Oxford or Imperial?

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March 27, 2020
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While (still) not being an expert on viruses, we note the difference of opinion between several people that are. In one corner we have the catastrophists from Imperial College London (who as noted in a previous post were the people behind the slash and burn policy of the UK Foot and Mouth outbreak in 2001) and on the other a team from Oxford who believe that more than 50% of the country have the virus already or have had it.

The press of course, catastrophists all, are behind Imperial as are the puritan tendencies demanding ever more stringent restrictions on movement and effective martial law. As a laymen, it makes a change to see genuine difference of scientific opinion, ever since the powers that be decided ‘the science was settled’ on climate change for example, almost no dissent from the catastrophist modelling has been allowed – save if you are even more extreme that is. When you take only one side of an argument and then defer policy making to the scientists, even good science (which is not to say any of this is, or indeed is not) can make for very bad policy.

The only way to settle the argument would be for mass testing, which is some way off yet, but it is interesting to us to note that with today’s announcement that Boris Johnson has the virus, it means that, along with Sophie Trudeau, Prince Charles and Idris Elba, is looks like everyone at the recent Commonwealth conference has contracted it. By everyone of course, we mean everyone tested. It stands to reason that if the virus is as contagious as we are told it is, that the official count of positive tests is likely to be a huge under-estimate and what we are really capturing is the proportion who are sufficiently badly affected (or famous) as to be actually tested. And here, we mean the relatively slow and expensive test for evidence of existing infection, not the cheaper test for antibodies that show who has had it and recovered.

If the count for the denominator is much larger than it appears, then with the same numerator (number of related deaths) we would find the death ‘rate’ meaningfully lower. This is probably one of the reasons that team Imperial has quietly lowered some of its estimates for deaths, even though it compromises some of their policy demands. It is also a reason for some cautious optimism. As soon as we can widely test for Covid-19 antibodies we can identify those that can get back to work while quarantining only those that need it as a form of protection. Widespread testing could also help identify early cases where there is (some) evidence that cheap drugs are actually effective.

None of this is to confuse the need for Intensive Care units and respirators and it is interesting to observe the nationalistic behaviours emerging over this. Of particular interest is the EU, where health systems are very different. It was surprising to hear for example that the French private sector is not being required to help with beds and equipment, equally that the Germans refused licenses to export respirators. Just as with the belief in open borders, the ‘co-operation’ between EU countries appears to have evaporated in the face of the crisis and more than ever the lack of genuine ‘European’ leadership raises a question about the sustainability of the project. When this is all over, the French Gilet Jaunes are not going to disappear, indeed, they are currently rallying under a hashtag of “They knew” (in French) claiming that the French elite knew all about this virus and tested and protected themselves before shutting down the country. Conspiracy theory or not, there is no doubt that the coming months are not going to get any easier for M Macron.

Markets meanwhile had a strong rebound from very oversold conditions following on from the options expiry last week, exaggerated by a lot of margin calls in the derivative markets according to what we are hearing. Some stocks with sound balance sheets and good cash flows rallied by as much as 40%, before a bit of trading profit taking set in. Long term investors looking for yield should definitely be looking, but asset allocators are likely to remain wary for a while yet. Risk levels remain unquestionably high on our models and following downgrades to earnings, many sectors may look cheap, but not outstandingly so. In the US for example, it’s only sectors like consumer stables and communications that are close to the valuation lows seen in q4 2018. Others are well off their highs, but not as cheap as they might at first look.

The consensus now seems to be that there is no need to rush, and that we will retest the lows. Indeed if we look at, for example the end of the dot com crash era, you didn’t have to pick the exact bottom of the S&P on 11 March 2003 of 800, you could have waited a month or so and picked it up at a (less technically risky) 900, which would have stood you in good stead for the run to 1561 in 2007. By the same token, you didn’t have to pick the GFC low of 676 in March 2009, waiting until July would have got you invested -again around 900, ahead of a run to 3380 by end 2019. The risk in both these (and other) occasions however was that people not only didn’t pick the bottom, they missed the next in-price because they were waiting for a re-test of the low. They went from being fearful to being greedy. They don’t ring a bell at the top and they sure don’t ring one at the bottom.

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Political Cicadas - no change in the product, just the sales team

The habit of spending long periods underground before re-emerging is not limited to the Cicada, for while this year sees the coincidence of the 13 year year Cicada cycle and the 17 year one, something that last happened 221 years ago, it is also 17 years sine Tony Blair was last in power and 13 since Francois Holland (likely PM in the French Hung Parliament) was. Both now look to be re-emerging to ensure continuity of policies that never really went away. The key sources of protest across Europe - crippling expensive wars against Russia and Climate change as well as uncontrolled immigration have only been addressed in the doubling down - the first thing UK PM Starmer did was fly to Washington to offer more money to NATO, while his Chancellor promised more money for Net Zero. Meanwhile, the left alliance put together to thwart Le Pen is even more pro immigrant than Macron. For markets, there is no prospect of lower spending and every prospect of higher taxes - the only 'Change' visible but not the one promised. The Technocrats and Globalists expecting this 'democracy' means that the populous will go quietly will be disappointed, especially with the arrival in the Autumn (once the Cicadas have gone) of the great populist, anti open border, anti net zero and anti war populist Donald Trump.

Market Thinking July 2024

The scorecard for the first half puts Equities, commodities and Gold in the top half of the table, with cash and fixed income in the lower half. This is consistent with the steady but uninspiring macro backdrop and positioning ahead of a tricky H2 from a political perspective. The anomaly of the Market Cap weighted SPX out-performing the equal weighted SPW by over 10% points tells us both that the SPX is no longer telling us anything about the US economy and that this excess return is for taking (considerable) concentration risk. Meanwhile, with Bond analysts 'pivoting from the Pivot' the fixed income markets have calmed down a little and leaving The Donald' rather thna 'The Fed' as likely the biggest policy influence on Markets over the next 12 months. In particular, we would look out for a 'Trump Plaza Acord" early next year, 40 years after the last one- something the FX markets aren't talking about, but the asset allocators seem to be (at least subconsciously) pricing in.

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