Logic (noun)
- a proper or reasonable way of thinking about something : sound reasoning.
- a science that deals with the rules and processes used in sound thinking and reasoning
a particular way of thinking, especially one that is reasonable and based on good judgment:
When Britain irrationally and illogically put South Africa on the red list last week, and named the new B.1.1.529 variant another variant from South Africa, they did so without seemingly giving sound thinking or reasoning to the issue. And the consequences were dire – not only for South Africa who are about to embark on their annual summer holidays, but the fears of another wave of infections spooked the world markets and governments around the world.
The poor Americans were on their Thanksgiving long weekend, when the half day markets in the US dropped dramatically on thin “risk off” trade. The S&P 500 dropped 3.2% on thin trade. But what does Omicron mean to investors and market watchers?
From what we have heard so far, it seems that Omicron is more infectious than previous variants, but the symptoms are milder. It also appears that this variant is more resistant to the vaccinations that have been developed thus far.
If the variant is resistant and no milder, there is a chance that there will be more restrictions in place around the world – remembering that the northern hemisphere is in their winter where people are more vulnerable. That would be bad for economies, but as I am writing, it doesn’t seem to be the case. What Omicron has done has shifted the monetary policy expectations. If there is a slow down in opening up the economy and growth is weakened it would be harder to raise rates and ease liquidity in the market.
Meanwhile, inflation does not seem to be letting up. Unemployment in the USA has started to fall, and the Initial Jobless Claims have fallen to multi-decade lows. Personal Consumption Expenditure – which is a good inflation indicator – has risen to multi decade highs and inflation has risen at the fastest rate seen in the last thirty years. The inflation has been driven by consumer spending on goods rather than on services. If the pandemic delays the opening up of the economy people are likely to spend even more on goods. And so the tussle between pandemic driven looser monetary policy and inflation led tighter monetary policy begins.
The oil price fell on the news of Omicron. It has been trading at elevated levels since the developed world came out of lockdown in the northern hemisphere summer. The oil price has a big effect on inflation – it tends to influence the price of most things as a result of the transportation costs, so a falling oil price should be good for the inflation print.
Emerging markets are affected differently. If this variation does cause a problem for the pandemic, emerging market countries will have another tough year with economies slowing and already indebted countries having to support industries and individuals affected by the virus. A country can’t print money if there is no revenue to service the debt. South Africa is slightly better off than some of its counterparts, but heavily constrained nonetheless. While the dollar strengthens as funds flow to safe haven treasuries, along with the lower oil price and an ongoing pandemic, it is difficult to see how emerging countries will manage.
The things to keep an eye on over the next few weeks will probably be the strength of the dollar – rather than rand weakness – and how the oil price moves – as an indication of whether more severe lockdowns are expected or not. The volatility index is also an indication of fear or greed (it is an index based on the cost of options used to buy protection), and it has traded sharply higher since the news of omicron emerged.
As always, please feel free to make contact if you have any questions! Otherwise, the team at Compound Growth wishes you a safe and happy holiday season. Here’s hoping that travel will be allowed and planned trips will be allowed to continue!!
Logic has left the building
Logic (noun)
a particular way of thinking, especially one that is reasonable and based on good judgment:
When Britain irrationally and illogically put South Africa on the red list last week, and named the new B.1.1.529 variant another variant from South Africa, they did so without seemingly giving sound thinking or reasoning to the issue. And the consequences were dire – not only for South Africa who are about to embark on their annual summer holidays, but the fears of another wave of infections spooked the world markets and governments around the world.
The poor Americans were on their Thanksgiving long weekend, when the half day markets in the US dropped dramatically on thin “risk off” trade. The S&P 500 dropped 3.2% on thin trade. But what does Omicron mean to investors and market watchers?
From what we have heard so far, it seems that Omicron is more infectious than previous variants, but the symptoms are milder. It also appears that this variant is more resistant to the vaccinations that have been developed thus far.
If the variant is resistant and no milder, there is a chance that there will be more restrictions in place around the world – remembering that the northern hemisphere is in their winter where people are more vulnerable. That would be bad for economies, but as I am writing, it doesn’t seem to be the case. What Omicron has done has shifted the monetary policy expectations. If there is a slow down in opening up the economy and growth is weakened it would be harder to raise rates and ease liquidity in the market.
Meanwhile, inflation does not seem to be letting up. Unemployment in the USA has started to fall, and the Initial Jobless Claims have fallen to multi-decade lows. Personal Consumption Expenditure – which is a good inflation indicator – has risen to multi decade highs and inflation has risen at the fastest rate seen in the last thirty years. The inflation has been driven by consumer spending on goods rather than on services. If the pandemic delays the opening up of the economy people are likely to spend even more on goods. And so the tussle between pandemic driven looser monetary policy and inflation led tighter monetary policy begins.
The oil price fell on the news of Omicron. It has been trading at elevated levels since the developed world came out of lockdown in the northern hemisphere summer. The oil price has a big effect on inflation – it tends to influence the price of most things as a result of the transportation costs, so a falling oil price should be good for the inflation print.
Emerging markets are affected differently. If this variation does cause a problem for the pandemic, emerging market countries will have another tough year with economies slowing and already indebted countries having to support industries and individuals affected by the virus. A country can’t print money if there is no revenue to service the debt. South Africa is slightly better off than some of its counterparts, but heavily constrained nonetheless. While the dollar strengthens as funds flow to safe haven treasuries, along with the lower oil price and an ongoing pandemic, it is difficult to see how emerging countries will manage.
The things to keep an eye on over the next few weeks will probably be the strength of the dollar – rather than rand weakness – and how the oil price moves – as an indication of whether more severe lockdowns are expected or not. The volatility index is also an indication of fear or greed (it is an index based on the cost of options used to buy protection), and it has traded sharply higher since the news of omicron emerged.
As always, please feel free to make contact if you have any questions! Otherwise, the team at Compound Growth wishes you a safe and happy holiday season. Here’s hoping that travel will be allowed and planned trips will be allowed to continue!!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.