“We need something cheerful for the Christmas issue!”. More of the “Oh come, all ye faithful, joyful and triumphant!”, and less of the “In the bleak mid-winter”; you get the gist. As with the best laid plans of mice and men, if that was the brief only a couple of weeks ago, Omicron had other ideas, swooshing through the population faster than grass through a goose.


The NHS once more teeters on the brink of the operational precipice from whose edge it is never far yet always seems surprised to meet. Politicians and scientists are falling out among themselves and with each other but ultimately not having the nerve to cancel Christmas while dropping heavy hints that whatever else, we will repent the sins of our collective hangovers, indulgences and congregations at our leisure in when-is-a-lockdown-not-a-lockdown January (or in our Balkanised nation, from Boxing Day if you’re Scottish or Welsh, indeed in Wales you’ll become a criminal if you leave home to go to work “unreasonably”). In Germany, acting health minister Jens Spahn, full of bonhomie and glad tidings pronounced in the context of Covid, “by the end of this winter, Germans will all be vaccinated, recovered or dead”; he’s a Cheerful Christmas Charlie, isn’t he?


In the week that Professor Medley, a prominent member of SAGE and chairman of its modelling committee, unwisely admitted in a lively, unguarded and now viral Twittersphere exchange with Fraser Nelson, the Editor of the Spectator, that effectively only worst case Covid projections are modelled and to political order (by circular inference, then to be holy writ as politicians are “guided by the science”) having alleged that in the next few days we could be facing a new case load of 600,000 per day, we have to remind ourselves that only at the end of October the Oxford group of scientists, those behind the AstraZeneca vaccine, were equally confidently predicting that the then daily new case rate of close to 50,000 would be reduced to 5,000 by Christmas; hindsight shows the rate in fact doubled. If we’ve learned anything in the last two years, it is that the virus does nothing to order, models are only as good as the assumptions fed into them; garbage in, garbage out.


As Omicron sweeps the globe and the scientific soothsayers interrogate the chicken’s entrails to find evidence that this variant, while swifter to spread than its cousins, is nevertheless not as virulent, swathes of humanity are once more subject to widespread curtailments of freedoms to varying degrees. Coercive vaccination policies are also in play, as we discussed in our most recent musing about the moral hazards of such actions. Central bank policymakers have had to factor all this into their modelling for surging inflation which brings its own brand of corrosive economic infection.

But now for some good news! Economic progress in 2021

But first, amid the daily diet of catastrophic Covid headlines, there is indeed some cheerful news of which to remind ourselves. After the economic collapse of 2020 (albeit with the direct effects blunted by employment and business protection schemes and massive state aid, all funded on the never-never, stacking up the longer-term financial risk on national balance sheets), it might seem difficult to believe but there really has been an extraordinary recovery in 2021.


If the UK economy shrank by 9.9% last year, 2021 might yet bounce back by a record-beating 6.5%-7% with the prospect of reattaining December 2019’s nominal level of GDP in 2022. In the US, after a decline of 3.4% last year (a remarkable fall for the world’s biggest economy at a quarter of total global GDP), the December 2019 figure had been surpassed by the end of the first quarter of this year. Europe remains the laggard: behind on jabs, sclerotic in policy delivery, the first to reintroduce societal repression as health services struggle to cope with Covid, even before Omicron was identified as a threat.

If inflation is a universal factor….

Inflation, however, remains the insidious economic threat, and it too is spreading. In November the UK’s Consumer Price Index (CPI) measure of inflation weighed in at 5.1% year-on-year, up from 4.2% in October; worse, the Retail Price Index measure topped 7.1%, its highest since March 1991 and still of great relevance when calculating a range of regulated prices. In the US, it is a similar story with CPI rising to 6.8%, while the Eurozone recorded 5.2%. All of these must be seen in the context of central bank mandates to manage their respective economies to an inflation rate of 2% nominal or, in the case of the US, 2% as an average over an indeterminate period.

…central banks are diverging in dealing with it

It was against this backdrop that last week’s central bank policy announcements were made, and as we suggested might be the case, paths have diverged. Having already curtailed quantitative easing, and with Governor Bailey not wishing perpetually to be cast as the “unreliable boyfriend”, the Bank of England raised its base interest rate from 0.1% to 0.25%. If the Bank is now actively pursuing tougher policy, the US Federal Reserve still seems determined not to find ghosts where it believes none exist: despite the inflation rate and its positive reading of the US economy and its own assessment of an improving employment market, the Fed opted only to taper the rate at which it purchases US Treasuries and mortgaged-backed securities. In essence, it is still shovelling coal into the boiler’s firebox, merely at a slower rate than before.


Completing the December western policy triple witching hour, the European Central Bank (ECB) agreed to curtail its emergency pandemic purchasing programme at the end of March 2022 (however, if not pouring net new money in, it will continue to re-finance existing bonds in the programme which meet maturity), while slowing its core asset purchasing programme (the one which has been running consistently since 2015) from a monthly rate of €40bn per month in Q1 2022, to €30bn per month in Q2. Whatever the short-term inflationary rate, the ECB remains concerned that long-term deflationary pressures will have the upper hand and it expects interest rates to remain negative for the foreseeable future (in the mangled English of ECB-speak: “the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon”).


But it was the People’s Bank of China which provided a further twist to the story; if earlier in the year the government had been actively restricting access to credit, partly to cool a fast-paced economy but partly politically to begin the deflation of the housing bubble (contributing to the corporate collapse of Evergrande), effectively admitting a now stuttering economic backdrop the Chinese central bank opted to reduce interest rates and to relax the amount of regulatory capital required by the commercial banks when assessing their loan books. Less widely reported in the West, China too is still struggling with Covid a full two years after it escaped either a Wuhan wet market or a government virology lab. If the western central banks are tapering or tightening, China is doing exactly the opposite and in the space of six months has gone from jamming on the brakes to gunning the accelerator again.

Ukraine: In the Bleak Mid-winter, less that frosty winds are moaning as the heat is rising

Meanwhile, and away from economics, as the British media and the Westminster kindergarten obsessed themselves ahead of the North Shropshire by-election with what constitutes a party, a gathering with wine and cheese or a working meeting at which wine and Boris’s wife were present and whether Covid rules were broken, back in the real world with the grown-ups, tensions on the Ukrainian border are progressing from simmering to close to boiling point. President Biden threatens “nuclear” economic sanctions against Moscow, targeting Russian assets held in the west, and suggesting Russia might be forcibly excluded from the international banking and financial systems; President Putin threatens the real thing, a tactical nuclear strike at western capitals.


It remains unclear where this game of bluff ends but as the stakes ratchet higher, both men are expending much political capital, potentially painting themselves into corners with no face-saving exits. Biden needs to be able to create and project a unified and credible front among the western allies that they mean business, there’s a mailed fist inside the diplomatic glove: if he fails, it only increases the perception in Moscow, Beijing, Tehran and Pyongyang that the West is weak, divided and in disarray, further undermining Biden’s reputation after the disaster of the withdrawal from Afghanistan; Putin, the strong-man, runs the risk that if he is forced to back down, or he loses his nerve if threatened with mutually assured destruction, his political enemies in Moscow will smell blood. Incidentally, riding both horses, but helping nobody and least of all Ukraine, the new German government has said that in the event of an invasion of Ukraine, Germany will abandon Nord Stream 2, implying that with no invasion, NS2 will proceed.


It is worth repeating General Sir Richard Shirreff’s memorable observation at a Jupiter Investment Conference when promoting his book, War with Russia 2017 (which was about Russia’s strategically important Kaliningrad enclave on the Baltic, rather than Ukraine, but the context from a former NATO Deputy Supreme Allied Commander Europe is highly informed and illustrative): “in the event of a ‘limited’ nuclear war, you won’t be pondering the economic consequences; forget the word ‘limited’: you’ll be entirely preoccupied with not being burned to a crisp”.


The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.


Cheerful enough? Happy Christmas!

The value of active minds – independent thinking

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