Back to Normal: We're not buying it

By: Uri Estrin - January 19, 2021 08:39am EST
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The WHO too are skeptical about herd immunity in 2021
The WHO too are skeptical about herd immunity in 2021

The mainstream consensus is forecasting a difficult Q1 2021, followed by a return to full employment by 2022/3, inflation and a broad-level recovery over the next 18-24 months supported by stimulus efforts. In my opinion this is flawed and naively optimistic.

We continue to be in a period of blinded exuberance and the most monumental disconnect between wall street and main street since the 1920s. The economy is showing, not surprisingly, extreme signals of distress and weakness.

The jobs numbers are going in the opposite direction. Job openings are declining and unemployment (and continued unemployment) claims are rising – indicating a weaknening. We wrote on July 15, 2020 about a ‘dead cat’ bounce in employment numbers, we were a little early on the curve, but looks like this is starting to prove correct (read: Employment Data Show Probable Dead Cat Bounce).

The talk of inflation is another distraction, looking for the wrong thing in the wrong place. The December CPI rose 0.4% y/y adjusted and 1.4% over the last 12 months (core CPI was 0.1%). This is against the backdrop of the BIGGEST STIMULUS package ever. If there were to be inflation, we would have seen it by now. Another $1.9T fiscal stimulus (agreed – fiscal stimulus is potentially more inflationary than monetary stimulus) – will keep the economy from falling into deflation, rather than stoke the fires of inflation. Europe and Japan are battling deflation. China’s inflation is almost non-existent. Even highly inflationary emerging market economies like India and South Africa has very muted inflation. The US is an outlier, and only just, because of its massive stimulus.

It’s hard to see where US inflation will come from – especially given the disastrous number of unemployed and disemployed. So why then have longer term Treasury Yields move up ? Ah, that’s a marvelous question. With a financial system based solely on stimulus, more stimulus and the promise of stimulus, everything is up. This rise seems to me to be fleeting and short term (read: Treasuries Blow Out: We don’t agree).

There’s another leg to the argument to support ‘robust’ and ‘inflationary’ growth this year and that is vaccination. When the vaccine candidates looking for FDA emergency use approval made their announcements, it was figured that mountains would be moved and arms jabbed and we would well be on the road to ‘herd immunity’ by Spring 2021.

We didn’t share that optimism and we still don’t. Read what we wrote on Nov 18,2020 (Vaccine: Shot of Reality).

Further, it is believed that vaccinated people will jump out of their arm chairs and rush out to fly off to resorts and cruises to assuage their ‘pent up’ demand. We see that too as moderate.

The WHO too are skeptical about herd immunity in 2021 and roll out in the US, Canada, Europe and the UK have been less than average and well behind promised targets.

The pandemic rages on, the cases mount, the deaths rise. Proposals in place to extend the moratoriums and forbearances further distort real estate and other asset prices. We believe that there is still a sense of ‘suspended animation’ with the misinterpretation that we can skip straight back to ‘normal’. (Read what we wrote back in June 2020: The Markets are in a Suspended Animation Perpetuating a Denial of Reality).

There is so much economic evidence to the contrary, that we find it difficult to understand how a ‘back to normal’ can be the main view point.


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