Pavlov Lives. If Only He Were A Virologist

It feels like I’ve used the word “inauspicious” at least a half-dozen times over the past several days.

Unfortunately, I’m compelled to employ it again. Breakthrough cases of COVID are occurring among high-level US officials and also among high-profile athletes, an inauspicious development, even if the vaccines ultimately prove effective at preventing severe disease.

On Tuesday, Nancy Pelosi’s office said a staffer tested positive after being vaccinated. And Jen Psaki confirmed that a vaccinated White House official also received a positive test.

Axios, which first reported the news, wrote that although “both individuals are vaccinated and mildly symptomatic, they illustrate how Americans inoculated against the coronavirus can still contract and, potentially, unknowingly transmit the virus — even at the highest levels of the nation’s government.” Commenting, a Biden official said “We know there will be breakthrough cases, but as this instance shows, cases in vaccinated individuals are typically mild.”

The news came less than 24 hours after Kara Eaker, an alternate on the US women’s gymnastics team, tested positive. She too was vaccinated, as was Katie Lou Samuelson, who’s also out of the Olympics after a positive test. Samuelson isn’t a household name, but she’s close. In the world of women’s basketball, she’s a star. In an Instagram post, Samuelson confirmed she was “fully vaccinated and took every precaution.” Nevertheless, she became “sick with COVID,” as she described her situation.

During Senate testimony, CDC Director Rochelle Walensky said the Delta variant now accounts for 83% of COVID cases in the US. Commenting on the associated rise in fatalities, Walensky said “each death is… even more heartbreaking when we know that the majority of these deaths could be prevented with a simple, safe, available vaccine.” Anthony Fauci said the vaccines are still around 90% effective at preventing hospitalizations and deaths.

Although the virus failed to secure the top slot above the fold on a day when Jeff Bezos launched himself into space, even Fox News is adopting a more conciliatory cadence when it comes to the vaccines, which speaks to the gravity of the situation. Or, at the least, it speaks to the idea that someone at Fox believes the danger is real enough that the network needs to be inoculated against liability. Instructing a few anchors to openly advocate for vaccinations is around 90% effective at preventing litigation, I’m told. (That’s a joke.)

On the heels of a truly egregious Monday rout, equities barreled higher in the US as investors dutifully bought the dip (figure below).

There was chatter about magic lines (i.e., the 50-day MA) and the usual color that suggested market participants somehow came to a different conclusion Tuesday after “sleeping on it.”

There’s doubtlessly a quant narrative and there was something to be said for the idea that investors were “bargain hunting” in cyclicals and other reopening expressions that have erased most (or all) of their YTD gains amid the growth scare.

Ultimately, I doubt the utility of overanalyzing the situation. Folks have dry powder to deploy, they saw a sizable dip and they bought it. The most generic of all narratives made just as much sense as the nuance on Tuesday.

Bloomberg quoted one strategist who offered this gem: “Equities just make sense right now.”

You laugh. And I laugh. But assuming the man from which that groundbreaking assessment emanated went looking for supporting evidence, it wasn’t difficult to find. Equities do make sense right now. From a “TINA” perspective, yes. But also as an inflation hedge and as a generalized bet on the idea that the Fed simply won’t allow stocks to fall very much for fear of undermining sentiment and triggering tighter financial conditions.

“Despite all the talk about tapering and rates hikes, the fact remains that the Fed is still buying $120 billion of bonds each month, and that continues to lower effective policy rates under the shadow rate framework,” SocGen’s Vincent Cassot and Jitesh Kumar wrote this week, adding that when you adjust for inflation and QE, policy rates are the lowest in at least six decades (figure below, from SocGen).

They continued, noting that “since the early 80s, the Fed has managed to keep policy tight for less and less time.” The last effort to get back to neutral (in 2018) was ill-fated indeed.

And so, dips will likely be bought. By the informed “because policy.” And by the uninformed “because dip.”

“Dip buyers will be rewarded as the market continues to grind higher,” Bloomberg went on to say Tuesday, elaborating a bit further on the mood among market participants.

Pavlov is alive and well. Now if only he were a virologist.