2021 Holiday Eye on the Market: The Middle Ages

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FEMALE VOICE 1:  This podcast has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only as defined by local laws and regulations.  Please read other important information, which can be found on the link at the end of the podcast episode.

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MR. MICHAEL CEMBALEST:  Hello, everybody, and welcome to the Holiday 2021 Eye on the Market.  This one's called the "Middle Ages," for reasons you'll see in a minute.  Well, that was an interesting year.  We started out optimistic on equities, given our outlook on economic growth and leverage in corporate profits, limited new equity supply, lower interest rates and the idea that the COVID would have its impact reduced somewhat by vaccination.

We underestimated just how much operating leverage there was that companies would experience earnings growth shattered our expectations across the developed world, whether it was Japan, or Europe, or the United States, and equity markets rose handsomely in a lot of places despite declining PE multiples.

And by the way, for those of you keeping score at home, that barbell of U.S. and emerging markets overweight versus Europe and Japan worked again this year, despite the problems with China.  Resistance is futile on that front.

As always, the legislatures and central banks were doing their part to support all this.  We are now seeing, again, the largest monetary and fiscal experiment since the Lombards created banking in the Middle Ages.  I get asked a lot how these debt burdens are going to be resolved in the long run.  I have some ideas, but I will be retired long before I see if they're right or not.

It's hard to say for sure, but when you look at the expansion of Central Bank balance sheets--and there's no way I can convey this on a podcast.  You actually have to look in the piece at the chart.  When you see the rise in government debt and central bank balance sheets, it's kind of not surprising that cryptocurrency values rose from $250 billion before COVID to $2.5 trillion today. 

In any case, in the piece this week we make brief mention of some of the topics that we discussed and the Eye on the Market this year is kind of a year-end review.  We started out the year in January, walking through the specifics of the 12th Amendment and the Electoral Count Act because of the joint session of Congress. 

We've talked about stock markets, concentrated stocks.  We had our deep-dive energy paper.  We look at private equity and venture capital returns, goods and labor supply change delays and how long they take to revolve, unfunded retire health can [phonetic] and pension issues of U.S. states, and then we spent a lot of time on the commodity price shock and the imbalance between supply-and-demand policies.

There's a great chart in this Eye on the Market that you've got to see.  It shows the collapse in capital spending by S&P 1200 energy companies, which is a global basket.  Since 2015, capital spending by those companies is down 75%, so that's fine.  That reduces the supply.  What about demand for fossil fuels?  They're basically unchanged since 2015.

So there are some important questions to ask here.  We either need to stop the capital spending decline by these energy companies or we radically need to accelerate the decline in both the emerging and develop world and fossil fuel use.  And it's not clear on the policy front that that gap is going to be closed.

I apologize for the sirens.  I live in Brooklyn and it kind of goes with the territory.  Okay, so the sirens are gone.

I'm working on the Eye on the Market outlook for 2022.  It comes out on January 1st.  In addition to all the market stuff we're going to talk about what to do if you're a yield-oriented investor and looking for dividends.  We're going to take a look at China.  Is China's investment prospects--I don't think this regulatory purge is over.

U.S. office market fundamentals are already improving, despite very low office utilization rates.  We'll look at that.  We're going to look at potential upside for timber investors in a world searching for real sequestration.  Briefly, we'll talk about Brexit, which we haven't talked about in a while. 

And we take a look at infrastructure investing, which I think is really interesting, and things like regulated electricity distribution, solar power generation and liquid bulk storage.  We take a look also at cybersecurity investing.  One of the things that's most interesting about COVID's long-term impact is the substantial increase in products and services around the world that are now being offered digitally compared to pre-COVID.

That, of course, increases all sorts of cybercrime and opportunity for investors in cyber-security.  And then, finally, some underwhelming news on what the fintech industry did during COVID.  You will be both disgusted and amazed.

Anyway, so I'm writing this outlook from a basement apartment.  As many of you know, I had an accident and--let's see--I had a tibia plateau fracture and torn meniscus.  I was engaging in activity that's typically associated with younger people. And in the Eye in the Market this week, I get into the specifics of how happy I am to have access to 21st century medicine.

In the Middle Ages they would have bonesetters that would use these devices with cranks to realign your fractured limbs, and then they would dip the bandages in egg whites or milk and put them in a splint made of tree branches.  And obviously, sometimes you would have growth deformities from this, and in case of infection they might have to amputate your limb.  So I am happy to have access to 21st century medicine.

Medical knowledge improved during the 18th century, and this is a particularly interesting case given what's going on in the world right now.  Everybody's hero, George Washington, mandated that the Continental Army be inoculated against smallpox in 1777.  They didn't have vaccines yet, but they had this crude process called variolation.  And if he hadn't done that, the Continental Army might well have lost the war.

Smallpox disappeared in Boston around 1800, when there was a vaccine development.  And when you look at the history of life expectancy since the 1700s, it wasn't really until the 1940s when life expectancies in the developed world began to rise more rapidly, mostly due to mass production of antibiotics that were first discovered in the 1930s.

And I talk about the Middle Ages and some of this stuff with George Washington and bonesetters, 'cause let's fast-forward now to 2021 and the COVID pandemic.  There was this guy; his name is Dr. Atul Nakhasi.  He's a physician and policy advisor to the L.A. Health Department.  And he wrote a LinkedIn post in October and he talked about caring for unvaccinated COVID patients in their 20s and 30s who are on ventilators and how they regretted not getting the vaccine.

I used to think LinkedIn was less like Twitter, but apparently it's not, when you look at the posts that people made in response to Dr. Nakhasi using these examples.  People accused him of being creeping socialist.  They talked about how CDC protocols are the things that are actually killing people in the first place; how drug companies prefer when more people sick, 'cause they make more money; how doctors are held at gunpoint and arrested if they say anything negative about vaccines; that vaccines are more dangerous than the disease itself; that the vaccines don't work; they cause fertility problems; less dangerous than the flu, etc. etc.

And that was kind of interesting to read.  My first thought is that some of these responses were from bot accounts designed to sow dissention in the West.  There was a study from the EU External Action Service that demonstrated that that's exactly what operatives have been doing on social media, which is to discredit the efficacy of Western vaccines.

And there was a piece in the "Journal of Medical Internet Research," that founds that two-thirds of all bots were discussing COVID in some way.  But a lot of these responses appeared to be real ones.

I understand people that started out skeptical about the mRNA vaccines.  COVID's the first disease for which the mRNA vaccine approach is being widely used.  From the very beginning, I was hoping to take Novavax.  I was hoping that the subunit protein vaccines, otherwise known as recombinant protein vaccines, would be approved early on, and those are the kinds of vaccines that all of us have taken our whole lives.

But it's taken, as usually does, it has taken the recombinant protein vaccines a much longer period of time to be approved, as they usually do.

Anyway, for the record, five things.  Number one, overall death rates in the United States have been much higher than normal.  COVID is the only rational explanation for that.  So if anybody tells you that, you know, there's miscategorized death certificates, just ignore them.  Number two, estimates for COVID's infection fatality rate--in other words, what's the chance of dying if you get it--are kind of all over the place.  But no matter which one you use, and we plotted 12 of them that we found, they're all much higher than the infection fatality rate for the flu and the range is anywhere from 20 to 80 times higher.

Now, how many people are actually dying of COVID versus dying from the flu, which is a function of the infection fatality rate and the frequency of the disease in getting it.  There's actually 20 states in the U.S. that report that data.  And in these states the unvaccinated COVID deaths have been about 8 times higher than the number of unvaccinated flu deaths, and the year isn't even over yet.

So that data is just for the period of April through October, and we're using for the flu the three years before COVID as a baseline.  So no, you know, anybody saying that COVID is less dangerous than the flu just simply doesn't feel like looking at information.

Number four, the mRNA vaccines are not 100% effective.  They were never advertised to be, but while there are signs of fading efficacy versus infection.  The evidence from the U.S. and other countries shows very high efficacy of mRNA vaccines versus hospitalization, ICU admission and death.  Particularly if you get booster shot, you are taking much better chances by being unvaccinated, and that's even before incorporating the risk of long-COVID conditions.

We have some charts in here.  I don't know how to make this any simpler than it already is.  The charts have one line for unvaccinated and another one for fully vaccinated, in terms of infection and mortality and you can look [phonetic] for yourself.

Of course, like everybody else, we're looking at and examining the data out of South Africa regarding Omicron cases and hospitalizations.  It's really soon in the process.  There is uncertainty around the timing of some of those original infections, so estimates of transmissibility are still very fuzzy.

Hospitalizations are rising, but there's a gap between the private and public hospitals in South Africa.  We need to have a couple of weeks of patients here before you start interpreting some of this stuff.  And also, within a couple of weeks Pfizer and Moderna should have completed their in vitro tests regarding the efficacy, at least in vitro, of their vaccines against this variant.

And then number five, the mRNA vaccines prevent negative COVID outcomes far more often than they cause myocarditis, and we have some data in here as well on that.

Anyway, if you're going to ignore all this information, you might as well just transport yourself back to the Middle Ages and take your chances there with a cocktail of leeches and hydroxychloroquine and zinc.

Anyway, to all of our clients, whether vaccinated or not, I wish you all a very safe and Happy Holiday season and you will hear from us next around the timing of the 2022 Eye on the Market outlook, which comes out on January 1st.  Have a great Holiday Season.

FEMALE VOICE 1:  Michael Cembalest, Eye on the Market, offers a unique perspective on the economy, current events, markets and investment portfolios, and is a production of JPMorgan Asset and Wealth Management.  Michael Cembalest is the chairman of Market and Investment Strategy for JPMorgan Asset Management and is one of our most renown and provocative speakers.

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