Europe: The Final Lockdown(?)

 It's the final countdown... I guess there is no one to blame...

The song 'the final countdown' was published by the band Europe in 1986 and has one of the most famous keyboard riffs in the 80s pop era. Interestingly, the band members first thought it was too dumb to be used in a song and nearly threw it away. 

This brings me back to today's events. More and more European countries are preparing for lockdowns again or are already in the middle of it. Austria, once again, is a pioneer: the government has sent 30 % of its population into prison home-quarantine (except for buying food and going to work), just to impose a lockdown on its whole population a few days afterward.

At the latest, everyone should understand that Covid-19 infection rates are coming and going in a seasonal pattern, just like every other coronavirus. The winter wave is running the same way as last year (mostly because politicians changed nothing on their approach). Regardless of what politicians order, at some point, infection waves break. Clearly, Spain and Sweden (as you can see above) reached their peaks in infection waves around New-Years-Eve, while Austria reached its peak around November 20, 2020, and this year the rise repeated. 

That is why I suggest being cautious if one points to Spain and Portugal as proof that vaccination reduces infection rates. The weather is still very mild in November there, while Austrian weather, for example, is already around 0 degrees Celsius. My guess is that infection rates will rise there as well soon.

Comparing infection rates between countries is extremely difficult because all European countries test in different manners: While Austria tests like crazy (non-vaccinated, kindergarten, schools) since the beginning of 2020, Scandinavian countries solely test people with symptoms. Anyway, while Europe sang that there is no one to blame, this is not true anymore...

If you have a scapegoat, the day will be structured!, said German comedian Volker Pispers in one of his sketches, and European politicians, eager to cover up their total failure, already point their finger to one. The unvaxxed are the ones to blame!!11! For the rest of the Winter, they will be ordered to stay at home, doing nothing apart from working and buying food, while the vaxxed will enjoy at least a tiny fraction of freedom. (At least they are not locked down into quarantine camps as Australia does with the infected people).

Do not get me wrong: Vaccines save lives, and every one of a certain age or a specific other risk factors should get vaccinated to diminish her risk to die (or to get into the hospital) from covid, at least for a certain period after the shot. But at some point, everyone has to forget about the idea that the current vaccines prevent someone from spreading the virus and that immunity (in the sense of a milder sickness) is somewhat diminishing over time. This would explain why countries with high vaccination rates are confronted with a rise in hospitalizations. An argument for the booster shot...

Nevertheless, even handing out boosters will not stop the transmission of the virus (breakthrough cases are increasing). A study from Israel (they studied airport-test data) found that vaccination only lowers infection probability by 35 % compared to unvaccinated. According to the authors, Boosters are maybe at least 60 % effective. Additionally, the scientists criticize the system of the green pass, arguing that this might increase the infection rate because the number of infected persons within the group of the vaccinated is at least as high as with the unvaccinated. 

However, politicians do not want to hear that, and thus every scientist with a different opinion was excluded from their task forces. On the contrary, Austria came forward, stating that it implements compulsory vaccination. Ursula von der Leyen (the EU commission president) said that there need to be European-wide vaccine mandates this week. (Of course, because if there are national laws, it is much easier to get rid of them again...)

According to the ECDC, 66.2% of all citizens are partially vaccinated. If one wants to force the vaccine on the unvaccinated (because they are so good, apparently) and give them 1 to 2 booster shots a year, as many expert statements suggest, this would be the creation of a bureaucratic monster. 

Additionally, many people argue that the vaccine is safe and even a young person has less risk from vaccination than from infection. But what if the shots need to be repeated yearly (or half-yearly)? Then my guess is that every shot increases the risk of side effects. At some point, young people have a higher risk of suffering from side effects from the shots than from catching covid (If you disagree, please write me a message and explain to me why this is wrong). Thus, this is not about health anymore but about compliance.

Especially in Germany and Austria, it is en-vogue to have a scapegoat to cover up its own incompetence: Germany has reduced ICU units in 2021, and nothing was done to increase the number of nurses. On the contrary, as at least 10 % of all nurses are not vaccinated, compulsory vaccination poses a significant risk of worsening the situation.

One will be fired if one points that out, like someone from the LMU hospital in Munich. As Mao Zedong once said: Punish one, Teach a Hundred! Within two years (scary enough), a world with a very open society has turned back into a world where governments are cheered for segregating minorities. Frightening. 

However, all of that means political tension: Politicians always claim that a high vaccination rate will guarantee that everyone can be free again and that lockdowns can be ruled out, but honestly: after we are two years in this pandemic, why should someone who is already critical to government believe at least one word of their promises? Everything that governments claimed to be a conspiracy theory (remember, those are the very same people who want to ban fake news from the internet) has happened: the first lockdown. Mask mandates. The second lockdown. Segregating unvaccinated from vaccinated. Compulsory vaccination. Sadly, it's very likely that we will see more political and social unrest soon.

Although infection rates in the US are still lower than those in Europe, those numbers start to rise, and so will hospitalization rates. At least US courts turned down obligated vaccination for workers in big firms.

Like everything in economics or life, actions have consequences. So do government-imposed restrictions. In the DACH region (Germany, Austria, and Switzerland), children's psychiatric clinics are overflowing, directly resulting from covid policy measures. Many of the consequences for the children are unseen today and only will become apparent in some years (luckily for the politicians, there will be others at the helm to deal with that problem).

What does this mean for the economy? Already now, we see that lockdowns reduce the availability of services, and thus demand durable goods rises. This will continue with more lockdowns and means tailwind for inflation. 

Accountable for inflation is primarily the rise in money supply, and only secondarily, supply chain disruptions and high energy prices. Wrong monetary policy has artificially elevated demand, which washed trillions of dollars/euros into the system. At the same time, supply could not catch up with it because of all the lockdowns and restrictions. 

Further, Europe already suffers from high inflation rates. While CPI numbers are below US numbers (at least for now), PPI-indices explode all over Europe. Spain PPI YoY rose 30(!) % in October, Italy 25 % YoY, and even more astonishing is Italy's MoM PPI in October: 9.4 %! 

German CPI is already at 6 %, and while Isabel Schnabel (ECB) said this probably will be the top, I tend to disagree. Eurozone inflation was 4.9% in October, and rising producer prices will spill over to them. These spillovers from producer prices, the slowing service sector, and high freight rates let me conclude that inflation has still not topped. 

Lockdowns lower supply, drive people away from lockdown affected industries, and hinder efficient allocation of workers. Transfer payments, either to unemployed or because of reduced working hours, are inflationary, and so are energy-transfer payments or corona-bonuses. 

If the proponents of school closures prevail, this has an additional negative effect on workers' supply. That means the pressure for companies to pay higher wages.

However, lockdowns, compulsory vaccination laws are not the only problem on the horizon for the world economy. Last Friday, news about a new coronavirus variant came up: Omicron, from South Africa. According to scientists, more infectious but less severe (that is known now). However, this was enough to cause a collapse in yields and stock prices around the globe.

Given that the variant is already spread around the world, it does not seem so far-fetched that the variant has been circulating for quite a while now. Interestingly, the news about Omicron arrived two days after South Africa asked Johnson & Johnson and Pfizer to stop delivering more vaccines because they have enough doses. The situation in Africa has been less complicated than in the Western world. Few people died from covid. Bloomberg reported that approximately 80 % of all South Africans had already been infected in August. Still, nevertheless, now some scientists and politicians (why does everyone need to be a salesman for Biontech-Pfizer?) try to force additional vaccination to unvaccinated Africans because those are the cause of many mutations. 

However, at the beginning of the week, stock markets have calmed down until Moderna stated that there needs to be a new, modified vaccine to combat the new variant. Markets had already given up gains, and then Jay Powell started to testify before congress. 

In his statement, Powell said that the Fed now acknowledges that inflation is not transitory (although in reality, he said that one should not describe inflation as transitory). Tapering could be much faster than previously stated. Since then, the stock market has been under pressure, on the one hand, because of Omicron and on the other hand because of Powell.

What is going on in the bond market is even more interesting. As I wrote many times here, those statements do not always lead to rising yields. The curves flattening continued this week, with the 30y US-treasury yield back at levels from January (!) this year. The 20s30s part of the curve is already inverse as investors see trouble ahead for the economy. 

The Fed is trapped: To raise rates or not fight inflation? Better wait until the outlook worsens, but risking even higher inflation? 

My view: The Fed knows that they are trapped, and they also know that (despite many mistakes) the market still trusts the Fed to do the right thing. The Fed has to bring up tapering and possible rate hikes on the table to stay credible. 

However, even rate-hikes may lead to the opposite: more inflation (remember Joseph Wang's argument?). QE may have caused so much damage to the system that higher rates may cause increased lending and thus higher inflation. 

I think Jay Powell is praying for another unforeseeable event that allows him and the Fed to reverse course again to be able to kick the can down the road further. 

The Final lockdown(?), growing political tensions because of compulsory vaccination, and segregation of the unvaxxed in Europe + Omicron do not make the current situation in financial markets not easier. And apart from that too...

Have a great weekend!
Fabian Wintersberger

NOTE: A previous version said that 'suicides went through the roof'. This was wrong. I deleted the sentence!

Disclaimer: This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions, or organizations that the owner may or may not be associated with within a professional or personal capacity.