They may well be right. But it’s uncomfortable that quite so much is riding on it.
CoronaNumbers
That leads to another question. Why so bearish about the economy all of a sudden? The obvious answer begins with a Greek letter. The delta variant has plainly had an impact on the latest round of economic numbers, and it would make sense if it had also had an impact on economic expectations. As summer started, the general expectation was that North America and western Europe would be fully back to “normal” by now, and they aren’t.
But a look at the data on the virus suggests that rather than a reaction to the pandemic, we are instead witnessing one of the purest and most deadly expressions of political risk on record. The toll of the virus is increasing, and its progress has confounded much expert prognostication once again. But it is political differences, which generally have more to do with some kind of tribal allegiance than with any ideology, which are driving negative outcomes. It looks to me as though investors perceive it that way, and that the coronavirus itself is no longer their greatest concern.
That is made clear by another handy chart from the BofA survey, which has been noting what percentage of managers view Covid as the biggest tail risk out there since last April. Here is the latest one:
Delta did indeed register on investors’ radar, but their concern has already peaked and begun to decline. The big issues for them concern inflation and bonds, rather than another pandemic wave. And if we look at experience in Europe, where many BofA respondents are based, you can see why. NatWest Strategy in its regular roundup of Covid-19 data publishes charts of excess deaths, arguably the most reliable tally of the ultimate human cost of the pandemic. Below is the chart for England, the country where both the alpha and delta variants made their first big impact on the Western world. The scale is in terms of difference from the norm; the blue dotted line is the base line, or the number of deaths we would normally expect for that time of year. Anything above the red-dotted line suggests deaths in excess of anything that can be explained by normal random variation. It tells quite a story:
Statistically, last year’s first wave was indeed as horrific as it felt at the time. But the delta wave has caused no identifiable increase in deaths beyond what we would usually expect. Indeed, the English death rate in recent weeks has been unusually low. So although it does create problems, these data seem to confirm that the contagion is under control in the U.K.
Now to compare with the U.S. In the following chart, I have indexed both the U.S. and the U.K. death rates to their peak during the first wave in the spring of last year. This seems to be the fairest way to gauge the relative severity of each wave for each country. The difference is startling:
