Matthew: Hello once again, and welcome to the latest edition of Under the Macroscope, our weekly catchup with Skybound Capital’s Chief Strategist based in the London office, Jabir Sardharwalla. Our podcast is available on Apple, Spotify and the Google Podcast platform for Android. We thank you to those of you who have downloaded and subscribed already, and we’re getting some wonderful feedback. Please keep it coming.

Jabir, in the last couple of weeks, not surprisingly, vaccine programs, vaccinations have been a keen topic, and it’s no different this week. We’re one month almost to the day into a Biden presidency, and the vaccination program is rolling out certainly in the U.S. and the U.K. at great pace. There are, though, as you are quick to point out, certain things that can go wrong, and I guess a key topic for us this week will be the impact on the vaccination program and the continued rollout on growth.

Jabir: That’s right. Thank you, Matt. You’re absolutely right. I would say that it’s going to be a year that comes down to the vaccine rollout. That will determine pretty much everything that takes place. But, based on the latest stats, I have to admit it’s looking very impressive indeed. You cannot often use the word “exponential”, but this is looking very exponential, certainly in terms of the key players. Vaccination rates have now hit very high levels indeed.

To give you an idea, based on the current rate and building upon some fairly modest assumptions, the U.S. and U.K., as an example, should be reaching herd immunity by about April/May of this year.

It’s a coincidence that the talk about easing from this lockdown is coinciding with that timescale. I think overall; it’s going to be quicker than expected. But it’s not without its risks. I don’t think anyone is blind to this. There are a couple of risks that I see.

One is if we end up with another variation, a new strain on this virus, that does play havoc with the vaccines we have right now. We saw the challenge presented by the strain found in South Africa, for instance, on the current drug makers. So that is the one big unknown in all of this.

The other is in terms of manufacturing capability. We’ve seen, for instance, a bit of a setback in the Russian manufacturing scene, and they’ve now had to outsource a lot of their manufacturing to other countries, to 10 countries, in fact, across 15 manufacturers. Those countries include Brazil, China, India, South Korea.

These are very prevalent, but it’s very much subject to that. But the impact on growth once that easing takes place is going to be significant.

Matthew: We’re seeing that in some ways. You did a presentation to colleagues. Employment numbers, or rather more accurately, unemployment numbers, have changed rapidly, which indicates a real positivity in some major markets.

Jabir: Yes, I think the problem with certain indicators is that they are what economists would call lagging indicators. It’s a bit like driving and looking in the rearview mirror. What’s done is done. It’s in the past. It’s very difficult to come up with forward-looking indicators. Unfortunately, much of what we’re still seeing is based on timescales of between 30 days and possibly 60 days. It’s behind us. The point now is what happens when the easing begins? That’s why, unlike many others, I don’t place a huge amount of emphasis on unemployment numbers, because for the most part, particularly when you’re talking about developed economies which by definition are more, for instance, reliant on consumer demand. Their workforces tend to be quite flexible. For instance, the losses have been primarily and understandably in the service sectors. The pickup there, I would expect to be significant.

If you think about it, what’s been closed down? Restaurants, bars, public centres, malls, and so on. Well, once they start to pick up, you’re going to need people. You can begin to staff this again. I don’t see a major problem there. You see signs in the private sector of a pickup. The overall headline figure is still quite ugly to look at.

Matthew: What are the things that we need to look out for, Jabir, at a macro level, especially assuming that the programs roll out according to plan?

Jabir: The first thing we see right now is the situation with government 10-year bond yields. There already, I would hasten to use the word alarmingly seeing a dramatic pickup. The start of the year is an example. If you take the U.S. government 10-year bond yield, that’s in many respects the risk-free rate on the assumption that the U.S. government can never default and let’s pray that it never does. That started the year at about 1%. It was actually, to be exact, 0.99%. Today it’s already at around 1.3–1.31%. That’s a big move. It might sound small in the grand scheme of things, and it’s not going to damage anything overnight. Still, such a shift in such a short period, and here we are, roughly middle of February, illustrates how markets are pricing in the forward effect of what could be the result, the beneficial result of the vaccine program and what it all means. Again, it comes back to this rearview mirror, forward-looking type analysis. They’re trying to look ahead, and they’re saying based on what we know with the vaccine progress, this is what we’re pricing in. That would be point number one.

You can throw into the mix that the U.S. is trying to negotiate a stimulus plan. Biden has proposed a $1.9 trillion spending plan. That’s roughly 9% of U.S. GDP. These figures are staggering. That’s going to be financed through debt. That’s more public debt. Then you have behind the scenes all the sort of monetary stimulus that’s still going on.

Something else that then needs to be looked at as another indicator is the inflation indicator. Now, this is a hot topic. For a long while, I felt like I was in the lone camp. Now it’s like every other article you pick up; it’s around inflation. You are starting to see a pickup. Now we’re coming off such a low base that I think the general reaction here is, look, guys, we don’t need to worry about it. It’s fine. Obviously low base, supply constraints. That may be. The risk in that theory is that it’s a short-term phenomenon, and eventually, it will all correct.

I’m just not sure because I think the sheer public debt mounting this time around is significant. So created, orchestrated by the fiscal side of life that it’s not going to go away so easily this time. But it’s evident in some of the key ingredients. I mean, look at food. It’s easy, for instance, to look at food price inflation and say, “Well, okay, yes, that’s going up 3%, 4%, 5% per annum.” That alone is a lot. That’s significantly more, probably three, four, five times more than the headline rate of inflation. But when you dig even deeper, some of them are quite concerning, and they’ve seen huge price rises just this year alone. Whether you’re looking at corn or pork and hogs and all this kind of stuff. This is an important part of some certain country’s diets.

Then look at energy. You’ve seen what’s happened with oil. It’s gone through the roof. I’m talking about even before the severe bad weather that Texas is going through. Then you have precious metals; you have industrial metals. These have all shown big increases. At some point, that’s going to have to come through. You’ve got a limited supply chain at one end because of the cutbacks during Covid, and at the other end, you’ve got severe input prices coming in. Something has to give. That’s another one to keep an eye on.

Matthew: Inflation is never really that far from any conversation we have with you at the moment. I know you keep a very close watching brief. It’s probably worth bringing to people’s attention because it’s fascinating when you think about things this way. It’s not only rising prices that indicate inflation. You made a fascinating observation about the gaps between the triangle on a certain well-known brand of chocolate. We’re seeing the size of soft drinks diminishing, but the price not changing. Inflation isn’t just about what you see on the price tag. It can come through in various ways, but eventually, something has to give, as you say.

Jabir: That’s absolutely right. It’s almost like a magician’s trick. They get you looking in one direction, but you don’t think about the obvious, and often the answer lies in the obvious. That’s absolutely true. You mentioned soft drinks just now. That’s noticeable in the size of the bottle. It has been reduced from 1.5 liter bottles to 1.25 liter bottles. But guess what? There’s no change in the price.

Now, what is the definition of inflation? It is a sustained increase in the price, a sustained increase. But what about the inverse? Typically a sustained increase means the same amount, but it costs you more. What about the opposite? You pay the same, but you get less. Isn’t that inflation in stealth? That’s exactly what we’re seeing. Now manufacturers, to my mind, have been doing this for a long time. That’s part of the reason why I think we’ve got away with such low inflation, to begin with. I don’t blame economists for this. They need a measure at the end of the day. But you have to adjust for it. It’s like the old productivity debate. Technology has gone such a long way to enhancing productivity. Well surely you can factor in quantity changes to adjust for inflation baskets, but it’s never been done. I think the most frustrating thing to any consumer, certainly in the low to middle-income groups, is that they see their shopping bills go up, they see their utility bills go up, they see their energy bills, petrol or home heating bills go up, and at the upper end you have these authoritative figures, politicians and central bankers and eminent economists telling you, “No, we’ve got it under control.” It must be so damn frustrating. That is absolutely right. I think for many years, we’ve had inflation by stealth, and now it’s got to a point where it can’t go on. I think it’s got to manifest itself in official inflation.

Matthew: Well, no matter what the main key topics are of Under the Macroscope next week, we know that Jabir will always keep an eye on inflationary trends. There’s plenty to look forward to in Jabir’s week in review. If you want to subscribe to the podcast, go to Apple, Spotify and the Google podcast platform for Android. If you want to look at some of the past podcasts, they are available on Skybound Capital’s website, www.skyboundcapital.com. As always, our thanks to Jabir for his ongoing insights and until the next edition of Under the Macroscope, have a great week.

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