The guest commentary below was written by Joseph Y. Calhoun, III of Alhambra Investments on 11/28/21. This piece does not necessarily reflect the opinions of Hedgeye.
Here we go again. Or maybe, more accurately, here we go still. COVID has reared its ugly head again, this time in the form of a new variant called Omicron.
The name surprised some folks because the next letter in the Greek alphabet was Nu, but the WHO thought that sounded too much like “new” so they skipped that one, as Greek speakers are generally confined to Greece these days.
And the next letter was “Xi” which the WHO said was a common last name and that their policy required “avoiding causing offense to any cultural, social, national, regional, professional, or ethnic groups.” Well, goodness no, wouldn’t want to offend anyone, certainly not the most famous man with the last name of Xi.
What I’m trying to figure out is if I actually slept through epsilon, zeta, eta, iota, kappa, lambda, and mu or if WHO thought those might offend someone too, like maybe some fraternity or sorority.
They sure didn’t seem to mind offending Animal House fans by naming the last one Delta. Maybe they were worried about offending nerds (Lamda, Lamda, Lamda). Ah, WHO cares?
About the only thing we know for sure is that last Friday’s selloff didn’t have anything to do with the name because that happened while the WHO was deep into research on the Greek alphabet and who it might offend.
We were having a nice pleasant Thanksgiving week, eating turkey and ham and yams, watching football – if that’s what you call what the Lions play – and just generally enjoying a couple of days away from the market when WHAM!
Here comes Mu or Nu or Xi or Omega or whatever and the market tanks like it hasn’t done since all the way back in February. Worst week since, um, well, last month. The S&P 500 was down 2.2% last week which, in normal times, would be barely worth a mention.
But in today’s speculative market, that qualifies as a correction and Twitter is all atwitter this evening about the rebound everyone expects tomorrow.
We don’t know anything about this new variant yet and so there is no way to judge the impact. Yes, some countries are closing borders but they can be opened just as quickly. I have said since the onset of this pandemic that we better learn how to live with this thing because it isn’t going away.
And unless Omicron turns out to be an extremely deadly version of COVID, my guess is that people are just going to go on with their lives; COVID exhaustion has set in. So, whatever the state of the economy was prior to the arrival of the big O, that’s what it is now too, no matter the WHO’s permanent state of panic.
The global economy is still recovering from the COVID shock – the shutdowns and the response. The first two quarters of this year were a big rebound as the vaccines were rolled out.
Last quarter was a bummer with the emergence of the delta variant (or at least that was the accepted wisdom). And this quarter so far is looking like a pretty good rebound from that slowdown. The Chicago Fed National Activity index rebounded in October to 0.76, a big improvement from -0.18 in September.
The 3-month average is now 0.21, showing growth as just a bit above trend. Until the new variant news hit Friday, markets were starting to confirm the improvement in the economy. Both nominal and real rates were up on the week – for a change – and the economic data was almost uniformly positive. But rates were down hard on Friday and finished the week in the red. We’ll see if that lasts this week.
When it comes to economic and market data, I try not to react too much to any one report. I learned a long time ago that the first pass on economic data is really just a guess and revisions can change your entire view of the economy. And this week, we got reason number bajillion why that is true.
Last month we got a report on goods trade that showed a large drop in exports. A lot of pixels were expended in explaining why that was a big warning sign about the global economy.
But the drop was confined to one category of goods called “industrial supplies” and I warned that we didn’t know what caused it. Well, since then we discovered that the biggest drop was in “non-monetary gold”, which means essentially nothing to the global economy.
I don’t know why it dropped that month but it rebounded this month and the entire drop has now been wiped away. There were some other weak items in that category as well – crude oil and petroleum products – but none of it was that surprising or important to the global economy.
The point is that one shouldn’t make any rash judgments about the markets or the economy based on one report.
And the same applies to the latest virus news, whatever it might be. The emergence of the Omicron variant could be negative – or not. It may evade the vaccines – or not. It may be deadly – or have mild symptoms with low hospitalization and death rates. We just don’t know.
I do believe, based on my own reading about coronaviruses, that COVID-19 will eventually mutate into something our immune systems can handle. It could become like the flu or even better, like the common cold (which is actually a bunch of viruses). That is, after all, what coronaviruses do (not all viruses obviously). They evolve and mutate to a form that allows it and its host to survive. How long that takes is anyone’s guess but if history is a guide it doesn’t happen quickly.
You could be talking years before we reach that point. In the meantime, we need to do the best we can and live with it. Because it isn’t going away. Still.
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EDITOR'S NOTE
Joe Calhoun is the President of Alhambra Investments, an SEC-registered Investment Advisory firm doing business since 2006. Joe developed Alhambra's unique all-weather, multiple asset class portfolios. This piece does not necessarily reflect the opinions of Hedgeye.
