USA cases average back above 100,000 per day = seasonal impact. Why "transitory inflation" is our base case. 1.96% of the 2.57% rise in inflation looks transient.

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STRATEGY: Myth vs Reality –> Omicron + Inflation –> Our biggest variance is bet on “transitory inflation” in 2022

MYTH vs REALITY: Omicron sowing public fear greater than its apparent health risk
Omicron continues to be front and center in the media headlines, reflecting the high anxiety of individuals, health experts and policymakers.

– it will be sometime before conclusive and global clinical data is available on Omicron
– but the incoming anecdotal information shows Omicron may be less lethal than expected
– this would be a positive development
– Dr Gottlieb below, notes that the risk of contracting Omicron remains low
– Americans should be worrying about Delta variant

…Americans are frantically googling Omicron, matching Delta at its very heights in late July
But the panic among Americans is far beyond the tangible health risk. This is evident looking at google searches for Omicron:

– Omicron searches have gone parabolic
– nearly matching Delta in late July
– Delta variant cases were peaking in late July

– thus, google searches show a level of interest that was never evident in the first 3-4 weeks of the Delta surge

Why are consumers so much more anxious about Omicron? Is this PTSD from COVID? Is this just the media overly focused on this? Why are policymakers panicking?

– this just underscores to me the chasm between perception and reality

STRATEGY: MYTH vs REALITY –> Why one could argue US inflation is transitory
Arguably the more important issue facing markets is the future developments around inflation. It is obvious that inflation concerns are central to market thinking. Take a look at the latest BofA survey below:

– clients list “inflation” as the biggest tail risk
– COVID-19 is 5th and below “asset bubbles”

This survey is from early November, before the Omicron became the subject of mainstream focus.

But it is more than just investors asking about inflation. Many notable public figures also list inflation and more specifically “hyperinflation” as a high probability risk. In fact, take a look at these tweets below:

– Jack Dorsey, founder of Twitter, made this comment in October 2021
– Michael Burry, of Big Short fame, made similar comments in Feb 2021

And google trends shows that parabolic surge in searches for “hyperinflation” since late October. This latter part does worry markets, because it is a change in consumer inflation expectations that is what could impact behavior in the economy.

…Inflation (core CPI) is running hotter recently than last 10 years, and consumer starting to expect higher inflation
Inflation has increased in the past few months (see below) and consumer inflation expectations similarly surged.

– the consumer forecast is 7.6% inflation, vs core CPI of 5.6%
– but as chart below shows, consumers average inflation is 5.25%, so this is not as dramatic a rise

6 items drive 1.96% of the 2.57% CPI increase
Our data science team, led by tireless Ken, looked at the top 10 contributors to Core CPI based upon their respective weights:

– Core CPI is 4.60% (last 12 months) vs 2.03% (2010 to 2019)
– this is a rise of 257bp, or 2.57%
– the top 10 categories (of 30) are the bulk of the increase (see below)

Here is what is interesting, it is the contribution of the top 5 categories:

– top 6 are
– Shelter +24bp
– Used cars and trucks +93bp
– New vehicles +43bp
– Household furnishings +34bp
– Recreation Services +12bp
– Apparel +14bp

…These 6 items fall into the “core goods” area and you can see this uptick is a break from historical trend
I know this sounds obvious, but these items fall into the “goods categories” more than they fit into services. And as this JPMorgan chart below shows, core goods have not seen inflation for a decade.

– and now core goods CPI is surging

…Core goods are up due to supply chain glitches or due to “revenge spend”
Think about why CPI for these components are up. We made a table below to highlight this and used 3 categories:

– supply chain related,
– revenge spend
– structural

Of these, only shelter seems structural and that is only adding 24bp.

– the other categories, in our view, are transitory
– these added 1.96% or 196bp of the total
– thus, 1.96% of the 2.57% is arguably “transitory”

…Understanding what is inflation
This is probably too basic for many clients, but we need to think about the future trend/ outlook for prices. Below are 3 price trend charts:

– price keeps going up
– price stabilizes
– price goes up and falls

Below is the calculated inflation impact from these. As you can see, there are 3 completely different inflation patterns:

– only the first one is inflation
– the second is transitory as inflation drops to zero
– the last one is transitory turning into deflation

What is the point? Does one really believe core goods prices will “keep” rising at this pace? We can look at this more closely.

Used car prices have gone parabolic since 2020 and if believe this is the trend, then we have inflation
Simply, do you believe this is the future of used car prices? This is the Manheim US Used Vehicle index price. And is a good measure of the resale value of a used car. This impacts the auto industry broadly as lease rates, etc incorporate used car prices.

– this is showing 50% gains YoY
– this is contributing almost entirely to a 2.0% rise in inflation rates

…US automaker inventory is 61,000 cars versus 1.3 million average since 1967
To answer whether one believes higher car prices are permanent, take a look below. This is the US automaker inventory since 1967

– averaged 1.3 million cars
– current value is 61,000

Yup. There are few cars in inventory. Once supply chain pressures ease, this inventory should rise

– rising inventories will boost GPD = good
– rising inventories should lead to easing used car prices = good

In other words, much of the core goods inflation would be transitory.

SECTORS: Leadership still Cyclicals/Early-cycle aka Epicenter
Relative sector performance is shown below and as we can see, 5 sectors are showing positive relative trend:- Energy
– Basic Materials
– Technology
– Transports
– Discretionary

– sort of Financials/Banks

These are all cyclical groups. And also have general positive exposure to reflationary trends. Inflation, incidentally, in isolation is not a bad word. The real risk to markets is:

– too much inflation hurting consumer confidence
– or unanchored inflation expectations, fear of uncontained inflation

This is not necessarily what markets seem to be pricing. If markets were worried about either of the above, Defensive stocks or Growth stocks would be leading. Instead, we are seeing Cyclicals lead.

Into YE, our recommended strategies are:

– Energy
– Homebuilders (Golden 6 months) XHB
– Small-caps IWM 0.05%
– Epicenter XLI 0.11%  XLF 0.60%  XLB 0.85%  RCD
– Crypto equities BITO 2.64%  GBTC 2.72%  BITW 3.20%

Into 2022…
– Industrials

30 Granny Shot Ideas: We performed our quarterly rebalance on 10/25. Full stock list here –> Click here

POINT 1: Daily COVID-19 cases 205,617, down -15,165 vs 7D ago…

Current Trends — COVID-19 cases:

• Daily cases 205,617 vs 220,782 7D ago, down -15,165
• Daily cases ex-FL&NE 202,903 vs 215,993 7D ago, down -13,090
• 7D positivity rate 7.4% vs 10.2% 7D ago
• Hospitalized patients 54,800, up +12.1% vs 7D ago
• Daily deaths 1,226, up +43.2% vs 7D ago

*** Florida and Nebraska stopped publishing daily COVID stats updates on 6/4 and 6/30, respectively. We switched to use CDC surveillance data as the substitute. However, since CDC surveillance data is subject to a one-to-two day lag, we added a “US ex-FL&NE” in our daily cases and 7D delta sections in order to demonstrate a more comparable COVID development.

The latest COVID daily cases came in at 205,617, down -15,165 vs 7D ago. The Thanksgiving distortion appears to be clearing out as per the more consistent trend in the recent data. As such, Wave 4 is clearly underway; this is not surprising, and is our base case. We expect this surge to peak below the wave 3 peak of 300,000 cases per day. Case roll over will likely resume in the near future as booster vaccine rates are increasing.

Rolling 7D delta Thanksgiving distortion beginning to clear out…
The rolling 7D delta Thanksgiving distortion is beginning to clear out as evident by the more consistent trend in the data. Nonetheless, we’ll continue to monitor the data closely.

33 states are seeing a rise in cases while cases continue to decline in the remaining states…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling, and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.

• The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
• We also calculated the number of days during the recent case surge
• The US as a whole, UK, and Israel are also shown at the top as a reference

Hospitalizations, deaths, and positivity rates are rolling over amidst case rollover…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID.

– Net hospitalizations peaked below the Wave 3 peak and are currently rolling over
– Daily death peaked slightly above the Wave 2 peak and are currently rolling over
– As per the decline in daily cases, the positivity rate is currently rolling over

POINT 2: VACCINE: vaccination paceacceleratesas boosters become more widely available…
***The CDC didn’t reported vaccination data from Wednesday, 11/24 to Monday, 11/29 due to Thanksgiving. As such the data is currently distorted.
_____________________________

Current Trends — Vaccinations:
– avg 1.8 million this past week vs 0.9 million last week
– overall, 59.6% fully vaccinated, 70.4% 1-dose+ received
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Vaccination frontier update –> all states now near or above 80% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are near or above 90% combined penetration
– Given the 2.5x multiplier, all states besides AL, AR, IA, HI, LA, MS, IN, WA, WV, OR, TX, OH, ID, MI, MO, and GA are now above 100% combined penetration (vaccines + infections). Again, this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

Below is a diffusion chart that shows the % of US states (based on state population) that have reached the combined penetration > 60%/70%/80%/90%/100%. As you can see, all states have reached combined infection & vaccination > 100% (Reminder: this metric can be over 100%, as infected people could also be vaccinated. But 100% combined penetration does not mean that the entire population within the state is either infected or vaccinated).

There were a total of 1,392,780 doses administered reported on Monday. As per the note above, the excessively high number of vaccines administered 7D ago is due to Thanksgiving. This distortion aside, we’ve been seeing the vaccination pace accelerate as booster shots are becoming more widely available. Also, the same catalysts remain in place:

• Proof of vaccination required by many US cities and venues
• Booster shots
• Full FDA approval of Pfizer COVID vaccines (hopefully it could help overcome vaccine hesitancy)
• Biden’s vaccination plan

The daily number of vaccines administered remains the most important metric to track this progress and we will be closely watching the relevant data.

84.4% of the US has seen 1-dose penetration > 60%…
To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 45%/45%/50% of its residents fully vaccinated, displayed as the orange lines on the chart. Currently, 100% of US states have seen 40% of their residents fully vaccinated. However, when looking at the percentage of the US with at least 45% of its residents fully vaccinated, this figure is 100%. And only 88.5% of US (by state population) have seen 50% of its residents fully vaccinated.

We have done similarly for residents with at least 1-dose of the vaccination, denoted by the purple lines on the chart. While 100% of US states have seen 1 dose penetration > 50%, 98.4% of them have seen 1 dose penetration > 55% and 84.4% of them have seen 1 dose penetration > 60%.

This is the state by state data below, showing information for individuals with one dose and two doses.

The ratio of vaccinations/ daily confirmed cases has been falling significantly (red line is 7D moving avg). Both the surge in daily cases and decrease in daily vaccines administered contributed to this.

– the 7D moving average is about ~12 for the past few days
– this means 12 vaccines dosed for every 1 confirmed case

In total, 432 million vaccine doses have been administered across the country. Specifically, 234 million Americans (71% of US population) have received at least 1 dose of the vaccine. And 198 million Americans (60% of US population) are fully vaccinated.

POINT 3: Tracking the seasonality of COVID-19

In July, we noted that many states experienced similar case surges in 2021 to the ones they experienced in 2020. As such, along with the introduction of the more transmissible Delta variant, seasonality also appears to play an important role in the recent surge in daily cases, hospitalization, and deaths. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.

The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors

If this holds true, seasonal analysis suggests that the Delta spike could roll over by following a similar pattern to 2020.

We created this section within our COVID update which tracks and compare the case, hospitalization, and death trends in both 2020 and 2021 at the state level. We grouped states geographically as they tend to trend similarly.

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.