Another month, another wave of COVID: We have arrived at variant Omicron, and I wonder what we will do after finishing the Greek alphabet. Alpha-alpha, starting all over again? In the UK, the Scots talk of a COVID “tsunami” and England’s Peppa-Boris was quick to call it a “tidal wave” in response. The media are undecided whether the recent strain is much more benevolent and only flu-like, with hospitalisations picking up slower than with previous variants; or more dangerous, as Omicron is vastly more infectious.
At the time of writing, British health authorities estimate already 200,000 people to be infected in a matter of days. New lockdowns threaten, and we in Malta are ordered to wear masks outdoors, against any plausible transmission theory.
This leaves us insecure and scared, and it will damage tourism and hospitality further, even without a formal lockdown. Countries like Italy, France and Austria, which have largely missed out on a winter season in 2021, have to fear for the worst. Winter vacations in Austria, for instance, constitute four per cent of GDP.
After last year’s blow, hotels and restaurants already struggle to hire as their workers do not want to risk another season in limbo. The Austrian hotels we regularly frequent in winter have turned into B&Bs, incapable to employ enough kitchen personnel to feed its guests. Sadly, the restaurants in their surroundings are facing the same issues.
As a consequence, airline shares and cruise ship operators have tanked once again, followed by hotels and eateries. As I have pointed out in previous columns, inflation has widened now to all items in the consumer basket, embracing purchases and services seemingly unrelated to the immediate effects of lockdowns and reopenings, like supply bottlenecks or the disproportionate preference for goods over services.
Most salient are sharply higher salaries, house prices and rents, even though energy costs have come down noticeably over the last few months. This holds true for all countries, even deflationary economies like the eurozone and Japan, but became a real worry in the US, with inflation readings not seen in 40 years. What US monetary and fiscal authorities will wish to do about it will have implications for all of us. Galloping inflation, and hence higher interest rates in the US, will feed through.
Most observers seem to agree that the Federal Reserve will withdraw liquidity and raise interest rates more speedily than envisaged only a couple of months ago. The US central bank is stuck in an unenviable situation. Monetary action takes long to yield effect. Bank of England deputy governor Ben Broadbent reckons with a time lag of at least 18 months. If the Fed does nothing, it is damned. If it plays by the book and tries to catch up with a clearly deteriorating situation it will be cursed. Growth will stall and markets will tank.
What ups the ante are huge cushions of cash accumulated by both enterprises and consumers, which means that higher interest rates may have a negligible impact for longer. The risks of overdoing it are high, while an even modest lifting of interest rates to say 2.5 per cent will wreak havoc on financial markets. The force of reduced liquidity and rising rates is hard to calculate and will be augmented by fiscal retrenchment. Most countries are unwilling to extend their generosity towards labour and corporations much further and will start to heal their damaged budgets.
There’s even the likelihood for all conflicts breaking out in concert, possibly even agreed- Andreas Weitzer
It is therefore little surprise that both the progression of the pandemic and (US-led) monetary tightening are in the crosshairs of investors. As outlined earlier this month both shares and bonds are imperilled, as will be most alternative investments. With consumption skewed towards goods, and essential workers fleeing to more predictable jobs or escapism, inflation may stick around for longer than anybody would have expected. Supply may still struggle in a year’s time, suffering from new waves of infection, labour scarcity and ongoing logistical hiccups.
Sadly, apart from these known unknowns, we retail investors will have to deal with geopolitical risks that we have been only too happy to ignore, despite recent experiences of embargoes and trade skirmishes. The US, and we Western allies, face simmering conflicts in the Middle East and with Russia and China, which will be dealt with in the usual way – with ignorance, incompetence and short-termism.
At the turn of the millennium, after having successfully extended NATO to include former Soviet republics, we started to flirt with Ukraine too, hinting at possible EU membership and inclusion under a defence umbrella. Promised Western financial support never materialised, but we took a stance when the Orange Revolution deposed of Russia-devoted politicians and lately started to supply arms to the Ukrainian nationalist government, friendly ignoring the mistreatment of their sizable Russian-speaking minority.
The stalemate we have arrived at is unsolvable. Russia wants guarantees to stop more deadly weapons being delivered to Ukraine and to legislate a halt to NATO extension, both being incompatible with sovereignty ‒ ours and Ukraine’s. A Russian invasion of the eastern, Russian-speaking part of Ukraine seems certain, and with it a wave of embargoes against Russia.
Among the damaging ideas now aired are banning USD/Russian rouble exchange, exclusion from the SWIFT payment system and the mothballing of the Nord Stream II pipeline. Be prepared for an EU winter with higher heating bills and a return to coal power.
China’s shockingly nationalistic and aggressive stance in Southeast Asia and its ever-increasing military might is countered by the US and its allies with dangerous ambiguity, particularly towards Taiwan, which is a microchip-producing powerhouse we all depend on. Any kind of armed conflict between China and the West will have devastating consequences for the world economy, but it will be equally devastating if we decide to prevaricate and to look on as China takes over its democratic sister country by force, as it recently did with Hong Kong.
The ephemeral line to tread between plausible defence commitment and unnecessary provocation of a Chinese leadership as irascible and irredentist as Putin’s Russia, is too thin to be visible.
Talks between parties about how to resurrect the Iran nuclear agreement, known as the Joint Comprehensive Plan for Action, brokered in 2015 and broken by the Trump administration, are in the meantime idling on in Vienna. The Iranians, who in the last few years have substantially added to their pile of fissile material, demand a stop to crippling embargo measures imposed by Trump as their condition for a new, lasting agreement.
The US wants to square the circle, demanding that the Iranians comply with the suspended agreement while insisting on embargoes that violate it. The Biden administration also intends to increase the scope of a resurrected agreement to include any missiles and the disarmament of Iran-allied militias in the region.
The Gulf States, tired of the war in Yemen, vying for business with Teheran and wishing to go nuclear too, believe any agreement is better than nothing. Israel at the same time is drawing up plans for a bombing raid on all of Iran’s nuclear facilities.
Any of the above-described areas of conflict can go hot at any time in 2022 with cataclysmic consequences for consumers, inflation and economic growth and hence our portfolio. There’s even the likelihood for all conflicts breaking out in concert, possibly even agreed. That said, I wish my readers a happy, prosperous New Year. Sometimes there’s more divine fortune in our endeavours than we deserve.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com