Hello and welcome to our video MacroMemo. This week, we will talk about a number of important issues.

We’ll begin, as always, with COVID-19 and the trends on that front. We’ll pivot from there to some long-term pandemic thoughts, perhaps where this eventually ends up a year or two down the road. We’ll then pivot over to perhaps firmer footing and we’ll talk about the economic situation, some strength in the U.S., some weakness in Canada, some trends elsewhere. We’ll revisit business cycles and the extent to which a mid-cycle is still a correct designation. And we’ll also briefly touch on inflation, which is high, but could be peaking on geopolitics which are certainly intense at the moment, particularly in Ukraine, and on central banks, who are very much in the focus for markets in particular.

Let’s start on COVID-19 and we can see some further improvement in COVID-19 infection numbers around the world. That improvement has been ongoing for a number of weeks now for the developed world, but it’s a new improving trend for emerging markets.

We can say infections at one point were rising in about 90% of the world’s countries; now they’re falling in about two-thirds of the world’s countries, so there’s been a real shift over the last month or so; Canada and the U.S. both in that group of improving countries.

There are certainly some exceptions, Iran, Russia, Germany, Japan are just a handful of a number of countries that are still seeing rising cases, but, for the most part, it seems like these are countries that are just coming late to Omicron. They got the Omicron wave late. I don’t think it’s a different story altogether.

Now, on the subject of different stories altogether, we should still be aware there seems to be this subvariant currently called BA2 or BA.2, and it’s still spreading quite significantly. It now is found in up to 57 countries; that’s from 40 countries just a few weeks ago. It seems to be more infectious than even Omicron, though initial estimates said it was twice as infectious, have since been ratcheted back to about 34% more infectious. But nevertheless, it does seem to be significantly infectious.

Maybe the good news here is that even as we look in countries where it is the dominant variant, and that would include Denmark and India, and now actually South Africa as well, those countries aren’t actually spiking in terms of higher caseloads. If anything, they’re high, but coming down a little bit, so that’s an interesting thought, that even if we do see this next variant take over the world, it doesn’t necessarily mean big new waves.

And in terms of trying to reconcile that, I suppose I can say really, it comes down to the idea that we have seen quite levels of vaccination now. Maybe even more importantly with Omicron, a lot of people have just gotten sick and built up natural antibodies. There may be less room for this next variant to operate, even though it is, in theory, more contagious, but that’s not the last word on variants to be sure.

In fact, on the subject of variants, and I suppose on long-term pandemic thoughts, let’s begin with the observation that it’s hard to predict where this pandemic goes from here.

I was recently reflecting back on the conventional thinking from the last few years and how wrong it had proven to be, and in early 2020, when this pandemic first began, the thinking was it would be gone after six weeks of lockdown. It was not an unreasonable guess to the extent China had locked down and had essentially eradicated the virus, but it turned out, the rest of the world had rather more porous restrictions and so that wasn’t meant to be.

I think back then, to early 2021 and a year ago, and vaccines were new and very promising, and the thinking was vaccines would eradicate the virus by last summer, and it wasn’t an unreasonable expectation. You just needed about 65% of the population to be vaccinated to get to herd immunity. But, of course, then variants came along, much more infectious variants, and it turned out you ultimately would need a level of immunity that was 90%, 95%, even 100% of the population, which just isn’t proving possible, and so previous predictions have been incorrect.

That may mean this prediction is incorrect as well. But as it stands right now, the base case thinking is that because of higher levels of immunity and vaccines and natural immunity, that we may see further waves. They could be somewhat less consequential, at least from a hospitalization and death perspective, and maybe even from an infection perspective as well. That’s not a bad guess. That’s probably a reasonable base case scenario. But let’s appreciate there are a wide range of actual possible outcomes and we could get lucky and this virus could become milder and cease to be relevant altogether, like the Spanish flu eventually did. It could become just a seasonal or a multi-seasonal flu-type situation, which is undesirable, but I think quite tolerable.

It could conversely though, and now turning to worse-case scenarios, it could evade immunity and put us back to square one with no immunity across the world’s population and/or it could become significantly more deadly and create problems requiring material restrictions for a very long period of time.

So a lot of different scenarios here. I think all are frankly plausible. I do think that antiviral drugs plus research right now on a universal coronavirus vaccine would go a long way toward undermining even the worse-case scenarios. So there are ways out of this, but nevertheless, as it stands right now, probably less consequential waves over the span of 2022, but let’s be humble and respect the fact that prior predictions were not exactly on.

Let’s turn from that and talk about the economic activity. And so the economic trend’s actually been very positive in the U.S. Here we are emerging from an Omicron wave and even in the month of January, which was arguably peak Omicron wave, we’ve seen surprisingly good U.S. economic data.

The latest news is that payrolls added 467,000 jobs in the U.S. in the month of January. That easily exceeded the consensus expectation. The twin ISM numbers, which give a good read of business conditions, indicate that there was some deterioration, but still a very healthy level of growth reported not just on the goods side, but on the services side as well, which is the high touch, of course, service area that would be most affected by a pandemic wave.

I can say our own real-time indicator for the U.S. shows a bit of weakness in December and early January, but shows pretty clearly something of a rebound since, and so it’s been a pretty good news story from a U.S. perspective.

I will say we do see evidence of more economic damage in some other countries because of Omicron. So, for instance, in Canada, where it should be said the restrictions were somewhat fiercer, Canadian business conditions have turned sharply lower according to Stats Canada in December and January. I can say that the January employment numbers for Canada just came out. They’re down 200,000 jobs. That means 1% of Canadian workers lost their jobs in January, which is a pretty tragic thing. Hours worked actually fell by 2%, so an even bigger drop there. So there is some pain on the Canadian side.

But I should say it does seem to be temporary. It’s very clearly linked to the restrictions. The job losses were all in places like accommodation and foodservices and recreation and retail, and so, it’s quite reasonable to think over the coming months, we should get all of that back.

On the broader subject of the business cycle, which is a way of thinking about the economy in a medium-term sense, I suppose, looking past the wiggles in the short run, looking past the long-term trends, and just saying where are we in this expansion. We’ve just revisited our scorecard system and it’s still telling us that we’re mid-cycle.

That was a new conclusion a quarter ago. It’s the same conclusion now. But nevertheless, we can see some forward movement beneath the surface. So, for instance, there are fewer claims to early cycle this quarter versus last quarter. There are more claims to mid-cycle, and there are more claims to late cycle as well, as much as it’s the third most likely scenario.

And so it’s mid-cycle, which is a pretty benign place to be and is associated with decent growth and means there should be a number of years of expansion left and so on. But we can see this is a cycle that’s moving quickly, and so this thesis we’ve had for some time that maybe the business cycle only lasts five or so years instead of the usual ten, that could still be valid. And then keep in mind, as well, risk assets like stocks are usually happiest the closer they are to the start of the cycle. So as we progress, you go from expecting robust stock market gains to more moderate gains in a mid-cycle type of environment.

Let’s spend a quick moment on inflation. And so inflation is still extremely high. It’s one of the big issues and threats out there from a macro standpoint, but we do think it will come down somewhat. Maybe not in the next month or two, but visibly beyond that and any number of reasons why.

We’re not convinced oil prices can stay this high indefinitely is one reason. But in terms of some new thoughts and some new developments, I suppose one of relevance is supply chains and just the observation that supply chains may be on the cusp of starting to improve. And we say that from a theoretical standpoint which is we’re past Christmas, we’re past Chinese New Year. The first quarter is normally a time for supply chains to breathe and so that’s an opportunity, but also from an anecdotal perspective which is to say that we can hear from a lot of businesses now starting to report they are seeing improvements in supply chains, even in the chip space. And so I think we are going to see some improvement which will help to take a bit of pressure off inflation.

By the way, as an aside, we should be aware as supply chain situation improves, some of that will be because demand for goods go down as demand for services go up, and that’s a normal thing. It’s a rebalancing thing, but we should be aware. That’s going to hit some goods producers. It’s going to hit the likes of China perhaps as well as a big goods exporter. So do be aware there’s a negative underbelly, I suppose, to that normalization process.

In terms of inflation. We’re also seeing real-time inflation measures start to steady if not come down a bit. So they’re not arguing for further increases in inflation so we’ll take that. And we’ve been thinking fairly hard about inflation today versus in the 1970s, and that’s its own big, long discussion which I won’t bore you with here, but I will say that while there are some similarities to the 1970s, a degree of politicization of central banks and, of course, lots of fiscal expansionary spending in both the ’70s and recently, I do think there are ultimately more differences.

And so the 1970s had just seen the elimination of the gold standard. So inflation was somewhat unmoored. The inflation of the ’70s was a negative supply shock which is a universally bad thing. This is mostly a positive demand shock which has more constructive interpretations. And demographics are very different. It was a young population which lends itself, we think, to inflation. Today, it’s a much older population which lends itself, if anything, to deflation. And so on a number of fronts, we do believe inflation will get less high, at least by the spring if not before.

Let’s spend a moment on geopolitics and so I’ll focus on two things. The first is the Ukrainian situation and I’m happy to say when I look at some of the betting markets out there, they had been indicating a 75% chance of a Russian invasion. They’re now indicating about a 65% chance. We had thought the odds were below what the market was thinking back when the number was 75. I’d still say the same thing now that it’s 65. The odds of an invasion are somewhat below that. NATO has now awoken.

There are ways for Russia to win without invading such as just boosting President Putin’s popularity in Russia, and we’ve actually seen that happen. His popularity has gone from really its lowest point outside of the worst moment of the pandemic in the spring of 2020. The lowest level in years to actually one of the higher levels that we’ve seen recently, in large part because of the threats that have been made to Ukraine, but the point being you don’t actually have to invade to achieve that kind of goal. So there are a number of ways that an outright invasion can be avoided, we think though, though not with absolute certainty.

And then on the subject of U.S. politics. I know we’re some distance out but the midterm elections in the U.S. are nevertheless approaching. They’ll be in November. And it’s worth flagging that President Biden’s popularity is significantly down. Republican affiliation is way up. Markets are giving an 80% chance that the Republicans claim the House of Representatives, a 70% chance they claim the Senate. Now, that could yet change, but as it stands right now and given historical pattern of midterm elections, it seems quite likely that there will be a divided—well, perhaps not a divided congress. Perhaps an all-Republican congress but nevertheless, one divided against the White House such that legislation will be awfully hard to come by over the subsequent couple of years though there is some scope for executive orders. Maybe the bigger message is one of 2024. Could be a very interesting election, though that’s some distance off.

Let me finish with a few thoughts just on central banks and it’s a familiar refrain. It’s that central banks are still hawkish and so the Bank of England has raised rates for a second time. The European Central Bank is no longer promising that it won’t raise rates in 2022. In fact, it looks fairly likely, we think, that it will.

The U.S. Federal Reserve seems very much primed to raise rates in March. It says that inflation is where it—well, not where it needs to be but beyond where it needs to be. It says the labour market is where it needs to be. It’s indicated it thinks it can do a fair amount of tightening, such that people are speculating about rate hikes at consecutive meetings which is unconventional, at least by the standards of the last few decades. And so there’s some real rate-hiking coming in the U.S.

For Canada, it’s not a different story. It really is very similar. The only twist is the Bank of Canada didn’t raise rates in January even though the market had expected that. So there was a slight delay there but the market has not been dissuaded over the medium run which is to say that now seven rate hikes are expected over the next seven meetings in Canada. That seems like a lot to us. We might take the under on that as well, but significant tightening certainly seems to be on its way.

Just be warned that there’s a higher level of data dependency in all of this than usual. We’re not getting central banks that are holding our hands and telling us what they’re going to do for the next year. There is an element of uncertainty around that. So there could yet be substantial surprises. Not to the extent of no hikes at all, but whether it’s seven hikes or four hikes or three hikes or something else, there is a lot of question about that. And, again, we would tend to take the under as opposed to the over on that subject. Okay. I’ll stop there. Hopefully, you found some of that useful and perhaps even interesting. Thanks for sticking with me and please tune in again next time.