Maybe We’re Worried About The Wrong Tail Risk

Jim Bullard said Friday that the spread of the Delta variant is likely to be a temporary issue. Or maybe "transitory" is better. He also struck a decidedly hawkish tone when it comes to tapering asset purchases, something he said the market is "very much ready" to digest. I "very much" doubt that assessment of market preparedness. I'm sure you do too. His take on inflation was borderline alarmist, or at least as policymakers go. "We should go ahead and get the taper going... so we would have s

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13 thoughts on “Maybe We’re Worried About The Wrong Tail Risk

  1. My feeling is that another Covid surge started getting priced into some individual stocks for at least a couple of weeks. Look at the up moves in vaccine names (BNTX MRNA), testing names (PKI, DHR), the takeoff was mid July.

    If the surge were to have major economic consequences, I’m not sure that is priced in – well, based on BAML FMS I guess it isn’t. Will it? A few possibilities:
    – disrupts supply chains even further (happening overseas to some extent, not in the US part of supply chain yet)
    – suppresses some types of consumer activity (seems likely to see some of this in 3Q)
    – slows business hiring right about when UE benefits end (I’m doubtful this happens, but would be grave)

    By now there have been many Covid surges in the US and elsewhere, and investors can estimate the duration of the rise – 2 months? 3 months? – and get ready to pile into the most-impacted names as soon as the new case curve starts rounding over.

    What else I’d guess is not priced in?

    First, if there is something very different about the current virus variant – much higher immune escape, much greater acute severity (IFR, CFR), or much greater chronic disease (long Covid), let’s say.

    Second, if vaccination fails as a way to permanently control SARS-COV-2 – such that masking and other NPI, and major Covid surges, become a permanent part of our future.

    1. JYL, to your initial point, look at the mirror-image downward price action in energy, airlines, cruise ships, etc. in July. Certainly some COVID surge getting priced in there, beyond the overall Growth + Defensives > Value + Cyclicals sentiment during that time.

      1. Yes, Delta surely contributed there as well, though it is hard to say how much was second derivative and peak recovery stuff. I took profits on a bunch of that stuff in the past couple months, and am mulling over whether to jump back in at peak Delta, which i surmise could be Sept/Oct-ish.

  2. In an odd way, the Delta variant is like high prices, in that the cure for it is more Delta spread. IOW, as more unvaccinated people die or fall seriously ill from the virus, more unvaccinated people will decide to get vaccinated. Baring the emergence of a more virulent strain, we should be close to herd immunity in the places where most of the country’s GDP is produced by 1Q22. If that’s the case, the Fed should start to taper purchases of MBS — say, $10m a month for a quarter, then ramping to $20m a month a quarter thereafter — in 4Q21. That might take the indices down 10% over a few months, but it will put a lid on soaring housing prices and knock a few points off of inflation, setting us up for a more sustainable recovery in 2H2022-23.

  3. In the UK, Delta cases started rising in June and are possibly peaking, based on a review of Worldometer data. Although deaths have risen, the total number of deaths are quite small compared to deaths occurring during previous surges.
    This is happening against a backdrop of businesses, pubs, etc. remaining open.

    In the US, if the older/more at risk are already mostly vaccinated, this fall is hopefully no worse than a lot of people getting sick (but not bedridden) with minimal hospitalizations/deaths resulting. Businesses will be open and bars will be packed with young people who have cold symptoms. I remember fondly the days when I went to the bars more worried about what I should wear than whether I or others had a virus. Now, I have the complete opposite concerns.

    I am expecting that going forward, over the next 6 quarters, corporate EPS can handle some covid, some inflation, tapering, and small interest rises, “scheduled” for 2023…..or even a bit sooner.
    Seriously, doesn’t the reaction to Amazon seem a bit excessive?

    1. See link for US vax rate by age.

      Pretty high for the very oldest groups, but by the 50-64 group the rate of fully vaxed is down to 60%-ish and drops from there. If this data were broken out by state, some states would have much lower rates.

      The Delta variant is so transmissible, around 2X more than the original strain, and Americans are taking so few precautions, that this will, I believe, be the biggest surge yet in number of cases.

      In number of hospitalizations and deaths . . . we’ll see. The UK experience is hopeful, but their vaccination pattern is very different than ours. See UK vax rate by age here

      Logically, I don’t really see why the US should count on having as fortunate a hosp/death outcome from this surge as the UK has had (so far).

      I think H had a post that made this point, a couple wells ago.

  4. With respect to libertarians, I would like to say that the French have it correct with their national motto.

    Liberte, Egalite, Fraternite

    The underlying, but not overtly stated principal is that this expression is a tripartite, essentially meaning those 3 words are part of a singular concept and you do not get to “pick and choose” just one word in the motto that you want to follow.
    There should be a better balance in all of our national discussions between individual rights and the greater good. Sometimes, we just have to agree to something, whether we like it or not, for the greater good.

    1. The vast majority of Americans don’t have the slightest conception of what a libertarian even is and, as I’m fond of putting it, couldn’t name a libertarian thinker if their lives depended on it. It’s just an excuse for people to complain about things they don’t like. Anything that’s disagreeable is framed as an assault on their “liberty.” Americans used to make the same argument about seat belts, but eventually they got bored with it because arguing over a piece of fabric with a buckle attached to it just wasn’t very exciting.

  5. I have to say that Pazuzu reference is pretty neat. For what is worth the Delta sequel to the pandemic might scare the markets as Minerd suggests, but I doubt it will be anything close to the scare caused by the original wave and strain, just as the Exorcist II lacked the impact and fear of the original Exorcist, even with Pazuzu in the story.

  6. I am sure that H will disagree with me as he normally does, but has not the idea of a vaccine passport come and gone? If you are vaccinated, you can still have the delta variant and spread it so why mandate employees have the vaccine or indeed force people to prove they have had it if it does not prevent spread?

    1. Reality is not binary, black or white, absolute yes or absolute no. It matters if “can” is 85% probability or 15%. The inability of many to comprehend decision making in a grayscale world is one of our largest problems right now.

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