Insecurities in securities: why markets are sliding

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Hello and welcome to the Intelligence from the Economist. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Antibiotics were once practically magical. A shot or a pill and bacterial infections were gone. But they proved almost too easy. Use them too much and they work less and less. And the costs of that are becoming deadly clear in South Asia. And by now everyone knows that eating less meat would mean a lot fewer carbon emissions. As lots of people have gone vegan for January, our data journalists looked at another striking gain that veganism would bring huge tracts of habitable land. But first, America's economy showed some stunning growth last year. Numbers released Yesterday showed that GDP grew by 5.7% in 2021, the highest since 1984. But that measure is looking back, 2022 is going to be a very different year. America's central bank is making louder and louder noises about cooling down that growth, raising interest rates and turning down the taps of money it's been pouring into the economy. So the view ahead isn't nearly as clear or as rosy. GDP forecasts are getting hurriedly marked down. All that is making investors uncertain. And you can tell America's big stock market indices have been bouncing all over the place each day. But but all told, they're on a steep slide so far this year. And there you have it.

The closing bell at the New York.

Stock Exchange to end a wild first.

Day of trading this week. Another wild ride on Wall street today as stocks give up some pretty substantial gains from the early session. The Nasdaq had another wild day on Wall Street. Stocks plunged early in the session. Investors seem to be reacting to the end of mid pandemic, free and cheap money and an economic environment that is swiftly shifting.

It's been a Rocky start to 2022 for stock markets, particularly in America. The NASDAQ Composite, an index of technology stocks, is down by double digits and we're only in the fourth week of trading. The S&P 500. A broader stock market index keeps approaching a 10% correction, but sort of backs off from it when it gets there, but has fallen quite a long way from its January 3rd peak.

John O' Sullivan is our Capital Markets editor.

And we've seen the same around the world to greater or lesser degrees. And what's been going on with the broad indices doesn't really give you the full flavor of the turmoil underneath the surface.

What do you mean? Where is the turmoil concentrated?

Well, there's two dimensions of it really. One is the individual stock or industry sector level. So a lot of individual stocks have fallen by far more than the market averages. And a lot of the turmoil's been concentrated in the technology sector. And there's also that if you looked at where the markets close every day, it wouldn't be telling you the full story about what had been going on during the day. We've had some quite remarkable intraday moves with markets sometimes in the case of Monday, down 4% at one point and then closing marginally up. We've seen that pattern really for the past week. The end of last week you had strong opens and then the market faltering as it reached the close of the trading day. This week on Tuesday it was a weak opening and then a rally. So it's been even within the day, you've seen some pretty remarkable volatility.

And as you say that the sort of index level, the broad trend, isn't looking great though. What's behind that? What's driving all of this gloom?

Well, there's a few things going on, remarkable as it might seem to say, given what I've just described, about the sort of minute to minute, hour to hour movements, the market is somewhat forward looking. If you go back to the beginning of the pandemic or the sort of early stages of the pandemic, America's stock market rallied pretty hard even as most of us in North America or Europe were still sort of locked down. So it was looking already to the good news on the horizon in terms of what the impact of lower interest rates would mean, fiscal stimulus, all that sort of stuff. So the market is forward looking and what it's doing now is looking forward to maybe to the next six to nine months. And it doesn't really like what it sees. It sees a lot of trouble ahead and not much to excite it in terms of the possibility of things going up further.

What kind of trouble ahead though? What's the market seeing here?

So there's three factors in particular. One is is interest rates, monetary Policy and the Federal Reserve. So just before Christmas, the Fed met and communicated what I think was quite an abrupt U turn in terms of its attitude towards interest rates. It spent a lot of last year basically saying inflation was transient and there was no need to do anything soon on interest rate policy. And then towards the end of the year it started to say actually we need to get interest rates up pretty soon. And then on January 5, the minutes to that meeting were released and it reinforced this idea that rates were going up soon. And of course this week the Federal Reserve sent a very, very strong signal that rates were going up. And not just that, but Jay Powell, the Fed's chair, also suggested, or certainly was not in a mood to deny, that there could be a series of quite rapid interest rate increases.

Funds rate. I would say that the committee is, is, is of a mind to, to, to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so. We have, we have our eyes on, on the risks particularly. Okay, so interest rates, that, that's a big factor.

What's the second concern is slowdown in the economy. A lot of the very strong growth we saw last year and the very strong earnings that listed companies enjoyed was predicated on the 1.9 trillion fiscal package in America. A lot of pent up demand from people had been locked down and obviously low interest rates this year those impulses are going to go away or even in the case of interest rates, reverse. So you get a natural ebbing in sort of aggregate demand going into 2022. But there are concerns that that slowdown could be particularly sharp. The IMF this week in its quarterly update of its forecast, slashed its estimate of GDP growth in America this year quite a long way and gave a fairly cautious view of the risks to that. So it may be the start of a sort of downgrade cycle for GDP growth. It particularly in America, but also elsewhere and alongside the concerns about slowing revenue, is a concern about rising costs. The jobs market in America is very tight. So companies like tech, like investment banking, that rely on skilled workers more than lots of physical capital are going to see their cost bases rising pretty sharply. And that's going to eat into profits as well.

Right, and what's the third issue?

A third concern is valuation. There's a widespread view that the market is very expensive. In fact, on one measure, the cyclically adjusted price earnings ratio, which is a measure that was popularized by Robert Shiller of Yale University, stocks have only once been more expensive than they are now, and that was towards the end of the dot com boom in the late 1990s. So the market was looking expensive, particularly tech stocks. And we've seen a of lot, a lot of the frothier end or speculative end of technology sell off quite dramatically, not just in the last two weeks, but really over the last few months.

So plenty of room for gloom. What the markets are responding to now, are there signs of hope that could pull this back?

Well, there's a few things that investors might eventually cling to. A few glimmers of good news. First, China's economy seems to be bottoming out. And while we're talking about a monetary policy tightening in the United States, in China we're actually getting looser policy, both in terms of interest rates, but also probably from fiscal policy. We're talking about the absence of fiscal stimulus in America this year, but there's still more than a bit of fiscal fuel in the tank in Europe. So when Europe fully reopens, we could see reasonable growth there. Certainly in markets like the UK there's a whole lot less tech in those indices than in the United States. So you could see those markets probably outperforming the US which they already are, but probably doing pretty well maybe later in the year as you get a bit more optimistic about growth in the rest of the world. And of course there's the Omicron variant, the sort of feeling that maybe this is the last stage of the pandemic, so we're going to reopen in earnest. And if one of the things that's been driving up inflation is bottlenecks in the jobs market, maybe as people start to drift back to work in America, you start to see an attenuation of this inflation and less concerned that the Fed has an awful lot of work do to contain.

Sounds then like the markets are in for more of this wild ride.

The Fed hasn't even raised interest rates yet, so I think we've got some. Either it's an emotional adjustment or a price adjustment to go through before we can really be confident that this rocky period is over. So I think we're in for quite a volatile few weeks or even few months in the early part of this year.

John, thanks very much for joining us.

Thank you.

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Warnings about antimicrobial resistance have been growing for years. When antibiotics are overprescribed or overused, that puts evolutionary pressure on the bugs that they're supposed to kill. They develop a resistance to those drugs, making infections harder to treat. In most developed countries, it's not a problem yet. But in the developing world and South Asia in particular, bacteria are becoming increasingly resistant. Infections that were once easily solved are becoming deadly.

I've been to visit the ICDDRB hospital in Dhaka several times.

Susanna Savage writes about South Asia for the Economist.

When you first walk into the hospital, it's very busy. There's a lot of people, it's very noisy. In the pneumonia ward, there's a lot of children. And speaking to the parents of these children, a lot of them come from slum areas where they're exposed to harmful bacteria quite often. And when I spoke to Dr. Chisty, who leads the pneumonia department, he told me the children with drug resistant illnesses are much more likely to die.

And there's been this kind of talk about drug resistant infections for some time. What's the situation now, more broadly?

Yes, a few years ago it was reported as a threat for the future, and now we know that actually antimicrobial resistant infections are a leading cause of death around the world. That's just come out in a new report by the Lancet, a medical journal. They looked AT numbers from 2019. In that year, 1.3 million deaths can be directly attributed to drug resistant illnesses. And the highest tolls were by far in Sub Saharan Africa and in South Asia. In sub Saharan Africa, 24 deaths per 100,000 were because of antimicrobial resistance. And in South Asia, 22 deaths per 100,000. So these numbers are really high. Bangladesh, India and Pakistan, the biggest countries in South Asia, have some of the world's highest rates of drug resistant bacteria. So they're really at the center of this problem.

And why is it such a problem in those three Countries in particular.

Let me take you back to the beginning of antimicrobials in order to explain this. Antimicrobials like antibiotics and antifungals. These became widely available in rich countries during the 1940s and, and they completely revolutionized medicine because from the laboratories of.

Our pharmaceutical manufacturers are coming an ever wider variety and an ever larger supply of the wonderful life preserving drugs known as the antibiotics.

Think penicillin. During the Second World War, the drugs also boosted industrial farming. In the second half of the 20th century, they get rid of diseases that are rife among animals in factory farms.

At Guernsey Dell Farm, something new in medical treatment. An 800 pound purebred bull goes into an oxygen tent. His diagnosis, pneumonia. To save the champion bull, rare penicillin is obtained from the war production board.

But the more the microbes, the bacteria, et cetera, are exposed to antimicrobials, the more they start to evolve, to become resistant to them. This leads to the creation of what we would call superbugs, which can't be treated with any of our available antimicrobials. The use of antibiotics has been rising in South Asia. By 2018, the region's 1.8 billion people were taking a quarter of the world's antibiotics. Just to compare that to a different region, Sub Saharan Africa, where 1.1 billion people live in 2018 were consuming just over 10% of the world's antibiotics.

So that part seems clear. There's the greatest resistance where there is the greatest consumption of antibiotics. But still, why should South Asia be consuming so much of them?

There are a number of reasons behind this, and a lot of them are to do with rising prosperity. Actually more people can afford to buy them and also people eating more animal protein. And the more animal protein you're eating, the more factory farming there is and then the more harmful practices like antibiotic use in livestock. At the same time, they don't have the regulations in place to stop overuse. So people can easily buy antibiotics over the counter and, and you can easily buy antibiotics for animals. In the same way, poverty has also contributed. So people will get unwell drinking dirty water because of the poor infrastructure, and then they'll have to take antibiotics, or they think they do anyway. Also, when you get antibiotic residue in water systems, for example, from the pharmaceutical hubs that you have in India, which make a huge number of the world's drugs, then it spreads around, contaminating the environment and exposing local communities to drug resistant microbes. This was all the situation before COVID but since then Things have got a lot worse. In the eu, there was a noted decline in the use of antibiotics during the first part of COVID But in India, it was completely the opposite. According to one study, at least 216 million excess doses of antibiotics were taken in the first wave alone.

So there are some regional reasons why things are so bad in South Asia. But as you say, this is ultimately a global problem that will be reckoned with in similar ways elsewhere.

Yes, that's right. And it's worth noting that sub Saharan Africa actually has the highest burden in terms of deaths. But in Sub Saharan Africa, unlike in South Asia, the use of many types of antibiotics actually remains low. Therefore, in that part of the world, increasing availability would actually reduce both the AMR and the broader disease burden. But drug resistant bacteria and the infections they cause would don't respect borders. A few Years ago, in 2016, British government scientists warned that antimicrobial resistance would kill about 10 million people a year by 2050 and cost a cumulative $100 trillion in lost productivity. Obviously that's speculative, but when I was interviewing scientists and doctors in South Asia, they told me that treating a patient with a drug resistant infection was up to three or four times more expensive than treating one with an infection sensitive to antibiotics.

So what's to be done here? Is the genie out of the bottle here? How to head off those kinds of numbers, both of deaths and costs?

Well, their efforts are patchy. After a study showed the level of antibiotic residue in water systems in India, the Ministry of Environment, Forest and Climate Change proposed limiting the antibiotic residue permitted in wastewater released by drug factories, which would have been a world first. But then last year, they quietly reneged on this promise. In South Asia, several antibiotics have been barred for use in livestock, which follows similar bans we've seen in the US the uk The EU is definitely furthest ahead with this. At the end of this month, new regulations will be introduced in the bloc which restrict all preventative use of antibiotics in livestock. In 2019, over the counter sales of antibiotics for humans were banned in Islamabad, the capital of Pakistan. But the problem is these rules are often not enforced. Also, restricting sales is tricky. While many South Asians take too many antibiotics, others suffer or even die because they have access to too few. India has one of the highest levels of inequality when it comes to antibiotic access, for example. But all the scientists I spoke to were pretty clear that what governments most need to do in order to tackle the rise of drug resistant infections is to drastically improve sanitation and healthcare systems in General, which would drive down demand for antibiotics. So there's a lot of hope that the new numbers released from the Lancet will push them to do this.

Susanna, thanks very much for joining us.

Thank you, Jason.

For more analysis like this from our international network of correspondence, take out a subscription to the Economist. Get a great introductory deal@Equality.com IntelligenceOffer the link is in the show notes. Veganuary is drawing to an end. If you haven't heard of it, it's just being a vegan for the month of January. Those who have gone all plant based may be looking forward to more indulgent menus. Those who haven't are probably relishing not hearing veganuary, which, let's face it, is a horrible word. The merits of veganism are clear cut, no animal welfare concerns, much reduced emissions. Done right, it can even be healthy. But there are other potential upsides too.

So one of the best justifications for veganism is that it just a much more efficient way to produce food.

Sandra Solstad is a senior data journalist at the Economist.

Rather than eating plants like vegan stew, carnivores sometimes feed plants to animals first, then eat the animals or their milk and eggs for added deliciousness. But that extra step has a high cost. For beef, about 95% of calories are lost. That means that more plants are needed. And producing food for carnivores does take up a ton of land.

Okay, so let's suppose the whole world goes vegan starting tomorrow. What difference will it make? What do the data say on this?

What researchers estimate is that about 50% of habitable land is currently used for agriculture. Now you might think that of this 50% most is spent growing wheat, rice, these big crops that feed the majority of the world's population. But that is actually incorrect. About 80% is used to produce food for carnivores. So mainly meat, but also eggs and dairy. Now this comes from an extensive study of global food systems with data gathered from nearly 39,000 farms and hundreds of different agricultural processes conducted by Joseph Poor and Thomas Nemesek. What they found was that if everyone went vegan agriculture would need just one fourth of the space it occupies today. So freeing up more than a third of all habitable land on the planet. But even a vegan light diet, avoiding beef and sheep meat only, would see land use cut in half.

Okay, so it's simple as that. You free up that land, you grow more plants, you bring down costs, everything's great, right?

Well, yeah. I mean, straightforward map would suggest that if we could produce the same amount of food with one fourth the space. We could just use all of that space and produce four times as much food. Unfortunately, things are not that straightforward. Some current pasture land, for instance, like the Scottish Highlands, say, cannot easily be converted to cropland. And even if they could convert it to cropland and so grow plants that humans would eat, it might not produce more food than it does presently. Furthermore, it might look less pretty too. That is to say, cultural concerns are a real thing. Humans and animals have interacted for millenn to produce the landscapes that we see today. There's also a bunch of culture in food and food that contains animals, so these concerns have a place too. But on the other hand, in most places where agriculture is currently expanding, a shift from animals to plants would mean more food per unit of land. And these cultural concerns probably doesn't apply as fully where agriculture is currently expanding, which is, say, in the Brazilian Amazon, producing food for people who are thousands of miles away that never take part in any of the processes involved.

So with your data scientist hat on here, given these numbers, the sort of, you know, the extreme case, what prescription could you reasonably make, knowing what this sort of limiting case looks like?

I would say that avoiding meat would be good in terms of making food more accessible to more people and allowing us to produce more of it. But I think if people struggle to cut down on their meat consumption, then going for some meats, essentially beef or lamp, would be a good idea.

And is veganuary a thing for you? Are you following some of these prescriptions or.

No, I'm not a strict vegan, but I don't eat meat.

There's a position of some moral authority on this matter.

Well, I'm not sure about that, but maybe I've found it very easy to be honest.

Sondre, thank you very much for joining us.

A pleasure as always.

That's all for this episode of the Intelligence. The show's editors this week are Marguerite Howell, Chris Impey and Kim Gittleson. And our sound engineer is Will Rowe. Our senior producers are Stevie Hertz, Sam Westron, Jack Gill and John Jo Devlin. Our producers are William Warren, Rory Galloway and Alize Jean Baptiste, and assistant producer Amisoye o'. Neill. Daro, we'll all see you back here on Monday.