Market Briefing For Wednesday, Aug. 18

Stagflation is a condition I've discussed off-and-on for a couple months, the idea of a COVID-delta sobering, which suppresses economic activity just a bit, at the same time you still have elevated inflation, primarily due to wage hikes.

So the debate shifts to what the Fed will do this Fall, and the answer is they'll likely stand-back somewhat, but not reduce laying the groundwork for moving to tapering, if for no other reason that confidence infrastructure spending next year is going to lift the economy, and the Fed thinks they want to get ahead of the situation, and the 'curve' as is often referenced.

Whether the FOMC focuses on stagnation or inflation is less of a question we think, again because surging costs won't retreat (much of that is related to the horrible Western drought we've talked about influencing agricultural supply as well as prices), and they know things will be more robust post-pandemic.

That presupposes the pandemic is corralled and that's the big problem. Many are optimistic about 'herd immunity' essentially within a couple months, before we get into the 'riskier spread' of winter season.

This concerns me and is 'not' being discussed yet and is demoralizing. A not yet peer-reviewed study from Brown University found that babies born during the COVID-19 pandemic tend to have reduced motor, verbal, and overall cognitive performance when compared to children born before it began.

It's more evidence of the insidious and devious characteristics of this virus for sure far worse than any 'flu' or coronavirus Americans have experienced. But it is another aspect that an enemy trying to dumb-down our youth very well might target. Obesity and lack of intellectual curiosity are already endemic, so this 'bio-weapon' aspect only makes things worse. Separately I read a report from the U.K. suggesting an 'average' IQ decline of 4 in most who had COVID. (Yes I recall I mentioned that once, but worth tying the two together.)

Foremost calling 'peak COVID' has been Dr. Gottlieb, while this is contrary to the Oxford Professor or some in our official agencies like NIH and CDC. 'Peak COVID' leading to 'herd immunity is the goal, but nobody knows enough yet to reliably pontificate on arrival of that 'holy grail' epidemiology moment.

I'm pleased that some recognize monoclonal antibodies potential to help. For sure Governor De Santis creating a 'strike force' with monoclonal antibodies is a good platform to make more people aware of the use, even as CDC & FDA are unfortunately sort of lukewarm with their enthusiasm. Now Florida's scene lets the Governor try to get out of a corner he boxed himself into, but that's of course not the point, it's that he's actually helping regardless of his motives (I hope they are noble but also possible he benefits politically, and that's ok). By the way his counterpart in Texas, Governor Abbott, has tested COVID-positive.

Oils well that ends well, and Oils (along with Banks) are lackluster at best for now (OIL). The market is slumping but not terribly heavy, with Brent trading just below the 70 per barrel and WTI hovering around 66 / bbl. Despite the relative lull, longer term optimism (climate change, EV trends and more) limit decline to a degree. Short-term sentiment turned increasingly bearish as China’s July readings indicated its weakest refining performance since May 2020, at the same time as China's 'Retail Sales' also slid (which we think is broader COVID wave than admitted by Beijing). So while denting hopes of a robust Chinese demand bounce-back coming anytime soon, it doesn't change the long-term.

Upheaval in Afghanistan preoccupied our thoughts yesterday, as it should. It's not something to relegate to the 'back burner' although media may, because it has ramifications that will be with us for years, not to mention atrocious ideas of actually recognizing the barbaric Taliban regime.

Why would we do that in the midst of debacle and genuine horrifying images of Afghanistan falling quickly, with Americans or those who worked for allied forces still on the ground? It's not showing how futile nation-building efforts all are, though some, including President Biden, give that impression. America did failed to build sufficiently resilient institutions given ingrained corruption in that Country, but 'modeling' constitutions and governments after our principles is something to be proud of, and a tenet of foreign policy for decades. Shame, therefore, on trying to degrade the concept of helping establish human rights, as well as the heritage of 'republic' forms of governance, really globally.

Afghan government and armed forces were strikingly fragile. Far fewer troops than official counts existed (in effect, the U.S. was paying for more than actually were fielded). Commanders were willing to surrender and walk away for amounts as low as $300 from the Taliban, or promises of position. After all this is about power and money, religion is just a tool to control the masses in a place like that. Talk about poppy fields, cocaine or 'lithium' mines, and you have a better idea of what the Taliban are really interested in.

In-sum: 

A lot of good news is priced-into the averages, but not broad market. And that's the dilemma bears have faced all year dealing with a bifurcated as well as COVID-influenced market, with all the variables associated with that.

On top of being expensive for the Index, it's 'dog days of August', with limited interest in the markets for many traders, though hard to imagine vacations of a truly relaxing nature in this health-conscious environment. I even got turned down for a lunch date by a lovely lady, citing not risking going out during this 'COVID environment'. Good excuse but also makes sense (I venture out little, even with a combination of natural immunity and my first shot, other than gym time because exercises are essential as part of recovering some strength).

The market is trying to flex its muscles with an intraweek rally, but unlikely to get much of a move. The Government is now going to require masks worn at all airports and all airlines through January of 2022 at least, so that's a sign of low confidence of reaching immediate 'peak COVID' and getting things opening on a broader scale. All such restrains contribute bits & pieces to 'stagflation'.