What a week this may turn out to be. Finally at long last, our long global nightmare extended by the arcane American process of transferring executive power will be over. It may take 20,000 troops quartered in the US Capitol. And it may take walls erected around Capitol Hill (Fortress America). But Joe Biden should be inaugurated as the 46th President of the US on 21 January at 12pm EST. Donald Trump will go play golf in Florida.
Nothing says ‘peaceful transfer of power’ like troops with guns and walls to keep out the serfs. But such is the state of modern US. And with protests in Italy (by diners) and the Netherlands (outside the Van Gogh Museum), the lockdown backlash has begun in most places. Australia can be excused because cricket is being played and the tennis will soon be on, once the players are out of quarantine.
What do markets make of all this drama? They just keep going up. And why? It’s either liquidity or psychology, likely a combination of both.
When it comes to liquidity, American investors seem to like the idea of another $1.9 trillion stimulus plans from the new Biden administration. Details aren’t out yet. But it will probably include direct payments to qualifying Americans, an extension of Federal unemployment benefits and massive cash grants to the States (to be dispensed to favoured industries, unions, or political interests for maximum advantage of the incumbent party).
If American consumers spend the money, some of it should translate into higher earnings for someone. I’m being deliberately vague about the transmission process from stimulus to higher stock prices. In a bull market, it doesn’t pay to ask too many questions, even if they’re reasonable, practical and logical. That kind of thinking will just get in the way of you making more money.
There are also interest rates to consider. More government spending is the ‘fiscal’ side of stimulus. Lower interest rates via yield curve control (as practiced by the Reserve Bank of Australia) is also thought to be ‘stimulating’ from a macroeconomic point of view. How?
When you keep the price of credit low, you create an incentive to borrow (in theory). That should lead to higher business investment and eventually new jobs, incomes, profits etc. But it also changes the flow of capital in the economy. When interest rates are low, investors who want or need a higher yield on their savings must take greater risks and put it to work elsewhere.
This leads to a lot of predictable hucksterism and shady advertisements for financial products that promise high yield with no risk. It also leads to higher stock prices, generally. Faced with low or negative real yields in fixed income, investors and financial planners run the white flag up the pole and throw their money into trend and growth strategies. Momentum trumps safety.
It all looks good until the momentum runs out or the liquidity dries up. Are we there yet? In The Bonner-Denning Letter, Bill and I believe the risks from another 30–50% ‘drawdown’ don’t justify chasing whatever upside is in the market. To be fair, we said that last year and the market went up double digits.
Is the chance for more gains worth the risk?
In the end, you have to decide if the chance for more gains is worth putting your capital at risk. Part of that calculation involves how much time it would take you to recover lost gains in a drawdown. And part of THAT calculation involves thinking about the nature of event which leads to the ‘drawdown’ (I’d call it a crash, but that might be dismissed as fearmongering).
From a geopolitical point of view, it’s worth asking what the chances are of an external or ‘exogenous’ event hitting the market. This transition in American political power has been painful. The system looks fragile and vulnerable. If you considered yourself a strategic adversary of the US — or just a garden variety anarchist who likes to watch the world burn — now might be a very good time to cause trouble.
Those kinds of risks are hard to quantify. In fact, they may be better described as ‘uncertainty’ rather than ‘risk’. If you can’t measure for it, you can’t really plan for it or hedge it. You just have to live with it and hope for the best.
Or, as with our strategy in The Bonner-Denning Letter, you can have a defensive asset allocation strategy that spreads your risk across different asset classes (cash, gold, stocks, real estate and cryptos).
Currently we have zero allocation to bonds or fixed income in the strategy. Instead, we are looking for income producing stocks, more of which will be discussed in the January issue later this month.
In the meantime, what about COVID-19? I note the hysteria in the Australian mainstream media about mutant strains entering the country. This justifies further border closures, lockdowns, the relentless attack on small businesses and the systematic destruction of freedom of assembly, free speech and individual liberty.
Yet what does the science say? A study published by Stanford University concludes that ‘non-pharmaceutical interventions’ (lockdowns, curfews, etc) do not appear to have stopped the spread of COVID-19. In fact, evidence shows that to the extent they confine people indoors with one another, they may increase case numbers.
It also appears lockdowns may cost more lives than they save. This is important when weighing the total effect of a public health policy across all of the population. The Bank of International Settlements published research which shows that recessions end up killing people. Lockdowns produce recessions. Yet the ‘excess deaths’ — especially among children or the poor and most vulnerable in society — receive no attention from the politicians, health experts, or media figures advocating for more lockdowns.
This an important point in revealing the rhetorical and logical ignorance (or deliberate manipulation) of the lockdown supporters. They tell us that lockdowns put lives over profits, and that human lives are more important than human rights. They say the science is on their side.
But to describe the costs of lockdown on the general population as purely economics is sophistry. Loss of income, of livelihood, of the ability to support your family, pay your mortgage, or live your life with dignity directly correlates to ‘excess deaths’, according to the BIS study. Recessions kill children in the developed world at higher rates because the loss of jobs and income leads to malnutrition (among other things).
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Lockdowns cost more lives than they save
It’s time to stop defending lockdowns on the grounds that they prevent case growth and save lives. They don’t prevent case growth. And they save some lives at the expense of others. The numbers show that net-net, they cost lives.
That is not to say we shouldn’t protect those most at risk from COVID-19. That is what we should have been doing all along. Evidence shows that the largest source of virus deaths have come from those over the age of 70 in care homes. As of early December, 40% of all COVID-related deaths in the US were from nursing home residents and staff (with 8,110 deaths from New York alone).
Instead of mask bans, arresting protestors and putting up barriers at the border, public health officials and politicians should have been focused on protecting those most obviously at risk. Instead, in New York, Governor Andrew Cuomo forced care homes to admit convalescing COVID-19 patients — concentrating the virus exactly where it would do the most damage. He could hardly have done more damage had he personally planted a bomb in each care home.
What about the vaccine? Won’t that solve our problems and allow us to ‘open up’ again? Or could it make things worse?
Norway reports 29 deaths from patients who’ve been vaccinated with the Pfizer BioNTech vaccine. Death can’t just be the side effect of a vaccine. But it appears that for those over 80 or will terminal illnesses, the COVID vaccine could be just as dangerous as the virus itself. That’s according to the Norway Medicines Agency.
To sum up, studies show the government’s policy hasn’t stopped the spread in cases. Research shows that, measured over the whole of the populations, lockdowns cost more lives than they save. And now we have evidence that our promised way out of this draconian, dystopian descent into house arrest and permanent emergency may end up killing those people we’re trying to save the most.
Maybe the public will ‘wake up’ to all of this. Or maybe the crack down on free speech and freedom of assembly is designed to put people to sleep. Either way, psychologically, this will be an interesting week. Stay safe. But don’t forget to be free and think for yourself.
Editor, The Rum Rebellion