Surveillance: Omicron Risks & Recovery Hopes

how are you doing? Thanks so much for joining us. Happy New Year's Eve Day to you. What do you make of this? I mean, it's been an incredible year for people. Long equities up like twenty eight percent, and the third year in a row of big double digit gains? Can this continue? I actually thinking, Ken, and I think there's sort of an instinctive natural suspicion. But hey, he can't get you know, four double digit years in the SMP five hundred in a row. That's just not supposed

to happen. Um. And I think, while I appreciate that sort of um instinctive concern, I actually, you know, my price target for next year is hundred, which is up another from where we are right now. Uh there, And I think it's it's it's people have to you know, look, Matt, this year, I was you know, I was among the highest for the year and for this year at fifty from twelve months ago when I upgraded that to forty eight hundred in July, and I, you know, here we

are almost forty eight hundred. I think we take through it yesterday. But look the the arithmetic of the probabilities for me spell it a pretty obvious way, the ten years kind of range bam. That reinforces a pretty healthy equity risk premium. And you're looking at nominal GDP next year in the United States of seven to eight percent.

That's just based on Bloomberg insensus forecasts there um and and potentially some rest of work, you know, international GDP that will uh actually recover if and when the virus continues to fade um, that will reinforce the international dimension of SMP earning. So you know, why would you why why? I guess my my argument is why should twenty two

be any different from two thousand twenty one. Um, sure, it's not going to be as exciting in terms of the explosion of earnings growth with faith and base effects. But the nominal GDP picture is very strong. You've got big tech anchoring forty for some of the index with uh you know, really still what is your what, by the way, what is your earnings expectation? Michael? Next year? Uh it's it's uh two hundred in sixty. I'm sorry that that's twenty three two hunt for next year two

hundred and forty. Well, let's go from yeah, still strong. Well, let's go from the earnings with fundamentals to the volatility picture. Because we got as high as a thirty seven handle on the VIX this year, we're now hovering about an eighteen handle. January is a seasonally volatile session or seasonally voltil month. I should say, what are you expecting on that front? Well, uh, you know, look, the VIX this entire year has been very robust. It's been um you know.

If you look at credit high yield credit spreads, for example, they plummeted after the uh you know, the initial shock of COVID in the spring of two thousand twenty, and they kind of what I argued is that they've kind

of led the VIX down the vix. You know, you can measure it on the spread of applied volatility to realize volatility, or pitfall skew or tail skew and all those different metrics within the SNP options universe, and they've all been saying, uh, sort of reflecting tension and some anxiety, right And and that's one of the reasons why the dips throughout this year have been five to six percent

and not fift percent, right. It's the markets have been pretty well ensured coming into this and that's a very healthy factor and one of the reasons why I've been very bullish this year and why I continue to be bullish next year, because it seems like the bigs here, you know, it's just going to be uh, it refuses to like just drop down to that level. I don't think we've had a close below fifteen this entire year, despite a relentless march higher, right um there, So that

that is very healthy for the SMP five hundred. I've been, you know, opportunistically putting on some short volatility trades, but that's you know, um, you know, you have to sort of pick your spots there. I think the like you people shouldn't expect Yeah close, Yes, I did, I did. Um. But you know that trade was you know, it made money, but it wasn't a you know, like a fantastic like you know, two thousand seventeen style short politility trade right.

Um there. But again, that's that's one of the reasons why the tension within the Vicks world is one of the reasons why the SMP keeps sort of relentlessly edging higher. Here. Um all right, Michael, I gotta I gotta cut you off. I can hear the Cantabrian water dog in the background barking. I think your cows have gotten out. Michael Purvis coming to us. They're from the Sturious Spain actually, one of my favorite places in the entire world. Absolutely love um

the area there in Asturias, Spain. And uh, I hope you have a great New Year's Eve and wish the best for you and the whole family. Thanks so much for joining us, Michael Purvis. There from tal Back in Capital, Christina Hooper joins US global market strategists UM right now at invest Go and Christina, you know, we have been talking to so many investors who have told us they see uh lesser returns in then we've become used to over the past three years. Do you agree? I agree,

But let me give you this caveat. I think we're going to see lesser returns when it comes to developed markets, but I think could be a great year for emerging markets, and that's a year for outperformance for em in particular China, which has had a disappointing Alright, So China is one area that we're watching incredibly closely, not just because of the blew up in the property market, but also because they seem set on increasing stimulus and making it really focused.

Do you expect that to bring decent games, both for China and for the global economy. I do. I do. I think it's going to be a combination of of monetary and fiscal stimulus that helps the Chinese economy re accelerate in two and I think we're likely to see uh fewer regulations. Right, we saw a lot of regulatory actions directed at reform in I think we're going to see less of that in two and that should be

another positive catalyst for China equities um. But for developed markets, I think what we're going to see is more of a convergence of asset classes that typically is the case when we enter a slow down phase of the economic cycle. Um, it's nothing to be scared of. But I do think we're going to see more muted stock market returns. Well. In terms of China, we saw the Golden Dragon China Index, which of course is the a d R is listed in the US, return nine point four percent yesterday, their

biggest gain since two thousand eight. Of course, it's still very far off the highs. It's China tech a place that interests you. Oh absolutely, UM. Now, we certainly have to recognize that China has some long term policy goals that are part of its common Prosperity vision. UM. So we have to recognize that there could still be more regulation to come in. But I think it's pretty understandable

the areas they're focusing on, like, for example, data security. UM. But having said all that, there is a lot of opportunity for Chinese technology stocks. I do think we need to be more patient with that. This may not be a phenomenon, it may be something that as is a good story for longer term China tech holders. Christina, let's talk about a second for the omicon variant, because we

have to to hit about the impact. Now, the consensus on Wall Street is that this isn't going to have quite the same impact on, say, operations on consumer spending that the original strain of the virus did back in the spring of But I'm curious how much of gains were based on the fact that we are going to have this return to office, that we are going to have this kind of much bigger progress in vaccines. What is your take on that. How much of those gains might we have to pair back in two as we

kind of face reality. Well, I don't think we're going to see a big pairing bag of gains because the omicron variant represents UH negative outcomes in the shorter run, but could actually be a positive in the longer run UM. And by that I mean that it is incredibly contagious and the numbers we're seeing are are just like nothing we've seen with any other variant. Having said that, the

silver lining is that it is UM. It does seem to be far more mild, and it moves through populations rather quickly, So we can take South Africa as an example. UM cases peaked on December sixteen. UM now we're seeing cases at less than half of what they were then, So this is a really fast move through South Africa

already burning out. So if we can use that as an example, and that really does happen with other countries and it seems to be the case um from from early indications in some other areas, UM, then that suggests that it will move through the population rather quickly, create some real issues in the shorter run, right in terms of supply chain disruptions UM, exacerbating inflation, but then could move through quickly and have that residual effect of having

immunized populations far more rapidly than say any vaccination program UM. So it could be a positive again, UM if it remains as mild as it seems to be. Are you worried about the FED? In I know that the market is expecting three rate hikes UM and March is reportedly according to Governor Waller alive meeting. But if they don't start until later, they're gonna squeeze them in pretty tight. Yeah,

So I'm not worried about the FED. And certainly we always want to be following inflation and inflation expectations, and that is a wild card because there is an element of behavioral economics to all of this UM. But having said that, I do believe that the fed UM will have only three rate hikes in two or less UM, and the market expects three rate hikes, so I think that creates a relatively supportive environment for risk assets. Certainly,

we're going to see some volatility UM. There is going to be some uncertainty along the way UM with regard to monetary policy in the United States, but I think ultimately we won't see the fed UM get get nervous and overreact to any kind of high inflation print. All right, Christina, thanks very much pleasure having on the program, and we wish you and your family a happy and healthy New Year's Eve. Christina Hooper there of Investo giving us her

outlook for let's talk about geopolitics right now. Daniel tennebound partner and America's anti financial crime leader at Oliver Wyman, joins us to discuss the not just the phone call that President Biden had with President Putin yesterday, but also the relationship and the issues that Russia has right now with the West as it amasses troops on the border of Ukraine. Reportedly, Dan, thanks so much for joining us. How do you think the call went to kick it off.

I mean on New Year's I'm feeling a bit light. I mean it was a perfect call for both sides. UM. Realistically, I think both Putin and Biden got their messages in

where both sides can declare victory. It was largely reiterating prior points that both sides made in terms of Russian demands of what it was looking for from an assurance standpoint for security, what Biden was looking to put out there in the event that Russia escalated issues, which were largely further sanctions in the event of a further escalation

into Crimea or into Ukraine. So I think realistically both sides were able to walk away with a win, and it really set the tone nicely for the talks that will commence on January ten, with kind of the working level within both governments to try and see how they can deescalate the situation. But I mean, as a reminder, this is largely a crisis of Putin's creation. There was

no imminent security threat against Russia. UM. This was a pre emptive move to move troops into the Dambas and begin to threaten UM, begin to threaten the Ukrainian sovereignty, Daneen, I could exchange a dollar and get thirty six rubles in return. Now if I exchange a dollar, I get get about seventy five rubles. Really, since that crimea annexation in that really spurred a lot of those sanctions from

the United States. In addition to that big drop in oil prices we saw then, the ruble has never recovered. Oil prices did, but the Russian currency didn't, and a lot of that is thanks to sanctions. Just how much further an impact can sanctions have on Russia right now? So the sanctions that were imposed in ten were very targeted. They were focused on certain aspects of the financial services, energy and defense sectors, but there is more that could

be done. The threats that have been levied were a focus on potentially cutting Russian financial institutions off from global payment systems access, further sanctions to more significant oligarchs, and escalation of what President Trump did in eighteen with a number of significant oligarcs where their assets were frozen. Um there are still more sanctions that could be imposed, even on nord Stream too, in potentially cutting off the usage in Europe of the nord Stream to pipeline, which would

have an adverse impact on the Russian economy. So there is still more that can be done. The sanctions were very surgical in nature. What's being threatened now is much more of a broadsword approach. What wouldn't wouldn't cutting off nord Stream to be a problem for Germany as well? I mean don't I mean clearly they rely on Russian energy supplies and isn't that a faster, cheaper way for

them to get in? It is, and especially coming into the colder winter months, that's not really the best time of year to start talking about cutting off any sort of access the cheaper fuel. It is still something that the US has been pressuring its German and other European allies.

Hard is one of several options and potential sanctions that could be imposed, but it is probably one that it's been less interesting to the Biden administration to push forward, and something we've seen from Congress in the US where both the Republicans and Democrats have been pushing for more action on nord Stream too, even though it's completed um and this is picking up off of an issue that wasn't dealt with properly on the Trump administration side. Dan.

Beyond sanctions, another stick that US officials have waived or is the possibility of the augmentation of NATO forces should diplomacy not work. What effect would that have? Considering uh Putin's narrative has been that NATO continues to move east. I think there's no imminent threat as we understand it, of further deployment of NATO forces into Ukraine unless there is certain actions on the part of the Russians to escalate.

I think there's certainly talk of using troops to bed down any sort of Russian escalation, any sort of Russian incursion into Ukraine, but that certainly seems to be a last measure. That being said, you know, we have certainly seen sanctions have impact of the Russian economy, but they certainly not necessarily scared off President Putin. President Putin seems to understand force above all else. Dan, great to get some time with you. Thanks so much for joining us um.

I think we really gain a lot from your inside Daniel tennebown there of Oliver Wyman talking to us about US Russian relations, and we wish you a happy and healthy new year as well. Let's get back to the virus, because the numbers that we have seen are just eye popping. As I said, more than two million confirmed new cases in one day globally yesterday it's the fourth day in

a row of more than a million. Mercedes Carnathon joins, US Vice chair at the Northwestern University Feinberg School of Medicine, Department of Preventative Medicine. And to some extent, this is prevented prevent to bowl, uh, Mercedes, Um, But we see the numbers just popping up. Is there any way to turn this around now? Or does everybody eventually get the omicron variant? You know, it's a really scary situation, and

thank you for having me to talk about it. All along be known that this particular variant was highly contagious and was infecting people even before they knew they had significant symptoms. And then with it being slightly less virulent and a large proportion of our population being vaccinated, the symptoms can be so subtle that it's really spreading. I mean, I hate to I hate to say we throw in

the towel and accept that everyone gets it. That's not what we want to do because we still don't know what the long term impacts will be I think we've got to double down on the masking. We've got to really emphasize and encourage vaccinations. Mercedes, when schools return next week, what should they be doing, What measures should they be taking if they are in person to prevent a spread of a variant which has been spreading exponentially. You know,

that's a real concern. I've got young children who are heading back to school. I feel very strongly that they are safer in school than they are on play dates that are happening in a much more casual setting and even some general public places that you might take them to have some fun. So I think returning to school must be a priority. I think that a central strategy to keeping children safe in school is going to be testing.

It's going to be surveillance testing so that you can get a picture of the background rates of the virus within the community and population of the school. And it's going to be testing symptomatic and asymptomatic people so that we can isolate them quickly. Let's talk about the isolation period for a second. We just heard from the CDC very recently that now if you are asymptomatic, you only have to quarantine for five days. It's a ruling that

has had some industries, the airline industries. What I'm thinking of, really up in arms about it. What are your thoughts about simply the safety and the effectiveness of that strategy. You know, I think that when when the CDC and other organizations have to select a strategy that involves individual behavior, there are always trade offs, and it can always feel as though it's a choice between two least bad options.

The reality is that the recommendation is science driven. We have seen throughout that the infectious period can be relatively short, particular a early in individuals who are vaccinated. What becomes more challenging is the unvaccinated and really needing to have separate recommendations, and the CDC chose not to do that and to make the single recommendation. Certainly upon release from isolation, masking should still be used in order to protect other individuals.

All right, Mercedes, thanks so much for joining us. Really appreciate your time on this would be should be holiday on this New Year's Eve Day. Mercedes Carnathon there of Northwestern University joining us to talk about the seriousness of UH the COVID challenge that we still faced. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg