That's a London scene from the post-apocalyptic zombie flick 28 Days Later on the left, and a London scene from the pre-apocalyptic March Covid lockdown on the right. I say pre-apocalyptic because today's Covid situation in London with a 70% prevalence of the B117 SARS-CoV-2 virus is a lot worse than the situation last March. No zombies yet, but 2021 is young.
Last Wednesday we published our analysis of behavioral Covid fatigue + UK-variant SARS-CoV-2 spread in the United States.
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This comment may have better been left after the podcast, but I will leave it here. In your analysis of who is available to catch the new strain you eliminated those who have been vaccinated and those who have already had Covid. The CDC has that number at an artificially high number and I agree with you on that.
However , if someone had Covid over 90 days ago are they not vulnerable to catch it again? Would that not make the number of people susceptible to the new outbreak even higher? Most of the people that the CDC says had it and never got tested would have 6 months or longer their antibodies may well be gone. As someone who has recovered I hope my analysis on this is wrong.
From what I’ve read, there is evidence against the premise the UK strain defeats natural immunity effectively (and evidence that vaccine immunity is all but the same efficacy). Evidence generally supported immunity lasting at least 6 months, and it is likely the immune system’s memory lasts at least 9-12 months.
The same cannot be said for the Brazil (and possibly SA) variants, where they seem to be seeing re-infections. Manaus, Brazil was estimated to have 50-75% of the population infected by October 2020 and they’re now seeing a 2nd surge. I think the new viral strain is certainly a probable cause (especially as it has mutations on the same regions that a virus exposed to repeated doses of convalescent plasma did).
This is something that’s been running circles in my head for the last couple weeks. And I want to be clear that I’m speaking on from the perspective of the impact on markets here, not the impact on human life.
When we first started hearing about the B117 variant, I had my “wall of worry” reaction. You know, the one where a nebulous idea takes hold of market participants who don’t really understand it, only for it to release the markets once a solution is found or it turns out to not be any problem at all.
But by early January, I saw the case curves in the UK and Ireland. They were awful. And I started to get a flashback to January of 2020. Because this is exactly how things started then. I watched for a couple more days, and then on January 8, I sold 80% of my equity exposure.
I bought it back one hour later.
Not because I don’t think B117 has the potential to drive further exponential spread in the US. Not because I don’t think B117 could dramatically increase the number of deaths we see over the next 2-3 months. Not because I think we have any handle on this that could possibly reduce spread over that time period. I bought my equity exposure back because I view the market reaction to this as having two stories that I do think are fundamentally hard to challenge:
- The vaccine timeline is way, way closer right now, meaning that even if we see a huge ramp up in infections and death, we are far closer to being through it than we were last March. 1-2 quarters of bad economic news is different from the potential end of the world.
- My investment time horizon for the bulk of my investments is looking at 2-3 year trends. And regardless of the short-term hurdle we may run into, it’s hard to see B117 changing my overall outlook for that time horizon. And I don’t want to get sucked into playing someone else’s game that I’m not familiar with.
It’s not that I think equity markets can’t go down. It’s that for me and how I’ve built my portfolio structure, I’m ok with whatever unrealized losses I see in the short-term, because I still have conviction that over the time period that I’m looking at, we’re able to see a significant resumption in economic activity with a bunch of fiscal support backing it.Now, the SA variant that apparently may have some problems with neutralization from the vaccine? That has my spidey-sense more worried when it comes to my investment timeframe and thesis. I’ve been thinking about it a lot this morning. I’m still not quite sure what to do, and generally if I’m not sure what to do, the best thing is usually nothing. But I’ll be watching it closely over the next week or two, because the lack of vaccine effectiveness against a new variant is something that is more threatening to my portfolio. So while I think B117 could be a disaster when it comes to human life, when it comes to my portfolio, it draws me closer to playing a game that I don’t think I can succeed at, and so I choose to ignore it because it’s an acceptable risk over a timeframe that I can afford losses.
Thanks for the information Kessler ??
This is exactly what I’ve read as well … evidence for long-lasting immune memory from prior Covid infections against new baseline Covid infections (incl B117), but problematic indications for Brazil variant (and maybe S. Africa, too).
I think everything you write here makes a ton of sense. And there’s no doubt in my mind that the only thing that could really derail this market is, as you say, a lack of vaccine effectiveness against a prominent viral strain.
Two questions Ben.
First, (from the Podcast) with regard to the contention that the number of cases may be overstated by the CDC b/c they use typical flu modelling of who reports their illness… The CDC has several studies on their website (not conducted by them) that estimate the true number of cases based upon serological testing. When I looked at them awhile back, they suggested that the true actual case rate was likely 5-25x the confirmed rate. The CDS was not accepting/endorsing any of these studies, but is it possible that their total case estimate of 100m is backed up by more than just their traditional pro-forma flu modelling.
Second, why is it that … “the longer it takes for B117 clusters to appear, the less the impact of B117 common knowledge on markets”. That is not intuitive to me. What happens over time to appearance that mitigates the common knowledge process?
As always, regards.
SG
Ben, I am surprised that you don’t think Inflation is a very real risk to stock markets (and other). Even if the Fed ignores rising inflation above 2%, wouldn’t the market have to start discounting the beginning of the end of the Fed Put ??
The key is the extreme valuations the stock market is facing now.
Doesn’t take much with these extremes, in fact Jeremy Grantham says it never is “an event” that pops the bubble (he ascribes this market as a classic bubble) .
All’s it takes is for Financial conditions to be a bit less bubbly than before.
Seems to me that evidence that inflation is starting to get out of hand qualifies as a “less bubbly financial conditions” thing.
Good questions, Sal, and I’ll cover them in depth with my next note.
(https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/commercial-lab-surveys.html)
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I’ve been writing about the very real risk that inflation poses to this market for a long time. It is the Fourth Horseman, and it is the only thing that I believe can break the Central Bank Omnipotence narrative that has created the market bubble. (https://www.epsilontheory.com/things-fall-apart-part-3-markets/)
That said, a Covid resurgence is a profoundly deflationary event. It just is.
Thanks Ben, yes you did. it was just the words you used to Canid that caught my attention.
Are you willing to explain why you believe a resurgence is deflationary? It needn’t be lengthy, but I’m having trouble wrapping my head around how that is the outcome. Perhaps it’s because I assume a resurgence means more stimulus and more Fed asset buying, both of which have been and will continue to be inflationary. Help me see what I’m missing, because I am very obviously missing it.
I’m not Ben, but I’ll offer a couple of thoughts anyway.
COVID resurgence leads to more lockdown and more
bankrupt companies which leads to more unemployed people. Unemployed people don’t spend much, so demand drops, so prices drop. Also lack of demand can lead to more bankrupt companies, an ugly feedback effect. That is deflationary. Also think of the price of oil. Much less driving is happening, much less air travel, so much less demand for oil.
There is a balancing effect however where supply drops due to bankruptcy of the weakest suppliers, so maybe the surviving suppliers can maintain or increase prices if weakened demand outstrips the reduced supply.
People talk about “a K shaped recovery”. We could talk about a K shaped resurgence. If you run a cinema, a theatre, a restaurant, a nightclub, an airline, resurgence drives you down. If you are Zoom or Amazon or provide meals delivered to homes, a resurgence drives you up.
It is not simple.