Category: zerohedge

Just as the WHO feared, India’s brutal second wave has spilled over its borders, sending COVID-19 cases rising across the region, as cases climb in neighboring Bhutan and Nepal and as far away as Laos and Thailand.

According to Bloomberg, the acceleration in the region is mainly due to more contagious mutant strains, like the B.1617 variant first identified in India, which has been now been traced beyond its borders. The WHO has released a list of 10 mutant strains that it is keeping a close eye on.

New strains are identified every day as the virus continues to evolve, but only a handful make the WHO’s official watchlist as a “variant of interest” or the more serious designation “variant of concern,” which is generally defined as a mutated strain that’s more contagious, more deadly and more resistant to current vaccines and treatments.

Like in India, the surging case numbers are overwhelming health-care systems in Laos and elsewhere. Laos health minister last week sought medical equipment and supplies as cases jumped 200x in a month. Nepal is seeing hospitals quickly filling up and, like India, it’s running out of oxygen supplies. Health facilities are under pressure in Thailand, where 98% of new cases are from a more infectious mutant strain, while some island nations in the Pacific Ocean are facing their first waves of COVID.

Though it’s not obvious by glancing at the charts above, ranked by the change in newly recorded infections over the previous month, Laos came in first with a 22,000% increase, followed by Nepal and Thailand, both of which saw fresh caseload skyrocketing more than 1,000% on a month-over-month basis.

Source: Bloomberg

The abrupt outbreak in Laos, which only saw 60 total cases through April 20, shows the challenges facing some of the landlocked nations. Porous borders make it harder to clamp down on illegal crossings though entry is technically banned.

Although nowhere close to India’s population or flare-up in scope, the reported spikes in most of these countries have been far steeper, signaling the potential dangers of an uncontrolled spread. The resurgence, and first-time outbreaks in some places that largely avoided the scourge last year, heightens the urgency of delivering vaccine supplies to poorer, less influential countries and averting a protracted pandemic.

“It’s very important to realize that the situation in India can happen anywhere,” said Hans Kluge, the regional director at the World Health Organization for Europe, during a briefing last week. “This is still a huge challenge.”

To fight the outbreak, Communist Laos has ordered lockdowns in its capital Vientiane and banned travel between the capital and provinces. The health minister reached out to neighbors like Vietnam for aid, but it’s unclear whether much will be forthcoming.

Even Vietnam, which has among the lowest number of infections in Southeast Asia, is imposing curbs on public gatherings after reporting a 131% surge in new cases n April. With daily cases topping 3K last week for the first time since February, Malaysia is set to tighten restrictions May 6 through May 17 in six districts of Selangor, the country’s richest state.

But by far the most closely watched country is Thailand, which had been seeking to revive its ailing tourism industry after a successful effort to crack down and eliminate COVID-19. The country just reintroduced a two-week mandatory quarantine for all visitors, as the government forecasts for 2021 tourism revenue were just cut to 170 billion baht ($5.5 billion), from January’s expectations for 260 billion baht.

With the country’s public health system under pressure, authorities are trying to set up field hospitals to accommodate the flood of COVID-sickened patients. About 98% of cases in Thailand are of the variant first identified as linked to the UK mutant “Kent Strain” based on a sample of 500 people, according to Yong Poovorawan, chief of the Center of Excellence in Clinical Virology at Chulalongkorn University.

On the vaccine front, Thailand has launched a campaign on Tuesday to vaccinate 50K people living in a crowded river-side district of the capital Bangkok, as the country tries to contain a third wave of coronavirus infections.

Fed Chairman Jerome Powell insisted once again last week that the inflationary pressures building up in America’s overheating economy would be “transitory” (though the central bank is keeping a close eye on prices in keeping with its mandate), but as Wall Street strategists warned their clients on Tuesday as US equities tumbled, signs that the US economy might be headed toward hyperinflation are getting harder and harder to ignore.

As investors brace for the prospect of a sustained downturn in equities, Sam Zell, the infamous Chicago real-estate investor and billionaire, told Bloomberg that he’s seeing signs of inflation everywhere he looks. 

And as Treasury Secretary Janet Yellen hints that the Fed (which she once led) might be forced to hike rates sooner rather than later, threatening lofty equity valuations, Zell is resorting to an old-fashioned inflationary hedge that some investors claim has been rendered obsolete by bitcoin.

Sam Zell

Many are questioning whether gold (which has been out of favor seemingly since the financial crisis) has become obsolete in the age of crypto, and Zell acknowledged that even he has mocked investors for believing in the yellow pet rock.

“Obviously one of the natural reactions is to buy gold…It feels very funny because I’ve spent my career talking about why would you want to own gold? It has no income, it costs to store. And yet, when you see the debasement of the currency, you say, what am I going to hold on to?”

Continuing on this theme, the 79-year-old Zell says he’s also concerned about the dollar, and other currencies as well as countries print money like the US. He also questioned whether inflation will be transitory, as Powell and others – though not Treasury Secretary Janet Yellen – have insisted.

As far as where inflationary pressures are most evident, Zell said inflation can be seen “all over the place”.

“Oh boy, we’re seeing it all over the place,” Zell said. “You read about lumber prices, but we’re seeing it in all of our businesses. The obvious bottlenecks in the supply chain arena are pushing up prices. It’s very reminiscent of the ‘70s.”

While Zell is buying gold, he doesn’t have as much confidence in other commodities, like oil, which he says isn’t pricing in the long-term demand risk presented by EVs. He added that he’s concerned about renewables weakening American power grids, pointing to recent examples in Texas and California of power grid failures.

“Everybody’s worried about going back to work and office-space occupancy. I don’t think that’s really an issue,” he said. “The problem is that, before the pandemic, we were dealing with an oversupply of office space. Obviously the pandemic hasn’t reduced that oversupply and has probably encouraged it accordingly.”

He also described bricks-and-mortar retailers as “a falling knife”.

“Street retail today is like a falling knife, and you don’t know how far it goes down,” he said. While that “doesn’t mean the best malls aren’t going to perform,” there’s a “huge amount of real estate that’s going to have to be reprogrammed in one form or another.”

Hotels are facing more of a temporary challenge over the next three to four years, Zell said.

“We will see a slow recovery in business travel,” he said. “In the interim period of time, it’s going to be a slow recovery, and hotels are big overhead things and running them at less-than-optimum occupancy is a very expensive scenario.”

Watch the full interview below:

As the White House pressures states to boost vaccination numbers, President Biden has just announced an aggressive new federal target: a goal of administering at least 1 jab to 70% of American adults by July 4.

Biden is set to announce the new target in a speech Tuesday afternoon. It will officially set a goal to have 160M US adults – roughly fully vaccinated by July 4. Together, meeting these goals will require about 100M more shots in arms, both first and second doses, across the next 60 days, a senior administration official told the Hill.

Readers can watch Biden’s speech live below. It’s set to start at 1430ET:

Only about 35MM more adults need to get their first shot to reach the 70% goal, according to the CDC. Reaching the goal would mean about 180M adults have at least one dose up from about 145M, or 56%, currently.

“This is what we anticipated as we entered this phase,” a senior administration official told reporters when asked about the slowdown. “Those most eager, those willing to get in their car and drive an hour, have gotten their shot.”

The next phase focuses on reaching people who are “skeptical or less motivated,” the official said.

In the past, Biden has pointed to the 4th of July as the holiday where Americans can expect things to go back to “normal” as they attend holiday parties with their friends and families. Unfortunately, the US vaccination campaign has slowed as demand has slumped. Biden Administration officials are now reluctant to discuss expectations about “herd immunity” (in theory, 70% is when the threshold is supposed to be reached) though they told the Hill that the expectation is the spread of the virus will slow dramatically once vaccination rates surpass this level.

The average number of shots per day has been falling in recent weeks, though it is still at about 2.2M per day, according to official CDC numbers.

The administration will direct pharmacies in the federal pharmacy program to offer walk-in vaccinations without an appointment, and encourage states to do so. Many states have already moved in that direction.

Thanks to the US being first in line for vaccines, Biden has easily met all of his vaccination targets so far. But with demand faltering, this could be the first time that the White House fails to achieve its target. Since it can’t (at least, in theory) force Americans to accept the vaccine, we wonder what the administration might do on July 5 if the 70% goal isn’t reached?

In a world flooded with liquidity, where the backlog to get a new supercar is sometimes measured in years, one would think that ultra luxury carmakers would be soaring. Alas, that’s not the case for Ferrari (RACE) today, whose stock plunged more than 8% in Milan trading, the biggest drop since March 2020, making it the worst performer on the FTSE MIB and the Stoxx 600 Automobiles & Parts Index after the supercar maker delayed by a year longstanding profit targets for 2022 initially set before the Covid-19 pandemic, adding to a roster of challenges for the carmaker that has been without a CEO for almost five months.

As Bloomberg reports, the Italian manufacturer delayed plans to earn at least €1.8 billion ($2.2 billion) EBITDA by 2022, saying it now plans to achieve this and other goals a year later. Chairman John Elkann reset expectations as he keeps searches for a new CEO following Louis Camilleri’s surprise resignation in December.

Elkann, the Agnelli family scion and head of holding company Exor NV, said last month that Ferrari was making good progress in its search for a permanent CEO who will have the “technological capabilities” to lead the lead the company forward.

To some, such as Bloomberg Intelligence credit analyst Joel Levington, Ferrari’s “comments that its financial goals for 2022 are delayed by a year eliminates a well-anticipated overhang,” even if the market did not quite see it that way. “Finding a suitable CEO who can maintain the company’s culture while transitioning toward electrification are meaningful challenges.”

Ferrari would adjust expenditures in response to Covid-19, Elkann said in a statement, which doesn’t give specific figures for the planned change. Adjusted Ebitda rose to 376 million euros in the first quarter, topping analysts’ average estimate of 368.3 million euros. Shipments in the period totaled 2,771 units, up slightly from a year ago.

Ferrari shares had already underperformed in early 2021 after leading the Stoxx 600 Automobiles & Parts Index each of the last three years. Rivals Volkswagen and Daimler have better capitalized on enthusiasm around electric vehicles, although Elkann said during last month’s annual general meeting that Ferrari will unveil its first EV model in 2025.

Jefferies, which has an underperform rating, said that although not unexpected, 2022 targets were postponed by one year “due to Covid” and said the delayed announcement might have raised expectations that targets would be confirmed. That said the bank said the actual quarter was “smooth”, with all numbers “within the usual margin of error of well-guided consensus;” mix/price and “other” (F1 calendar + Maserati engines) main contributors to EBIT with net orders “robust” and order book at record level.

Looking ahead, Bloomberg notes that the next CEO of Ferrari will inherit a company that’s been reluctant to abandon the internal combustion engine. A month before Camilleri stepped down for unspecified personal reasons, he told analysts he didn’t see Ferrari ever shifting to 100% EVs and ruled out the company moving to 50% electric in his lifetime, which long-time Ferrari enthusiasts probably welcomed.

The Stoxx Europe 600 Automobiles and Parts Index (SXAP) fells as much as 3.2%, the region’s second-worst performing sector, on the Ferrari news:

• SXAP was down 3% as of 5:12pm, with Ferrari falling 7.4%, Porsche Automobil Holding -4.8%, Faurecia -3.2%, BMW -2.8%, Daimler -2.4%
• Volkswagen preferred shares down 4.8%, common stock -3.3% ahead of results due Thursday Stellantis falls 1.1% ahead of Wednesday’s 1Q sales

But it wasn’t just the supercar maker that tumbled on Tuesday trading: Daimler ADRs also plunged more than 5% in US trading after Daimler holder Nissan Motor said it would offer 16.4 million shares via BofA and SocGen. The announcement also dragged down Nissan Motor shares 2% to session lows.

Authored by Anthony Rozmajzl via The Mises Institute,

In the past couple of months, our esteemed public health experts have had a rough go of defending the supposedly settled science behind lockdowns and mask mandates.

White House covid-19 advisor Andy Slavitt was first on the chopping block back in mid-February, when he was reduced to parroting empty platitudes about social distancing after failing to explain why a completely open Florida had numbers no worse than a strictly locked-down California. Then comes media darling Dr. Anthony Fauci, who has had a particularly embarrassing series of public appearances of late. During a recent MSNBC interview Fauci expressed confusion and wasn’t “quite sure” as to why Texas was experiencing falling cases and deaths an entire month after lifting its mask mandates and capacity restrictions. Moreover, during a hearing with Representative Jim Jordan, Fauci completely dodged Jordan’s question of why Texas has lower case rates than some of the most notable lockdown states. Fauci, refusing to answer the question, simply responded that having a lockdown is not the same thing as obeying lockdowns. Fauci was correct here, but he indirectly claimed that citizens of New York and New Jersey, two notorious lockdown states, were complying less with mitigation measures than a state that had, and still has, practically none. A quick check of Google’s covid-19 mobility reports lays this counterintuitive claim to rest.

The American Media’s Agenda

When governments and media outlets around the world have successfully captured audiences by stoking fear of covid-19, the data that should so easily assuage this fear become irrelevant, and interviews like those mentioned above are simply brushed aside in favor of a fear-born allegiance to the “morally superior” government-mandated lockdowns, curfews, mask mandates, and more. This “scared straight” approach, as Bill Maher correctly described it, is the state’s bludgeon of compliance.

As far as scaring citizens straight, Project Veritas has released footage showing CNN employees explaining how the network plays up the covid-19 death toll to drive numbers. Especially disgraceful was CNN technical director Charlie Chester’s admission that the network doesn’t like to report recovery rates because “[t]hat’s not scary…. If it bleeds it leads.”

CNN isn’t alone in the fearmongering business. Thanks to the surplus of United States media outlets willing to churn up a disproportionate amount of negative covid-19 headlines—roughly 90 percent of covid-19 news in the United States is negative compared to 51 percent internationally—is it any surprise that nearly 70 percent of Democrats, 51 percent of Republicans, and almost 50 percent of independents think the chances of being hospitalized with covid-19 range anywhere from 20 percent to over 50 percent?

Where’s the Correlation?

Government- and media-induced panic have blinded us to the data, which for the past thirteen months have consistently shown zero correlation between the timing, strength, and duration of mitigation measures and covid-19 incidence. Nowhere could this lack of correlation be more prevalent than among lockdowns and mask usage.

Leaving aside the disastrous and deadly consequences of government lockdowns—see here, here, and here—the evidence for lockdowns’ ability to mitigate covid-19 mortality remains scant.

Looking at the United States, we can address the widely believed notion that states with more intense lockdowns will see fewer covid-19 deaths by plotting each state’s average restriction ranking over the past thirteen months against the total number of covid-19 deaths for each state. To get the average ranking, the author averaged data from Oxford University’s Blavatnik School of Government—this source ranked each state by the average time spent at a stringency index measure greater than sixty up until mid-December 2020—and Wallethub, which also ranked each state by stringency using a weighted average of various measures from January 2021 onward. Now, if the past year’s worth of sanctimonious lectures from public health experts have any scientific weight behind them, we should see a very strong negative correlation between the intensity of states’ restrictions and total covid-19 deaths.

Source: Data on deaths (as of Apr. 28, 2021) from the NYTimes Covid-19 Data Bot. Data on restriction rankings from the NYTimes Covid-19 Data Bot (through December 2020); Adam McCann, “States with the Fewest Coronavirus Restrictions,” WalletHub, Apr. 6, 2021 (since January 2021); and Laura Hallas, Ariq Hatibie, Saptarshi Majumdar, Monika Pyarali, and Thomas Hale, “Variation in US States’ Responses to COVID-19” (Blavatnik School of Government Working Paper No. BSG-WP-2020/034, December 2020).

Contrary to what the public health experts have been telling us for more than a year, there is no correlation between the strength of a state’s lockdown measures and total covid-19 deaths. In fact, notorious lockdown states such as New York and New Jersey have some of the worst mortality numbers to date. To blame noncompliance for these poor numbers is ridiculous on its face considering states with no restrictions, such as Texas and Florida, have far fewer deaths than New York and New Jersey. In fact, you’ll find that every state that has either removed its mask mandate or all covid-19 restrictions entirely is outperforming New York and New Jersey in terms of deaths.

The same lack of correlation can be seen when comparing average lockdown stringency with the total number of patients hospitalized who have suspected or confirmed covid-19. As a point of clarification, the author summed the current number of patients hospitalized each day to arrive at the total number of patients hospitalized. This will result in slightly inflated total numbers since patients may spend more than one day in the hospital, but having applied the same aggregation method across all states, the total hospitalization metric still provides an accurate assessment of covid-19 hospitalizations in each state.

Source: Data on hospitalizations (as of Apr. 24, 2021) from the US Department of Health and Human Services. Data on restriction rankings from the NYTimes Covid-19 Data Bot (through December 2020); Adam McCann, “States with the Fewest Coronavirus Restrictions,” WalletHub, Apr. 6, 2021 (since January 2021); and Laura Hallas, Ariq Hatibie, Saptarshi Majumdar, Monika Pyarali, and Thomas Hale, “Variation in US States’ Responses to COVID-19” (Blavatnik School of Government Working Paper No. BSG-WP-2020/034, December 2020).

Internationally speaking, the data continue to expose lockdowns as the single greatest public health failure in human history. Plotting lockdown stringency against total covid-19 death toll reveals, yet again, zero correlation between the two variables.

Source: Data on deaths (as of Apr. 28, 2021) and lockdown stringency (as of Apr. 28, 2021) from Our World in Data.

In light of a year’s worth of data showing wildly different mortality and hospitalization outcomes for fifty states with fifty very different lockdown stringencies, as well as drastically different mortality outcomes for 166 countries with 166 different lockdown stringencies, one can only marvel that such a deadly and ineffective policy can be recommended by public health experts.

If the lockdowns failed to mitigate the spread of covid-19 in the United States just as in dozens of countries around the world—remember, the lockdowns fail without even taking their costs into account—it’s possible that mask usage is the missing piece of the mitigation puzzle.

It wouldn’t be fair to the reader to post quite literally hundreds of charts that show the exact opposite outcomes the media would have you expect after regions remove or institute mask mandates—Ian Miller has done more work in this area than anybody else. It also wouldn’t be fair to claim that mask mandates and mask usage are synonymous. However, based on reactions to states lifting their mask mandates, I don’t think any proponent of mask wearing would seriously expect the same level of mask usage should mandates be lifted. Nevertheless, the claim that mask usage negatively correlates with cases and deaths is easily refuted with a quick look at the data. Given the data available, we’ll again only be looking at the fifty states.

Source: Data for cases and deaths (as of Apr. 28, 2021) from the NYTimes Covid-19 Data Bot. Mask usage data from the Delphi Group’s COVIDcast.

Even though the trend lines travel in the exact opposite direction of what our public health experts would have us expect, the correlations are statistically meaningless. Note that the above chart only covers the 2.5-month period starting February 9, 2021, which is when COVIDcast began reporting mask usage numbers for each state. Therefore, the author included only the cases and deaths that occurred during this 2.5-month period. Despite this truncated time period, 2.5 months should have been more than enough to have exposed any sort of meaningful correlation between mask usage and both cases and deaths.

It is worth noting that Rhode Island and New York, each with some of the highest mask usage rates and lockdown stringencies in the country, are leading the pack with some of the largest case increases since early February. What is more, in the 2.5 months since early February the ten states with the highest rate of mask usage have been doing worse in both cases and deaths than the ten states with the lowest rate of mask usage.

Source: Data for cases and deaths (as of Apr. 28, 2021) from the NYTimes Covid-19 Data Bot. Mask usage data from the Delphi Group’s COVIDcast.

Remember, we aren’t measuring the amount of rules that simply say you have to wear a mask. What’s being measured is the percentage of people actually wearing masks in public in each state. It’s quite difficult to look at the trends depicted above and make the case not only for continuing mask mandates, but wearing masks at all.

Some may have an issue with the fact that the trends above only cover the couple of months since February. Let’s assume, for the sake of a more complete picture, that mask usage trends were consistent for each state since the start of the pandemic. We can also expand our filter to the top and bottom fifteen states to account for some states’ movement in and out of the top and bottom ten states.

Source: Data for cases and deaths (as of Apr. 28, 2021) from the NYTimes Covid-19 Data Bot. Mask usage data from the Delphi Group’s COVIDcast.

In terms of cases, from April to around mid-June, states with the lowest rates of mask usage were outperforming states with the highest rates of mask usage. This trend reversed from mid-June through mid-January and then reversed again in favor of states with the lowest rate of mask usage.

In terms of deaths, states with the lowest rates of mask usage outperformed states with the highest rates of mask usage from April until mid-July. From mid-July to mid-February, death trends were more favorable to states with the highest rates of mask usage, but after mid-February death trends again became more favorable to states with the lowest rates of mask usage. Again, if we are assuming fairly consistent rates of mask usage across the entire duration of the pandemic while also assuming that the science behind masks is truly settled, it’s quite difficult to explain away any period of time in which states with the lowest rates of mask usage were outperforming states with the highest rates.

The supposedly settled science behind both lockdowns and mask mandates has always been in serious trouble but is even more so now. Completely leaving aside the incredible death toll of the lockdowns, their numerous social and psychological costs, the totalitarian denial of our most basic liberties, and the decimation of tens of thousands of small businesses, they would still be a miserable failure by nearly every covid-19 metric we have available. Though, to be fair, the lockdowns did make our cities quieter. But aside from that, the data continue to deny that either lockdowns or mask mandates are effective tools for mitigating the spread of covid-19.

Two weeks ago, Bank of America warned that it had observed a sharp reversal to “increasingly euphoric sentiment” among its institutional, hedge fund and HNW clients, all of whom sold in the previous week even as stocks continued their grind higher. This happened around the time that Goldman’s Prime Brokerage had observed a startling streak as hedge funds sold stocks for 7 days out of 8, which prompted us to warn that a short squeeze was coming… we were right, because just a few days later the S&P was back at all time highs on – you guessed it – another whopping short squeeze.

Then, last week, when looking at its latest client flow data, BofA found that bearish sentiment accelerated and for the second week in a row the bank’s clients were net sellers (-$2.0B) of US equities with net sales in both single stocks and ETFs (only the third time this year clients sold ETFs), while retail clients were the “least dumb money”, and according to BofA were once again the only client group to buy stocks, albeit at the weakest level since mid Feb.

So after two consecutive weeks of sheer “smart money” revulsion did buyers finally emerge?

Well, according to the latest BofA Client Flow Trends report published overnight, not only did buyers not return – as the bank’s clients were net sellers (-$2.2B) of US equities for the third week in a row…

… and are now net sellers on a YTD basis…

… as the market reached another record high and equity sentiment as measured by BofA’s propreitary indexes marched further toward euphoria – but the rolling 4-week avg. flows for hedge funds hit a record low in our data history (since 2008) and were three standard deviations below the average.

This matters, because the only other time flows were this extreme was at the end of last August after which the S&P 500 declined by 2.5% and 2.3% in the subsequent one and four weeks, respectively (although that was driven more by the collapse of the SoftBank gamma squeeze than anything organic).

And while institutional clients sold equities for the third week in a row (but at a decelerating pace) while hedge fund (HF) clients sold for the fifth week (largest outflow in over a month)…

… the only buyers were retail clients who have been net buyers for 10 straight weeks, providing once again that as stocks hit all time high, they were the smart money (although it remains to be seen what they do as stocks now appear set for a pullback).

Some more details on the latest client flow trends:

• Clients sold stocks in seven of 11 sectors with the largest outflows from Tech, Industrials, and Cons. Disc.
• Selling was most pronounced in cyclical and growth-oriented sectors: Energy outflows were the largest in nearly two months, Cons. Disc. saw its seventh straight week of outflows, and Tech outflows were the largest since mid-Jan.
• Health Care and Real Estate saw the biggest inflows. Inflows into Health Care neared historic highs for the second week, though cumulative flows for Health Care have generally been negative since last spring.

A breakdown by market cap reveals more nuanced picture, and while clients have been puking large-caps since April, they have offset this by buying mid-caps, even as they bought small caps all year.

Finally, digging through ETF flows, we find that BofA clients sold ETFs for the second straight week, which is rare and last occurred during the March 2020 selloff. Outflows were driven by Growth ETFs, which saw the largest weekly outflow since mid-Jan, while Value ETFs saw small net inflows.

BofA highlights “that a rotation from Growth to Value could suggest downside to the S&P 500 overall”, meanwhile energy ETFs saw the largest inflows among sector ETFs while Tech ETFs saw the largest outflows.

So while institutions and hedge funds were dumping and retail was buying, another entity was waving stocks in with both hands: corporations themselves.

That’s right: after they exited the buyback blackout period, companies have unleashed a massive buyback spree, and BofA notes that corp. repurchases (led by Financials), accelerated amid the height of earnings season, and YTD are tracking +19% vs. last year’s levels at this time.

While the surge in buybacks has yet to validate our thesis laid out last week “The Catalyst For The Next Leg Higher: Buyback Blackout Period Just Ended“, we are confident that it’s only a matter of time before the massive firepower unleashed by tech firms – recall that just AAPL and GOOGL combined will repurchase a record $140BN in stock between the two – reverses the downward flow in stocks and hedge funds and momentum chasers reverse their bearish bias and jump on the retail-driven bandwagon, looking for much higher stock prices.

In short: we are back to the pre-QE market where it wasn’t Fed purchases as much as (debt funded) stock buybacks that provided the relentless dry powder pushing risk assets to all time highs. There is just one difference – not only do we have record buybacks but we also have $120BN in monthly Fed liquidity injections. We say that just in case someone is naive enough to actually short the manipulated policy tool once upon a time known as “the market.”

Translation: it’s just a matter of days, if not hours, before hedge funds – whose prime brokers know with complete clarity about their extreme bearish positioning – are squeezed and push the broader market higher.

Economic ties between the EU and China are quickly deteriorating, following a ‘high-water mark’ for relations marked by a major investment deal in December, with both the EU’s executive branch and Germany each crafting legislation which would make it far more difficult for Chinese entities to invest, according to Bloomberg, which frames it as ” joining the U.S. in swapping tit-for-tat sanctions with Beijing.”

Italy, meanwhile, has gone from backing Chinese President Xi Jinping’s Belt and Road Initiative to similarly blocking planned acquisitions by Chinese companies. In France, China’s ambassador didn’t even appear when summoned in March, citing “agenda reasons.”

In short, Europe is hardening its stance on Beijing – with the biggest shift potentially to come amid a surge in popularity among the China-skeptic Greens party in Germany.

Chancellor Angela Merkel spoke with Chinese Premier Li Keqiang last week, and the two pledged closer cooperation on Covid-19 vaccines and fighting climate change. Yet the talk in Berlin is that optimism around the relationship is gone, and one Chinese official characterized ties with Europe as on a downward trajectory. Whether the Greens come to power in Germany or not, EU-China relations are at a critical juncture, said the official, asking not to be identified speaking about strategic matters. -Bloomberg

The report suggests that Europe is “moving closer to the views of President Joe Biden’s administration in its standoff with China” while US Secretary of State Antony Blinken conducts discussions with his G7 counterparts in London, “a Europe more aligned with Washington would signal some repair to the damage done to transatlantic ties by the Trump administration, with implications for trade, tariffs and access to technology.”

The Biden administration has noted the shift – with one official saying there’s been a “sea change” in European thinking towards the US stance on China, particularly in Germany.

“There’s been a mood shift,” according to Joerg Wuttke, Beijing-based president of the European Chamber of Commerce in China and a board member of the Mercator Institute of China Studies in Berlin, one of the entities sanctioned by China in March.

Wuttke cites a “perfect storm” between China’s hardline stance on Taiwan, efforts to tighten its political grip over Hong Kong, and international sanctions over widely-reported human rights violations in the Xinjiang region – plus, the fact that China hasn’t come through on its promises of opening up economically.

That said, some EU members, such as Hungary, are maintaining warm ties with Beijing.

Economic ties remain paramount since China is the EU’s biggest trading partner, with a total volume of some $686 billion in 2020 outstripping U.S.-China trade of $572 billion. Yet now even the Netherlands, which is among China’s top 10 trading partners, is growing more wary, protecting its high-tech companies from takeover and enacting a dedicated China strategy. According to the Chinese official, the U.S. has forced the EU to take sides.

The sentiment was different just four months ago when Merkel helped steer the bloc to seal the EU-China Comprehensive Agreement on Investment, which Commission President Ursula von der Leyen said was “an important landmark in our relationship with China.” Still subject to ratification by the European Parliament, it would provide improved access to the Chinese market for European investors while committing China to “ambitious principles” including on forced labor.

Yet by late March, the EU had joined the U.S., Canada and the U.K. in imposing sanctions on China over alleged mistreatment of  Muslim Uyghurs in Xinjiang, including forcing them to work. Beijing responded with its own sanctions, while a public backlash saw Swedish fashion retailer Hennes & Mauritz AB subject to an unofficial boycott. -Bloomberg

 “The EU has recently added more agenda items tied with human rights, ideology, democracy,” according to Zhang Monan, senior fellow at the U.S.-Europe Institute at the China Center for International Economic Exchanges in Beijing. “This kind of opposition and friction is expected to continue.”

Now, the European Commission is proposing rules to hit foreign state-owned companies with fines, while Merkel and her cabinet have approved additional powers to stem foreign investments in high-tech sectors, including artificial intelligence and quantum computing – both of which directly affect China.

According to one academic at a Chinese government-affiliated think tank, China’s hope to separate political and economic issues and to bind Europe with its consumer market is ‘increasingly impossible’ now.

“China and Germany have different views on some issues, this is a fact,” Li told Merkel – essentially telling Germany to butt out of their treatment of Uighurs, adding that he hoped the two countries could “eliminate unnecessary distractions” in order to maintain “healthy and stable bilateral ties.”

If the Greens in Germany are able to claim victory in September, Merkel will step aside, making way for a government with a much harsher line towards China than the current administration. The Greens have called for Beijing to end its “blatant human-rights violations,” along with closer coordination between Europe and North American partners on China.

That said, Europe is “determined to avoid decoupling entirely with China,” according to the report, pointing to an April call between Merkel, French President Emmanuel Macron, and Xi, as well as an April 28 article in China’s Global Times referring to “optimism and confidence in China-Germany cooperation” despite “some impacts” due to the election.

The question, as Wuttke at the European trade chamber notes, is whether China will continue to underestimate the concern in Germany over its human rights record – particularly after Merkel is no longer in control.

Authored by Jonathan Turley,

In 1964, Stanley Kubrick released a dark comedy classic titled “Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb.” The title captured the absurdity of getting people to embrace the concept of weapons of mass destruction. The movie came to mind recently with the public campaign of Facebook calling for people to change her attitudes about the Internet and rethink issues like “content modification” – the new Orwellian term for censorship.

The commercials show people like “Joshan” who says that he was born in 1996 and grew up with the internet.” Joshan mocks how much computers have changed and then asks why our regulations on privacy and censorship cannot evolve as much as our technology. The ads are clearly directed at younger users who may be more willing to accept censorship than their parents who hopelessly cling to old-fashioned notions of free speech.  Facebook knows that it cannot exercise more control over content unless it can get people to stop worrying and love the censor.

There was a time when this would have been viewed as chilling: a corporate giant running commercials to get people to support new regulations impacting basic values like free speech and privacy. After all, Joshan shows of his first computer was a “giant behemoth of a machine” but that was before he understood “the blending of the real world and the internet world.”

The Facebook campaign is chilling in its reference to “privacy” and “content modification” given the current controversies surrounding Big Tech. On one level, the commercial simply calls for rethinking regulatory controls after 25 years. However, the source of the campaign is a company which has been widely accused of rolling back on core values like free speech. Big Tech corporations are exercising increasing levels of control over what people write or read on the Internet. While these companies enjoy immunity from many lawsuits based on the notion of being neutral communication platforms (akin to telephone companies), they now censor ideas deemed misleading or dangerous on subjects ranging from climate denial to transgender criticism to election fraud.

Moreover, Facebook knows that there is ample support for increasing censorship and speech regulation in Congress and around the world. Free speech is under attack and losing ground — and Facebook knows it.

The rise of the corporate censor has challenged long-standing assumptions of the free speech community. Our Constitution and much of free speech writings are focused on the classic model of government censorship and state media. What we have seen in the last few years is that corporations have far greater ability to curtail speech and that you can have a type of state media without the state.

Free speech advocates are not the only ones to notice. Authoritarian figures have recognized these companies as competitors. Recently Russian President Vladimir Putin denounced Big Tech as a threat to “Democratic institutions” – a farcical objection from one of the world’s most blood-soaked, anti-democratic figures.

Other leaders have simply sought an alliance with the companies for mutually beneficial censorship. Countries like India appear to have out-sourced censorship duties to Big Tech. Twitter admitted recently that it is actively working with the Indian government to censor criticism of its handling of the pandemic. There are widespread reports that the Indian government has misrepresented the number of deaths and the true rate of cases could be as much as 30 times higher than reported. Thousands are dying each day due to a shortage of beds, oxygen, and other essentials. Twitter is saying that it had the power to “withhold access to the content in India only” if the company determined the content to be “illegal in a particular jurisdiction.” Thus, criticism of the government in this context is illegal so Twitter has agreed to become an arm of the government in censoring information.

Sikh groups last year objected that Facebook censored Sikh posts during #SikhGenocide remembrance movements. They also objected to such censorship by Instagram and Twitter, was centered on stifling anything linked to the Khalistan and likely was done at the behest of the Indian state.

These corporations are now offering politicians what they have long desired in controlling speech and curtailing criticism. Leaders in this country have encouraged the same mutually beneficial alliance. Politicians know that the First Amendment only deals with government censorship, but who needs “Big Brother” when a slew of “Little Brothers” can do the work more efficiently and comprehensively.

When Twitter’s CEO Jack Dorsey came before the Senate to apologize for blocking the Hunter Biden story before the election, he was met by demands from Democratic leaders for more censorship. Senator Chris Coons (D., Md.) pressed Dorsey to expand the categories of censored material to prevent people from sharing any views that he considers “climate denialism.” Likewise, Senator Richard Blumenthal (D., Conn.) chastised the companies for shying away from censorship and told them that he was “concerned that both of your companies are, in fact, backsliding or retrenching, that you are failing to take action against dangerous disinformation.” Accordingly, he demanded that they “commit to the same kind of robust content modification playbook in this coming election.”

That brings us back to Facebook’s glitzy media campaign. Polls show that younger Americans are more open to censorship after years of speech regulation in their high schools and colleges. They have grown up with media figures like CNN’s host Brian Stelter calling censorship simply a “harm reduction model.” They have read writers and editors embracing book banning and blacklisting. They have been conditioned to fear unrestrained free speech. making them natural allies in “evolving” with Big Tech companies.

What is fascinating about Joshan and his equally eager colleagues Chava and Adam is that they tie changes in technology to possible changes in core principles like reconsidering “content modification.” They were all born in 1996 — the sweet spot for censors between the Millennials and Generation Z members. Those generations, and particularly Gen Z, are the most likely to come stop fearing the censor and love “content modification.” Joshan and his technologically woke friends simply want us (and regulations) to “change” with our computers. After all, it may not be our content that needs to be “modified” but ourselves in our attitudes and assumptions. Just do not be surprised if that upgrade to You 2.0 requires the removal of the free speech bug that is inhibiting your “blending of the real world and the internet world.”

For the past few months we – unlike the Fed – have been warning readers that the US is about to get by a wave of soaring prices the likes of which have not been seen since the early 1970s (see “”Buckle Up! Inflation Is Here!”). And while two weeks ago we noted the even “Companies Are Freaking Out About Soaring Costs“, sellside analysts had retained composure, with most comforting their clients that whatever inflation we get will be transitory (despite occasional luminaries such as Jeff Gundlach saying that the Fed and banks may well be wrong about the “transitory” narrative).

Well, as of this week, the analyst narrative has taken a sharp U-turn, starting with JPMorgan which yesterday admitted that there are an increasing amount of articles that illustrate rising inflation expectations, “even if those measures are not captured by official government releases” to wit:

• Rental Companies Buy Up Used Cars as Chip Crisis Get Worse (BBG Terminal)

• Demand is outpacing supply of new vehicles – why that’s bad for shoppers but good for investors (CNBC)

• Tourists in Hawaii Are Driving U-Hauls Because Rental Cars Are So Expensive (CNN)

• Lumber Prices Break New Records, Adding Heat to Home Prices (WSJ)

And while JPM has long been in the “transitory” bandwagon, the bank’s strategist Andrew Tyler admits that in a crack to the party line, his view “is that we’ll see inflation expectations continue to move higher over the summer, as we see improving macro data (NFP, CPI, PPI, and Retail Sales the most topical).”

To help investors formulate their own inflation expectations – especially amid rising strains on the global supply chain created by COVID – he presents out the following charts:

LAD vs. KMX vs. IYT vs. SPX

ISM vs. CPI vs. PPI

ISM vs. 5Y BREAKEVENS vs. 5Y5Y INFLATION SWAPS

5Y BREAKEVENS vs. BLOOMBERG COMMODITY INDEX [BCOM]

As Tyler accurately concludes, “one of the biggest questions is how long this persists” adding that the answer to that question may help investors determine whether to update models with lower growth/margin expectations or to look through this seemingly one-time event (which may not be as one-time as so many say it will be). His advise for investors who need to hedge inflation exposure in their portfolios, he recommends adding commodities or commodity equities: “our favorite play is Energy.”

* * *

Goldman next picks up where JPM leaves off, with the bank’s Chris Hussey pointing out the obvious: “a combination of slowing growth and rising inflation” – i.e. stagflation, “is an unfavorable one for forward looking assets like equities.” And while he also falls back on Goldman economists’ macro view which expects inflation “to be benign over the near-term, and are less concerned about the prospect of an overheating economy”, a more nuanced industry breakdown reveals a far more dismal picture, with Hussey noting that Goldman analysts now focus on soaring input cost inflation and supply chain pressures across retail and housing. Consider:

• Auto parts retail. Kate McShane believes Autoparts Retailers should be able to realize pricing power as they fulfill rising demand for do it for me (DIFM) projects in a re-opening economy in “Improving DIFM outlook + inflation pass-through ability.” Most Auroparts demand comes from must-have fix-it projects (non-discretionary), providing retailers with the ability to sustain prices. The group is also trading at a sharp discount to historical valuation levels — presenting a disconnect between valuation and fundamentals.

• Grocers. By contrast, Kate McShane believes Grocers will struggle to pass rising food inflation onto its customers as promotions return to the industry following a pandemic hiatus in “Margin Pressure Potential in Grocery from Inflation and Competition.” The grocery competitive landscape did not change much during the pandemic giving us little reason to believe that the category will not become promotional again.

• Housing. Strong housing demand and shortage of available homes should keep house price growth firm — potentially boosting core inflation in the shelter category through higher rent inflation, writes Ronnie Walker in a May-2 economics note “Housing on Fire.” And Sue Maklari remains bullish on bellwether homebuilder PHM following last week’s results as we believe the company should have the pricing power to offset rising lumber and labor cost.

* * *

If that wasn’t enough, yesterday Bank of America made ripples across trading desks when in its summary of the third week of earnings season, the bank’s strategist Savita Subramanian, she noted that mentions of “inflation” have quadrupled YoY, and after last week, mentions have exploded nearly 800% YoY.

And the punchline from her report:

“on an absolute basis, mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.”

Yes, this is a top 4 bank saying the US is facing “transitory hyperinflation.” Because when one thinks hyperinflation, “transitory” is what comes to mind.

In any case, digging into the actual data, BofA finds that by category, mentions of pricing (+36%) and transportation (+35%) rose the most, followed by materials (+28%), while labor-related mentions rose the least (+9%). And to further substantiate her point, Subramanian has pulled some of the most memorable “reflation” and “higher prices” remarks from recent conference calls:

• FAST (Industrials): “we are experiencing significant material cost inflation, particularly for steel, fuel and transportation costs.”

• GIS (Staples): “Looking ahead, as we experienced higher inflationary environment, our first line of defense will continue to be our strong holistic margin management cost savings program. In addition, we are taking actions now and in the coming months […] to drive net price realization that will benefit our FY2022. “

• CAG (Staples): “we’re seeing input cost inflation accelerate in many of our categories and across the industry.”

• LW (Staples): “while the pandemic-related effects on our supply chain were the primary drivers of our cost increases, we also realized higher costs due to input cost inflation in the low single-digits. We expect that rate will begin to tick up in the coming quarters as edible oil and transportation costs continue to increase.”

• STZ (Staples): “similar to previous years, we’re expecting substantial inflation headwinds in the low to mid-single-digit increase range, largely related to glass and other packaging materials, raw materials, transportation and labor costs in Mexico. “

• PPG (Materials): “we experienced a significant acceleration of raw material and logistics cost inflation during the quarter. Coming into the year, we were expecting an inflationary environment and had prioritized selling price increases across all of our businesses. This has helped us achieve solid price increases year-to-date. With a higher inflation backdrop, we have already secured further selling price increases and are in the process of executing additional ones during the second quarter. “

• DOV (Industrials): “What we are going to fight against between now and the end of the year […] is inflationary input costs between raw materials, labor, and price/cost.

• […] the way it’s looking we may have to intervene on price again in certain of the businesses over the balance of the year.”

• TEL (Tech): “I would expect our margins to modestly improve as we work our way forward here into the third and fourth quarter based on some of the actions that are underway and our ability to combat some of the inflationary pressures out there. […] Certainly, we’re feeling the biggest inflation right now is on the freight side. The freight inflation has been significant. And as we battled through there and there’s a variety of reasons for that including higher air freight and so forth in terms of that. And that’s not unique to TE. Certainly, I think that’s been as well publicized across the overall supply chain. […] labor cost is not a major issue on the inflation side, but labor  availability in certain places that are still being more impacted by COVID continues to drive some inefficiencies.”

• CMG (Consumer Discretionary): “So, all of that is very, very manageable and we feel like if there is going to be significant increased inflation because of market-driven or because of federal minimum wage, we think everybody in the restaurant industry is going to have to pass those costs along to the customer.”

• ALLE (Industrials): “This guide incorporates pricing actions to offset direct material inflation, as well as reflecting our supply chain capability to mitigate industry challenges on supply and electronic component shortages. We anticipate that these challenges will persist for the balance of the year, and we will continue to monitor and adapt to changing market conditions.”

• WHR (Consumer Discretionary): “The global material cost inflation in particular in steel and resins will negatively impact our business by about $1 billion. We expect cost increases to peak in the third quarter.”

• PNR (Industrials): “All inflation remains high. We have instituted a number of selling price increases across the portfolio that we expect to help mitigate inflation in the second half of the year.”

• TSCO (Consumer Discretionary): “Compared to our initial outlook for the year, our forecast does reflect higher transportation costs and product inflation. We experienced increasing pressures from these factors during the first quarter and expect them to continue to be a headwind throughout 2021.”

• POOL (Consumer Discretionary): “We previously said that inflation would be in the 2% to 3% range but now believe it will be in the 4% to 5% with some products into double-digits. We don’t anticipate any of this getting hung up in the channel so that will provide a tailwind for the year. Considering that most of our – most of the cost of constructing a new pool or remodeling an existing pool is tied up in labor we don’t anticipate this inflation having a meaningful effect on demand as it relates to nondiscretionary products such as chemicals, inflation has simply passed through again with no real effects on demand.”

• LUV (Industrials): “Outside of salary, wages and benefits, the largest drivers of our sequential cost pressure are flight driven cost increases and landing fees, employee, customer and revenue related cost, and maintenance expense…”

• HON (Industrials): “Yeah, that’s definitely a watchout item for the year. And for us, inflation is taking hold. There’s no doubt about it. We knew it. We see it. It’s real. And if you don’t stay on top of it, the two areas where – and this is not a surprise – steel, semiconductors, copper, ethylene, those are the four elements that we saw substantial inflation in Q1. [..] I can tell you that we stood up a pricing team, which has been in place since the beginning of the year. We’re quickly taking actions and we are staying ahead of it. And we’re going to continue to monitor what happens and stay ahead of it. But it’s a watchout item. I don’t think things are going to abate. The short cycle is definitely hot. We all read the same articles around semiconductors and what’s going on there, and I think we’re going to have to just stay ahead of it. But we do expect an inflationary environment this year. And we’re going to stay ahead of it. That’s our commitment.”

• CE (Materials): “We’re certainly feeling the inflationary factor. I think, the good news is we anticipated this coming back in the fourth quarter of last year already and started moving prices […] So, although it is an inflationary pressure, we’ve been able to push that through in our pricing and basically maintain the same level of variable margin.”

• KMB (Staples): “The biggest reason being that our pricing actions and the benefits of that will be coming through the P&L in the second half. In terms of input cost inflation, that is ramping in the first quarter, and the second quarter. We expect that, it will peak and then moderate and, in some cases, come down a bit in the second half.”

• MDLZ (Staples): “In terms of inflation, there is more inflation coming. And so, profitability is great in Q1. We believe we are going to hit the numbers as we had originally in mind. But the higher inflation will require some additional pricing and some additional productivities to offset the impact, which I believe at this point is absolutely manageable given that all these positions are pretty much hedged for 2021.”

• SHW (Materials): “On the cost side of the equation we now expect raw material inflation for the year to be in the high-single-digit to low-double-digit range, a significant increase from the low- to mid-single-digit range we communicated in January. And let me just begin by reiterating a little bit what John and Al have been saying. This whole area of raw material inflation is a transitory issue for us. It’s not new for us. We’ve demonstrated an ability to manage through this many times in the past, and we’ll get through this as well.”

• WM (Industrials): “We do expect that inflation will kick up a little bit, and so we’ll get some help. And we’re typically a beneficiary of higher inflation.”

• PKG (Materials): “We also anticipate continued inflation with freight and logistics expenses as well as most of our operating and conversion costs. However, energy costs should improve as we move into seasonally milder weather.”

• MMM (Industrials): “We are also raising prices, but it’s going to take a little bit of time. The inflation has come in faster. So you’re going to see 75 to 125 basis points of headwind which is the net of price versus inflation and logistics.” “On supply chain disruption, there are two pieces. One is of course the inflation that we’ve told you about which will cost 75 to 125 basis points of headwind between price and inflation and the raw material and logistics costs as well as making sure that we have all the product availability that we have. So that’s the other, I would say, headwind to 1Q.”

• PHM (Consumer Discretionary): “We have updated our guide in terms of what the inflationary aspect of the sticks and bricks is. We have been at or near 5%, 6%. We’re now 6% to 8%. And depending what lumber does, that could move a little bit even higher than that.”

• F (Consumer Discretionary): “We’re definitely feeling the commodity headwind, as John said. And inflation, it feels like we’re seeing inflation in variety parts of our industry kind of in ways we haven’t seen for many years. On the other hand, it feels like it’s all due to a lot of one-timers as the economy comes out of lockdown. So I think it’s a bit too early to declare the run rate or where it’s going to be. It’s just too hard to tell from my standpoint.”

• AVY (Materials): “supply chains have remained tight and input costs have been increasing. As a result, raw material and freight inflation were above our initial expectations. And we have continued to see costs rise as we entered the second quarter We now expect mid to high single digit inflation for the year with variations by region and product category.”

• IDX (Health Care): “I would say on the inflationary front, it’s kind of spotty for us. I mean remember we’re a little further down the food chain. We don’t buy a lot of giant quantities of base material. We buy things that have been converted, so it does have a little bit of a lag for us. And so we see the same things others are seeing where we buy lots of metals. There’s some inflationary pressure; electronics, a few other places but we’re navigating around those on the freight side. That’s certainly a challenge both on the price, frankly more on the availability side. […] We’re no different than anybody else trying to find sea containers, trucking, trains, port facilities that have to unclog all of those things. Our model helps us. Our folks help us. I think as we go further out, the inflationary pressure, I actually think that’s going to ramp up a bit for everybody.”

• SWK (Industrials): “As many of you follow, steel and resin represent the two largest commodity exposures and they have been impacted by rapid spot market increases as the global supply chain response to the surge of demand and temporary supply gaps. This dynamic has occurred across many of our key commodities, components, finished goods that we purchase. We now expect inflation headwinds to approximate $235 million, which is up $160 million versus our previous outlook of $75 million.”

• MAS (Industrials): “We have seen significant inflation in raw materials, namely copper, zinc, and resin, used in both our paint and plumbing businesses as well as increases in freight costs. All in, we expect our raw material and freight costs to be up in the  midsingle-digit range for the full year for both our Plumbing and Decorative segments, with inflation likely reaching high single-digit levels in both segments in the third and fourth quarters.”

Last but not least, perhaps the most surprising finding by BofA, is that despite all the mentions of inflation coming from raw materials, transportation, and supply chain issues, S&P 500 non-Financial net margins jumped to a record level in 1Q. Of the 11 sectors, Real Estate and Utilities are expected to see lower margins YoY.

While we don’t know whether the coming “hyperinflation” will be transitory or not, but one thing we are certain of – if prices indeed enter their Zimbabwe phase, profit margins for the broader market will soon hit a record, only in the wrong direction.

Authored by Bill Blain via MorningPorridge.com,

“A great civilisation is not conquered from without until it has destroyed itself from within… ”

Across the Occidental Economy there seems a trend towards political failure as polarization, sleaze and opportunism takes hold, even as electorates suffer from increasing inequality and declining prospects. As the threat of post-pandemic inflation rises, the ingredients are all there for further instability and labour strife. It’s all happening as the geo-political spheres of influence between China and the West are being redrawn.

The Gates’ divorce of the millennium is getting the headlines this morning – which could provide some welcome relief for many politicians, beset by increasingly noisy and hostile news flow. Increasingly institutional investors are concerned about how distorted the political process is becoming – and what the consequences for markets could be.

Growing political instability across Occidental Economies is becoming a trend. It takes two forms:

• First is ineffectiveness – for all the political noise, nothing seems to get done.

• Second is a rising tide of resentment as society becomes more fragmented between the haves and have-not.

Political failure could well become a mounting crisis for markets in coming years – especially if weak governments come alongside the kind of short, sharp shock of inflation which many strategists and economists now expect. Inflation could fuel union demands for wage rises at a time when corporates remain weakened in wake of pandemic – fuelling the kind of industrial wage militancy we last saw in the 1970s.

This time, political instability looks possible across the whole Western economy – with inflation simply being a spark to ignite the fire. But, the fire may already be alight. Let me illustrate this morning with snapshots from England, Scotland, France, and the USA about how politics is fuelling future instability.

It increasingly feels the politics of the west is tumbling into a deep black hole. It’s happening at a time of increasing concern about what future geopolitical fault-lines will mean for investment opportunities: Chinese expansion versus the increasingly fragmented and ineffective looking Western democracy.

More than a few market commentators have been drawing allusions between the current fracturing political situation in the West, and the last days of Rome. All the usual themes are there; from the threat of monetary weakness from inflation (which will no doubt fuel cryptocurrencies), rising inequality, a rising sense of everyone in it for themselves, and the masses being ignored.

Last night I watched the film Nomadland – it’s bleak, but catches the sense that while we all might be disposable to the Gods of Mammon it is still possible to retain dignity on our own terms. I’m really not so sure we all have that option.

UK

Let’s start a quick jaunt round the collapse of Western Democracy with Boris here in the UK.

While the UK struggles with massive issues like education, the future of the NHS, post-pandemic recovery and the threats of global supply chain crisis (already chip-shortages have effectively closed a large part of automotive manufacturing), the political noise across the nation is about how Boris paid for renovating his grace and favour flat.

Tory supporters are furious – how can such a little thing be important? They claim its proof of a media conspiracy against them. Equally it demonstrates the unworthiness of the political opposition against him – how dare the opposition Labour party be trying to score such pointless, meaningless, petty-pinching points at this moment of national victory against the virus? They see the noise around Wallpaper-gate as proof the establishment is biased, and determined to seize any opportunity to pillory him, and bring him down no matter what the cost to the nation.

But…. Rules are rules.

Where would you draw the line? A prime minister who nicks a kit-kat or one taking kick-backs on arms-deals? One who asks rich pals a few simple small favours, or the one who goes on to allow grand scale kleptocracy by his/her party as every politician sees a few “extras” as their right? Or Tory party politicians set to make millions by selling their contacts to dodgy finance firms, or from stakes in companies favoured for ill-governed pandemic contracts?

Compare and contrast the spluttering resentment of Tory diehards to the reality out in the burbs. We may get some signals from this week’s local elections, but the Tories will likely do well against the fragmented Labour party. The political opinion of voters is now so anaesthetised to muck that its increasingly seen as ok for politicians to lie. If they can lie, what’s the next step?

Put the few quid Boris might have overspent on the Downing Street Trianon in context with the over 700 Royal Mail postmasters who lost their jobs, their livelihoods, their reputations, went to jail or committed suicide on the back of dodgy Horizon software that Royal Mail executives knew wasn’t fit for purpose. For 20 years these hardworking people’s lives have been destroyed – and no one is being punished.

It’s difficult not to feel fury when reading about the crass behaviour of Royal Mail accountants, about covered up investigations, or pregnant postmasters sent to jail. Lives destroyed. The case is beyond shocking. These people had no chance to retain their dignity – like the heroine of Nomadland. They were not just discarded by the system, but actively destroyed by it.

Scotland

It is difficult not be impressed with the modern political masterclass that is Nicola Sturgeon. She is direct and, unlike any other modern politician, she answers the question – or, at least, gives the appearance of doing so. She has facts, numbers and information at her fingertips and presents her case with fluency, direct eye-contact. Love her or loathe her, Nicola looks and sounds credible.

At elections this week Sturgeon will hold her position as Scotland’s First Minister. The SNP may even win an overall majority of seats, empowering it to demand a new referendum on Scottish Independence, which is currently a 50/50 call for the Scot’s electorate. She has packed that vote by enfranchising 16-year olds, and she will present a rosy plan for Scotland as part of Europe with nary a care for a border with its largest trading partner – which, of course, is England.

She will gloss over the budgetary implausibility of independence and quote widely about the success of small nations. And since she is good – a damn good politician – she gives the impression she is listening, before calmly, rationally and effectively explaining how Scotland is doomed if it stays part of England, liberally blaming Boris for everything… and because you will agree with that, you will find yourself agreeing with the rest of her argument.

Like all very dangerous politicians the SNP are very clever. They don’t need their arguments for leaving the UK to stand up to scrutiny. They just need Scotland to reject Boris’ calls to stay.

Independence will, of course, be madness for Scotland and bad for the UK. Already analysts are advising clients to short GBP. But politically… it may happen.

France

Nothing ever changes in France – it remains the canary in the coal-mine for revolution, which is simmering. As the Far-left and police clashed at the regular Mayday fixture, the only beneficiary is the Far-Right, which is now the mid-right and determined to avoid the “vote for anyone but Le Pen” trap which won Macon the last election. The French electoral analysts now say Marine Le Pen represents a credible right-wing choice for French voters – which really should be worrying the rest of Europe.

Politically, the risks of right-wing, Euro-phobic French Government are barely being factored into the pricing equation on the Euro or the delicate political balance of Brussels and ECB. If it wobbles…

USA

I’ve deliberately saved up the USA for last in this rush round the collapsing political process – because it is most obvious.

How foolish we were to think Joe Biden could be a source for healing America. Rather than pull together Democrats and Republicans together on a plan for national rebuilding – which they all agree is required – the rancour and polarization between them has deepened. Senior republicans are full of fury that Biden is actually doing stuff.. (Much of it the same stuff Trump was going to do…)

A usually smart clever, erudite US chum was beside himself with rage that Biden was actually delivering left wing policies like Tax rises and accused him of pandering the hard left. He believes Biden’s “naked socialism” will deliver the next election to Trump. The US is setting itself up for a 4-year battle till the next presidential election – where MAGA and Trump will be setting the tone. It means 4 more wasted, hostile, polarising years…

The Chinese really could not be any happier with the outcome. Politics matter for markets.

* * *

Free Bronze subscription allows unlimited blog access, email notification and weekly round up