
  12. Be patient and learn how to sit on your hands.
  13. Try to get a little smarter every day and read as much as humanly possible – an investment in knowledge pays the best dividends.
  14. Investors sometimes think too little and calculate too much.
  15.  Read and re-read Security Analysis (1934) by Graham and Dodd – it is the most important book on investing ever published.
  16. History is a great teacher.
  17. History rhymes.
  18. What we have learned from history is that we haven’t learned from history.
  19. Investment wisdom is always 20/20 when viewed in the rearview mirror.
  20. Avoid “first-level thinking” and embrace “second-level thinking.”
  21. Think for yourself – those who can make you believe absurdities can make you commit atrocities.
  22. In investing, that what is comfortable – especially at the beginning – is most often not exceedingly profitable at the end.
  23. Avoid the odor of “group stink” – mimicking the herd and the crowd’s folly invite mediocrity.
  24. The more often a stupidity is repeated, the more it gets the appearance of wisdom.
  25. Always have more questions than answers.
  26. To be a successful investor you must have accounting/finance knowledge, you must work hard and you have to be keenly competitive.
  27. The stock market is filled with individuals who know the price of everything but the value of nothing.
  28. Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
  29. Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
  30. Avoid “the noise.”
  31. Reversion to the mean is a strong market influence.
  32. On markets and individual equities… when you reach “station success,” get off!
  33. Low stock prices are the ally of the rational buyer – high stock prices are the enemy of the rational buyer.
  34. Being right or wrong is not as important as how much you make when you are right and how much you lose when you are wrong.
  35. Too much of a good thing can be wonderful – look for compelling ideas and when you have conviction go ahead and overweight “bigly.”
  36. New paradigms are a rare occurrence.
  37. Pride goes before a fall.
  38. Consider opposing investment views and cultivate curiosity.
  39. Maintain a healthy level of skepticism as you never know when the Cossacks might be approaching.
  40. Though doubt is uncomfortable, certainty is ridiculous and sometimes dangerous.
  41. When investing and trading, never let your mind dwell on personal problems and always control your emotions.
  42. ‘Rate of change’ is the most important statistic in investing.
  43. In evaluating the attractiveness of a company always consider upside reward vs. downside risk and ‘margin of safety.’
  44. Don’t stray from your investing and trading methodologies and timeframes.
  45. “Know” what you own.
  46. Immediately sell a stock on the announcement or discovery of an accounting irregularity.
  47. Always follow the cash (flow).
  48. When new ways of earnings are developed – like EBITDA (and before stock-based compensation) – substitute them with the word… “bullshit.”

Two Bonus Rules

  1. Favor pouring over balance sheets and income statements rather than spending time on Twitter and/or wallstreetbets.
  2. Always pay attention to what David Tepper and Stanley Druckenmiller are thinking/doing. (Trade/invest against them at your own risk). 

Bob Farrell | 10 rules for investing

Bob Farrell

Bob Farrell wrote these 10 rules after spending more than 50 years on Wall Street. He is dead today but his rules still apply, even in the current bull market euphoria.

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an excess in the other direction
  3. There are no new eras — excesses are never permanent
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
  5. The public buys the most at the top and the least at the bottom
  6. Fear and greed are stronger than long-term resolve
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
  8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
  9. When all the experts and forecasts agree — something else is going to happen
  10. Bull markets are more fun than bear markets

Hat tip to Lance Roberts at Real Investment Advice.

Services inflation

A friend asked a question: “Our advanced economies are 70 – 80 % Services based these days; so will this make CPI inflation difficult to sustain if wages growth is not sustained.”

The answer is YES. Inflation is unlikely to be sustained if wages growth declines.

BUT wages growth is accelerating, not declining, both in the services sector and in the broader economy.

Average Hourly Wages Growth: Total Private & Services Sector

Wages growth is also not likely to decline while we have record job openings; 5.4 million in the services sector alone.

Job Openings: Services Sector

Employers are having to offer higher wages and sign-on bonuses to attract workers — the result of record high savings levels fueled by government stimulus.

M2/GDP

New COVID variant upsets markets

JOHANNESBURG — A new coronavirus variant has been detected in South Africa that scientists say is a concern because of its high number of mutations and rapid spread among young people, Health Minister Joe Phaahla announced Thursday.

South Africa has seen a dramatic rise in new infections, Phaahla said at an online press briefing.

“Over the last four or five days, there has been more of an exponential rise,” he said, adding that the new variant appears to be driving the spike in cases. (NBC)

Concern is focused on the rapid spread of new cases and the variant’s high number of mutations which could make the virus resistant to current vaccines.

The new COVID-19 variant, called B.1.1.529, has a very unusual constellation of mutations, which are worrying because they could help it evade the body’s immune response and make it more transmissible, scientists have said. South African scientists have detected more than 30 mutations to the spike protein, the part of the virus that helps to create an entry point for the coronavirus to infect human cells…..In comparison, the Beta and Delta variant respectively have three and two mutations. (Al Jazeera)

The UK suspended flights from 6 African countries on Thursday. (Yahoo.com)

The S&P 500 fell 2.3% on Friday, while declining peaks on the daily Trend Index warn of a correction.

S&P 500

Conclusion

There is a high level of uncertainty as scientists do not yet know how lethal — and how resistant to vaccines — the new strain is. Investors are being cautious and reducing risk. Expect a correction to test primary support but no bear market unless worst fears are realized.

Inflation is coming

Inflation tops investor concerns according to Fed report

Concerns over higher inflation and tighter monetary policy have become the top concern for market participants, pushing aside the COVID-19 pandemic, the Federal Reserve said on Monday in its latest report on financial stability. ….Roughly 70% of market participants surveyed by the Fed flagged inflation and tighter Fed policy as their top concern over the next 12 to 18 months, ahead of vaccine-resistant COVID-19 variants and a potential Chinese regulatory crackdown. (Investing.com)

The market is no longer buying the Fed’s talk of “transitory” inflation.

Fed’s Bullard expects two rate hikes in 2022

St. Louis Federal Reserve Bank President James Bullard on Monday said he expects the Fed to raise interest rates twice in 2022 after it wraps up its bond-buying taper mid-year, though he said if needed the Fed could speed up that timeline to end the taper in the first quarter. “If inflation is more persistent than we are saying right now, then I think we may have to take a little sooner action in order to keep inflation under control,” Bullard said in an interview on Fox Business Network……Bullard has been among the Fed’s biggest advocates for an earlier end to the Fed’s policy easing, given his worries that inflation may not moderate as quickly or as much as many of his colleagues think it will. (Reuters)

The Fed are reluctant to hike interest rates, to rein in inflationary pressures, as it would kill the recovery.

Producer Price Index

Producer prices (PPI) climbed more than 22% in the 12 months to October 2021, close to the high from 1974 (23.4%). Consumer prices have diverged from PPI in recent years but such a sharp rise in PPI still poses a threat to the economy.

Producer Price Index (PPI) & Consumer Price Index (CPI)

Iron and steel prices, up more than 100% year-on-year (YoY), will inevitably lead to price increases for automobiles and consumer durables. Other notable YoY increases in key inputs are construction materials (+30.6%), industrial chemicals (+47.3%), aluminium (+40.7%), and copper (+34.5%).

Producer Price Index: Commodities

Underlying many of the above price rises is a sharp increase in fuel, related products and power: up 55.7% over the past 12 months.

Producer Price Index: Fuel & Energy

Conclusion

Inflation is coming, while the Fed are reluctant to hike interest rates. Buy Gold, precious metals, commodities, real estate, and stocks with pricing power —  a strong competitive position which enables them to pass on price increases to their customers — if you can find them at reasonable prices. Avoid financial assets like bonds and bank term deposits.

Technology-critical elements

Technology-critical elements (TCEs) are elements for which a striking acceleration in usage has emerged, relative to past consumption, and which are critical to emerging technologies.

Wikipedia provides a useful list:

Rare-earth elements (REEs)

In atomic order:

Light (LREEs)

  • scandium
  • yttrium
  • lanthanum
  • cerium
  • praseodymium
  • neodymium
  • promethium

Heavy (HREEs)

  • samarium
  • europium
  • gadolinium
  • terbium
  • dysprosium
  • holmium
  • erbium
  • thulium
  • ytterbium
  • lutetium

Platinum-group metals (PGMs)

  • iridium
  • osmium
  • palladium
  • platinum
  • rhodium
  • ruthenium

Other elements

  • antimony
  • beryllium
  • caesium
  • cobalt
  • gallium
  • germanium
  • indium
  • lithium
  • niobium
  • tantalum
  • tellurium
  • tungsten

Retail sales, missing workers and the inflation threat

The October labor report shows hours worked were roughly unchanged from September and still 100K below the pre-pandemic high (5.25m). But GDP of 19.5 trillion is up slightly when compared to 19.2T in Q3 2019, indicating that productivity has improved.

Real GDP & Hours Worked

Monthly retail sales for September, on the other hand, were way above trend.

Retail Sales

People are spending Dollars they didn’t earn, courtesy of record government stimulus.

That is one of the primary causes of rising consumer prices (red below): when demand outstrips supply.

Average Hourly Earnings & CPI

A rising CPI in turn causes second run inflation through higher wage demands (green and gray above) if central banks fail to act quickly. They become embedded and difficult to dislodge.

The combined effect of the pandemic and government stimulus has had a profound impact on the US labor market. The economy added 5.8 million jobs in the 10 months to October, at an average of 580K per month. That rate is likely to slow as the economy reopens and enhanced unemployment benefits end.

We are missing 4.2 million employees, compared to the pre-pandemic peak of 152.5m jobs, and seem unlikely to find them, judging by the 10.4 million job openings in September. High levels of job openings are likely to exert continuing upward pressure on wages.

Non-farm Payroll & Job Openings

The missing workers — aided by government handouts — have either retired, quit their jobs to day-trade Tesla and crypto-currencies, or have re-assessed their work-life priorities. No doubt there will be a trickle back to the workforce — as day-traders encounter reversion to the mean and/or savings run low — but the Fed needs to reassess its full employment target. Failure to do so would leave interest rates too low for too long and allow second run inflation to become entrenched. The only way to then dislodge it is with the kind of drastic measures that Paul Volcker used in the early eighties, with the fed funds rate peaking at 20%.

Fed Funds Rate under Paul Volcker

David Woo: Prelude to volatility

The bond market had a heart attack last week. Rising inflation caused a massive back up in bond yields in the short end of the market. The market is now pricing in two rate hikes in 2022. The Fed will have to raise real interest rates in order to tame inflation.

Real interest rates are falling. The stock market is taking its cue from the bond market and is rising. Stock prices represent discounted future cash flows, so negative real interest rates make a big difference to earnings multiples.

The Democrats are determined to spend their way to a mid-term election victory, with a $1T infrastructure bill and $1.75T social spending, both light on tax revenue. The GOP will try to stop them when the debt ceiling issue returns in December but they don’t have much leverage.

Financial conditions will have to tighten a lot more in 2022. The Fed is way behind the curve and is going to have to play catch-up.

Conclusion

Inflationary pressures in the US economy are growing, while the Democrats plan a further $2.75T in fiscal stimulus which is light on tax revenues.

Long-term yields lag far behind inflation, with real interest rates growing increasingly negative. The assumption is that the Fed will tighten sharply in 2022 to curb inflation. We expect that the Fed will taper but is not going to rush to hike interest rates for three reasons:

  1. The Fed would be tightening into a slowing economy, with growth fading as stimulus winds down;
  2. High energy prices will also help to cool demand; and
  3. US federal debt levels — already > 120% of GDP and likely to grow further with proposed new stimulus measures — are a greater long-term threat than inflation. The Fed and Treasury are expected to work together to boost GDP and tax revenues through inflation, keeping real interest rates negative to alleviate the cost to Treasury of servicing the excessive debt burden.

Job openings flag upward pressure on wages

Job openings fell by 660k in August, from 11.10 million to 10.44 million. Unemployment fell by less, from 8.70 million to 8.38 million (-320k), as absentees return to the workforce. Unemployment declined steeply (-710k) to 7.67 million in September and we expect an even larger decline in job openings as more return to the workforce.

Job Openings & Average Hourly Wage Rates

Job openings in August exceed unemployment by 2.06 million. While this is expected to reduce over the next few months, as stragglers return to the workforce, the persistent gap is likely to add upward pressure to wages. Average hourly earnings growth, currently at 4.6% YoY, is expected to rise in the months ahead.

Small Business - Difficulty in Finding Workers

The number of people who quit jobs voluntarily – to work for another company that offered higher wages and benefits and a signing bonus; to change careers entirely; to stay home and take care of the kids; to spend more time with their money; or whatever – spiked by another 242,000 people to a record of 4.27 million in August, up 19% from August 2019…….This enormous number of quits is the hallmark of a tight and competitive labor market that encourages workers to switch jobs to seek the greener grass on the other side of the fence. (Wolf Richter)

Job Quits

Conclusion

The economy is recovering but the persistent gap between job openings and unemployment suggests that upward pressure on wages is likely to continue into next year. Rising wage rates add pressure on prices of consumer goods and services, adding to the inflationary spiral.